Answer to Question #310199 in Microeconomics for joseph

Question

Explain intuitively why marginal revenue is less than the price for a monopolist, but marginal revenue is equal to the price for a perfectly competitive firm

Answer 1

In a monopoly the profit maximizing quantity is where marginal revenue is equal to marginal cost. This tells us the quantity of production.

The firm can restrict output and raise prices, the price that the monopolist charges is above the marginal revenue and marginal cost. This is because entry into the market is difficult because the monopolist has a differentiated product or there are high entry costs.

In perfect competition entry and exit is easy so the price the firms can charge is equal to marginal cost. The firms can't restrict output and increase prices so they can only charge the P = MC and if price is constant then it is always equal to the marginal revenue.