The marginal revenue of a non-price-discriminating monopolist lies below the demand curve because
a) the demand curve is unit elastic.
b) the monopolist must lower the price on all units sold in order to sell additional units.
c) the monopolist is a price taker.
d) the marginal revenue curve coincides with the average revenue curve.
Marginal revenue is the additional revenue earned by the monopolist when they sell an extra unit of output in the industry. The monopolist is a price maker as they are the single firm existing in the industry. This makes them exert the maximum market power by full control over the price of the commodity they are selling.
Answer and Explanation: 1
The marginal revenue of a non-price-discriminating monopolist lies below the demand curve because b) the monopolist must lower the price on all units sold in order to sell additional units.
The marginal revenue lies below the demand curve because the monopoly is a price-maker. To sell additional units of their product, the monopoly has to lower the price to earn profits in the market. If they do not lower the price, the demand for products will fall which will make them incur a loss. To prevent loss and maximize profit, the price is lower. This makes marginal revenue less than the demand curve (average revenue).
B. The demand curve facing a monopolist is not unit elastic. It slopes in the downward direction and is sensitive to changes in prices. It can be both elastic as well as inelastic.
C. The monopoly is a price-maker rather than a price taker. Being a single firm in the industry, it dictates the price to the entire market.
D. The marginal revenue is less than the average revenue for the monopolist.
Correct Option: B
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fromChapter 7 / Lesson 2
Understand the meaning of a monopoly in economics and what it does. Also, know the characteristics of a monopoly and the different types of monopolies.