In which of the following market models do demand and marginal revenue diverge?

• A. Monopoly
• B. Perfect competition
• C. Monopolistic competition
• D. Oligopoly

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the concept of demand and marginal revenue. Demand represents the price consumers are willing to pay for each quantity, while marginal revenue (MR) is the additional revenue a firm earns by selling one more unit of output.
2. Step 2: Recall that in perfect competition, firms are price takers, meaning the price is constant regardless of quantity sold. Therefore, demand and marginal revenue are equal because selling an additional unit does not change the price.
3. Step 3: In a monopoly, the firm faces the entire market demand curve, which is downward sloping. To sell more units, the monopolist must lower the price, causing marginal revenue to be less than the price (demand) at each quantity. This creates a divergence between demand and marginal revenue.
4. Step 4: For monopolistic competition and oligopoly, firms also face downward sloping demand curves, but the degree of divergence between demand and marginal revenue depends on market structure specifics. However, the key distinction is that only in monopoly is the divergence absolute and fundamental due to single seller power.
5. Step 5: Conclude that the market model where demand and marginal revenue diverge clearly and consistently is the monopoly, because the monopolist’s marginal revenue curve lies below the demand curve.