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As demand increases to D2, marginal revenue increases to MR2. Because the firm maximizes profits by setting MR = MC output must rise to Q2 and price must rise to P2.
In our study of perfect competition we learned that the MC curve was the firm's supply curve. In the case of firms with downward sloping demand we can't speak meaningfully of a supply
curve. A supply curve shows how a firm reacts to market price,
but firms with downward sloping demand have some control over
price so there is no supply curve for such firms.
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