1. What do demand and marginal revenue curves look like in monopolistic competition? How do they...

1. What do demand and marginal revenue curves look like in monopolistic competition? How do they compare to the demand and marginal revenue curves in perfect competition and monopoly?

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Expert Solution

Monopolistically competitive firm's are referred to as price maker's as they set their prices Higher than marginal cost incurred by them.
Due to higher prices, the demand in the monopolistically competitive firm's fall due to which firms earn very less revenues which falls below the average revenue.
Hence both the demand and marginal revenue curves in a monopolistically competitive market are negatively sloped or slope downwards.
The below diagram shows the demand and marginal revenue curves for this market :

A perfectly competitive firm on other hand is considered as a price taker as it cannot influence the market price and must sell its outputs at the prevailing market price.
Hence these firms face a constant demand curve and the marginal revenue also remains constant and it equals the average revenue earned by them hence both the demand and marginal revenue curves remain perfectly horizontal.
The below diagram illustrates this :

Rahul Sunny answered 8 months ago

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