Q.In the monopoly schedule of Exercise 4, MR is less than AR at every output beyond the first unit. Explain the economic reasoning: why must MR fall below AR whenever a firm faces a downward-sloping demand curve, unlike a firm under perfect competition?

A monopolist must cut the price on ALL units sold (not just the new one) to sell more, so the true gain in revenue from an extra unit is less than that unit's own selling price.

Under perfect competition, the firm can sell as many units as it wishes without ever having to change the price — the market price is given to it. So selling one more unit adds exactly that unchanged price to total revenue, with no offsetting loss anywhere; hence MR always equals AR (= price).

Under imperfect competition (including monopoly), the firm faces a demand curve that slopes DOWNWARD: the ONLY way to sell a larger quantity is to lower the price. But a firm generally cannot charge different prices to different buyers for the identical product (assuming no price discrimination) — so lowering the price to sell one extra unit means the price falls for EVERY unit sold, including all the units that were already being sold at the previous, higher price. …

It is a common error to think MR falls below AR simply because 'demand is falling' in some vague sense — the precise reason is the SPECIFIC mechanism of a uniform price cut applying to …