Question

What would be an example of when marginal revenue would be less than the demand curve.

Answer 1

In the case of a monopoly firm, the marginal revenue is not necessarily equal to the price. Because the monopolist facing a downward sloping demand function which results in a downward facing Marginal Revenue curve. A monopolist's demand curve and AR curves are the same.

For example,  Milan is a monopoly firm and it sells teddy bear toys.

Suppose the firm charges $10 for a single unit of teddy bear, he can sell only one unit at $10. If the firm wants to sell more units, they need to reduce the price. If the price of teddy bear falls to $9.50 the firm can sell two units of teddy bear.Then the marginal revenue is $9.5. If the firm wants to sell four units, they need to reduce the price as $8 the marginal revenue will be at $6.50. If the firm wants to sell ten units the price should not be higher than $5. From the following table we can easily understand how this works. The average revenue(AR) curve and marginal revenue(MR) curves are both downward sloping curves. The average revenue curve(AR) cannot be zero, but the marginal revenue curve(MR) can be zero or even negative.

Quantity sold	Average revenue (AR = P)	Total revenue (TR)	Marginal revenue (MR)
0	10.00	0	–
1	9.50	9.50	9.50
2	9.00	18.00	8.50
3	8.50	25.50	7.50
4	8.00	32.00	6.50
5	7.50	37.50	5.50
6	7.00	42.00	4.50
7	6.50	45.50	3.50
8	6.00	48.00	2.50
9	5.50	49.50	1.50
10	5.00	50.00	0.50
11	4.50	49.50	(-)0.50