5 Steps to a 5 AP Microeconomics, 2014-2015 Edition

Market Structures, Perfect Competition, Monopoly, and Things Between ‹ 119

Since the only decision to be made by the perfectly competitive firm is to choose the

optimal level of output, the firm’s rule is as follows:

• Choose the level of output where MR = MC.
  Table 9.2 can be modified to show the marginal revenue and marginal cost of selling
  additional bushels of carrots.

Table 9.2

TOTAL TOTAL MARGINAL MARGINAL

DAILY BUSHELS PRICE REVENUE COST PROFIT REVENUE COST

OF CARROTS (q)(P) (TR) (TC) (P) (MR) (MC)

0 $11 $0 $16 -$16

1 $11 $11 $22 -$11 $11 $6

2 $11 $22 $27.50 -$5.50 $11 $5.50

3 $11 $33 $34 -$1 $11 $6.50

4 $11 $44 $42 $2 $11 $8

5 $11 $55 $53 $2 $11 $11

6 $11 $66 $65 $1 $11 $12

Notice that in perfect competition, the price is equal to marginal revenue. This is fairly

simple if you recall the assumptions of the model. Farmers can sell as much as they want at

the market price. If a farmer sells one more bushel, total revenue increases by the price of

the bushel, $11 in this case. Sell another bushel; earn another marginal revenue of $11.

Price is also equivalent to average revenue(AR), or total revenue per unit. These relation-

ships can be seen in Figure 9.2.

•MR =DTR/DQ=P¥DQ/DQ=P

• AR =TR/Q=P¥Q/Q=P


• P=MR =AR =Demand for the firm’s product

“If you only
remember one
thing, remember
this! MR =
MC.” —Kristy,
AP Student

MC

$

11 d=P=MR=AR

qe=5

One Carrot Farmer

Quantity

Figure 9.2

TIP

TIP