Question

A price-setting firm...

- can lower the price of its product and sell more units.
- cannot raise the price of its product without losing nearly all of its sales.
- does not possess market power.
- sells a product that is standardized or undifferentiated.

Answer 1

A perfectly competitive firm is a price taker and cannot set its own prices due to market forces, whereas a monopolistic competitor can adjust prices due to the availability of substitutes, indicating some market power.

Step-by-step explanation:

The student is referring to different types of market structures and the abilities of firms within these structures to set prices. In a perfectly competitive market, firms are price takers and must accept the market price determined by supply and demand. They face a perfectly elastic demand curve, meaning they can sell any quantity at the market price but cannot influence the price itself.

In contrast, a monopolistic competitor faces a downward-sloping demand curve, indicating the firm can raise its price without losing all its customers due to the presence of substitutes. Thus, a monopolist can increase prices with fewer lost customers compared to a perfectly competitive firm but more than a monopoly.

Additionally, it is important to note that a perfectly competitive firm sells standardized or undifferentiated products and has no market power, whereas a monopolistic competitor sells differentiated products and has some degree of market power.

Answer 2

A price-setting firm's ability to influence the price of its products depends on the market structure. Perfectly competitive firms are price takers and cannot set above-market prices, while monopolistic competitors have some market power due to product differentiation and can marginally adjust prices.

Step-by-step explanation:

A price-setting firm operates differently based on the market structure it is in. A firm in a perfectly competitive market is known as a price taker, meaning it cannot set its own prices above the market equilibrium without losing its customers to competitors because the product it sells is standardized and buyers can easily find the same product elsewhere at the prevailing market price. Such a firm can sell any amount of product at the market price and faces a perfectly elastic demand curve, unable to influence market pricing.

In contrast, a monopolistic competitor has some degree of market power to set prices due to product differentiation. This firm faces a downward-sloping demand curve, indicating it can raise prices and not lose all customers, as buyers have preferences for specific brands or features and may be willing to pay more for them, but will eventually turn to substitutes if the price increase is too steep. On the spectrum of market structures, monopolistic competition lies between perfect competition and monopoly, with firms having the ability to influence their prices to an extent.