Question 1

What is the difference between average revenue and marginal revenue in a monopoly?

Accepted Answer

Average revenue (AR) is revenue per unit sold, calculated by dividing total revenue by quantity. Marginal revenue (MR) is the additional revenue from selling one more unit. In a monopoly, the MR curve slopes downward more steeply than the AR curve because the monopolist must lower the price on all units to sell an additional unit, affecting MR more dramatically.

Question 2

Why does a monopolist's marginal revenue fall below average revenue?

Accepted Answer

A monopolist must lower the price on all units sold to sell an additional unit. This price reduction affects marginal revenue more dramatically than average revenue. MR equals AR only for the first unit; afterward, MR remains less than AR, explaining why monopolists typically produce less and charge higher prices compared to firms in competitive markets.

Question 3

How does the total revenue curve behave in a monopoly?

Accepted Answer

The total revenue (TR) curve initially rises at a decreasing rate, reaches a maximum point, then declines. This occurs because to sell more units, a monopolist must lower the price. When TR is increasing, MR is positive; when TR reaches its maximum, MR equals zero; when TR is decreasing, MR becomes negative.

Question 4

Why is the demand curve also the average revenue curve in a monopoly?

Accepted Answer

In a monopoly, the monopolist sets the market price and quantity sold. Since average revenue equals price per unit, the AR curve mirrors the demand curve. The downward-sloping demand curve reflects that the product's quantity demanded is not highly responsive to price increases due to the lack of suitable substitutes.

Question 5

What does it mean when marginal revenue equals zero in a monopoly?

Accepted Answer

When marginal revenue equals zero, total revenue reaches its maximum point. At this point, selling additional units generates no additional revenue. Beyond this point, MR becomes negative, meaning total revenue declines as the monopolist sells more units by further lowering prices.

Question 6

How is total revenue calculated in a monopoly market?

Accepted Answer

Total revenue (TR) is calculated by multiplying the price per unit by the quantity sold (TR = P × Q). In a monopoly, the TR curve can be nonlinear, increasing at diminishing rates due to the inelastic portion of the demand curve. This reflects the monopolist's need to lower prices to increase quantity sold.

Question 7

Why do monopolists produce less output than perfectly competitive firms?

Accepted Answer

Monopolists produce less because MR is less than AR for all units beyond the first. This relationship means the revenue gained from selling additional units declines faster than in competitive markets. Combined with profit maximization strategies, this leads monopolists to restrict output and charge higher prices than firms in competitive markets.

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