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.

Question

Quizplus · 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.

If a Monopolistically Competitive Firm Lowers Its Price And, as a Result