Final answer:
Marginal revenue is less than price in an imperfect market such as a monopoly because a monopolist must lower the price on all units sold to sell an additional unit, which means the revenue gained from the new unit is offset by the reduced revenue from all previously sold units. This leads to the marginal revenue curve being below the demand curve, where it can eventually turn negative as more units are sold.
Step-by-step explanation:
The question asks to clarify why marginal revenue is less than price in an imperfect market, particularly in the context of a monopoly. The answer lies in the understanding of how demand and pricing work for a monopolist. To understand this concept, we need to consider the implications of selling an additional unit in an imperfect market.
When a monopolist sells an extra unit, they do not only gain revenue from this additional unit. Since they must lower the price to sell more, all previously sold units also now bring in less revenue; this drop in price affects all units sold, not just the additional one. Hence, for every unit sold beyond a certain point (output increases), the marginal revenue decreases proportionally more than the price, leading to a situation where it is actually less than the price of the additional unit sold.
This effect is depicted by the marginal revenue curve, which lies below the demand curve. For linear demand curves, marginal revenue falls twice as fast as demand. This culminates in the phenomenon where a monopolist sees marginal revenue diminish to zero, and eventually negative marginal revenue when the quantity sold reaches a level where the price drop outweighs the revenue from selling more units.