Question
Explain the relation between marginal revenue and average revenue when a firm is able to sell more quantity of output:
- At the same price.
- Only by lowering the price.
✓
Answer
- Relationship between Average Revenue and Marginal Revenue at a same price
- When price remains the same at all output levels, the firm cannot influence the prevailing market price of the commodity. The price is given to it.
- It can sell any amount of the commodity at this given price. Under such a case firm's average and marginal revenue remains equal and their curves coincide as shown in given figure.
- Relationship between Average Revenue and Marginal Revenue by lowering the price
- When price falls, with rise in output, then AR falls, MR also falls but at a much faster rate. As a result, the revenue from every additional unit (i.e. MR) will be less than AR.
- As a result, both AR and MR curves slope downwards from left to right. This can be explained with the help of given Figure.
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