For a firm, marginal revenue can sometimes be negative. Which type of market structure is most likely to exhibit negative marginal revenue?

• A. Monopoly
• B. Monopolistic competition
• C. Oligopoly with perfect collusion
• D. Perfect competition

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of marginal revenue (MR), which is the additional revenue a firm earns from selling one more unit of output. It is calculated as the change in total revenue divided by the change in quantity sold, expressed as \(MR = \frac{\Delta TR}{\Delta Q}\).
2. Step 2: Recall that in perfect competition, firms are price takers, meaning the price remains constant regardless of quantity sold. Therefore, marginal revenue equals the market price and is always positive or zero, never negative.
3. Step 3: Consider a monopoly, where the firm is the sole seller and faces a downward-sloping demand curve. To sell additional units, the monopolist must lower the price, which can cause total revenue to increase at a decreasing rate and eventually decrease, leading to negative marginal revenue.
4. Step 4: In monopolistic competition, firms have some market power and downward-sloping demand curves, but the presence of many competitors limits the extent of price control. Marginal revenue can be positive or negative depending on the output level, but the effect is less pronounced than in a monopoly.
5. Step 5: In an oligopoly with perfect collusion, firms act like a monopoly, setting prices collectively. This can also lead to negative marginal revenue when increasing output reduces total revenue, similar to a monopoly scenario.