Chapter 11 – Non-Competitive Market Questions and Answers: NCERT Solutions for Class 12 Micro Economics

Question 1. Explain why the demand curve facing a firm under monopolistic competition is negatively sloped?

Answer:
1. The demand curve of a firm under monopolistic competition is negatively sloped because of product differentiation.
2. The product of the sellers are differentiated but close substitutes of one another.
3. Each seller has some degree of monopoly power of ‘Making’ the price. But since there are many close substitutes available, the result is downward sloping and elastic demand curve.

Question 2. What is the reason for the long run equilibrium of a firm in monopolistic competition to be associated with zero profit?

Answer:
1. The reason why firm in monopolistic competition earns zero profit in the long run is free entry and exit of firm.
2. If firm earns super-normal profits in the short run then new entry will take place in the long run. If the firm is incurring losses in the short run, firm will leave in the long run.
3. The result is zero abnormal profits in the long run.

Question 3. What is the value of MR when the demand curve is elastic?

Answer: When demand curve is elastic (e > 1), MR is positive.

Question 4. List the three different ways in which oligopoly firms may behave.

Answer: Oligopoly firm may—:
1. cooperate with each other and formally have a contract or written document of their policies.
2. cooperate with each other but have tacit (informal) understanding.
3. not cooperate with each other.

Question 5. What is meant by prices being rigid? How can oligopoly behaviour lead to such an outcome?

Answer:
1. Price rigidity refers to a situation in which whether there is change in demand and supply, the price tends to stay fixed.
2. In an oligopolistic market firms . are in a position to influence the prices.
3. However, they stick to their prices in order to avoid a price war. If a firm tries to reduce the price the rivals will also react by reducing their prices. So, it will be of no benefit.
4. Likewise, if a firm tries to raise the price other firms will not do so. As a result, the firm which intended to raise the price will lose its customers. So, oligopoly behaviour leads to price rigidity in an oligopolistic market.
I. Very Short Answer Type Questions

Question 1. Define monopoly.

Answer: ‘Mono’ means single and ‘poly’ means seller, i.e., single seller. Monopoly is a market situation where there is a single firm selling the commodity and there is no close substitute of the commodity sold by the monopolist.

Question 2. Under which market form, firm is a price-maker?

Answer: Monopoly.

Question 3. What are the shapes of AR and MR curves under monopoly?

Answer: Both AR and MR curves slope downward s. ‘

Question 4. How many firms are there in a monopoly market?

Answer: One firm.

Question 5. What is a price-maker firm?

Answer: A price maker firm is one to fix the price itself because of its monopoly power.

Question 6. What does Monopolistic Competition mean?

Answer: It refers to a market situation in which there are many firms which sell closely related but differentiated products.

Question 7. Why is the demand curve under monopoly less elastic as compared to the demand curve under monopolistic competition?

Answer: Demand curve under monopoly is less elastic as compared to the demand curve under monopolistic competition due to absence of close substitutes in monopoly.

Question 8. Define product differentiation.

Answer: Product differentiation refers to differentiating the products on the : basis of brand, size, colour, shape, etc.

Question 9. In which form of market there is product differentiation?

Answer: Monopolistic competition.

Question 10. Give the meaning of ‘Oligopoly’.

Answer: Oligopoly is a market situation in which an industry has only a few firms (or few large firms producing most of its output) mutually dependent for taking decisions about price and output.
II. Short Answer Type Questions

Question 1. A monopolist can sell any quantity he likes at a price. Give reasons with true or false.

Answer: False: A monopolist cannot sell any quantity he likes at a price.
1. A monopolist faces a downward sloping demand curve because of price discrimination which means that a monopolist can sell more quantity only by lowering the price.
2. A monopolist controls only the supply of the product and not the demand of the product.

Question 2. Why AR curve (demand curve) under monopolistic competition is more elastic than AR curve under monopoly?

Answer:
1. AR curve under both the markets slope downwards.
2. However, AR curve under monopolistic competition is more elastic as compared to AR curve under monopoly because of presence of close substitutes.
3. AR curve is less elastic in monopoly because of no close substitutes.

Question 3. Explain the feature of few firms in an oligopoly market.

Answer:
1. The number of sellers in an oligopoly market is small—when there are two or more than two, but not many sellers.
2. What matters is that these few sellers account for most of the industry’s sales.
3. These “few” sellers consciously dominate the industry and indulge in intense competition. Each firm is aware of that it possesses a large degree of monopoly power.
4. For example, the market for mobile service provider in India is an oligopolist structure as there are only few producers of mobile service provider. There exists severe competition among different firms and each firm tries to manipulate both prices and volume of production to outsmart each other.

