Question

(a) Using the graph of a demand curve, intuitively explain why marginal revenue is always less than the price.

(b) Prove the result from part (a) formally. (you can use any of the equations obtained in class).

Answer 1

As we can see in the picture below that at quantity Q1 .. MR is less than the price. This can be easily by equations. We let the price function to be linear. Then we calculate total reveneue and marginal revenue as done in the figure. Thus we can say that slope of MR is twice the slope of th demand curve( represented by price func.)

MR MR. b 1-2 노

Thus we can say that any change in quantity will change the MR more than the price. Thus as the picture also explains that at any quantity MR is less than the price.

Also as we know that marginal revenue is the revenue earned from selling one extra unit of output. Whereas demand curve represents the reservation price or the highest price a person is willing to pay for a particular unit of good. Even intuitively we can say that demand price will always be greater than the marginal revvemue.