In a purely competitive market, what is the shape and position of the marginal revenue curve for an individual firm?

• A. It is an upward-sloping line above the average revenue curve.
• B. It is a downward-sloping line below the demand curve.
• C. It is a horizontal line at the market price.
• D. It is a vertical line at the equilibrium quantity.

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the nature of a purely competitive market. In such a market, each firm is a price taker, meaning it cannot influence the market price and must accept the price determined by overall supply and demand.
2. Step 2: Recall that the demand curve facing an individual firm in perfect competition is perfectly elastic (horizontal) at the market price, because the firm can sell any quantity at that price but nothing at a higher price.
3. Step 3: Define marginal revenue (MR) as the additional revenue gained from selling one more unit of output. In perfect competition, since the price is constant, the marginal revenue equals the market price.
4. Step 4: Recognize that because marginal revenue equals the constant market price, the marginal revenue curve for the individual firm is a horizontal line at the level of the market price.
5. Step 5: Note that this horizontal marginal revenue curve coincides with the firm's average revenue curve and demand curve, all being horizontal lines at the market price.