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Chapter 10: Q.1 (page 251)

Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?

Short Answer

Expert verified

Because of this situation, the prices of the product sold by the monopolistic competitor will increase.

Step by step solution

01

Step 1. Explanation.

Because of the successful advertising, the demand for the product rises the monopolistic competitor will increase the price of the product to earn more profit on the given quantity of product because in economics seller have a mind of earning more profits and here the demand is also in favor of the seller or monopolistic competitor.

02

Step 2.Graphical behavior.

A rightward movement in the demand curve and a rightward change in marginal revenue will occur as demand rises. The marginal cost curve will go upward as the marginal income curve shifts. The new pricing should be more expensive. The move along the average cost curve to a higher level of average cost will be caused by the rise in quantity. The price will rise, resulting in a rise in overall earnings.

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Most popular questions from this chapter

Continuing with the scenario in question 1, in the long run, the positive economic profits that the monopolistic competitor earns will attract a response either from existing firms in the industry or firms outside. As those firms capture the original firm’s profit, what will happen to the original firm’s profit-maximizing price and output levels?

Sometimes oligopolies in the same industry are very different in size. Suppose we have a duopoly where one firm

(Firm A) is large and the other firm (Firm B) is small, as the prisoner’s dilemma box in Table 10.4 shows.


Firm B colludes with firm AFirm B cheats by selling more output
Firm A colludes with firm B
A gets \(1000,B gets \)100A gets \(800, B gets \)200
Firm A cheats by selling more outputA gets \(1050, B gets\)50A gets \(500, B gets \)20

Assuming that both firms know the payoffs, what is the likely outcome in this case?

Suppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?

When OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long term—that the incentives for individual members to cheat would become too strong. More than forty years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? Hint: You may wish to consider non-economic reasons.

Would you rather have efficiency or variety? That is, one opportunity cost of the variety of products we have is that each product costs more per unit than if there were only one kind of product of a given type, like shoes. Perhaps a better question is, “What is the right amount of variety? Can there be too many varieties of shoes, for example?”
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