this example the change in total revenue is $10 and the change in
quantity is 10 units, so as plotted in the figure at a
quantity of 45 units (halfway between and ).
That marginal revenue is always less than price for a monopolist is an
important contrast with perfect competition. Recall that in perfect
competition, the firm’s marginal revenue from selling an extra unit of
output is equal to the price at which that unit is sold. The reason for the
difference is not difficult to understand. The perfectly competitive firm is
a price taker; it can sell all it wants at the given market price. In contrast,
the monopolist faces a negatively sloped demand curve; it must reduce its
price in order to increase its sales.
If you plot the data on TR from the table in Figure 10-1 , you will notice
that TR rises (MR is positive) as price falls, reaching a maximum where
and Then, as price continues to fall, TR falls (MR is
negative). Using the relationship between elasticity and total revenue that
we first saw in Chapter 4 , it follows that demand is elastic when
MR is positive and demand is inelastic when MR is negative. The
value of elasticity declines steadily as we move down the demand
curve. As we will see shortly, a profit-maximizing monopolist will always
produce on the elastic portion of its demand curve (that is, where MR
positive).
1 When drawing these curves, note that if the demand curve is a negatively sloped straight line,
the MR curve is also a negatively sloped straight line but is exactly twice as steep as the demand
curve. The MR curve’s vertical intercept (where Q = 0) is the same as that of the demand curve,
and its horizontal intercept (where p = 0) is one-half that of the demand curve. [25]
ΔTR/ΔQ=$ 1 ,
Q= 40 Q= 50p=$ 5 MR=0.
(η> 1 )
(η< 1 )
(η)