* Your assessment is very important for improving the work of artificial intelligence, which forms the content of this project
Defining Marginal Revenue for a Firm with Market Power Marginal revenue (MR) is the change in total revenue (TR) that a firm gets from selling one more unit of its product. For a monopolist, marginal revenue is always less than price because to sell an additional unit of its product, a firm has to lower the price not only for the marginal unit but for all units. Average revenue (AR) is the total revenue divided by output. AR is the per unit revenue, and for a monopolist it is always the price. In the example on the left, assume that the firm has a monopoly restaurant at an airport. It can sell different quantities of meals at different prices, as shown in the two far left columns. It has a down-sloping demand curve. You then multiply P x Q at each point to get total revenue (TR). Marginal revenue (MR) is the change in total revenue at each price/output combination. There are some things that you should remember about the MR/TR relationship: 1. TR increases for awhile then begins to decrease. At first, as the price falls, the firm sells more dinners that more than compensate for the lower price, but later the additional meals do not make up for lost revenue from selling all of them at a lower price. 2. When TR is maximum, MR is zero. 3. When MR becomes negative, TR is falling. From the production schedule on the previous page, you can draw a demand curve which tells you the quantity sold at any given price. The demand curve is also called the average revenue (AR) curve. Average revenue is total revenue/quantity. For a monopolist, average revenue is the same as the product price. The most important concept to remember in this lesson is that marginal revenue is always less than the price for a monopolist. The marginal revenue curve is depicted on the left. The reason that it is less than the price at all output levels is that if the firm wants to sell more dinners, it has to lower the price for all customers. For a competitive firm, marginal revenue is always the price because one additional sale increases total revenue by the price. For a monopolistic firm, total revenue changes by something less than the price because when it lowers the price, it has to lower it for all customers.