Which of the following describes a difference between the marginal revenue and demand curves of a perfectly competitive firm and a monopolistically competitive firm?Group of answer choicesThe perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies above its demand curve.The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies below its demand curve.The monopolistically competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a perfectly competitive firm lies below its demand curve.The marginal revenue curve of a monopolistically competitive firm lies below its demand curve; the marginal revenue curve of a perfectly competitive firm lies above its demand curve.
Question
Which of the following describes a difference between the marginal revenue and demand curves of a perfectly competitive firm and a monopolistically competitive firm?Group of answer choicesThe perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies above its demand curve.The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies below its demand curve.The monopolistically competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a perfectly competitive firm lies below its demand curve.The marginal revenue curve of a monopolistically competitive firm lies below its demand curve; the marginal revenue curve of a perfectly competitive firm lies above its demand curve.
Solution
The correct answer is: The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies below its demand curve.
Here's why:
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In a perfectly competitive market, the firm is a price taker, meaning it has no control over the price of the product it sells. The price is determined by the market. Therefore, the demand curve, which shows the relationship between price and quantity demanded, is perfectly elastic (horizontal line). This means that the marginal revenue (the additional revenue from selling one more unit) is equal to the price, so the marginal revenue curve is the same as the demand curve.
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In a monopolistically competitive market, the firm has some control over the price because its product is differentiated (not identical to the products of other firms). Therefore, the demand curve is downward sloping. This means that to sell more units, the firm has to lower the price. As a result, the marginal revenue (the additional revenue from selling one more unit) is less than the price, so the marginal revenue curve lies below the demand curve.
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