Question

In: Economics

Write your responses in complete sentences. Each answer should be two - three paragraphs (150 –...

Write your responses in complete sentences. Each answer should be two - three paragraphs (150 – 250 words) in length.

1. What is Marginal Revenue? For both Perfect Competition and Monopoly, explain the relationship between marginal revenue and demand.

Solutions

Expert Solution

Answer : Marginal Revenue : when firm earn additional revenue by selling additional one unit of output then this additional revenue is known as marginal revenue.

Perfect competition : In perfect competition the relationship between marginal revenue and demand is that,

Marginal Revenue = Demand.

This means that in perfect competition marginal revenue and demand are equal. Hence in perfect competition the marginal revenue curve and price are same. So, in perfect competition the price (P)  is equal to marginal revenue (MR), i.e., P = MR.

Monopoly : In monopoly the relationship between marginal revenue and demand is that,

Demand = 2 * Marginal Revenue .

This means that in monopoly the demand is double of marginal revenue. Hence in monopoly the demand curve lies above the marginal revenue curve. For this reason, in monopoly the price (P) is greater than the marginal revenue (MR), i.e., P > MR.  

Rahul Sunny answered 2 years ago
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