Question

Why does a monopolist's marginal revenue decrease as output increase?

Answer 1

Monopoly producer is called as price maker as it is the only producer of a particular commodity in the market without any competitors. So he can fix prices of commodities to maximise his profit. While there are lot of buyers, seller is only one. Price of products in monopoly market are determined considering the equality between marginal revenue to marginal cost. But when monopolist try to increase the sell additional amounts of commodities, they would have to reduce the price of the commodity. So marginal revenue get reduced with the increase of output. As there is price effect in the monopoly market, increase in the production of commodities results in decrease in the marginal revenue as they need to fix prices at which buyers are willing to pay for the extra quantity reducing the total revenue with each item sold.