Problem 18 What is the usual shape of a tot... [FREE SOLUTION]

Chapter 9: Problem 18

What is the usual shape of a total revenue curve for a monopolist? Why?

Short Answer

Expert verified

The usual shape of a total revenue curve for a monopolist is an inverted U-shape. This is due to the interplay between price and quantity. As the monopolist increases sales volume, it must lower the price. Initially, the total revenue rises with increasing quantity, but eventually, the decline in price dominates, and the total revenue starts to fall. The inverted U-shape results from the balance between increased sales and lowering prices to sell more units.

Step by step solution

1. Understanding Total Revenue

Total revenue is the total amount of money a firm receives from selling its product. For a monopolist, it can be calculated by multiplying the price of the good by the quantity of goods sold (Q 脳 P).

2. The Monopolist's Demand Curve

A monopolist is a single firm controlling a market. Consequently, the demand curve for a monopolist's product is a downward-sloping line, implying that the monopolist has to lower the price in order to sell more of its product. This is in contrast to a perfectly competitive market where the demand curve would be horizontal, representing that the price remains constant.

3. Marginal Revenue

Marginal revenue refers to the additional revenue generated by selling one additional unit of the good. For a monopolist, the marginal revenue curve also slopes downward and lies below the demand curve. The slope of the marginal revenue curve is steeper compared to the demand curve. This implies that as the monopolist sells more, the additional revenue generated from selling an extra unit is decreasing.

4. Monopolist's Total Revenue Curve

To derive the total revenue curve for a monopolist, we need to consider the relationship between price, quantity, and revenue. As the monopolist increases sales volume, the price has to be lowered, which also reduces the additional revenue gained from selling further units (marginal revenue). Initially, total revenue will rise with an increasing quantity, but eventually, the decline in price will dominate, and the total revenue will start to fall. Therefore, the total revenue curve for a monopolist will exhibit an inverted U-shape.

5. Why the Total Revenue Curve for a Monopolist is Inverted U-shaped

The usual shape of a total revenue curve for a monopolist is an inverted U-shape due to the interplay between price and quantity. When a monopolist starts selling more products, it initially gains more revenue due to increased sales volume. However, since the monopolist has to lower its price to sell more units, the additional revenue from selling those extra units decreases. Eventually, the losses from decreasing the price outpace the gains from selling more units, causing total revenue to decrease. This results in an inverted U-shape for the total revenue curve.