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Question:

What is the relation between market price and marginal revenue of a price-taking firm?

Answer:

Marginal revenue is defined as the change in the total revenue that occurs due to the sale of one more unit of output. It is calculated as
MRn= TRn – TRn-1
Where
MRn = Marginal revenue due to nth unit of output
TRn = Total revenue due to n units of output
TRn-1 = Total revenue due to n units of output
TRn-1 = Total revenue due to (n-1) units of output
Suppose that the market price is P
MRn = TRn - TRn-1
= PQn – P (Qn – 1)
MR = PQn – PQn+P
MR = P
Thus for a perfect competitive firm marginal revenue is equal to the market price per unit of output.


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