AP Microeconomics : Perfectly Competitive Output Markets

Study concepts, example questions & explanations for AP Microeconomics

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Example Questions

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Example Question #91 : Perfectly Competitive Output Markets

For which of the following market structures is demand always equal to marginal revenue?

Possible Answers:

Monopolistic competition

Monopoly

Perfect competition

Oligopoly

Correct answer:

Perfect competition

Explanation:

The marginal revenue curve always has the same intercept on the price axis as the demand curve and twice the slope of the demand curve.

For market structures of oligopoly, monopoly, and monopolistic competition, the firm faces a demand curve that is downward sloping (indicated market power), so the marginal revenue curve would be steeper than the demand curve.

For perfectly competitive market structures, however, the firm faces a demand curve that is horizontal, with a slope of 0 (i.e. it is perfectly elastic). For a firm in perfect competitive market structure, therefore, the marginal revenue curve, which has the same intercept and twice the slope, results in the exact same curve as the demand curve.

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