True or False and explain why: A. Equilibrium in monopolistically competitive ma

Question

True or False and explain why: A. Equilibrium in monopolistically competitive markets requires that firms be operating at the minimum point on the long-run average cost curve. B. A high ratio of distribution cost to total cost tends to increase competition by widening the geographic area over which any individual producer can compete. C. The price elasticity of demand tends to fall as new competitors introduce substitute products. D. An efficiently functioning cartel achieves a monopoly price-output combination. E. An increase in product differentiation tends to increase the slope of firm demand curves.

Explanation / Answer

Equilibrium in monopolistically competitive markets requires that firms be operating at the minimum point on the long-run average cost curve, the statement is False. The equilibrium in monopolist market is attained at a point of tangency happens between the average cost curve and firm demand. The monopolist firms decides their own rates and allocate resources accordingly. This on a long run increases revenues untill a new firm breaks the monopoly.

A high ratio of distribution cost to total cost tends to increase competition by widening the geographic area over which any individual producer can compete, the statement is False. It requires a low ratio of distribution cost to total cost. It tends to increase competition by widening the geographic area over which any individual producer can compete.

The price elasticity of demand tends to fall as new competitors introduce substitute products, the statement is False. Infact there is rise in the price elasticity of demand. It happens because substitute products are introduced by the new competitors in the market.

An efficiently functioning cartel achieves a monopoly price-output combination, the statement is True. It creates a dominance inthe market due to low competition.

An increase in product differentiation tends to increase the slope of firm demand curves, the statement is True. The quality of the product defines the stability of the same in the market. The demand increases, thereby, increasing the supply.

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