Association of Chartered Certified Accountants (ACCA) Certification Practice Test

What will the firm's average revenue (AR) curve look like in the short run?

1. It will be greater than the marginal revenue curve

2. It will be the same as the firm's marginal revenue curve

3. It will be below the marginal revenue curve

4. It will be unrelated to the marginal revenue curve

The correct answer is: It will be the same as the firm's marginal revenue curve

In the short run, a firm's average revenue (AR) curve reflects the revenue generated per unit of output sold. For firms operating in a perfectly competitive market, the average revenue curve is equivalent to the demand curve, which is horizontal at the market price. When a firm sells more units, it receives the same price for all units, meaning that both the average revenue and marginal revenue are equal to the price of the product. Hence, each additional unit sold generates the same amount of revenue as the average revenue earned per unit, leading to the conclusion that the average revenue curve coincides with the marginal revenue curve. In contrast, in other market structures, such as monopolistic competition or monopoly, while the average revenue can still fall in line with the price received for goods, the relationship may differ in terms of how MR behaves relative to AR due to the downward-sloping demand curve faced by these firms. This makes the understanding of the AR and MR relationship particularly important in distinguishing between market types, but for the given scenario, particularly in the short run within a perfectly competitive context, the average revenue curve mirrors the marginal revenue curve. Therefore, this relationship illustrates the direct connection between price, average revenue, and marginal revenue in the short run for firms