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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