Question 1

What are the most important differences between perfectly competitive markets and monopolistically competitive markets?

Accepted Answer

The answer of What are the most important differences between...

Question 2

The demand curve of a monopolistically competitive firm
A)is horizontal because the firm must cut its price to sell more.
B)is perfectly elastic.
C)is downward-sloping because it sells an identical product.
D)is downward-sloping because it must cut its price to sell more.

Accepted Answer

The demand curve of a monopolistically competitive firm is downward-sloping because, although the product is differentiated, there are still close substitutes that consumers may choose instead. Therefore, the firm must lower its price to sell more and compete with these substitutes.

Question 3

When a monopolistically competitive firm cuts its price to increase its sales, it experiences a loss in revenue due to the income effect and a gain in revenue due to the substitution effect.

Accepted Answer

When a monopolistically competitive firm cuts its price to increase its sales, it may experience both an increase in quantity demanded and a decrease in revenue. This is because the decrease in price will lead to an increase in the quantity demanded due to the substitution effect, but at the same time, the decrease in price will also lead to a decrease in revenue per unit sold due to the income effect. Therefore, the overall change in revenue is uncertain and depends on the relative strength of the income and substitution effects.

Question 4

Which of the following statements is true?
A)The marginal revenue of a monopolistically competitive firm will be positive at high prices and negative at low prices.
B)Because the demand curve for a monopolistically competitive firm is downward-sloping its marginal revenue will be negative.
C)The marginal revenue of a monopolistically competitive firm will be always be positive.
D)The marginal revenue of a monopolistically competitive firm will be positive at low prices and negative at high prices.

Accepted Answer

The answer of Which of the following statements is true?
A)The...

Question 5

The marginal revenue of a monopolistically competitive firm
A)cannot be negative because the price the firm charges will always be greater than zero.
B)can be negative if the firm charges a high price.
C)can be negative if the firm charges a low price.
D)will equal average revenue.

Accepted Answer

Marginal revenue can be negative if the firm charges a low price. This is because as the firm sells one more unit at a lower price, the total revenue generated by that additional unit may be less than the revenue lost from charging a lower price for all units sold. Therefore, the marginal revenue for each additional unit sold may be negative.

Question 6

If a monopolistically competitive firm lowers its price and, as a result, its total revenue decreases then
A)the output effect of the price change was less than the price effect.
B)the output effect of the price change was greater than the price effect.
C)the firm's demand curve must have decreased.
D)the substitution effect of the price change was greater than the income effect.

Accepted Answer

In a monopolistically competitive market, a decrease in price will lead to an increase in demand for the firm's product due to the substitution effect. However, this increase in demand will be partially offset by a decrease in revenue per unit sold, as the firm's product is still differentiated from its competitors. If the decrease in revenue is greater than the increase in demand, it suggests that the output effect (increase in demand) was smaller than the price effect (decrease in revenue per unit sold). Therefore, the correct answer is A.

Question 7

Every firm that has the ability to affect the price of the good or service it sells will
A)have a perfectly elastic demand curve.
B)have a marginal revenue curve that lies below its demand curve.
C)earn a short-run profit but break even in the long run.
D)shut down in the short run.

Accepted Answer

If a firm has the ability to affect the price of the good or service it sells, it has market power and faces a downward sloping demand curve. Thus, its marginal revenue curve will lie below its demand curve. This means that the firm would have to lower its price to sell more of its product, resulting in a smaller increase in total revenue. The firm will maximize profit by producing where marginal cost equals marginal revenue. Since the marginal revenue curve lies below the demand curve, the price will be higher than the marginal cost, resulting in a positive economic profit. However, in the long run, new firms may enter the market, increasing competition and driving down prices, causing the firm to earn zero profit in the long run.

Question 8

New firms are able to enter monopolistically competitive markets because there are low barriers to entry.

Accepted Answer

In monopolistically competitive markets, there are no significant barriers to entry, making it relatively easy for new firms to enter the market and compete with existing firms.

Question 9

Firms in monopolistic competition compete by selling similar, but not identical products.

Accepted Answer

Firms in monopolistic competition differentiate their products in some way to make them slightly different from their competitors, but they still serve the same general market.

Question 10

Monopolistically competitive firms face a perfectly elastic demand curve.

Accepted Answer

Monopolistically competitive firms face a downward-sloping demand curve, but it is not perfectly elastic as buyers may have a preference for specific brands or product differentiation.

