Question

Question 1: Below are four statements about the perfectly competitive market structure. Which of the statements is FALSE?

A. All parties have perfect information about prices and product quality

B. Both buyers and sellers are price takers

C. Firms make their production decisions based on the market demand curve

D. The products are homogeneous

Question 2: Consider the demand curve that a monopolist is facing. Which of the following

price elasticities could the monopolist produce on?

A. -0.5

B. Any negative value

C. -1.5

D. -1

Question 3: Explain why the marginal revenue curve of a monopolist lies below the market demand curve.

Answer 1

Please give ratings it will be appreciable, for any query please comment, thank you

Solution 1

C - False - Industry decides the output and price on the basis of demand and supply but the firm decides the production on the basis of marginal cost, not on the basis of the demand curve.

Solution 2

the correct option is B) any negative value

Negative elasticity means a negative relationship between price and quantity as price increase quantity decrease (vice-versa) without the demand curve of the monopolist, we cannot determine the price elasticity.

Solution 3

Marginal Revenue below Market Demand Curve in the monopolist

to sell the additional unit monopolist must decrease the price, marginal revenue is less than the price so the MR curve is also less than the price (demand) curve.

Marginal revenue is additional revenue due to the additional unit of output.

let suppose at $5 firm sold 10 units

Total Revenue = Price*quantity = $50

If a firm wants to sell an additional unit he needs to lower the price to 4.90

at 11th unit Total Revenue = Price*Quantity = 11*4.90 = 53.9

Marginal revenue = TRn - TRn-1 = 53.9 - 50 = 3.9

If a firm wants to sell an additional unit he needs to lower the price to 4.80

at 12th unit Total Revenue = Price*Quantity = 12*4.80 = 57.6

Marginal revenue = TRn - TRn-1 = 57.6 - 53.9 = 3.7

By the above example, we can conclude in the monopolistic firm the MR always less than price (demand curve)