The figure given below shows the cost and revenue curves of a monopolist.Figure 11.9
D: Average revenue
MR: Marginal revenue
ATC: Average total cost
MC: Marginal cost
-In a certain monopolistically competitive market that is characterized by high prices and equally high-quality merchandise, if a firm's competitors begin to successfully introduce new products that cut into the firm's market share, the firm's best counter-strategy is to:
A)raise prices in order to increase the revenue.
B)introduce few new products in order to meet competitors head on.
C)reduce its advertising budget in order to save costs.
D)ignore its competitors and hope its customers' loyalty carry it through the threat.
E)look to the government for protection.

Question

The figure given below shows the cost and revenue curves of a monopolist.Figure 11.9
  D: Average revenue
MR: Marginal revenue
ATC: Average total cost
MC: Marginal cost
-In a certain monopolistically competitive market that is characterized by high prices and equally high-quality merchandise, if a firm's competitors begin to successfully introduce new products that cut into the firm's market share, the firm's best counter-strategy is to:
A)raise prices in order to increase the revenue. 
B)introduce few new products in order to meet competitors head on. 
C)reduce its advertising budget in order to save costs. 
D)ignore its competitors and hope its customers' loyalty carry it through the threat. 
E)look to the government for protection.

Quizplus · Accepted Answer

If the firm's competitors are successfully introducing new products that are cutting into its market share, its best counter-strategy is to meet its competitors head-on by also introducing new products. By doing so, it can maintain its market share and possibly even increase it. Raising prices would only exacerbate the problem by further alienating customers, while reducing advertising budgets would reduce the firm's visibility, making it less competitive. Ignoring competitors is not a viable strategy, as customers are likely to switch to other options available to them. Looking to the government for protection is not a viable strategy either, as it is unlikely to aid a particular firm in a monopolistically competitive market.

The Figure Given Below Shows the Cost and Revenue Curves