Question

For each of the following characteristics, check which types of firm it describes: a monopoly firm, a monopolistically competitive firm, both, or neither.

Characteristic Monopoly Monopolistically Competitive
1. Faces a downward-sloping demand curve
2. Has marginal revenue less than price
3. Faces the entry of new firms selling similar products
4. Earns economic profit in the long run
5. Equates marginal revenue and marginal cost
6. Produces the socially efficient quantity of output

Answer 1

1. Faces a downward-sloping demand curve

• BOTH MONOPOLIES AND MONOPOLISTICALLY COMPETITIVE FIRMS HAVE A DOWNWARD SLOPING DEMAND CURVE

2. Has marginal revenue less than price

• ONLY MONOPOLIES

3. Faces the entry of new firms selling similar products

• NEITHER, SINCE MONOPOLISTICALLY COMPETITIVE FIRMS OFFER DIFFERENTIATED PRODUCTS, NEW COMPETITORS WILL NOT OFFER SIMILAR PRODUCTS. MONOPOLIES HAVE THE ADVANTAGE OF BARRIER ENTRIES THAT PREVENT NEW FIRMS FORM ENTERING THE MARKET.

4. Earns economic profit in the long run

• ONLY MONOPOLIES, BECAUSE MARKET BARRIERS PREVENT NEW FIRMS FROM ENTERING THE MARKET.

5. Equates marginal revenue and marginal cost

• BOTH MONOPOLIES AND MONOPOLISTICALLY COMPETITIVE FIRMS MAXIMIZE ACCOUNTING PROFITS AT THIS POINT

6. Produces the socially efficient quantity of output

• NEITHER