For a monopolist, marginal revenue will turn negative when:
A)the price effect on revenue is greater than the output effect
B)the output effect on revenue is greater than the price effect
C)demand for the good has turned negative
D)An increase in the price results in a fall in demand

Question

Quizplus · Accepted Answer

Marginal revenue represents the change in total revenue that results from a unit change in output. As the monopolist increases output, it faces two effects on revenue: a price effect and an output effect. The price effect is negative because to sell more output, the monopolist must lower the price on all units sold. The output effect, on the other hand, is positive because selling more units increases total revenue. As long as the output effect is greater than the price effect, marginal revenue will be positive. However, when the price effect is greater than the output effect, the monopolist is selling each additional unit at a lower price than the previous unit, leading to a decrease in marginal revenue. Therefore, the correct answer is A) the price effect on revenue is greater than the output effect.

For a Monopolist, Marginal Revenue Will Turn Negative When