Question

1. The demand curve faced by a monopolistic seller

a. is perfectly inelastic, whereas that facing the purely competitive firm is perfectly elastic.

b. is downward sloping, whereas that facing the purely competitive firm is perfectly elastic.

c. is perfectly elastic, whereas that facing the purely competitive firm is perfectly inelastic.

d. is downward sloping, whereas that facing the purely competitive firm is perfectly inelastic.

2. The demand curve facing a

a. purely competitive firm is downsloping because the purely competitive firm is faced by a normal downward sloping industry demand curve b. pure monopolist is perfectly elastic because the pure monopolist may sell all that it wishes at the equilibrium price

c. purely competitive firm is perfectly elastic because the purely competitive firm may sell all that it wishes at the equilibrium price

d. pure monopolist is downsloping because the firm’s supply is so small a part of the total industry supply that it cannot affect the price

3. The monopolist's demand curve is not

a. Perfectly inelastic because MR is negative when demand is inelastic, so MR=MC<0

b. Perfectly elastic because MR is negative when demand is elastic, so MR=MC<0

c. Perfectly elastic because the firm will still have some competitors even if they are not close

d. Perfectly inelastic because MR<MC when demand is inelastic, so the price would be falling

Answer 1

1. The demand curve of a firm working under perfect competition is perfectly elastic at the ruling market price since it has absolutely no control over the price of the product. on the contrary, a firm working under monopolistic competition enjoys some control over the price of its product since its product is somewhat differentiated from others. If a firm under monopolistic competition raises the price of its product, it will find some of its customers going away to buy other products. As a result, the quantity demanded of its product will fall. It therefore follows that the demand curve facing an individual firm under monopolistic competition slopes downward. Therefore the answer is:

b. is downward sloping, whereas that facing the purely competitive firm is perfectly elastic.

2. The demand curve facing a purely competitive firm is perfectly elastic. This signifies that the firm does not exercise any control over the price of the product but can sell any amount of the product as it likes at the ruling price. Therefore, The answer is option C.

c. purely competitive firm is perfectly elastic because the purely competitive firm may sell all that it wishes at the equilibrium price.

3. An important feature of monopoly equilibrium is that the monopolist will never be in equilibrium at a point on the demand curve at which the price elasticity of demand is less than one. provided that MC is positive. Since MC never be negative, equality of marginal revenue and marginal cost can not be achieved where price demand is inelastic and MR is therefore negative. We know from the relationship between price elasticity and marginal revenue that whenever price elasticity is less than one, marginal revenue is negative. therefore, no sensible monopolist will produce on that portion of the demand curve which gives him negative marginal revenue, while the production of additional marginal units of output adds to his total cost. Therefore the answer is option a.

The monopolist's demand curve is not

a. Perfectly inelastic because MR is negative when demand is inelastic, so MR=MC<0