Price is always greater than marginal revenue because:
A) the monopolist cannot charge a price below the demand curve.
B) the reduction in revenue due to the higher price is subtracted from the increase in revenue from the extra unit produced.
C) the reduction in revenue due to the lower price is subtracted from the increase in revenue from the extra unit produced.
D) the increase in revenue due to the lower price is subtracted from the increase in revenue from the extra unit produced.

Question

Quizplus · Accepted Answer

Marginal revenue is the change in revenue that occurs when producing one additional unit of output. A monopolist faces a downward-sloping demand curve, which means that in order to sell more units, they must decrease the price. However, when the monopolist lowers the price, they not only gain revenue from selling an additional unit, but they also lose revenue from selling all previous units at a lower price. Therefore, the increase in revenue from the extra unit produced is less than the reduction in revenue from the lower price, resulting in marginal revenue always being less than the price. More specifically, the reduction in revenue due to the lower price is subtracted from the increase in revenue from the extra unit produced, leading to the answer choice C.

Price Is Always Greater Than Marginal Revenue Because