posted by G on .
A monopolistically competitive market could be considered inefficient because:
A. Marginal revenue exceeds average revenue
B. Price exceeds marginal cost
C. Efficient scale is realized in the long run, but not in the short run
D. Markup pricing does not occur in any other market structure
I picked B?
The administrative burden of regulating price in monopolistically competive market:
A. small due to economies do scale
B. large because price is usually below marginal cost
C. large because of the large number of firms that produce differentiated products
D. small because firms produce with excess capacity
I picked B?
I already put this question on the board before. I had originally picked D. The reponse was to go with A. When I was reviewing some other quesitons in the book, there was a sentence that appeared to state the answer to this that went along with D.
Could you please take a second look?
A profit-maximizinf firm in monopolistically competitive market 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.
Q1, I agree
Q2, why did you pick B? You already noted from Q1 that Price is above MC. I would go with C.
Q3. I stand by my original answer. I confidently presume Revenue is Price*Quantity, and profit is Revenue less costs. Unless marginal costs are zero, the optimizing point will occur when profits are maximized which will be a different point where revenue is mazimized. Further, Price is also average revenue, and for a monopolist, Price will exceed MR.
Perhaps you coud post the sentence(s) that caused you to go back to D; that may shed some light on our apparent confusion.
For Q3. In the section of my text for Monopoplistic Competition and Welfare of Society. It says "one source of inefficieny is the markup of price over magainal cost." This is why I was thinking D was the answer.
I fully agree with the quote, and the quote is referring to an area not covered by your initial question. Economically efficient allocation of resouces calls for the marginal cost of producing the last unit to equal the marginal benefit of that last unit. And marginal benefit is measured by the price that the "last" customer buys at; All other potential customers are unwilling to buy the product at that price. This has nothing to do with the profit maximizing position of the firm. The firm will produce where MC=MR, and for the monopolist, MC at the optimal point will be below price.