chapter 12
what is the relationship between differentiation and monopolistic competition?
monopolistic competition refers to a market where many firs sell differentiated products. differentiation can arise from characteristics of the good or service.
does each individual is a prisoners dilemma benefit more from cooperation or from pursuing self-interest
in certain situations all side can benefit from cooperative behavior
What is collusion?
It involves cooperative actions by sellers at the expense of buyers.
how does a monopolistic competition choose its profit-maximizing quantity of output?
the quantity at which marginal revenue is equal to marginal costs
how can a monopolistic competitor tell whether the price it is charging will cause the firm to earn profits or losses
when it does not produce at the minimum of its average cost curve then it will have losses
If firms in a monopolistically competitive industry are earning an losses in the short run, would you expect them to continue doing so in the long run
However, if the average total cost is above the market price, then the firm will incur losses, equal to the average total cost minus the market price multiplied by the quantity produced. It will still minimize losses by producing that quantity where marginal revenue equals marginal cost, but eventually the firm will either have to reverse the losses, or it will have to exit the industry.
If firms in a monopolistically competitive market are earning economic profits in the short run would you expect them to continue doing so in the long run?
If the competitive firms in an industry earn an economic profit, then other firms will enter the same industry, which will reduce the profits of the other firms. More firms will continue to enter the industry until the firms are earning only a normal profit. However, if there are too many firms, then firms will incur losses, especially the inefficient ones, which will cause them to leave the industry.
how is the perceived demand curve for a monopolistically competitive firm different from the perceived demand curve for monopoly
Monopolistically competitive demand curve is downward sloping and is more elastic than monopoly because there are more substitutes. Monopoly is the market demand curve and it is more steeply downward sloping and less elastic because it has no substitutes
What is game theory?
a branch of mathematics often used by economists that analyzes situations in which players must make decisions and then receive payoffs
What is a cartel?
a group of firms acting in unison
Is a monopolistically competitive firm allocatively efficient/ productively efficient?
a monopolistic firm is not productively efficient because it does not produce at the minimum of its average cost curve. It is not allocatively efficient because it does not produce where P=MC
explain how a monopolistically competitive industry may offer benefits of variety
because firm produce similar but differentiated products
Will the firms in an oligopoly act more like a monopoly or more like competitors? Briefly explain.
oligopoly is more like a monopoly especially if they form a cartel
compare the advantages of perfect competition with those of monopolistic competition and oligopoly
perfect competition has efficiency flexibility and responsiveness. monopolistic competition and oligopoly encourage variety and innovation.
how is the perceived demand curve for monopolistically competitive firm different from the perceived demand curve of a perfectly competitive firm?
the demand curve for a perfectly competitive firm is completely elastic and a horizontal line. Monopolistically competitive demand curve is downward sloping and is more elastic than monopoly because there are more substitutes.
when a monopolistic competitor has chosen its profit maximizing quantity of output how does it determine what price to charge?
the monopolistic competitor will produce that level of output and charge the price based on it's perceived demand curve