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Chapter 13: Problem 8

Is it possible for marginal revenue to be negative for a firm selling in a perfectly competitive market? Is it possible for marginal revenue to be negative for a firm selling in a monopolistically competitive market? Briefly explain.

Short Answer

Expert verified
Marginal revenue cannot be negative in a perfectly competitive market, but could be negative in a monopolistically competitive market, though this scenario is uncommon.

Step by step solution

01

Perpectly Competitive Market

First, let's take a perfectly competitive market. In this market, each firm is a price taker since the market price is determined by the industry-wide demand and supply. The marginal revenue for a firm in a perfectly competitive market is equal to the market price. Since the price cannot be negative, the marginal revenue in a perfectly competitive market cannot be negative.
02

Monopolistically Competitive Market

In a monopolistically competitive market, a firm has some influence over the market price because of differentiated products. So, the price, and hence, revenue can drop if a firm chooses to sell more units (But only when the selling price of the additional unit is lower than the average revenue of previous units). Thus, it is possible for marginal revenue to be negative in a monopolistically competitive market, but it is an unusual scenario as firms want to maximize their profits.

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Most popular questions from this chapter

How might a monopolistically competitive firm continually earn an economic profit?

A skeptic says, "Marketing research and brand management are unnecessary. If a company wants to find out what customers want, it should simply look at what they're already buying." Do you agree with this comment? Explain.

(Related to the Apply the Concept on page 464) In Chicago, Green Summit appears to be running nine different restaurants, with names such as Butcher Block, Milk Money, and Leafage. In reality, all the food for these restaurants is cooked in one central kitchen, and none of the restaurants have physical locations. The brands exist only as Web sites and on the delivery containers. An article on chicagotribune.com quoted the firm's \(\mathrm{CEO}\) as saying, "I don't really think anybody cares. They just want really high-quality food." a. If nobody cares whether a restaurant exists as a physical place, why does Green Summit have a Web site for each restaurant and packaging printed with each restaurant's name and logo? Aren't Green Summit's costs higher than if it just had a single name and one Web site? b. Does Green Summit's strategy increase or decrease productive efficiency in the restaurant business? Does the strategy increase or decrease allocative efficiency? Does it increase or decrease the well-being of its customers? Briefly explain.

(Related to the Don't Let This Happen to You on page 458) A student remarks: If firms in a monopolistically competitive industry are earning an economic profit, new firms will enter the industry. Eventually, a representative firm will find that its demand curve has shifted to the left until it is just tangent to its average total cost curve and the firm is earning zero profit. Because firms are earning zero profit at that point, some firms will leave the industry, and the representative firm will find that its demand curve will shift to the right. In long-run equilibrium, price will be above average total cost by just enough so that each firm is just breaking even. Briefly explain whether you agree with this analysis.

What are the most important differences between perfectly competitive markets and monopolistically competitive markets? Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets.
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