Question

State whether the following statement are TRUE and FALSE.

1. There is no price discrimination under Monopolistic competition.

2. In a monopoly market, firm and industry are the same.

3. Product differentiation is not possible under perfect competition.

4. Under perfect competition, price is determined by equilibrium of demand and supply.

Answer 1

1. True
In a monopolistic market there exists a large number of sellers selling differentiated products that are close substitutes of each other. Due to the presence of large number of sellers in the market none of them can follow price discrimination. This is because demand curve faced by the sellers is highly elastic. Even a slight change in the price brings about a large change in the quantity demanded. Thus, price discrimination cannot be followed.

2. True
A monopoly market consists of only one seller or firm. This single firm caters to the needs of a large number of buyers. Because there is only firm in the market, the firm is regarded as the industry.

3. True
Under perfect competition, the sellers sell goods that are homogeneous in nature. In other words, the product of each and every firm in a perfectly competitive market is a perfect substitute to others’ products in terms of quantity, quality, colour, size, features, etc. Therefore, product differentiation is not possible under perfect competition.

4. True
Under perfect competition, each firm is a price taker, while the industry is a price maker. In the industry, the market price is determined by the intersection of the supply and demand curves.