Monopolistic Competition
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.
For the first question about inefficiency in a monopolistically competitive market, you initially chose option B but are now questioning whether option D could be the correct choice based on additional information you found.
Let's evaluate the options one by one:
A. Marginal revenue exceeds average revenue: This option is incorrect because in monopolistic competition, marginal revenue is less than average revenue due to the downward-sloping demand curve.
B. Price exceeds marginal cost: This option is incorrect as well. In monopolistic competition, firms set their prices above marginal cost in order to maximize profits. Therefore, price exceeding marginal cost is a common characteristic of this market structure, but it doesn't necessarily indicate inefficiency.
C. Efficient scale is realized in the long run, but not in the short run: This option is correct. In monopolistic competition, firms often operate at less than the efficient scale in the short run due to the existence of excess capacity. This excess capacity leads to inefficiency because firms are not producing at the lowest possible average cost.
D. Markup pricing does not occur in any other market structure: This option is incorrect because markup pricing can occur in multiple market structures, not just monopolistic competition.
Based on the analysis, option C is the correct answer to the question.
Now, let's move on to the second question about the administrative burden of regulating price in a monopolistically competitive market. Initially, you chose option B but are now seeking a second opinion.
Let's evaluate the options once again:
A. Small due to economies of scale: This option is incorrect because the administrative burden of regulating price is not necessarily related to economies of scale.
B. Large because price is usually below marginal cost: This option is correct. In monopolistically competitive markets, firms often set their prices below marginal cost to attract customers. Regulating these prices would require significant administrative efforts.
C. Large because of the large number of firms that produce differentiated products: This option is also correct. Monopolistically competitive markets consist of numerous firms producing differentiated products, making it difficult to regulate prices efficiently.
D. Small because firms produce with excess capacity: This option is incorrect because the administrative burden is not directly linked to firms producing with excess capacity.
Given the analysis, the correct answer to the second question is either option B or C. Both options correctly identify the administrative burden in a monopolistically competitive market.
Regarding the third question about the characteristics of a profit-maximizing firm in monopolistic competition, here are the options:
A. Average revenue exceeds marginal revenue: This option is incorrect because for a profit-maximizing firm in monopolistic competition, marginal revenue exceeds average revenue.
B. Marginal revenue exceeds average revenue: This option is correct. In monopolistic competition, the firm maximizes its profit by producing where marginal revenue equals marginal cost. As a result, marginal revenue exceeds average revenue.
C. Average revenue is equal to marginal revenue: This option is incorrect as average revenue is always less than marginal revenue in monopolistic competition.
D. Revenue is always maximized along with profit: This option is incorrect because revenue maximization does not necessarily align with profit maximization. Profit maximization requires considering both costs and revenues.
Based on the analysis, option B is the correct answer to the third question.
I hope this clears up any confusion and provides you with the accurate answers to your questions. Let me know if you have any further queries!