Question

A firm is able to sell more quantity of a good only by lowering the price. Then what would be firm’s marginal revenue, as it goes on selling?

• A. Greater than Average revenue
• B. Less than Average revenue
• C. Equal to Average revenue
• D. Zero

Hint:

In monopolistic or imperfectly competitive markets, marginal revenue is less than average revenue because lowering the price to sell more units reduces the revenue gained from previous units.

Answer 1

The Correct Option is B

Step 1: Understanding Marginal Revenue and Average Revenue:
Marginal revenue (MR) refers to the additional revenue a firm gains from selling one more unit of a good or service. Average revenue (AR) is the total revenue divided by the quantity of goods sold. For firms with market power, the marginal revenue decreases as more units are sold because the price must be lowered to increase the quantity sold, leading to a decrease in marginal revenue.
Step 2: Analyzing the Situation:
In a case where a firm is able to sell more by lowering the price, this generally indicates that it is in a monopolistic or imperfectly competitive market. As more units are sold, the firm must lower the price not just for the additional units, but for all the previous units as well. This means that marginal revenue will be less than average revenue.
Step 3: Analyzing the Options:
- Option (A) Greater than Average revenue: This is incorrect. As more units are sold at a lower price, the marginal revenue will be less than average revenue.
- Option (B) Less than Average revenue: This is the correct answer. As the firm lowers prices to sell more units, marginal revenue will decrease and be less than average revenue.
- Option (C) Equal to Average revenue: This is incorrect. In monopolistic markets, marginal revenue is generally less than average revenue.
- Option (D) Zero: This is incorrect. Marginal revenue does not become zero unless the firm is at the point of maximum output, where additional units no longer add to total revenue.
Step 4: Conclusion and Answer:
The correct answer is (B) because as the firm lowers its price to sell more units, its marginal revenue will be less than average revenue.