A monopolistically competitive firm will increase its production if marginal rev

Question

A monopolistically competitive firm will increase its production if marginal revenue is greater than marginal cost marginal revenue Ls greater than average total cost price is greater than marginal cost price is greater than average total cost If advertising makes consumers more loyal to particular brands, it could [increase/decrease) the elasticity of demand and [increase/decrease] the markup of price over marginal cost. increase; increase increase; decrease decrease, increase decrease; decrease What is true of a monopolistically competitive market in long run equilibrium? Price is greater than marginal cost Price is equal to marginal revenue Firms make positive economic profits Firms produce at the minimum of average total cost

Explanation / Answer

15. A monopolistically competitive firm will continue to produce and sell until the marginal revenue becomes equal to the marginal cost. Or at least Marginal revenue is greater than marginal cost. This is so because its profits are increasing and will be maximum when MR = MC.

Hence option A is correct

16. Advertising increases the demand for a product. Advertisements are designed so that the customer who is reading/watching them, instantly decides to purchase the product without gathering information about its substitute present in the market. Usually, advertisements increases the demand for a product and with efficient scale management, the firm is able to sell more. Hence, it decreases the elasticity of demand and increases the markup cost.

Hence the correct option is C

17. Free entry and exit ensures that firms in monopolistically competitive market will be operating at zero economic profits. Price is greater than the marginal cost since profit maximizing quantity equates MR and MC , not Price and marginal cost. If Price falls below MC, the firm will leave.

Hence the correct option is A.

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