100 150 200

Quantity per time period is not horizontal, however, so marginal revenue does not coincide with price at any but the first unit of output. Marginal revenue is always less than price for output quantities greater than one because of the negatively sloped demand curve. Because the demand (average revenue) curve is negatively sloped and hence declining, the marginal revenue curve must lie below it.

When a monopoly equates marginal revenue and marginal cost, it simultaneously determines the output level and the market price for its product. This decision is illustrated in Figure 10.8. The firm produces Q units of output at a cost of C per unit and sells this output at price P. Profits, which equal (P - C) times Q, are represented by the area PP'C'C and are at a maximum. Remember, Q is an optimal short-run output level only because average revenue, or price, is greater than average variable cost, as shown in Figure 10.8. If price is below average variable cost, losses are minimized by shutting down. Thus, if P < AVC, optimal Q = 0.

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