A new competitor enters the industry and competes with a second firm, which had been a monopolist. The second firm finds that although demand is not perfectly elastic, it is now relatively more elastic. The second firm's marginal revenue will be _____________ and its profit-maximizing price will be ___________
Part 2
A.
less elastic; higher.
B.
more elastic; lower.
C.
perfectly inelastic; higher.
D.
perfectly elastic; the same.
The second firm, which used to be a monopolist, now faces competition. Consequently, its demand curve becomes more elastic because consumers now have more options and are more responsive to price changes made by the second firm. In other words, the second firm loses some of its pricing power.
Marginal revenue is closely related to the elasticity of demand. When demand is more elastic, a firm must lower its price to increase the quantity sold, and each additional unit sold adds less to total revenue compared to when demand was less elastic. Thus, the second firm's marginal revenue is more elastic after the competitor enters the market.
As for pricing, when a firm's demand becomes more elastic, it typically lowers its price to maintain or increase its quantity sold. This is necessary to stay competitive against the new entrant. Hence, the firm's profit-maximizing price will be lower.
Therefore, the correct answer is:
Part 2
B. more elastic; lower.