Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What does the firm's marginal revenue (MR) curve look like in the short run?

1. It decreases as quantity increases

2. It remains constant at all output levels

3. It is the same as the average revenue (AR) curve

4. It is lower than the average cost curve

The correct answer is: It is the same as the average revenue (AR) curve

The marginal revenue (MR) curve in the short run typically reflects how additional revenue changes as more units of a good or service are sold. In a competitive market, the price remains constant regardless of output level, leading to the MR being equal to average revenue (AR) at each quantity sold. This is because, in perfect competition, every additional unit sold brings in the same revenue per unit, which is the market price. Therefore, the MR curve coincides with the AR curve along its entire length. Understanding this relationship is crucial for firms in terms of pricing and production decisions, as maximization of profit occurs where MR equals marginal cost (MC). Hence, recognizing that the MR curve is the same as the AR curve is fundamental to grasping how firms operate in the short run under perfect competition. The other choices illustrate different scenarios. The idea that MR decreases with quantity is often applicable in monopolistic or imperfectly competitive markets, where each additional unit sold may require lowering the price on all units. The assertion that MR remains constant at all output levels is true only in perfectly competitive markets but does not specify the relationship to AR. Lastly, stating that MR is lower than the average cost curve does not provide relevant information about the relationship between MR and AR