Explain in detail the shape of a perfectly competitive firm’s Total Revenue function and a monopoly's...

Explain in detail the shape of a perfectly competitive firm’s Total Revenue function and a monopoly's Total Revenue function. Explain why they are different.

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Expert Solution

In perfect competition, the firms are price taker that is no form is having the market power. Since no form is having the market power therefore the price is determined through the market forces that is supply and demand.

As we know in perfect competition there are large number of sailors who deal in an identical product. Hence, the elasticity of demand is very high that is perfectly elastic. Therefore the firms face a perfectly elastic demand curve that is horizontal to the x-axis.

Since the firms are price taker therefore price remains constant to all the firms at all level of output.

The profit maximizing condition of a perfectly competitive firm is P = MC.

From this we can conclude that the total revenue curve of a perfectly competitive form is positive linear curve with constant slope it is an upward sloping linear curve.

In case of a monopoly the monopolist is having the market power that is the firm is having the power to influence the price of the product therefore the face in negative downward sloping demand curve.

Since the monopolist is facing a negative downward sloping demand curve therefore with the change in demand the total revenue curve also changes.

The monopolist demand curve will be elastic in some region of the demand curve, unitary elastic as well as inelastic along the demand curve.

At higher price level the demand curve is elastic. In case of Elastic demand curve higher the price lower the revenue and lower the price higher the revenue therefore as we move along from a higher price to a lower price the total revenue of the monopolist increases and when the demand curve is unitary elastic the total revenue is maximum after unitary elastic the demand curve becomes inelastic therefore with the decrease in price the total revenue starts decreasing.

Due to this fact we are having an inverted U shape of Total revenue curve for a monopolist

Images just for reference.

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Rahul Sunny answered 2 weeks ago

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