Sia
Question
Microeconomics
Posted 9 months ago
Priya's Party Supplies sells cake toppers in a market with many other sellers, but each seller has their own version of cake toppers.
Which of the following statements is true based on this information?
Choose 1 answer:
(A) Priya can charge whatever price she wants to for her cake toppers.
(B) Priya's average total cost curve is below her average variable cost curve.
(C) Priya's marginal revenue curve is less than her demand curve.
(D) Priya produces a socially optimal quantity.
(E) Priya produces in a perfectly competitive industry.
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Answer from Sia
Posted 9 months ago
Solution
a
Market Structure: Priya's Party Supplies operates in a market with many sellers, each offering a differentiated product. This suggests a monopolistic competition market structure
b
Pricing Ability: In monopolistic competition, firms have some degree of pricing power due to product differentiation, but they cannot charge any price they want because of the presence of close substitutes
c
Cost Curves: The average total cost (ATC) curve cannot be below the average variable cost (AVC) curve because ATC includes AVC plus average fixed costs (AFC)
d
Marginal Revenue: In monopolistic competition, the marginal revenue (MR) curve lies below the demand curve because the firm must lower the price to sell additional units
e
Socially Optimal Quantity: Firms in monopolistic competition do not produce at the socially optimal quantity because they produce where MR = MC, not where price equals marginal cost (P = MC)
f
Perfect Competition: The presence of product differentiation indicates that the industry is not perfectly competitive, as perfect competition requires homogeneous products
Answer
(C) Priya's marginal revenue curve is less than her demand curve.
Key Concept
Monopolistic Competition
Explanation
In monopolistic competition, firms face a downward-sloping demand curve and must lower prices to sell more units, causing the marginal revenue curve to lie below the demand curve.
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