Monopolistic Competition
A profit-maximizing firm in a monopolistically competitive maket is characterized by which of the following:
A. Average revenue exceeds marginal revenue.
B. Marginal revenue exceeds average revenue,
C. Average revenue is equal to marginal revenue.
D. Revenue is always maximized along with profit.
I picked D?
I would go with A.
Draw a typical monopoly model, with a demand curve and a marginal revenue curve. Draw a MC curve. At the optimal Q, What is the price (aka Average revenue)? What is the MR value?
BTW, with linear-drawn demand and MR "curves", Revenue is maximized when MR is zero. However, this is not the optimal profit point (unless MC
I would go with A.
Draw a typical monopoly model, with a demand curve and a marginal revenue curve. Draw a MC curve. At the optimal Q, What is the price (aka Average revenue)? What is the MR value?
BTW, with linear-drawn demand and MR "curves", Revenue is maximized when MR is zero. However, this is not the optimal profit point (unless MC is zero also)
To determine the correct answer, let's go through the characteristics of a profit-maximizing firm in a monopolistically competitive market.
In a monopolistically competitive market, each firm has some degree of market power, meaning they can influence prices. However, because there are multiple firms in the market, each offering slightly differentiated products, the demand for a firm's product is more elastic compared to a monopoly.
To maximize its profit, a firm in a monopolistically competitive market will produce where marginal revenue (MR) equals marginal cost (MC). This is because when MR is greater than MC, the firm can increase profit by producing more, while if MR is less than MC, the firm can decrease production to increase profit. Therefore, the profit-maximizing condition for a firm in a monopolistically competitive market is MR = MC.
Now, let's evaluate the given options:
A. Average revenue exceeds marginal revenue.
This is not necessarily true. In monopolistic competition, average revenue (AR) represents total revenue (TR) divided by the quantity sold. It does not directly relate to the profit-maximizing condition.
B. Marginal revenue exceeds average revenue.
This is not the profit-maximizing condition in a monopolistically competitive market. As mentioned earlier, the profit-maximizing condition is MR = MC.
C. Average revenue is equal to marginal revenue.
This is the correct answer! In monopolistic competition, the demand curve facing a firm is downward sloping (due to product differentiation), and as a result, AR is equal to MR. Therefore, the profit-maximizing condition is MR = MC = AR.
D. Revenue is always maximized along with profit.
This statement is too broad and not specific to monopolistic competition. Revenue maximization and profit maximization are not necessarily the same concept. A profit-maximizing firm in a monopolistically competitive market will aim to maximize profit, not just revenue.
Therefore, the correct answer is C. Average revenue is equal to marginal revenue.