question_answer

Draw Average Revenue (AR) and Marginal Revenue (MR) curves in a single diagram of a firm which can sell more units of a good only by lowering the price of that good. Explain.

Answer:

A firm can sell more only by lowering the price in imperfect market forms such as monopoly and monopolistic competition. In these market forms, the Average Revenue (AR) curve is downward sloping. When AR curve is falling, Marginal Revenue (MR) is less than AR. Therefore, MR curve lies below the AR curve. The slope of MR is half the slope of AR.      Diagram Showing Average Revenue and Marginal Revenue Curves It can be seen from the above diagram that at the mid-point of AR curve, MR is zero and below mid-point of AR, MR becomes negative.