Final answer:
Marginal revenue turns negative when the decrease in revenue from lowering the price to sell more units outweighs the revenue gained from selling those units. This happens when the additional unit sold causes every other unit to be sold at a lower price, as is the case with a monopolist beyond a certain output level.
Step-by-step explanation:
Marginal revenue turns negative at a rate of output when the additional revenue generated by selling one more unit of output is exceeded by the revenue lost on all the other units due to the reduction in price, which is necessary to sell the additional unit. This typically occurs in imperfectly competitive markets such as a monopoly. At the specified rate of output where marginal revenue is zero—here given as a quantity of 7—any further increase in output will cause marginal revenue to become negative. This can seem counterintuitive because we often expect that selling more units will always lead to more revenue, but this is not true for a monopolist. The monopolist faces a downwards-sloping demand curve, meaning that in order to sell more units, the price must be lowered, leading to a decrease in total revenue beyond a certain point.
At an output level where the marginal cost (MC) is higher than the marginal revenue (MR), producing additional units will decrease the firm's profits, as each extra unit costs more to produce than the revenue it generates. Therefore, firms will tend to reduce output until a point where MR equals MC, as this is where profit is maximized.