Figure 10-1 A Monopolist’s Average and Marginal Revenue
that the price received for the extra unit sold is not the firm’s marginal
revenue because, by reducing the price on all previous units, the firm
loses some revenue. Marginal revenue is therefore equal to the price
minus this lost revenue. It follows that the marginal revenue resulting
from the sale of an extra unit is less than the price that the monopolist
receives for that unit.
The monopolist’s marginal revenue is less than the price at which it sells its output. Thus the
monopolist’s MR curve is below its demand curve. [ 24 ]The relationship between marginal revenue and price for a numerical
example is shown in detail in Figure 10-1. Consider the table first.
Notice that the numbers in columns 4 and 5 are plotted between the rows
that refer to specific prices and quantities, because the numbers refer to
what happens when we move from one row to the next. As price declines
and quantity sold increases, marginal revenue is calculated as the change
in total revenue divided by the change in quantity:
MR=ΔΔTQR