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Chapter 11 Non Competitive Market Solutions

Question - 1 : - Explain why the demand curve facing a firm under monopolistic competition is negatively sloped?

Answer - 1 : -

  1. The demand curve of a firm under monopolistic competition is negatively sloped because of product differentiation.
  2. The product of the sellers are differentiated but close substitutes of one another.
  3. Each seller has some degree of monopoly power of ‘Making’ the price. But since there are many close substitutes available, the result is downward sloping and elastic demand curve.

Question - 2 : -  What is the reason for the long run equilibrium of a firm in monopolistic competition to be associated with zero profit?

Answer - 2 : -

  1. The reason why firm in monopolistic competition earns zero profit in the long run is free entry and exit of firm.
  2.  If firm earns super-normal profits in the short run then new entry will take place in the long run. If the firm is incurring losses in the short run, firm will leave in the long run.
  3. The result is zero abnormal profits in the long run.

Question - 3 : - What is the value of MR when the demand curve is elastic?

Answer - 3 : -

When demand curve is elastic (e > 1), MR is positive.
 

Question - 4 : - List the three different ways in which oligopoly firms may behave.

Answer - 4 : -

Oligopoly firm may—:

  1. cooperate with each other and formally have a contract or written document of their policies.
  2. cooperate with each other but have tacit (informal) understanding.
  3. not cooperate with each other.

Question - 5 : - What is meant by prices being rigid? How can oligopoly behaviour lead to such an outcome?

Answer - 5 : -

  1. Price rigidity refers to a situation in which whether there is change in demand and supply, the price tends to stay fixed.
  2.  In an oligopolistic market firms . are in a position to influence the prices.
  3. However, they stick to their prices in order to avoid a price war. If a firm tries to reduce the price the rivals will also react by reducing their prices. So, it will be of no benefit.
  4. Likewise, if a firm tries to raise the price other firms will not do so. As a result, the firm which intended to raise the price will lose its customers. So, oligopoly behaviour leads to price rigidity in an oligopolistic market.

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