Marginal Revenue & Monopoly - PowerPoint PPT Presentation

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Marginal Revenue & Monopoly

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  1. Marginal Revenue & Monopoly

  2. Marginal Revenue • Marginal Revenue (MR) – additional revenue gained from selling one more unit • MR = ∆ in Total Revenue/ ∆ in Quantity Sold Example:Firm sells 5 more T-Shirts at $20 each MR = $100/5 units = $20

  3. Marginal Revenue Handout

  4. D MR Demand > Marginal Revenue If a monopoly wants to sell more, it must lower price Price falls for ALL units sold. Price $11 10 Example: Lower price from $8 => $7 to sell 1 more unit 9 8 7 Old TR $24 ($8 X 3) New TR = $28 ($7 X 4) MR = $4 6 5 4 3 2 1 This is why P ≠ MR 0 –1 Quantity of Water 1 2 3 4 5 6 7 8 –2 –3 –4

  5. Profit Maximization • All profit-maximizing firms set: MR =MC • Competitive firms: P = MR = MC • set Price = MC • Monopoly firm = P > MR = MC • Set MR = MC P > MR P = MR

  6. Profit Maximizaton MC MC Set P = MC ------------- E1 Set MR = MC E1 --------------------- -------------