When a monopolistically competitive firm begins to charge an excessive prive for its product?

Question

a. the firm will go out of business
b. consumers will substitute a rival's product
c. consumers will boycott the product
d. the government will regulate the price

Answer 1

By claiming monopolistic, you are essentially eliminating b as there is no adequate rival to substitute.

From an economics point of view, the most likely result is c. If the price is too high, people will begin viewing the product as a luxury rather than a necessity and fewer products will be purchased.

If the time is truly a necessity (e.g. electricity), you might get d where the government would step in and institute price control, but that would be the exception and is more a poltical response than an economic and, as such, is unpredictable.

There is also a slim chance of a if the firm does not adjust to the reduced number of purchasers by cutting the supply or lowering the price back to the level supported by supply and demand.

Answer 2

This sounds impossible. A monopoly wouldn't have any competitors. Like Ma Bell used to be - they were the only telephone company. So you can't do #b. People might try to do #c but how if it's a product that they must have to live - like fuel for winter furnaces. #a sounds unlikely for the same reason. In lots of countries #d is done. In the U.S. we try to believe that we are free and the government can't take things over so we de-regulate and say that other companies have to start - and they usually do. In a perfect world they would go out of business and/or a smart new comer would spring up with competition for them.