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The relationship between marginal revenue and price in a monopolistic market is best understood by c

# The relationship between marginal revenue and price in a monopolistic market is best understood by c

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The relationship between marginal revenue and price in a monopolistic market is best understood by  considering a numerical example, such as the one  provided in Table 1  .  TABLE 1 Market Demand and Monopoly Revenue Output Price Total revenue Marginal revenue 0 \$14 \$0 1 12 12 \$12 2 10 20 8 3 8 24 4 4 6 24 0 5 4 20 −4 The first two columns of Table 1  , labeled “Output” and “Price,” represent the  market demand  schedule  that the monopolist faces. As the price falls, the market's demand for output increases, in  keeping with the law of demand. The third column reports the total revenue that the monopolist  receives from each different level of output. The fourth column reports the monopolist's marginal  revenue that is just the change in total revenue per 1 unit change of output. Note that the  monopolist's marginal revenue is declining as output increases.  Suppose the monopolist is currently producing 2 units of output for which it is receiving a price of \$10
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Unformatted text preview: per unit and a total revenue of \$20 (2 × \$10). Now, consider what happens when the monopolist increases its output to 3 units. The price that the monopolist can expect to receive falls to \$8 per unit. At this new lower price, the total revenue the monopolist receives for the first two units of output it supplies falls from \$20 to \$16 (2 × \$8), a loss of \$4. The monopolist's marginal revenue is equal to the \$8 that it receives from the third unit sold minus the loss in total revenue that it receives on the first two units due to the new lower price. Hence, the marginal revenue the monopolist receives from the third unit sold is \$8 − \$4 = \$4, which is below the market price of \$8....
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