Download Marginal Revenue Problem

Marginal Revenue Problem
The most significant difference between a purely competitive firm and a monopoly is that the monopoly deals with
the actual, downward-sloping, market demand curve. The purely competitive firm is too small to affect the price
and, therefore, perceives its demand curve to be horizontal at the market price. Because the monopolist's demand
curve is downward sloping, its marginal revenue curve is not equal to its demand curve. The following problem is
designed to convince you of this fact.
Numerical Solution
Price
Quantity
Total Revenue
(Price  Quantity)
6
0
0
5
1
5
4
2
8
3
3
9
2
4
8
1
5
5
0
6
0
Marginal Revenue
(ΔTR/ΔQ)
XXXXXXXXXXXXXX
(5-0)/(1-0) = 5
(8-5)/(2-1) = 3
(9-8)/(3-2) = 1
(8-9)/(4-3) = -1
(5-8)/(5-4) = -3
(0-5)/(6-5) = -5
1.
2.
3.
4.
5.
6.
7.
XXXXXXXXXXXXXX
Calculate the numbers for Total Revenue and Marginal revenue in the above table.
Construct a set of axes with each axis about 5" long.
On the vertical axis, put P ($/Q).
On the horizontal axis put Q.
Plot the demand curve.
Plot the marginal revenue curve. Be sure to plot marginal revenue between levels of output. (For example, as
quantity changes from 0 to 1, plot marginal revenue at ½ unit. As quantity goes from 1 to 2, plot marginal
revenue at 1.5, etc.)
Why does marginal revenue look the way that it does?
Graphical Solution
Demand and Marginal Revenue
Demand
Marginal Revenue
3
4
7
6
5
4
3
2
Price
1
0
0
1
2
-1
-2
-3
-4
-5
-6
-7
Quantity
5
6
7