Question

A downward-sloping demand curve

a. is a feature of all monopolistically competitive firms.
b. means that the firm in question will never experience a zero profit.
c. causes marginal revenue to exceed price.
d. prohibits firms from earning positive economic profits in the long run.

Answer 1

The correct option for a firm with a downward-sloping demand curve is 'a. is a feature of all monopolistically competitive firms,' but in the long run, such firms cannot maintain positive economic profits due to new firms entering the market.

Step-by-step explanation:

The correct answer to the student's question about a downward-sloping demand curve is a. is a feature of all monopolistically competitive firms. A downward-sloping demand curve indicates that as the price of a good or service decreases, consumers will demand a higher quantity, and conversely, as the price increases, the quantity demanded by consumers will decrease. This characteristic is indeed present in monopolistically competitive markets where numerous firms compete against each other with differentiated products. Each firm in such a market faces a more elastic demand curve compared to a pure monopolist because there are more substitutes available to consumers.

A monopolistically competitive firm will maximize profits by producing the quantity where marginal revenue is equal to marginal cost and charging the price at which this quantity is demanded according to the firm's downward-sloping demand curve. However, in the long run, the entry of new firms driven by economic profits will cause the original firm's demand curve to shift leftwards, leading to a decrease in price and quantity sold until economic profits are zero. Therefore, option d. prohibits firms from earning positive economic profits, in the long run, is also an acceptable answer in the long-run context as the entry of new firms erodes economic profits over time.

In reference to the choices provided, c. causes marginal revenue to exceed price is incorrect as marginal revenue is less than the price on a downward-sloping demand curve due to the price reduction needed to sell additional units. Likewise, b. means that the firm in question will never experience a zero profit is incorrect as firms can earn zero economic profit in the long run due to market entry eroding profits as previously discussed.

Answer 2

A downward-sloping demand curve is a feature of monopolistically competitive firms, where firms set prices and produce where marginal revenue equals marginal cost. While firms can earn profits in the short run, the entry of new competitors can erode these profits, leading to zero economic profit in the long run.

Step-by-step explanation:

The downward-sloping demand curve is characteristic of monopolistically competitive firms and indicates that the firm has some power to set its own prices. Firms in this market structure produce where marginal revenue equals marginal cost. In the short run, a monopolistically competitive firm may earn positive economic profits; however, in the long run, the presence of new entrants in the market due to these profits leads to a decrease in demand for the individual firm until economic profits reach zero. The correct answer to the student's question is that a downward-sloping demand curve is a feature of all monopolistically competitive firms. It does not prevent firms from earning positive economic profits in the long run, nor does it mean a firm will never experience zero profit, and it does not cause marginal revenue to exceed price.