Question 1

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 monopolistic competition, a decrease in price can lead to two effects: the price effect and the output effect. The price effect suggests that a decrease in price will lead to an increase in the quantity demanded, resulting in a positive effect on total revenue. The output effect suggests that a decrease in price will lead to a decrease in the total revenue because the reduction in the price would not be enough to compensate for the reduction in the quantity demanded.

Therefore, if a monopolistically competitive firm lowers its price, and the total revenue decreases, it implies that the output effect was more significant than the price effect. Hence, the correct choice is A, the output effect of the price change was less than the price effect.

Question 2

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 has market power (ability to affect price) will have a downward sloping demand curve. However, since the firm's actions impact the market, it must take into account the effect on total revenue when it changes its output. This means that the marginal revenue (MR) curve will lie below the demand curve. The firm will maximize profit by producing the quantity where MR=MC.

Question 3

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 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

In monopolistic competition, the marginal revenue curve lies below the demand curve. At high prices (and low quantities), marginal revenue is positive. As quantity increases and price decreases, marginal revenue can become negative.

Question 5

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, it may experience a gain in revenue due to increased sales (substitution effect), but it will not necessarily experience a loss in revenue due to the income effect. The income effect refers to the change in quantity demanded resulting from a change in real income (purchasing power). In the case of a price cut, the consumer's real income increases, which could potentially offset the revenue loss from the price cut. However, the overall effect on revenue will depend on the specific situation and market conditions.

Question 6

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

The marginal revenue of a monopolistically competitive firm can be negative if the firm charges a low price. This is because in a monopolistically competitive market, there are many close substitutes for the firm's product, and so the demand for the firm's product is relatively elastic. As a result, if the firm lowers its price to try to sell more units, it will not be able to make up the revenue it loses from the lower price through additional sales. This means that the marginal revenue of the additional units sold will be negative.

Question 7

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

Accepted Answer

A downward-sloping demand curve means that as the quantity sold increases, the price must decrease in order to maintain demand. As a result, the marginal revenue earned on each additional unit sold will be lower and will decrease as quantity sold increases.

Question 8

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 9

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

Accepted Answer

In monopolistic competition, firms offer products that are differentiated in some way from their competitors' products, whether through branding, quality, design, or other features. This differentiation makes the products similar, but not identical, and allows firms to distinguish themselves from their rivals in the eyes of consumers.

Question 10

Monopolistically competitive firms face a perfectly elastic demand curve.

Accepted Answer

Monopolistically competitive firms face a downward sloping demand curve, making it imperfectly elastic. This is because they are selling differentiated products that have substitutes, which gives them some ability to set prices above their marginal costs. However, since there are close substitutes, consumers can easily switch to a competitor's product if the price increases too much, limiting the firm's pricing power.

Question 11

Complete the following table.

Accepted Answer

The answer of Complete the following table.
 ...

Question 12

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

Accepted Answer

Monopolistically competitive markets have low barriers to entry, which means new firms can easily enter the market with their own differentiated products. This allows for new competition and can help prevent any firm from having long-term market power.

Question 13

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 it must cut its price to sell more. This is because the firm faces competition from other firms that sell similar but not identical products. Therefore, the firm has some market power and can control the price of its product, but it still needs to lower the price to attract more customers.

Question 14

If the 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 additional revenue earned from selling one more unit of the good is smaller than the revenue lost from lowering the price on all units sold. This is because the demand for the good is decreasing, so as more units are produced and sold, the price must be lowered to entice buyers. Therefore, the revenue lost from selling units at a lower price outweighs the additional revenue earned from selling one more unit.

Question 15

What is the most important difference between perfectly competitive markets and monopolistically competitive markets?

Accepted Answer

The answer of What is the most important difference between...

Question 16

There are many wheat farmers 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 wheat farmer faces a horizontal demand curve?

Accepted Answer

The answer of There are many wheat farmers in the...

Question 17

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 18

What are the formulas for total revenue, average revenue, and marginal revenue.

Accepted Answer

The answer of What are the formulas for total revenue,...

Question 19

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 close substitutes for the products, which means consumers have many alternatives to choose from. Therefore, if a firm raises its price, consumers can easily switch to a competitor's product that offers a similar benefit at a lower price. This makes it unlikely for a firm to be able to raise its price without losing any customers.

Question 20

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...

Quiz 13: Monopolistic Competition: the Competitive Model in a

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

Which of the following statements is true?