How is the demand curve faced by a perfectly competitive firm different from that faced by a monopoly? How does it affect their pricing policies?
What will be an ideal response?
Perfectly competitive firms face a horizontal demand curve for their product, while a monopolist faces a downward-sloping demand curve for its product. A horizontal demand curve implies perfectly elastic demand. This means that if perfectly competitive firms set their product prices above the market price, they lose all of their business. This makes them price takers. On the other hand, the downward sloping demand curve faced by a monopolist implies that a monopolist can sell a lower quantity at a higher price and vice versa. Hence, monopolies have the option of setting the market price for their products, which makes them price makers.
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Whenever a firm's marginal costs are less than its average costs, its average costs must be:
a. falling. b. rising. c. constant. d. falling, then rising.
Which of the following statements is TRUE about contestable markets?
A) There are significant barriers to entry. B) Firms earn large economic profits. C) Each firm faces a perfectly elastic demand. D) There are few firms in the industry.