Question 1

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

Accepted Answer

This is because firms must lower prices in order to sell additional units, which reduces the revenue gained from each additional unit sold.

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

In monopolistic competition, firms sell differentiated products, meaning they have some control over the price they charge. However, because there are close substitutes available, the demand curve for each firm is downward sloping. To sell more, the firm must lower its price, but it cannot raise its price without losing customers to competitors. Therefore, the demand curve of a monopolistically competitive firm is downward sloping because it must cut its price to sell more.

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 experiences a gain in revenue from the increased quantity demand (substitution effect). However, the decrease in price will also decrease the revenue per unit sold (income effect), leading to a possible decrease in the firm's total revenue. Therefore, the statement is false.

Question 4

Complete the following table.

Accepted Answer

The answer of Complete the following table.
 ...

Question 5

What is the profit-maximising rule for a monopolistically competitive firm?
A) to produce a quantity that maximises market share
B) to produce a quantity that maximises total revenue
C) to produce a quantity such that marginal revenue equals marginal cost
D) to produce a quantity such that price equals marginal cost

Accepted Answer

In monopolistic competition, firms have some degree of market power, meaning they can influence the price of their product. However, they also face competition and have to take into account the reactions of other firms in the market. The profit-maximising rule for a monopolistically competitive firm is to produce at the quantity where marginal revenue equals marginal cost. This is because profit is maximised where the difference between revenue and cost is greatest, and at the point where marginal revenue equals marginal cost, the increase in revenue from producing one more unit is exactly equal to the increase in cost. This means that producing any more or less than this quantity would result in lower profits.

Question 6

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 7

A monopolistically competitive firm maximises profit where
A) price = marginal revenue.
B) price > marginal cost.
C) marginal revenue > average revenue.
D) total revenue > marginal cost.

Accepted Answer

Monopolistically competitive firms operate in a market where they have some degree of pricing power due to product differentiation. Therefore, price will typically be greater than marginal cost as the firm may be able to charge a price premium for its unique product. However, maximizing profit in the short run requires producing the quantity where marginal revenue is equal to marginal cost (not average revenue), which is equivalent to setting price greater than marginal cost in a monopolistically competitive market.

Question 8

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 9

Suppose that if a local McDonald's restaurant reduces the price of a Big Mac from $4.00 to $3.25, the number of Big Macs it sells per day will increase from 4 to 5. Explain the output effect and the price effect resulting from this change. Using a graph, illustrate both the loss in revenue from selling each of the first 4 Big Macs for $0.75 less and the additional revenue from selling 1 more Big Mac. What is the total change in revenue received which results from this price decrease?

Accepted Answer

The answer of Suppose that if a local McDonald's restaurant...

Question 10

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

Accepted Answer

In monopolistically competitive markets, firms are able to differentiate their products, which means that new firms can enter the market with their own unique products. Additionally, there are typically low barriers to entry, as there are no or few legal or financial obstacles for new firms to start operating in the market. Therefore, new firms are able to compete against existing competitors in the same market.

Question 11

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 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 selling one more unit of the good will lead to a decrease in total revenue. Therefore, the revenue lost from receiving a lower price on all units would be greater than the additional revenue from selling one more unit.

Question 13

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

A firm that can affect the price of the good or service it sells has some pricing power, but it is not unlimited. As the firm increases its price, it will sell fewer units, so its marginal revenue (which is the additional revenue from selling one more unit) will be less than the price. Therefore, the marginal revenue curve will lie below the demand curve. This means that the firm will continue to produce and sell as long as the price is above its average variable cost, but it may earn a short-run profit or loss. In the long run, other firms may enter or exit the market, causing the price to adjust and the firm to earn zero economic profit (i.e. break even).

Question 14

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 in the case of a perfectly competitive market.

Question 15

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

Marginal revenue is the change in total revenue generated by selling one additional unit of output. In this case, the firm sells 25 units at a price of $10, so its total revenue is 25*$10 = $250.

When it reduces its price to $9, it sells 5 more units of output. The total quantity sold increases from 25 to 30 and the total revenue increases from $250 to $270 (30*$9).

Therefore, the marginal revenue from selling the 26th unit is the difference in total revenue when we sell 26 units instead of 25.

Marginal revenue = (Total revenue when we sell 26 units) - (Total revenue when we sell 25 units)

Total revenue when we sell 26 units = 26*$9 = $234
Total revenue when we sell 25 units = $250

Marginal revenue = $234 - $250 = -$16

This means that the marginal revenue from selling the 26th unit is negative. It is not profitable for the firm to sell the 26th unit at a price of $9.

Therefore, the firm should not reduce its price and should continue to sell 25 units at a price of $10.

The marginal revenue per unit of output when it sells 25 units at a price of $10 is equal to the price, which is $10.

Question 16

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

Accepted Answer

Monopolistic competition involves firms selling differentiated products that are close substitutes for each other, but not identical. This allows firms to have some pricing power and differentiate themselves through product features, quality, advertising, etc.

Question 17

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

Accepted Answer

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

Question 18

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

In monopolistic competition, there are numerous competitors producing similar but differentiated products. If one firm raises its price, customers have the option to switch to a similar product from a competitor, causing the firm to lose some customers. Therefore, firms in monopolistic competition must carefully balance the benefits of raising prices with the risk of losing customers.

Question 19

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 20

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)...

Quiz 10: Monopolistic Competition : The Competitive Model in More Realistic Setting

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

The demand curve of a monopolistically competitive firm