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Why does a monopolist's marginal revenue lie below its price when it expands sales by one unit?
ABecause the extra unit is sold at a price above the previous price
BBecause it must lower the price on all units sold, not just the extra unit
CBecause marginal cost always rises faster than price falls
DBecause average revenue is constant for all output levels
Answer & Solution
Correct answer: B. Because it must lower the price on all units sold, not just the extra unit
1. A monopolist sets a single price for all units it sells.
2. To sell one more unit it must reduce the price, and this lower price applies to every unit.
3. The extra unit adds its price to revenue but reduces revenue on previously sellable units.
4. So the net addition, MR, is below the new price.
_Source: ICAI BoS CA Foundation Paper 4 Business Economics, Ch 4 Unit III "Price-Output Determination under Different Market Forms", p.13_
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