Question

2) Demand and Marginal Revenue

a) Explain why a single price monopolist faces a downward sloping demand and why their downward sloping demand results in P>MR.

b) Explain why a 1) perfectly competitive market and 2) Perfect (first degree) price discriminating monopolist determines their demand curve, in general compare their demands, and despite their difference in demand why P=MR for both.

c) For a member of a cartel (for a firm in a cartel), explain the relationship between price and marginal revenue before they form a cartel and after they form a cartel. (Hint: why do cartels also have a quota for each member?)

Answer 1

a)

Downward sloping demand curve suggests that more commodity can be sold out in market at lower price. It also suggests that monopoly power does not mean that monopoly can charge any price arbitrarily. Slope of demand curve also indicates about elasticity of demand.

P =AR , and demand curve is downward sloping, when AR and MR are downward sloping. The MR would move fast than that of AR or P. Hence, P >MR.

c)

In perfectly competitive market, for single firm price is decided by the demand and supply forces. Hence, P =AR= MR.

Further, in first degree price discrimination, firm tends to get all consumer surplus thereby rendering consumers to pay maximum price they want to pay. Hence, In such market, P =AR = MR. Hence, P =MR in both Market.

c)

In cartel, firms combines their MCs and accordingly equate MC with MR. Hence, total output that to be produced is decided. They try to behave like monopoly.

Price is set where MR and MC are equal.

They also decide quota of production that can be produced by member. and Now member can produce quantity of good that has been specified in agreement. Now each member can set price according to its MC and MR.