IAI Actuarial Core Principles · Business Economics · Profit maximisation under perfect competition and monopoly
Which statement about a monopolist's marginal revenue is correct?
A monopolist's marginal revenue lies below its demand curve. To sell an extra unit it must cut the price on all units, so the gain from the new unit is partly offset by lost revenue on earlier units, making MR less than price.
- AIt lies below the demand curve because selling more requires a lower price on all unitsCorrect
- BIt lies above the demand curve because extra units add to revenue
- CIt equals price at every output level
- DIt is always negative
- It is constant and equal to average cost
Explanation
For a downward-sloping demand curve, selling an extra unit needs a lower price on all units sold, so MR = P plus a negative term. Hence MR lies below the demand (AR) curve. MR equals price only for price takers.
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