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IAI Actuarial Core Principles · Business Economics · Profit maximisation under perfect competition and monopoly

A single firm is the only supplier of a product in a market and faces the downward-sloping market demand curve. Which statement about its marginal revenue (MR) and price is correct?

Marginal revenue is below price at every positive output, because a monopolist facing a downward-sloping demand curve must cut the price on all units to sell one more. The revenue lost on existing units reduces the gain from the extra unit.

  1. AMR is equal to price at every output level
  2. BMR is below price at every positive output levelCorrect
  3. CMR is above price at every positive output level
  4. DMR is constant whatever the output level
  5. MR is always negative

Explanation

To sell an extra unit, the monopolist must lower the price on all units it sells. The extra revenue from the new unit is therefore offset by the revenue lost on earlier units, so MR lies below price. MR equals price only for a price-taker in perfect competition.

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