question_answer

Draw average revenue and marginal revenue curves in a single diagram of a firm which can sell more units of a good only by lowering price of that good. Explain.

Answer:

The firm that can sell more units of a good only by lowering the price of that good is a monopoly firm. A monopoly firm faces a downward sloping AR and MR curves. AR curve is also the demand curve for the monopoly firm.

The AR curve and the MR curve for a monopoly firm are depicted below.

A monopoly firm faces a downward sloping demand curve (AR curve) because it has no control over the quantity of the output that he can sell in the market. Although, it is a price maker, it depends on the buyers what quantity of output they want to purchase at the price fixed by the monopolist. If the monopolist fixes a higher price, then lesser quantity of the output will be demanded and lesser quantity will be sold in the market. On the other hand, if he fixes a lower price, then higher quantity of the good will be sold. This implies the negative relationship between the monopolist's price and the quantity demand by the buyers. This negative relationship is depicted by the falling AR curve and MR curve. Also, MR curve is more elastic than the AR curve and lies below me AR curve.