Question 11

There are many cattle ranchers in the world, and there are also many McDonald's restaurants in the world.Why, then, does a McDonald's restaurant face a downward-sloping demand curve while a cattle rancher faces a horizontal demand curve?

Accepted Answer

The answer of There are many cattle ranchers in the...

Question 12

If marginal revenue is negative then the revenue lost from receiving a lower price on all the units that could have been sold at the original price is smaller than the additional revenue from selling one more unit of the good.

Accepted Answer

If marginal revenue is negative, it means that the revenue from selling one more unit is less than the revenue from the previous unit sold. Therefore, selling one more unit would result in a decrease in total revenue. In this case, the revenue lost from receiving a lower price on all the units that could have been sold at the original price would be greater than the additional revenue from selling one more unit of the good.

Question 13

One of the assumptions of monopolistic competition is that firms produce differentiated products.What does this assumption imply about the demand curve facing a representative firm?

Accepted Answer

The answer of One of the assumptions of monopolistic competition...

Question 14

Explain the differences between total revenue, average revenue, and marginal revenue.

Accepted Answer

The answer of Explain the differences between total revenue, average...

Question 15

Why are demand and marginal revenue represented by the same curve for a firm in a perfectly competitive market, but by separate curves for a firm in a monopolistically competitive market?

Accepted Answer

The answer of Why are demand and marginal revenue represented...

Question 16

Suppose a monopolistically competitive firm sells 25 units at a price of $10.Calculate its marginal revenue per unit of output if it sells 5 more units of output when it reduced its price to $9.
A)$270
B)$20
C)$4
D)$2.50

Accepted Answer

The answer of Suppose a monopolistically competitive firm sells 25...

Question 17

In monopolistic competition, if a firm produces a highly desirable product relative to its competitors, the firm will be able to raise its price without losing any customers.

Accepted Answer

Monopolistic competition implies that there are substitutes available for the product. Therefore, if one firm raises its price, customers can switch to a similar product from a competitor, leading to a loss of customers for the firm that raised its price.

Question 18

When a firm faces a downward-sloping demand curve, marginal revenue
A)must exceed price because the price effect outweighs the output effect.
B)is less than price because a firm must lower its price to sell more.
C)equals price because the firm sells a standardized product.
D)must exceed price because the output effect outweighs the price effect.

Accepted Answer

When a firm faces a downward-sloping demand curve, it can only increase its sales by lowering its price, which means that each additional unit sold will bring in less revenue than the previous. This results in marginal revenue being less than the price.

Question 19

Which of the following describes a difference between the marginal revenue and demand curves of a perfectly competitive firm and a monopolistically competitive firm?
A)The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies above its demand curve.
B)The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies below its demand curve.
C)The monopolistically competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a perfectly competitive firm lies below its demand curve.
D)The marginal revenue curve of a monopolistically competitive firm lies below its demand curve; the marginal revenue curve of a perfectly competitive firm lies above its demand curve.

Accepted Answer

In a perfectly competitive market, the demand curve for each firm is perfectly elastic and horizontal, meaning that the firm can sell any quantity at the market price. Therefore, the demand and marginal revenue curves overlap and are the same line. In a monopolistically competitive market, the demand curve is downward-sloping, indicating that the firm has some market power and can increase the price above the market price by reducing output. The marginal revenue curve lies below the demand curve, indicating that the firm must lower the price to sell more output. Therefore, choice B is correct as it describes the difference between the two types of firms.

Question 20

For a downward-sloping demand curve, marginal revenue decreases as quantity sold increases.

Accepted Answer

Marginal revenue is the additional revenue earned from selling one extra unit of a product. In the case of a downward-sloping demand curve, in order to sell more units, the seller has to reduce the price of the product. As a result, the marginal revenue earned from each additional unit sold will decrease because the revenue generated from the last unit sold is lower than the revenue generated from the previous units sold. Therefore, when the demand curve is downward-sloping, marginal revenue decreases as quantity sold increases.

Quiz 13: Monopolistic Competition: the Competitive Model in a More Realistic Setting

What are the most important differences between perfectly competitive markets and monopolistically competitive markets?

The demand curve of a monopolistically competitive firm

When a monopolistically competitive firm cuts its price to increase its sales, it experiences a loss in revenue due to the income effect and a gain in revenue due to the substitution effect.

Which of the following statements is true?

The marginal revenue of a monopolistically competitive firm

If a monopolistically competitive firm lowers its price and, as a result, its total revenue decreases then

Every firm that has the ability to affect the price of the good or service it sells will