1.) To maximize profit, a monopolistically competitive firm a. Sets its rice equ
ID: 1126124 • Letter: 1
Question
1.) To maximize profit, a monopolistically competitive firm
a. Sets its rice equal to its marginal revenue while keeping it below marginal cost
b. Sets its price equal to its marginal cost while keeping above its average variable cost
c. Sets its marginal cost equal to its marginal revenue while charging a price higher than its marginal cost
d. Sets its price equal to its marginal revenue while keeping it above its average total cost
2. ) The long run equilibrium in a monopolistically competitive market is characterized by:
a. Excess supply
b. Excess capacity
c. Excess demand
d. Shortages
3.) In a kinked demand curve model, it is assumed that the demand curve faced by an oligopoly:
a. Is less elastic when the firm raises the price
b. Is less elastic when the firm lowers the price
c. Is more elastic when it lowers the price
d. None of the above
4.) Optimal markups vary across markets due to differences in:
a. Production costs
b. Price elasticity of demand
c. Total revenue
d. "a" and "b"
e. "b" and "c"
Explanation / Answer
1. In a monopolistically competitive market, there are less firms offering differentiated products and thus, are price makers of the market. This is because each firm has a little different version of each product to offer. Thus, the profit maximizing level under this market is where the marginal revenue equals the marginal cost. But the firms are in a position to charge a price that is higher than its marginal cost because of the market power and because of the nature o not indulge into a price war with its competitors since its products are differentiated on basis of branding or quality.
Thus, the correct answer is option (c) Sets its marginal cost equal to its marginal revenue while charging a price higher than its marginal cost.
2. In the long run, due to no restriction on entry and exit of firms in a monopolistically competitive market, the firms operating just break even. The demand for a firm falls short due to new entrants and thus, there is a resultant increase in capacity that the firm can produce but is not currently producing due to a smaller market for its product.
Thus, the correct answer is option (b) Excess capacity.
3. In an oligopoly, the price war among firms makes it irrelevant for a firm to make changes in its prices beyond a point. A lesser price charged by a firm is followed suit by its competitors, thus making no difference. While a higher price induces the firm's market demand to fall. The most change that a demand curve undergoes is when a firm increases its price. Here, the demand becomes elastic. However, any decrease in price brings about no major changes. Thus, a price decrease makes demand less elastic after the firms follow suit.
No option of the first three matches the working of an oligopoly under a kinked demand curve model. Therefore, the correct answer is option (d) None of the above.
4. Markup, i.e., the price over the marginal cost is determined according to the costs that a firm faces and the elasticity of demand faced by a firm's product in a market. If the demand is less elastic or production costs are high, firms charge a high markup. And vice versa.
Thus, the correct answer is option (d) "a" and "b".
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