For a price-taking firm, average revenue is equal to the market price. This is because:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → every unit the firm sells is sold at the same market price
AR is TR per unit. Since every unit sells at the same price p, TR = p × q, and dividing by q leaves p.
Option (1) every unit the firm sells is sold at the same market price — Correct. So the revenue per unit is the market price.
Option (2) the firm’s total revenue stays the same whatever the level of output — Incorrect. TR rises with output, by p for each unit.
Option (3) the firm sets its price equal to its average cost at every level of output — Incorrect. A price-taking firm does not set its price; it takes the market price.
Option (4) the firm sells extra units at a price lower than the market price — Incorrect. It can sell as much as it wants at the market price, so it has no reason to cut its price.
NCERT (2026-27): “4.2 Revenue … But, if this is the case, surely there is no reason to set a price lower than the market price. In other words, should the firm desire to sell some amount of the good, the price that it sets is exactly equal to the market price.” “4.2 Revenue … The average revenue ( AR ) of a firm is defined as total revenue per unit of output. Recall that if a firm’s output is q and the market price is p, then TR equals p × q. … In other words, for a price-taking firm, average revenue equals the market price.” |