Question 4. Explain the main features of barriers to the entry of firms.

Answer:
1. The main reason why the number of firms is small is that there are barriers which prevent entry of firms into industiy.
2. Patents, large capital, control over the crucial raw material etc, prevent new firms from entering into industry.
3. Only those who are able to cross these barriers are able to enter.

Question 5. Give reasons for the following statements:
1. Demand curve facing a perfectly competitive firm is a horizontal straight line.
2. Demand curve facing a monopolistic competitive firm is a downward sloping curve.
3. Demand curve facing a monopoly firm is less elastic than that curve facing a monopolistic competitive firm.

Answer:
1. Under perfect competition, every firm is a price-taker firm. The price is set by industry demand and supply. Therefore, every firm faces a horizontal straight line demand curve indicating that it can sell any quantity at the given price.
2. A monopolistic competitive firm has to design its own pricing strategy. It can expect to sell larger quantity at a lower price, and vice-versa. Hence, its demand curve slopes downwards.
3. A monopolist is the only producer of a good which has no close substitutes. A monopolistic competitive firm, on the other hand, produces a good that has several close substitutes. Hence, the demand curve facing a monopolistic competitive firm is more elastic than that faced by a monopoly firm.

Question 6. Draw a demand curve in different market situation and also compare its elasticity of demand.

Answer:

Question 7. Give reasons for the following statements:
1. A perfectly competitive firm is a price-taker.
2. Product differentiation is a characteristic feature of a monopolistic competitive market,
3. A monopolist cannot fix both the quantity that he likes to produce and the price at which he would like to sell.

Answer:
1. In a perfectly competitive market there are a large number of producers of a product. All of them produce a homogeneous product. Therefore, all the firms have to sell at the same price. This price is determined by industry demand and supply.
2. In a monopolistic competitive market there is a large number of producers. But each of these producers produces a product which is somewhat different from what others do. At least, the producers make all the attempts to influence the consumer with the idea that their product is better than the product of the rival producers.
3. A monopolist is faced with a downward sloping curve. He can sell a larger quantity at a lower price; or alternatively, he may charge a higher price and be satisfied with lower quantity. He has to make a choice between the two alternatives.

Question 8. Explain any two sources of restricted entry under monopoly.

Answer:
1. Grant of patent rights
(i) When a company introduces a new product or new technology it applies to the government to grant it patent certificate by which it gets exclusive rights to produce new product or use new technology.
(ii) Patent rights prevent others to produce the same product or use the same technology without obtaining license from the concerned company. Patent rights are granted by the government for a certain number of years.
2. Licensing by Government : A monopoly market emerges when government gives a firm license, i.e. exclusive legal rights to produce a given product or service in a particular area or region.

Question 9. What is meant by price rigidity, under oligopoly.

Answer:
1. Price rigidity refers to a situation in which whether there is change in demand and supply the price tends to stay fixed.
2. If a firm tries to reduce the price the rivals will also react by reducing their prices. Likewise, if it tries to raise the price, other firms will not do so. It will lead to loss of customers for the firm which intended to raise the price.
lll. TRUE OR FALSE

Question 1. Under monopoly all firms can sell at any price.

Answer: False: Under monopoly there is only one firm.

Question 2. In monopoly, firm is different from industry.

Answer: False: There is only one firm in monopoly market, so there exists no difference between firm and industry.

Question 3. Under monopoly new firms can enter the industry to raise the supply.

Answer: False: In monopoly, no other firm can enter into industry because of barrier created by monopoly firm.

Question 4. Under monopoly a firm sells the goods at a single price.

Answer: False: Under monopoly a firm can sell all of its output at different prices due to it’s complete control over supply and market.

Question 5. Under monopolistic competition there is only one seller of the product.

Answer: False: Under monopolistic competition, there are large number of buyers and also large number of sellers.

Question 6. Under monopolistic competition price discrimination can be made easily.

Answer: False: There is no possibility of price discrimination in the sales of goods in this market because of product differentiation.

Question 7. Under monopolistic competition, all the customers have perfect knowledge of the market conditions.

Answer: False: under monopolistic competition there is a large variety of a single
product, so they do not get perfect knowledge of the market conditions.

Question 8. Under oligopoly, there are large number of buyers and sellers.

Answer: False: In oligopoly there are a few sellers and a large number of buyers

Question 9. Under monopolistic competition, a firm faces a perfectly elastic demand curve.

Answer: False: Monopolistic competitive firm faces downward sloping demand curve as it can sell more only by lowering the price.
Note: As per CBSE guidelines, no marks will be given if reason to the answer is not explained.