<p>I'm stuck, and I can't understand please help me.
Here is the graph in my book.</p>
<p>ImageShack</a> - Hosting :: graphyo3.jpg
Now the thing is this:
For a monopoly
When MR (marginal revenue) is >0, then the demand is elastic.
When MR is 0, the demand is unit elastic.
When MR is <0 (below the x-axis), the demand is inelastic.
Usually when a monopoly is maximizing profits, it is operating on the elastic part of the demand curve.
Now this curve is a graph of a monopoly engaged in price discrimination.
It is charging different prices from buyers with different demand elasticities.</p>
<p>My problem:
The graph says that the Demand is Relatively Inelastic.
However, the place where Marginal Cost (MC) = MR, is at quantity Q and price P.
This is the elastic part of the demand curve, so the demand is elastic. </p>
<p>** Then how is this relatively Inelastic **</p>
<p>The demand curve is relatively inelastic because:
-the distance between MC=MR and the demand curve is a lot, and monopolies make the most profits when the demand curve is inelastic (if you raise prices, demand won't change much)
-Remember perfect competition and monopolies are on opposite ends of a spectrum. Thus while a perfectly competitive firm tends to have a horizontal, perfectly elastic demand curve, a monopoly aspires to a vertical perfectly inelastic curve (which thus maximizes profits; actually makes profits infinite o.o- thats why its not possible because of all the inefficient allocation)</p>
<p>Also your book is probably wrong saying that MC=Demand, because Marginal Cost is your Supply Curve not your demand curve.</p>
<p>Actually ignore my comment, I misunderstood your question. But ya I think your book mightve made a typo, cause that is definitely elastic. Also, can you extend a MR line to find say the unit elasticity?</p>
<p>Is the marginal revenue curve always equal to the demand curve? Is the marginal cost always equal to the supply curve? If not, then does it only apply to perfectly competitive firms?</p>
<p>Marginal Revenue is the amount that each successive unit of output adds to total revenue.</p>
<p>A monopoly has an MR curve that has double the slope of D as whenever a new unit is created the price decreases for ALL units sold, not just the last one.</p>
<p>A monopoly with perfect price discrimination would have MR = D as each successive unit of output would be sold at a smaller price without affecting the cost of previous units.</p>
<p>So both a normal and a PD monopoly sell where MR = MC (hell all firms do) but a PD monopoly has a different MR curve</p>
<p>the graph that the link shows has a horizontal MC curve, meaning that it is constant returns to scale, which I have never seen on a monopoly graph. That would mean that the AVC was also horizontal, making the ATC more or less horizontal... </p>
<p>and yes, collegeaddiction, marginal revenue is below demand in a monopoly and monopolistic competitive markets. The point where MR=0 is where it is unit elastic on the demand curve.</p>
<p>Oh, I just saw that graph in my PR book. Since MR is positive, demand is elastic. MC is assumed to be constant for simplicity. The graph means that the demand curve is relatively inelastic (steeper slope) compared to another graph that has a relatively elastic demand curve (flatter slope). Compared to the relatively elastic one, the graph shows that the monopoly can charge a higher price.</p>
<p>Hmm, I have a question from the 2000 mc test.</p>
<p>"For a certain firm, the marginal revenue product for the last unit of labor is $60, and the marginal revenue product for the last unit of capital is $100. Which of the following combinations of factor prices would be necessary for the firm to maximize profits?"</p>
<p>Correct Ans - Labor $60 Capital $100</p>
<p>Isn't productive efficiency achieved when MP<em>L / P</em>L = MP<em>C / P</em>C
MRP = MP * MR = MP * P
Then, MRP / P^2 has to be equal</p>
<p>Can somebody explain the answer? Perhaps, I'm just overanalyzing things...</p>
<p>I think I shouldn't read this thread anymore. I'll get confused.
Just gave my AP MACRO. 1 hour to my AP MICRO.
And guess what I thought that AP MICRO was first.</p>
