ECO MOD 10
The long-run equilibrium in a monopolistically competitive market results in firms realizing
normal profits, which removes all incentives for firms to enter or exit the industry.
What is one way that monopolistic competition is similar to a monopoly?
Both have some control over prices.
Which of the following markets could be considered monopolistically competitive? (Choose all that apply.)
Fast food Hotels Clothing
In order for a monopolistically competitive firm to produce at a point that is both productively and allocatively efficient, which of the following has to be true about the profit-maximizing quantity?
Demand = Marginal Cost = ATC Reason: Allocative efficiency means that the point of production occurs where Demand equals marginal cost. Productive efficiency means that the point of production occurs where marginal cost equals average total cost.
In a monopolistically competitive market, competitors make close substitutes, so demand curves are relatively more
elastic than those faced by monopolies and less elastic than those faced by perfectly competitive firms.
Monopolistic competition and perfect competition have one main characteristic in common: relatively easy market
entry and exit
Producers operating in oligopolistic markets can generate normal
profit and even loss in the short run
Given that oligopolistic firms face other competitors in their markets, their behavior must definitely be:
strategic
Using the table, which shows a monopolistically competitive firm's demand schedule, marginal revenue, and marginal cost to answer the following question. The profit maximizing price for this firm is $
7 MR =MC
A clear benefit to monopolistic competition for consumers is product
differentiation
Suppose Carl's Candies sells 100 boxes of candy for $4 each. The total fixed cost of the 100 boxes is $100 - and the average variable cost of the 100 boxes is $1.50 per box. Carl's makes a profit per unit of:
$1.50.
Referring to the graph, what is the profit maximizing price?
$140 Reason: To find the profit-maximizing price, find where MR=MC, then read up to the demand curve to find the price.
Suppose Carl's Candies sells 100 boxes of candy for $4 each. The total fixed cost of the 100 boxes is $100 - and the average variable cost of the 100 boxes is $1.50 per box. Carl's makes a total profit of:
$150.
Referring to the graph, the profit or loss amount for Sandra's Sweets at the profit maximizing output and price is $
-1280
Suppose Carl's Candies sells 100 boxes of candy for $5 each. The total fixed cost of the 100 boxes is $100 - and the average variable cost of the 100 boxes is $1.50 per box. Carl's makes a profit per unit of:
$2.50.
Suppose Carl's Candies sells 100 boxes of candy for $5 each. The total fixed cost of the 100 boxes is $100 - and the average variable cost of the 100 boxes is $1.50 per box. Carl's makes a total profit of:
$250
When the marginal benefit of the last unit equals the marginal cost of the last unit, production is
allocatively efficient
The level of profit that occurs when the total revenue is equal
to the total cost is known as normal profit.
Profit maximization implies that monopolistically competitive firms should expand production up to the point where the marginal revenue equals the marginal cost. (True or False)
true
In a monopolistically competitive market, which of the following represents a long-run adjustment?
Firms enter the market due to economic profits.
In monopolistic competition, once you find the profit-maximizing quantity, how do you find the profit-maximizing price?
You read the corresponding price from the demand curve. Reason: In every market structure, the profit-maximizing price is read from the demand curve.
Monopolistic competition is a market characterized by:
a relatively large number of sellers producing a differentiated product - for which they have some control over the price they charge - in a market with relatively easy market entry and exit.
One common feature of monopolistically competitive markets is that firms invest heavily in product development and innovation, which benefits
buyers greatly
Monopolistically competitive markets:
combine characteristics of competitive markets and pure monopolies
For monopolistically
competitive firms, branding serves as a signal to consumers about the products they are going to purchase.
The difference between the economic surplus when the market is at its competitive equilibrium and the economic surplus when the market is not in equilibrium is the:
deadweight loss.
The strategy of distinguishing one firm's product from the competing products of other firms is called product
differentiation
monopolistically competitive firms have an incentive to continuously improve and differentiate their products to have more control over their prices and, they hope, to earn more
economic profit
The underutilization of resources that occurs when the quantity of output a firm chooses to produce is less than the quantity that minimizes the average total cost is called
excess capacity
Total revenue minus the
explicit and implicit costs of production is economic profit
Because the products of monopolistically competitive firms are different
from other companies in their industry, the demand curve they face is downward sloping.
The presence of many monopolistically competitive firms in an industry makes the firm unable to produce enough output to reach the
minimum average total cost, so the firms have excess capacity to produce
One way in which monopolistic competition and monopoly differ is that:
monopolistic competition has many sellers, and monopoly has one seller.
In the presence of economic profits, firms enter a monopolistically competitive market until the market reaches the point at which the firms are generating a(n)
normal profit; then entry stops and the market settles into its long run equilibrium
When monopolistically competitive firms follow the marginal revenue and the marginal cost rule, the result can be
normal profits, economic profits, or even losses, depending on market conditions.
