Answer the following question using economic theory covered in this lesson. Make
ID: 1229359 • Letter: A
Question
Answer the following question using economic theory covered in this lesson. Make sure you answer all parts of the question.The definition of a price maker is a “firm with some power to set the price because the demand curve for its output slopes downward”, which in effect, means those firms with a downward sloping demand curve have some market power.
1.How does a firm then maximize their total revenue? Describe the relationship of the demand curve and total revenue curve, indicating which of the four types of market structures market power like this would occur (i.e., perfect competition, monopolistic competition, oligopoly, monopoly).
2.What happens when a firm raises its price in a market in which the price is in the inelastic range of the demand curve?
3.What happens when a firm raises its price in a market in which the price is in the elastic range of the demand curve?
Explanation / Answer
1.How does a firm then maximize their total revenue? Describe the relationship of the demand curve and total revenue curve, indicating which of the four types of market structures market power like this would occur (i.e., perfect competition, monopolistic competition, oligopoly, monopoly). In this case, this type of market is either an oligopoly or a monopoly. The firm will set quantity at the point where TR=Demand and price at the point where MR=MC or in this case, MC is the supply curve. 2.What happens when a firm raises its price in a market in which the price is in the inelastic range of the demand curve? In this case, the demand is inelastic so if a firm raises prices, there is only a slight decrease in quantity. This means there is more profit for the firm. In this case, the income effect outweighs the substitution effect. 3.What happens when a firm raises its price in a market in which the price is in the elastic range of the demand curve? In this case, The substitution effect outweighs the income effect and when price rises quantity decreases drastically. This causes profit to decrease. Hope this helps