Question 1

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 must lower its price to sell more, which means that the marginal revenue earned from selling an additional unit is less than the price. In other words, the firm must sacrifice some price to increase output, resulting in a smaller increase in revenue than the increase in output. Therefore, marginal revenue is less than price.

Question 2

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

In monopolistic competition, firms have some market power to set their own prices. However, they face a downward sloping demand curve, which means that in order to sell additional units of output, they must lower their price. This leads to a situation where marginal revenue is less than the price of the last unit sold. Therefore, marginal revenue can be negative if the firm charges a low enough price.

Question 3

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)...

Question 4

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 firm faces a downward-sloping demand curve, which means that when it decreases its price, it will sell more units of its product due to the output effect. However, the price decrease will also result in a lower price per unit, which reduces the revenue the firm earns on each unit sold. The magnitude of the output effect and the price effect determines whether the total revenue will increase or decrease. If the output effect is less than the price effect, the total revenue will decrease. Thus, choice A is the correct answer.

Question 5

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 will face a downward sloping demand curve. However, because it has market power, it can increase the price by reducing the quantity sold. This means that its marginal revenue curve will lie below the demand curve. The firm can earn short-run profits, but in the long run, other firms may enter the market to compete away those profits, driving the price back down to the minimum of the average total cost curve. If the price falls below this point, the firm will shut down in the short run. Therefore, option (B) is the best choice.

Question 6

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 that are not perfect substitutes for each other. While this gives them some control over the price they charge, they still face competition from other firms. Therefore, to sell more, a monopolistically competitive firm must cut its price, making its demand curve downward sloping. Choices A and B are incorrect because a firm in monopolistic competition cannot simply cut its price to sell more, as it faces competition from other firms. Choice C is incorrect because the products sold by monopolistically competitive firms are not identical.

Question 7

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 many firms producing similar but slightly differentiated products. If a firm raises its price, its customers have the option to switch to a slightly different product offered by a competitor at a lower price, leading to a loss of customers for the firm. Therefore, firms in monopolistic competition do not have complete control over their prices.

Question 8

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 9

Monopolistically competitive firms face a perfectly elastic demand curve.

Accepted Answer

Monopolistically competitive firms have slightly differentiated products, leading to downward sloping but still relatively elastic demand curves. The elasticity of demand varies depending on the degree of product differentiation and the availability of substitutes.

Question 10

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

Accepted Answer

This is because in a downward-sloping demand curve, when a firm wants to sell more units, it has to lower its price, leading to a decrease in marginal revenue.

Question 11

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

Accepted Answer

Monopolistically competitive markets have low entry barriers, which means new firms can easily enter and compete with existing firms.

Question 12

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 13

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 additional revenue from selling one more unit of the good is less than the revenue lost from receiving a lower price on all the units that could have been sold at the original price. Therefore, the statement in the question is false.

Question 14

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 15

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 16

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

Accepted Answer

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

Question 17

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 18

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

Accepted Answer

Monopolistic competition involves firms selling differentiated products, which means they are similar but not identical. This differentiation allows firms to compete and differentiate themselves from their rivals in the market.

Question 19

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 20

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...

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

When a firm faces a downward-sloping demand curve, marginal revenue

The marginal revenue of a monopolistically competitive firm

Which of the following statements is true?

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

The demand curve of a monopolistically competitive firm