The total revenue of a firm is increasing at a constant rate. Which of the following is true about this firm?
The total revenue of a firm is increasing at a constant rate. Which of the following is true about this firm?
Solution
Option 1 -> In an imperfect market, firms face a downward-sloping demand curve and cannot sell any quantity at a given price. This is contradictory.
Option 2 -> In a perfect (perfectly competitive) market, firms are price takers and face a horizontal demand curve. They can sell any quantity at the market-determined price, making total revenue increase at a constant rate (equal to the price).
Option 3 -> While this correctly describes imperfect competition, when a firm must lower price to sell more, total revenue increases at a decreasing rate, not a constant rate.
Option 4 -> This is contradictory. In a perfect market, firms don't need to lower prices to sell more; they accept the market price.
Hence, Option 2: It is operating in a perfect market and can sell any quantity of the good at given price -> When total revenue (TR = P × Q) increases at a constant rate, it means Marginal Revenue (MR = dTR/dQ) is constant. This only occurs in perfect competition where the firm faces a perfectly elastic (horizontal) demand curve at the market price. The firm can sell any quantity without affecting the price, so each additional unit sold adds the same amount (the price) to total revenue, making TR increase linearly at a constant rate. -> correct
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2025: 21 May Shift 1