Which of the following statement (s) is/are correct?
Statement 1: The average revenue ( AR ) of a firm is defined as total revenue per unit of output.
Statement 2: For a price-taking firm, average revenue equals the market price.
Answer & explanation
Correct answer: option 3
The correct answer is Option 3: Both statements are correct.
Statement 1: The average revenue (AR) of a firm is defined as total revenue per unit of output. Correct.
The formula for Average Revenue (AR) is:AR=TR/Q
where TR (Total Revenue) = Price × Quantity (P × Q). Since AR is TR divided by Q, it represents the revenue earned per unit of output.
Statement 2: For a price-taking firm, average revenue equals the market price. Correct. In a perfectly competitive market, the firm is a price taker, meaning that price (P) remains constant.
Since TR = P × Q, dividing both sides by Q gives:
AR =TR/Q= P*Q/Q = P