Question

b) How does N, the number of firms, affect each firm's demand curve? Explain the economics here by describing how this effect of N on a firm's demand curve is unique to the industry structure of monopolistic competition. This firm's demand depends ____________ on N, implying that if N gets ___________, this firm's residual demand ___________. A. Positively ; smaller ; decreases B. Negatively ; smaller ; increases C. Positively ; larger ; decreases D. Negatively ; larger ; increases

Answer 1

The firm's demand in monopolistic competition depends negatively on the number of firms (N); as more firms enter the market (N increases), each firm's demand decreases. This leads to a leftward shift in the demand and marginal revenue curves, which reduces the profit-maximizing quantity and price.

Step-by-step explanation:

In the context of monopolistic competition, the firm's demand curve is affected by the number of firms in the market, denoted as N. The firm's demand depends negatively on N, meaning that if N gets larger, the firm's residual demand increases. This is because, in a monopolistcally competitive market, many firms sell products that are differentiated but still close substitutes. As the number of firms (N) increases, consumers have more options available, leading to a decrease in the quantity demanded from any single firm at a given price, which implies a leftward shift in the firm's perceived demand curve. Consequently, the marginal revenue curve also shifts to the left, affecting the profit-maximizing quantity that the firm chooses to produce.

In the long-run, due to the lack of significant barriers to entry, original firms that are earning positive economic profits will attract new entrants. This will decrease demand for the original firm's product and, as a result, the profit-maximizing price and level of output will also decline. All companies in monopolistic competition will eventually earn zero economic profits in the long-run equilibrium.

Answer 2

This firm's demand depends positively on N, implying that if N gets larger, this firm's residual demand decreases. (option B)

In monopolistically competitive markets with N firms, each firm's demand curve depends positively on N, implying that if N gets larger, this firm's residual demand decreases. The demand curve for each firm in the monopolistically competitive market is
`\(Q^D = (100)/(N) - P\)`.

The unique characteristic of monopolistic competition is product differentiation, where firms offer differentiated products, leading to less perfect substitutes. As the number of firms (N) increases, the market becomes more competitive, diminishing the impact of an individual firm's product on overall demand.

Therefore, a larger N results in a smaller residual demand for each firm.

So, the correct option is:

B. Positively ; larger ; decreases

The complete question is:

Consider a monopolistically competitive market with N firms. Each firm's business opportunities are described by the following equations:

Demand: Q^D = (100 / N) - P

Marginal Revenue: MR = (100 / N) - 2*Q

Total Cost: TC = 50 + Q^2

Marginal Cost: MC = 2*Q

How does N, the number of firms, affect each firm's demand curve? Explain the economics here by describing how this effect of N on a firm's demand curve is unique to the industry structure of monopolistic competition.

This firm's demand depends ____________ on N, implying that if N gets ___________, this firm's residual demand ___________.

A. Positively ; smaller ; decreases

B. Positively ; larger ; decreases

C. Negatively ; smaller ; increases

D. Negatively ; larger ; increases