If a monopolist increases output from 14 to 15 by lowering its price from $32 to $31, marginal revenue is?

Expert Answers

An illustration of the letter 'A' in a speech bubbles

Marginal revenue can be defined as the increase in revenue from one additional item sold minus total price reductions on all other units. In this case, that would be $31 minus $14 (one dollar price reduction multiplied by 14 units), or $31 - $14 = $17.

However, if 14 units have already been sold at $32, the marginal revenue would be $31 (from selling one additional unit at $31). Presumably, if the next production run were at the higher amount of 15 units, all would have to be sold at the lower price (which would subtract $14 from the additional $31 gained from the additional unit sold), as the old customers would likely find out about the lower price the new customer got.

In a monopoly (where one producer can significantly affect the market price), micro-economic theory assumes that the market is already saturated at the current market price. That isn’t necessarily the case; theoretically, the monopoly producer might be charging less than could be obtained, due to unmet or potential demand.

Demand could be increased by improvements in quality and letting potential customers know of the improvements. Or, by an increase in the incomes of customers (more might then be able to afford the item).

In a competitive market, unless all producers used identical capital equipment and methods, units of different producers would be unique, and thus price comparisons would be difficult to evaluate.

Approved by eNotes Editorial Team
An illustration of the letter 'A' in a speech bubbles

We can find the answer to this by using the equation for finding marginal revenue.  This equation is

marginal revenue = change in total revenue/change in quantity.

In this case, the original total revenue is found by multiplying the 14 units made by the $32 charged for each unit.  14*32 = $448.  The new total revenue is found by multiplying the 15 units made by the $31 charged for each unit.  15*31 = $465 To find the marginal revenue, we calculate $465 - $448 and get $17.  Since the change in quantity is 1, marginal revenue is $17.

The marginal revenue received by the monopolist for the 15th unit is $17. 

Approved by eNotes Editorial Team

We’ll help your grades soar

Start your 48-hour free trial and unlock all the summaries, Q&A, and analyses you need to get better grades now.

  • 30,000+ book summaries
  • 20% study tools discount
  • Ad-free content
  • PDF downloads
  • 300,000+ answers
  • 5-star customer support
Start your 48-Hour Free Trial