Question

Marginal revenue for a firm in a competitive market is constant, but this is not the case for a monopolist. So, the marginal revenue of a monopolist might change for different quantities of production. Please explain why.

Answer 1

The marginal revenue is the addition made to the total revenue when an additional unit of the product is sold. It is calculated by dividing the change in total revenue with the change in quantity sold.  

In a perfectly competitive market, the firm is price taker means they cannot influence the market price by changing their price and output decisions. This means the competitive firms can sell any output at the market price, since the market price is constant the marginal revenue and the average revenue also the same.

For eg: The firm in a perfectly competitive market sell at $5 , so the first unit gives a a total revenue of , and the second unit produce a total revenue of , and the third unit and so on , it is to be noted that the marginal revenue remains the same(Change in total revenue ) , this is because the price has not changed at all. In the perfect competition there is no price effect that is why the marginal revenue is constant.

But in a monopoly the situation is different , the monopoly is a market structure characterized by single seller, so he has got the absolute market power. The monopolist can charge any price he wants, but to increase the quantity sold the monopolist should decrease the price and this will cause the marginal revenue decrease compared to the previous unit sold. There is a price effect in the monopoly that is why the marginal revenue is lower than the price.