Ch. 13 - Monopolistic Competition
If firms in a monopolistically competitive industry and earning economic profits, new firms will enter the industry.... Is this analysis correct or incorrect?
The analysis is incorrect. Firms will not leave the industry when earning zero economic profit. When the firm's demand curve is tangent to the average cost curve it is still earning zero economic profit.
What is the amount of the firm's loss at its optimal output level?
Total cost minus total revenue at the optimal output level.
Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets.
Apple and oranges are sold in perfectly competitive markets and Starbucks coffee and Gap clothing are sold in monopolistically competitive markets.
What is the best course of action for the firm in the short run?
It should stay in business because it covers some of its fixed cost.
If this firm continues to produce, what is likely to happen to the product's price in the long run?
It will increase.
What is its average variable cost of production at its optimal output level?
Total variable cost divided by quantity at the optimal output level.
There are many wheat farms in the U.S., and there are also more than 7,000 Starbucks coffeehouses. Why, then, does a Starbucks coffeehouse face a downward-sloping demand curve when a wheat farmer faces a horizontal demand curve?
Wheat is a homogeneous good, while Starbucks is able to differentiate its coffee from other coffeehouses.
Assume the market is monopolistically competitive and is in long-run equilibrium. How much excess capacity does the firm have?
Where MC meets ATC minus where MR meets on the demand curve.
With a downward-sloping demand curve, average revenue is equal to price With a downward-sloping demand curve, marginal revenue is below price
actually, average revenue is always equal to price, whether demand is downward sloping or not. because the firm must lower its price to sell additional units.
Marketing is
all activities necessary for a firm to sell a product including advertising, product design, and product distribution.
Are monopolistically competitive firms efficient in long-run equilibrium? Monopolistically competitive firms
are not productively efficient because they do not produce at min. average total cost and they are not allocatively efficient because they produce where price is greater than marginal cost.
Why does local McDonald's face a downward-sloping demand curve for its Quarter Pounder? In monopolistically competitive markets, If McDonald's raises the price it charges for Quarter Pounders above the prices charged by other fast-food restaurants, won't it lose all it's customers?
changing the price affects the quantity sold because firms sell differentiated products. No.
What are the differences between the long-run equilibrium of a perfectly competitive firm and the long-run equilibrium of a monopolistically competitive firm? Unlike perfectly competitive firms, in the long run monopolistically competitive firms
charge a price greater than marginal cost and do not produce at minimum average total cost.
The entry of new firms cause the demand curve of an existing firm in a monopolistically competitive market to shift to the left because _____ and become more elastic since _____.
each will have a smaller share of the existing market; consumers will have additional choices.
Unlike in perfectly competitive markets, in monopolistically competitive markets,
firms face downward-sloping demand curves, and the products competitors sell are differentiated.
In theory, in the long run monopolistically competitive firms earn zero profits. However, in reality there are some ways by which a firm can avoid losing profits. Which of the following is one such way?
identify new markets and develop products precisely for those markets.
In the short run, a profit maximizing firm's decision to produce should be guided by whether
its total revenue covers its variable costs.
A monopolistically competitive firm maximizes profit where
price>marginal cost.
Refer to the diagram to the right. The marginal revenue from the increase in price from p0 to p1 equals
the area (A-D).
If buyers of a monopolistically competitive product feel the products of different sellers are strongly differentiated, then
the demand curve for each seller's product is relatively inelastic.
Suppose the market for fast-food value meals is monopolistically competitive, with many restaurants selling their own brand of food. In the long run,
the demand curve will shift to the right and become more inelastic because the firms are currently experiencing losses.
Though monopolistically competitive markets are not allocatively or productively efficient, consumers benefit in that
they are able to purchase a differentiated product that more closely suits their tastes.
Why are so many companies so concerned about brand management? Companies use brand management
to maintain product differentiation and earn economic profits in the short run.
Profit-maximizing level of output occurs Total cost at the profit-maximizing output level of units is Economic profit is
where marginal revenue equals marginal cost. Total revenue equals price (shown on the demand curve). average total cost times the quantity. total revenue minus total cost.
