Question

5. Answer the following on marginal revenue.

a. Suppose a firm operates in a perfectly competitive market where the market price is $100. What is the marginal revenue for selling an additional unit for this firm? Please explain how the marginal revenue compares to price.

b. Suppose a firm operates in monopolistically competitive market where it sells 5 units at a price of $30 per unit. If it lowers its price to$29, it sells 6 units. What is the marginal revenue of selling the sixth unit? Please explain how the marginal revenue compares to price.

c. Explain how the marginal revenue curve for a perfectly competitive firm differs from the marginal revenue curve for a monopolistically competitive firm.

Answer 1

a)Marginal revenue in perfect competition is always equals to price as shown in diagram. Marginal revenue is same for all units because in perfect competition price will remain same. In perfect competition there is many firms selling same product so they can not charge higher prices. They are price takers not price makers.

In this competition Marginal revenue = Average revenue = Price = demand curve.

b) Marginal revenue is change in total revenue when one more unit is sold.

Total revenue at price $30 = Quantity * price = 5 * 30 = 150

Total revenue at price $29 = 6 * 29 = 174

So marginal revenue for 6th unit = 174 - 150 = $24

In monopolistic competition demand curve is downward sloping because there is many firms selling differentiated products. Firms marginal revenue is also downward sloping. If firm want to increase sell they have to decrease the price.

c) As shown in above diagram marginal revenue curve for perfectly competitive firm is paralle to X-axis and in monopolistically competitive firm marginal revenue curve will be downward sloping.

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