CFA Practice Question
Which of the following is a basic difference between a purely competitive firm and a monopolistic firm?
A. The monopolistic firm seeks to maximize profit, while the purely competitive firm seeks to equate price and average total cost.
B. The elasticity of demand facing a monopolistic firm exceeds that facing a purely competitive firm.
C. A purely competitive firm can sell as much as it wishes at the market price, whereas a monopolistic firm must lower its price to increase quantity sold by any significant amount.
Explanation: The downward sloping demand curve for the monopolistically competitive firm implies that in order to increased quantity sold, the price must be lowered. This is not true of the pure competitor who faces a horizontal demand curve.
User Contributed Comments 5
| User | Comment |
|---|---|
| nick1981 | Wasn´t clear to me that we are comparing here with a monopolistic competitive firm and not with a monopoly. must be my rusty english. |
| StanleyMo | sometimes monopolist and monopolistic is confusing. |
| Gooner7 | purely competitive firm cant technically sell as much as it wants. it can sell up to the amount demanded, which is why i didnt pick that |
| pstebelp | A purely competitive firm's market share is so small that it can sell as much as it can produce, as it wants. The point is it is not a monopoly so it will never be able to meet the market demand. |
| nickcoulby | "as much as it wishes at the market price"- ok, the firm wishes to sell a trillion widgets at the market price? |