Question
Under perfect competition, MR = AR, but under monopoly, MR < AR. Explain.
✓
Answer
Under Perfect Competition, AR = MR. Here, industry is the price maker and firm is the price taker. A firm has to accept the price as given by the industry. At this price a firm can sell any amount of the commodity it wants. This means that with sale of every additional unit, additional revenue (i.e., MR) and average revenue (AR) will be equal to the price and thus equal to each other.
But under Monopoly, MR < AR. Here, more of a commodity can be sold only at a lower price and thus MR < AR. AR and MR curves of the firm are downward sloping indicating more units of output can be sold at lower price. MR curve is below AR curve because sale of an extra unit forces down the price at which all units can be sold.
But under Monopoly, MR < AR. Here, more of a commodity can be sold only at a lower price and thus MR < AR. AR and MR curves of the firm are downward sloping indicating more units of output can be sold at lower price. MR curve is below AR curve because sale of an extra unit forces down the price at which all units can be sold.
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