4.Why is the Marginal revenue function always lower than the inverse demand func

Question

4.Why is the Marginal revenue function always lower than the inverse demand function? Can it Marginal revenue ever be the same as price? Explain.

5.Let’s get back to the pumpkin farm exercise. Suppose that the market is characterized by perfect competition with a market demand of Qd=840-5P.

a.How will each farm choose output to maximize profit in this market? (i.e.: what is the optimal output function?)

b.If there are 200 identical farms in this market, what is the market supply? How much will be exchanged in equilibrium? What will the price and output per farm be in equilibrium?

c.What are profits for each farm? Can this equilibrium be sustained in the long run? What do you expect will happen?

d.Look at your answer c in question 1. Why is the typical farm not operating at that level? Wouldn’t they be more efficient if they did? Please make sure you explain this very carefully, you can use math or intuitive analysis to do this.

Explanation / Answer

Only question 4 can be answered since MC is missing in question 5.Anyway I am required to answer only 1 question though I will like to answer even second

1 This is because in imperfect competition each successive unit sells at lower price. Now when price falls all previous units are also sold at this lower price. In other words marginal revenue of successive units is less than price. That is why marginal revenue function is less than inverse demand function. But under perfect competition each unit is sold at same price. Thus here the two curves are same

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