Question

The demand curve for a monopolist producing a normal good is downward-sloping because of

A. the substitution effect being larger than the income effect.

B. the income effect being larger than the substitution effect.

C. diminishing marginal returns.

D. price discrimination.

E. diminishing marginal utility.

Answer 1

The demand curve for a monopolist producing a normal good is downward sloping because of diminishing marginal utility.

The diminishing marginal utility refers the marginal utility obtained from consuming a good is decline as the consumption increase.

And, the price of a good which a consumer is willing to pay is depends on marginal utility.

So, as the consumption increases, marginal utility decrease and thereby consumer is willing to pay less price. Hence, there is negative relationship between price and demand for a good resulting a downward sloping demand curve.

So, the correct answer is an option (e).