Final answer:
Marginal revenue for a monopoly is lower than the market price because to sell more units, a monopoly must lower the price, leading to lower revenue per additional unit. Monopolies set quantities to maximize profits where MR = MC, and this results in positive profits if the market demand curve-set price exceeds average cost.
Step-by-step explanation:
For a monopoly, marginal revenue (MR) will always be lower than the price because the only way a monopoly will be able to sell more is by lowering the price. Therefore, the revenue they earn from selling one more unit will be less than they earned for the previous unit. A monopolist decides on the quantity to produce and hence the market price. The profit-maximizing level of output is where MR = MC (marginal cost). The monopolist selects this level of output and charges the price as determined by the market demand curve. If this price is above average cost, the monopolist earns positive profits.
A monopolist faces a unique situation compared to competitive firms. When it increases production to sell one additional unit, it not only gains revenue from the sale of that unit but also must reduce the price on all the units sold to sell that additional unit. Consequently, as the quantity sold increases, the resulting drop in price means that additional sales may result in less revenue for each subsequent unit. This leads to a situation where marginal revenue is negative when the drop in price, due to increased sales, outweighs the revenue from selling more units.