If a industry that is monopolistically competitive, raise it's prices, what will happen?
a) little joe's pizzeria will lose some of its customers
b) lil joe's pizza will not be able to sell any pizzas, because it was the only firm to raise its price.
c) the number of customers served by lil joe's pizza will increase
d) lil joe's pizza's profits will increase
Im leaning towards A and D.
Answer:
monopolistically competitive markets have supply curves that are partially elastic. This means that b is wrong. By the law of demand- a reasonable assumption- c is wrong. For the answer to be be d, you need to know something about the elasticity of demand and cost structure, which you don't.
a is the only answer that is consistent with the market structure, the information given, and the law of demand.
I think it is D because the main thing that differentiates monopolistic competition from perfect competition is product differentiation. Therefore you are assuming that this pizzeria wont lose any customers by this increase in prices because no other pizzeria offers close substitutes. Monopolistic competition also is a market form without great interdependency between firms therefore it doesn't matter whether or not the other companies raise its prices. Let me give you an illustration. If i only like peperoni pizza and little joe's is the only pizzeria to make this pizza even if they did raise their prices i wouldn's switch because no other pizzeria makes the pizza i like.
Answer "d" is the bean-counter's answer. And, as all bean-counter answers, it is right in the classroom, but wrong in the real world. It bean-counting answers were always right, raising taxes would consistently result in higher revenues. But when taxes reach a certain threshold, lowering taxes actually results in higher tax receipts.
Answer "c" is illogical altogether.
Answer "b" disregards human nature, and
Answer "a" may or may not be true as unknown variables impact customer behavior.
In other words, you don't have enough information to answer the question definitively. You can't answer a question like this in a vacuum. Did they remodel the restaurant and create an increased customer draw? Is their pizza so good that people won't go anywhere else? Is the customer service so good that people feel more like family than customers?
On the flip side, are they viewed as lecherous skanks, in which case customers will abandon them with prejudice?
We're not told why did LJ's Pizza raised their prices? So we can't accurately predict the outcome.
If a bean-counter asked the question, you're expected to give a bean-counter answer.
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It depends on if they survive losing the customers. If they do, then other pizza places might see that Little Joe's could do it and still get by, so they might do the same. The pizza industry is probably filled with people afraid to make a change like that unless someone else does it first.
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