1) Marginal Revenue with Pricing Power

a) The relationship between the graphs of the demand and marginal revenue curve is often described as P > MR: at any Q, MR is less than the current price, and the gap gets bigger at higher levels of output. Give a precise but intuitive explanation of why marginal revenue is less than price for a firm that faces a downward sloping demand curve. Use the A-B story.

b) Use the same framework to give an intuitive explanation of why a firm with pricing power will charge higher prices for consumers with less elastic demand.