Which of the following represents a difference in the process by which a monopolistic competitor and a monopolist make their respective decisions about quantity and price?
a)only the monopolist competitor faces a downward-sloping demand curve
b)the monopolists perceived demand curve is market demand
c) the monopolist competitors perceived demand curve is market demand
d) a monopolist need not fear entry and also slection b above
The correct answer and explanation is :
The correct answer is:
b) the monopolist’s perceived demand curve is market demand.
Explanation:
A monopolist and a monopolistic competitor both make decisions about price and quantity based on their demand curves, but the key difference lies in how they perceive these demand curves and the market structure they operate in.
Monopolist:
A monopolist is the sole seller in the market and has complete control over the market supply. Because there are no competitors, the monopolist’s demand curve is the entire market demand curve. The monopolist can set the price and adjust the quantity produced based on the demand curve they face. They are price makers, meaning they have the power to influence the price by choosing the quantity of output.
- Price-setting power: The monopolist chooses the quantity that maximizes its profit, and from there, it determines the price by referring to the market demand curve.
- No competition: Since the monopolist is the only provider of a good or service, there are no competitors to drive the price down or challenge the monopolist’s pricing decisions.
Monopolistic Competitor:
A monopolistic competitor, on the other hand, operates in a market where there are many firms offering similar but not identical products. Each firm has a degree of market power, meaning they can differentiate their product enough to set a price higher than marginal cost, but they do not have the complete control a monopolist does.
- Perceived demand curve: The monopolistic competitor faces a downward-sloping demand curve, but unlike the monopolist, this demand curve is not the entire market demand curve. The firm’s perceived demand curve reflects the demand for its specific product, considering the presence of close substitutes from other competitors. The competitor must also consider the prices of other firms in the market.
Key Differences:
- The monopolist’s perceived demand curve is the market demand curve, as they are the only supplier in the market, so they can determine both price and quantity.
- The monopolistic competitor faces a downward-sloping demand curve, but this curve represents the demand for its specific product, influenced by competition and product differentiation.
Conclusion:
The monopolist has more control over the market because they face the entire market demand curve, whereas a monopolistic competitor faces a more elastic demand curve due to the presence of substitutes. The answer option b is the correct one because it accurately reflects the monopolist’s control over the entire market demand.