When monopolistically competitive firms realize losses in the short run, some firms will exit
the industry increasing market shares and prices and eliminating losses for the remaining firms.
In a monopolistically competitive market, the closer the substitutes are for a product, the more elastic its demand will be ;
the more rare or unusual a product is, the more inelastic, its demand will be.
In an oligopoly,:
producers may or may not earn economic profits.
In a monopolistically competitive market - each firm produces a differentiated
product - so firms face downward-sloping demand curves.
The strategy of distinguishing one firm's product from the competing products of other firms is called
product differentiation
A number of entry barriers
are present in oligopolistic markets
Which of the following characteristics of monopolistic competition helps to best explain why consumers can usually find exactly what they are looking for based on their preferences and budgets?
A differentiated product Differentiated product means that consumers have lots of choice, and they can find exactly what they are looking for in the market.
Monopolistic Competition
A market structure characterized by a relatively large number of sellers producing a differentiated product, for which they have some control over the price they charge, in a market with relatively easy market entry and exit.
Allocative efficiency occurs when:
MB = MC
What is true about firms in monopolistic competition in the short-run?
Monopolistically competitive firms can generate an economic profit, a normal profit, or an economic loss. In the short run, monopolistically competitive firms can generate a profit, a loss, or a normal profit. Profits incentivize entry into and exit from the market in the long run.
Use the graph of a monopolistically competitive firm above to answer the following question. What is the amount of profit or less Monica will make at the profit maximizing price and quantity?
Profit of $2000 Reason: The price here is $160, and the quantity is 40. At this quantity, the ATC is $110. The profit per unit is equal to the price minus the ATC, or $50. The entire profit is ($50)(40) = $2,000). Profit = (P −ATC)*q = (160 − 110)*40 = $2,000
Which of the following is not a characteristic of monopolistic competition?
The products are standardized.
Product Differentiation
The strategy of distinguishing one firm's product from the competing products of other firms.
Which of the following is not an entry barrier in oligopolistic markets?
Upward-sloping long run marginal cost curve
Which of the following markets would most closely resemble monopolistic competition?
Wine There are a large number of producers, a differentiated product, sellers have some control over prices, and there is relatively easy market entry and exit.
A market structure characterized by a relatively large number of sellers producing a differentiated product - for which they have some control over the price they charge - in a market with relatively easy market entry and exit is known as monopolistic
competition
Because monopolistically
competitive firms have some control over prices, the firm will charge consumers the price they are willing and able to pay for the available output, which is found by projecting the profit-maximizing output level onto the demand curve
In a monopolistically
competitive market, consumers can usually find exactly what they are looking for based on their preferences and budgets.
Profit maximization
implies that monopolistically competitive firms should expand production up to the point where the marginal revenue equals the marginal cost.
the mutual
interdependence observed among oligopolistic firms is often studied using the tools of game theory.
Referring to the graph, Sandra's Sweets is a monopolistically competitive firm that produces 120 cakes. This level of production is:
not productively or allocatively efficient. Allocative efficiency means that the point of production occurs where Demand equals marginal cost. Productive efficiency means that the point of production occurs where marginal cost equals average total cost. Neither of these is true at a quantity of 120 cakes.
Monopolistic competition and a monopoly are:
not the same market structure.
As in a monopoly, in a(n)
oligopoly, the industry has extensive entry barriers.
In the long run, a monopolistically competitive firm will charge a(n)
price equal to the average total cost per unit produced.
Producing output at the lowest possible total cost of production per unit is
productive efficiency
Producing output at the lowest possible total cost per unit of production is:
productive efficiency.
Compared to perfect competition, a benefit of monopolistic competition for consumers is:
increased product variety. Reason: In monopolistic competition, there is some product differentiation, allowing consumers to have more choices. In perfect competition, each firm sells an identical product
Through advertising and branding, monopolistic competitive firms increase the demand for their products and make those demands relatively more
inelastic, allowing them to charge greater prices and generate larger economic profits.
oligopoly
market, there are relatively few firms and the product is either standardized or differentiated.
What do profits and losses in a monopolistically competitive markets lead to in the long run?
Entry into and exit from the market. Profits and losses signal firms to enter or exit the market, leading to profits, in the long run, arriving at normal profit, or zero economic profit.
What would happen to a firm's demand in a monopolistically competitive market if there was less competition in the market?
Demand would become more inelastic Less competition means that the demand would become relatively more inelastic.
What would happen to a firm's demand in a monopolistically competitive market if there was an increase in the number of consumers?
Demand would increase. More consumers would cause the demand curve to shift to the right, or increase.
