Managerial Economics Chp. 9 Solutions

6. (Revenue Schedules) Explain why the marginal revenue curve for a monopolist lies below its demand curve, rather than coinciding with the demand curve, as is the case for a perfectly competitive firm. Is it ever possible for a monopolist’s marginal revenue curve to coincide with its demand curve?

The perfectly competitive firm faces a perfectly elastic demand curve, indicating that it can sell additional units of its output without lowering its price. Thus, each additional unit has a marginal revenue equal to the prevailing market price. However, the monopolist faces a downward-sloping demand curve, indicating that it can sell additional units of its output only by lowering the price on all units. If the monopolist lowers its price, it gains revenues by selling more units but loses revenues on units that were previously selling at the higher price. Marginal revenue is the difference between the revenue gain from selling one more unit (which is the price of the unit) and the revenue loss from lowering the price on the other units. Thus, beginning with the second unit sold, marginal revenue is below the price, and the marginal revenue curve is below the demand curve. A monopolist’s marginal revenue curve can coincide with its demand curve if the firm is practicing perfect price discrimination—selling each unit for a different price.

7. (Revenue Curves) Why would a monopoly firm never knowingly produce on the inelastic portion of its demand curve?

In this portion of the demand curve demand is inelastic with respect to price. When demand is inelastic, a decrease in price actually reduces total revenue in spite of the increased unit sales. Thus, marginal revenue is negative. In addition, total cost is higher since output is increased, so profit must fall. Therefore, a firm will never produce where marginal revenue is negative.

8. (Profit Maximization) Review the following graph showing the short-run situation of a monopolist. What output...