1 For a nondiscriminating monopolist describe the relationsh

1. For a non-discriminating monopolist, describe the relationship between market price (P), average revenue (AR), and marginal revenue (MR).

(a) p = AR = MC

(b) p > AR = MR

(c) p = AR > MR

(d) p > MC > MR

(e) p = AR < MR

2. A monopolist

(a) can charge whatever price it wants.

(b) charges more than almost any consumer is willing to pay.

(c) is constrained by marginal cost in setting price.

(d) is constrained by demand in setting price.

(e) always earns an economic profit.

Solution

(c) P = AR > MR is the correct option.

Price equals average revenue (AR) because all units are sold for the same price, therefore, total revenue (TR) divided by quantity (Q) will always get us back to the price. AR > MR because in order to sell more units a firm has to lower price and that price cut has to apply to all identical units at one point in time