Question

State the relationship between AR and MR under monopoly.

Answer 1

• Average Revenue (AR) and Marginal Revenue (MR) have a relationship where MR is always less than AR in a monopoly.
• The reason for this is that in order to sell more units, a monopolist must lower the price of their product.
• The extra income (MR) is less than the price (AR) since the price reduction applies to all units sold, not just the extra one.
• Because of this, the MR curve always rests below the AR curve, even though both curves slope downward.
• This shows how, in a monopoly, the corporation has the ability to set prices yet receives less money for each additional unit sold.