What one bad thing happens when a monopolistically competitive firm lowers its price?
A)The output effect
B)The income effect
C)The substitution effect
D)The price effect

Question

Quizplus · Accepted Answer

When a monopolistically competitive firm lowers its price, the price effect kicks in. This means that although the firm may sell more units due to increased demand, the lower price also means a lower revenue per unit sold. This could eventually lead to lower profits for the firm. The other effects (output, income, and substitution) refer to changes in quantity demanded due to changes in price, but the price effect specifically looks at the impact on the firm's revenue.

What One Bad Thing Happens When a Monopolistically Competitive Firm