In which of the following market models do demand and marginal revenue diverge?
A) pure monopoly, oligopoly, and monopolistic competition
B) pure monopoly, oligopoly, and pure competition
C) pure monopoly only
D) oligopoly only

Question

Quizplus · Accepted Answer

In market models where firms have some degree of market power—meaning they can influence the price of their product to some extent—demand and marginal revenue curves diverge. This is because when a firm with market power wants to sell additional units, it often has to lower the price of all units sold to make the additional sales, which affects the marginal revenue.
In a pure monopoly, there is only one seller in the market with no close substitutes, giving the monopolist significant control over the price. As a result, the monopolist's demand curve is the market demand curve, which is downward sloping, and the marginal revenue curve lies below it because each additional unit sold at a lower price brings in less additional revenue than the previous unit.
In an oligopoly, a few firms dominate the market. These firms are interdependent and can influence prices, though not as much as a monopolist because they must consider the potential reactions of their competitors when making pricing decisions. Nonetheless, an oligopolistic firm's marginal revenue also diverges from its demand curve for similar reasons as in a monopoly.
In monopolistic competition, many firms sell products that are differentiated from one another. Each firm has some control over its price because its product is different from its competitors'. Like in monopoly and oligopoly, the demand curve a firm faces is downward sloping, and the marginal revenue curve lies below it.
In contrast, in pure competition (also known as perfect competition), firms are price takers with no control over the market price. Each firm's demand curve is perfectly elastic (horizontal) at the market price, meaning the firm can sell as much as it wants at that price but nothing at a higher price. In this case, the demand curve and the marginal revenue curve are the same because selling an additional unit does not require lowering the price on all units sold. Therefore, demand and marginal revenue do not diverge in pure competition.

In Which of the Following Market Models Do Demand and Marginal