Linear demand curve and marginal revenue curve

Question 1: Carefully explain why we believe that a linear demand curve will always be associated with a marginal revenue curve that has twice the slope of the demand curve in question.

A true supply curve shows the relationship between price and quantity supplied. For the monopolist, the key issue to consider is that the monopolist does not make quantity decisions based on price, but rather based on marginal revenue.

This can be illustrated with the concept of price discrimination: The monopolist does not necessarily charge the same price for the same quantity in two separate markets for the same good, since the monopolist will first consider the elasticity of demand.

Consider the diagram below. Starting out with two different demand curves with corresponding marginal revenue curves (remember, MR has twice the slopes of the demand curve), just draw a marginal cost curve that crosses through the intersection of the two different marginal revenue curves. As you can see, since the two different MR curves represent different demand curves, the price will be different even when MC=MR gives the same quantity for each demand curve. In short, you do not have a one-for-one relationship between price and quantity, and this means that there is no stable supply curve here.

**** See attachment for graph

Question 2: In this context, in your own words carefully explain why economists say that a monopolistic firm does not have a true supply curve in the same sense that a perfectly competitive firm does.

Question 3: Give at least three examples of industries in which price discrimination is common. In each case make sure that you explain the nature of the price discrimination in question and why you believe it persists.


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