Question

Q5 - Which of the following is NOT a characteristic of a monopolistically competitive market?

1- There are many firms.

2- Firms sells differentiated products.

3- Firms have control over price.

4- There are substantial barriers to entry.

Q6 - The perfectly competitive firm’s short-run supply curve is the part of the firm’s :

1. Short-run average cost curve above the marginal cost.

2. Short-run marginal cost curve above the shut-down price.

3. Short-run average variable cost curve above the shut -down price.

4.Short-run marginal cost curve above the break-even price.

Answer 1

Q5. The major difference between a perfectly competitive market and a monopolistically competitive market is that there is no product differentiation in a perfectly competitive market while it exists in monopolistically competitive markets.

Major characteristics of a monopolistically competitive market:

1. Many buyers and sellers
2. Firms produce slightly differentiated but closely substitutable goods
3. There exist no barriers to entry and exit
4. As firms sell differentiated products, the demand curve faced by each firm is downward sloping and the firms set the prices for the goods produced by them.

Ans: 4. There are substantial barriers to entry

Q6. The short-run supply curve of a perfectly competitive firm is that portion of its marginal cost curve which lies above the average variable cost curve.

This follows from the fact that the marginal revenue curve is a horizontal straight line passing through the price of the good and the profit maximizing quantity is the quantity at which the marginal cost equals the marginal revenue. Therefore, at any given price, the profit maximizing quantity is given by the MC curve of the firm. However, if the price falls below the minimum AVC, the firm shuts down as it cannot recover its variable costs from the revenue generated.

Consequently, this minimum AVC is also known as the shut down price as the firm shuts down if the price falls below this threshold level.

Ans: 2. Short-run marginal cost curve above the shut-down price