Association of Chartered Certified Accountants (ACCA) Certification Practice Test

Under what condition will average revenue and marginal revenue curves be identical?

1. When the selling price remains constant for all firms

2. When production is at its maximum level

3. In a monopoly market

4. In a perfectly inelastic market

The correct answer is: When the selling price remains constant for all firms

Average revenue and marginal revenue curves will be identical under the condition that the selling price remains constant for all firms. This scenario typically occurs in a perfectly competitive market, where firms are price takers. In such a market, the price set by the market is the same for all units sold, leading to both average revenue (total revenue divided by quantity sold) and marginal revenue (the additional revenue from selling one more unit) being equal to the market price. When the price is constant, each additional unit sold does not change the price but simply adds a fixed amount (the market price) to total revenue. Therefore, as output increases, average revenue remains constant and equal to the marginal revenue because there is no price effect—every additional unit sold generates the same revenue. In contrast, in monopolistic markets or those with price-setting power, marginal revenue would typically be less than average revenue due to the necessity of lowering the price on all previous units to sell an additional unit. This distinction leads to the curves being different in those contexts. Similarly, production levels or the elasticity of demand do not inherently create a scenario in which these two curves would align.