1. Explain why the MR curve is below the demand curve for a single price seller.

Question

1. Explain why the MR curve is below the demand curve for a single price seller. Can the MR curve equal the demand curve for a downward sloping demand curve? Under what conditions?

2. Assume that a monopolist is charging a Price > ATC. Draw a graph that shows the firm’s demand curve, MR curve, MC curve, the profit maximizing level of output and price, the ATC curve, and highlight the rectangle representing the firm’s profit.

3. Redo the graph in #2, but this time assume Price < ATC.

4. Colleges and universities often charge different prices to students to attend college through the use of scholarships. Suppose two students are identical except for their SAT scores. Which student will likely pay more for college, the student with the higher or lower SAT scores? Use graphs to support your answer (hint.­think price discrimination

Explanation / Answer

First question is answered below

1.

The MR curve lies below demand curve for a monopolist because of the price effect. That is, the seller must need to reduce prices to sell additional output, making MR less than price as it gets less revenue for previous units sold as well, thereby making it lie below demand curve.

MR will equal downward sloping demand curve only when price is same or constant throughout.

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