As output rises,the monopolist's marginal revenue
A)remains identical to price.
B)stays constant.
C)declines as quickly as price.
D)declines more quickly than price.

Question

Quizplus · Accepted Answer

A monopolist faces a downward-sloping demand curve, so to sell more output, it needs to reduce the price. Hence, as the monopolist increases output, it needs to reduce the price, causing marginal revenue to decline. Moreover, the decline in marginal revenue is steeper than the decline in price. This happens because to sell more units, the monopolist must lower the price not just on the additional unit (which would have the same price as the original unit) but on all units sold. Therefore, the extra revenue generated by selling another unit of output is offset by the loss in revenue caused by lowering the price on all units sold. As a result, marginal revenue decreases more rapidly than the price.

As Output Rises,the Monopolist's Marginal Revenue