Answer to Question #179478 in Economics for Akshay Surve

Question

explain the relationship between AR and MR in details?

Answer 1

Let us consider a situation when a monopoly firm produces and sells a certain amount of Qg units of product X and sets a single price for all these units of product. In other words, if a monopoly firm has released 100 units of product X, then it will offer all 100 units to buyers at the same price. If the demand for product X is known (i.e., the demand curve for the product produced by the firm is plotted), then the values ​​of the average and marginal revenue can be calculated: in the case when all units of the product are sold at the same price, the average revenue is equal to the price of the product, AR = P. However, in contrast to perfect competition, where the marginal revenue is also equal to the price, in a monopoly environment, the marginal revenue of MR is always less than the average revenue AR, i.e. MR is always less than the price of the item.