Question

please help with #2 - #4

2. Compare the curves for average and marginal revenue for firms in monopolis- tic competition to the average and marginal revenue curves for firms in pure competition and pure monopoly. Why are they different? 3. What are the possible long-run situations with respect to profits or losses for firms in monopolistic competition? Draw the appropriate diagrams. 4. Assuming identical cost curves, compare the economic performance of a firm in monopolistic competition and a firm in pure competition in terms of output, profit or loss, and efficiency. Is the assumption of identical cost curves realistic? Why?

Answer 1

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Q2) Pure competition is a market structure where there are large number of firms selling standardied product, there is free entry . Individual seller has no control over price of the product,a large number of buyers and sellers exist in the market and there is no non price competition.In a pure competition an individual firm is the price takeras price is determined by the forces of demand and supply in the market. Since price is equal for all the units produced ,AR ie price =MR and is horizontal as seen in the figure ..

Pure monopolist is the single selller in the market and is the price maker.Demand curve ie AR slopes downwards because the monopolist can sell more if it lowers its price and MR also slopes downward and lies below the AR . As the monopolist increases production MR falls  until it becomes negative.

Monopolistically competitive market has large number of firms selling identical product.In monopolistic competition the firm is the price maker and has negatively sloped demand curve. Its marginal revenue curve is also negatively sloped and lies below the average revenue curve.Both AR and MR are negatively sloped but MR lies below AR which means it is less than AR .

So both in pure monopoly and monopolistic competition we have negatively sloping AR and MR curves and MR lies below AR. But in pure competition ,AR=MR and is a horizontal line.