Question

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1 Is it possible for marginal revenue to be negative for a firm selling in a perfectively competitive market? Is it possible for marginal revenue to be negative for a firm selling in a monopolistically competitive market? Briefly explain.

. 2. Central Grocery in New Orleans is famous for its muffaletta, a large round sandwich filled with deli meats and topped with a tangy olive salad. Suppose the following table represents cost and revenue data for Central Grocery.

Muffaletta Sold per Day	Price (P)	Total Revenue (TR)	Marginal Revenue (MR)	Total Cost (TC)	Marginal Cost (MC)	Average Total Cost (ATC)	Profit
0	$15			$12
1	14			18
2	13			20
3	12			21
4	11			23
5	10			26
6	9			30
7	8			35
8	7			42
9	6			52
10	5			78

Fill in the table. What is the profit-maximizing price and quantity, and what profit will be earned at that level of production?

Answer 1

1.

No, it is not possible to have a negative marginal revenue for a perfectly competitive market. For a perfectly competitive firm, marginal revenue is equal to price and average revenue, all three of which are constant.

Its is however, possible in a monopolist market to have negative marginal revenue. For a monopoly there is a price effect. It must reduce price to sell additional output. So the marginal revenue on its additional unit sold is lower than the price, because it gets less revenue for previous units as well (it has to reduce price to the same amount for all units). Marginal revenue can even become negative – that is, the total revenue decreases from one output level to the next.

2.

Since the profit-maximising condition is

MR=MC

Corresponding to this intersection, the price is $9 and quantity is 6 units.

Profit (maximum) = $24