Question

13.

With monopolistic competition, firms have demand curves that are ________ the lowest possible cost.

correlated with

above

unrelated to

below

identical to

Answer 1

Solution:

Under monopolistic competition, firms produce differentiated products. So, in short run, firms earn super-normal profits which means they earn positive profits.

Profits = Total revenue - total cost

With positive profits, Total revenue - total cost > 0

Total revenue > total cost

Dividing both sides by quantity, we get, total revenue/quantity > total cost/quantity

This implies: Average revenue > Average cost

Since, the demand curve is curve marking relation between quantity and price, and thus the average revenue, demand curve is same as the average revenue curve of the firm. Average cost is the lowest possible cost. So, clearly, at production point, average revenue > average cost implies that demand curve lies above the minimum/lowest possible cost (only then firms can earn a positive profit).

So, correct option is (b) above.