were calculated in the table. For purposes of illustration, a straight-line
demand curve has been chosen.
Notice that marginal revenue is positive up to 50 units of sales, indicating
that reductions in price between $10 and $5 increase total revenue.
Notice also that marginal revenue is negative for sales greater than 50
units, indicating that reductions in price below $5 cause total revenue to
fall even though total quantity sold increases.
The figure also illustrates the two opposing forces that are present
whenever the monopolist considers changing its price. As an example,
consider the reduction in price from $6 to $5. First, the 40 units that the
firm was already selling bring in less money at the new lower price than
at the original higher price. This loss in revenue is the amount of the price
reduction multiplied by the number of units already being sold
This is shown as the shaded area ② in the
figure. The second force, operating in the opposite direction, is that new
units are sold, which adds to revenue. This gain in revenue is given by the
number of new units sold multiplied by the price at which they are sold
This is shown as the shaded area ① in the figure.
The net change in total revenue is the difference between these two
amounts. In the example shown in the figure, the increase resulting from
the sale of new units exceeds the decrease resulting from existing sales
now being made at a lower price. Since total revenue has increased as a
result of the price reduction, we know that marginal revenue is positive.
To calculate the marginal revenue, remember that
1( 40 units×$ 1 perunit=$ 40 ).
( 10 units×$ 5 =$ 50 ).
MR=ΔTR/ΔQ.