curve for a monopoly and a monopolistically competitive firm?
Select one:
a. The MR curve is the same as the demand curve in the long run
b. Because of product differentiation, monopolistically competitive firms have more elastic demand and MR curves
c. Advertising can shift the MR curve
d. Monopolistically competitive firms are price takers because of the many close substitutes
the whole question didn't post, oops.
What is the biggest difference between the marginal revenue curve for a monopoly and a monopolistically competitive firm?
Select one:
a. The MR curve is the same as the demand curve in the long run
b. Because of product differentiation, monopolistically competitive firms have more elastic demand and MR curves
c. Advertising can shift the MR curve
d. Monopolistically competitive firms are price takers because of the many close substitutes
The correct answer is b. Because of product differentiation, monopolistically competitive firms have more elastic demand and MR curves.
To understand why, let's first define the MR curve. MR stands for Marginal Revenue, which is the additional revenue generated by selling one more unit of a product. In competitive markets, the demand curve for a firm's product is perfectly elastic, meaning that the firm can sell as much quantity as it wants at the prevailing market price. Consequently, the MR curve for a perfectly competitive firm is a horizontal line, as each additional unit sold contributes the same amount of revenue.
In contrast, monopolistically competitive firms operate in markets with product differentiation. This means that their products are distinct from those of other firms, creating a degree of brand loyalty or product preference among consumers. As a result, these firms face a downward-sloping demand curve that is less elastic than a perfectly competitive firm's demand curve.
The MR curve for a monopolistically competitive firm will be below the demand curve because the firm must lower the price to sell more quantity due to the downward-sloping demand. The MR curve will typically be more elastic than the demand curve, reflecting the fact that an incremental increase in quantity sold will result in a smaller increase in revenue.
Therefore, because of product differentiation and the resulting less elastic demand curve, monopolistically competitive firms have more elastic MR curves compared to perfectly competitive firms.
To summarize, the correct answer is b because monopolistically competitive firms have more elastic demand curves, which leads to more elastic MR curves due to product differentiation.