Chapter 13- Monopolistic Competition
Which of these statements is correct?
Legally enforcing trademarks can be difficult.
Using the table data provided, what is the average revenue associated with the sixth unit of output produced and sold?
$3.00
What is brand management? Brand management is designed to
maintain the differentiation of a product over time
According to the graph, what price should the firm charge to maximize profits?
$15
According to the graph, if the firm is maximizing profits what is the dollar value of the profit?
$5.00
Suppose the figure to the right represents the market for a particular brand of shampoo, such as L'Oreal, Lancome, or Maybelline. Assume the market is monopolistically competitive and is in long-run equilibrium. How much excess capacity does the firm have? The monopolistically competitive firm's excess capacity is ______ thousand bottles of shampoo. Instead, suppose the market is perfectly competitive and is in long-run equilibrium (with the same cost structure as that illustrated in the figure.) How much excess capacity does the firm have? The perfectly competitive firm's excess capacity is ____ thousand bottles of shampoo.
4, = (11-7) 0, = (11-11) Excess capacity: Is equal to the difference between the profit-maximizing level of output and the productively efficient level of output. The long-run equilibrium price: In a perfectly competitive market is that price where long-run average cost is minimized. In this example, this occurs when price equals $1.10. Consequently, the firm produces 11 thousand bottles of shampoo. The productively efficient level of output: Where production occurs at lowest average total cost. This occurs when 11 thousand bottles of shampoo are produced. Therefore, the firm has no excess capacity. In general, perfectly competitive firms are productively efficient (with no excess capacity). Explanations in Notes
According to the graph, a decrease in price from $3.50 to $3.00 per cup results in a gain and a loss of revenue. Which area represents the loss of revenue?
Area A
According to the graph, a decrease in price from $3.50 to $3.00 per cup results in a gain and a loss of revenue. Which area represents the gain of revenue?
Area B
How does the entry of new coffeehouses affect the profits of existing coffeehouses? A monopolistically competitive firm in a long-run equilibrium produces where
Entry will decrease the profits of existing coffeehouses by shifting each of their individual demand curves to the left and making the demand curves more elastic. its demand curve is tangent to its average total cost curve.
What is the term given to all the activities necessary for a firm to sell a product to a consumer?
Marketing
Which type of efficiency is achieved by a monopolistically competitive firm in the long run?
Neither allocative nor productive efficiency
A monopolistically competitive firm doesn't produce where P = MC like a perfectly competitive firm because
P exceeds MR for a monopolistically competitive firm, and it's MR that must equal MC for profit maximization. Explanation: All firms use the same fundamental approach to profit maximization: they produce where marginal revenue equals marginal cost. For a perfectly competitive firm, price equals marginal revenue, P = MR. Therefore, to fulfill the MR = MC condition for profit maximization, a perfectly competitive firm will produce where P = MC. Because P > MR for a monopolistically competitive firm, which results from the marginal revenue curve being below the demand curve,a monopolistically competitive firm will maximize profits where P > MC.
There are many wheat farms in the United States, and there are also more than 2,000 Panera Bread restaurants. Why, then, does a Panera Bread restaurant face a downward-sloping demand curve when a wheat farmer faces a horizontal demand curve?
Wheat is a homogeneous good, while Panera Bread is able to differentiate its food from other restaurants.
According to the graph, what will be the firm's total revenue if it is maximizing profits?
$13,500
Which of the following best describes the additional revenue associated with selling an additional unit of output?
Marginal revenue
What are the most important differences between perfectly competitive markets and monopolistically competitive markets? Unlike in perfectly competitive markets, in monopolistically competitive markets, Give two examples of products sold in perfectly competitive markets and two examples of products sold in monopolistically competitive markets.
firms face downward-sloping demand curves, and the products competitors sell are differentiated. Apples and oranges are sold in perfectly competitive markets and Maybelline cosmetics and Ralph Lauren cologne are sold in monopolistically competitive markets.
According to the graph, what will happen if Starbucks increases the price of caffe lattes?
it will lose some, but not all, of its customers
A monopolistically competitive firm in a long-run equilibrium produces where:
its demand curve is tangent to its average total cost curve
A monopolistically competitive firm produces where:
marginal revenue equals marginal cost
Consider the graph to the right. Is it possible to say whether this firm is a perfectly competitive firm or a monopolistically competitive firm? The graph shows a _______ equilibrium because the firm is making ______ profits. What quantity on the graph represents long-run equilibrium if the firm were perfectly competitive? ____ burritos per week.
Yes. This is a monopolistically competitive firm because its demand curve is downward sloping. short run, positive 6 (b/c a perfectly competitive firm in the long run will be producing at the lowest average cost. This occurs at the quantity where marginal cost intersects average total cost at its minimum point.)
What trade-offs do consumers face when buying a product from a monopolistically competitive firm?
consumers pay a price greater than marginal cost but also have a wider array of choices
The monopolistically competitive firm sells a __________ product and faces a __________ demand curve.
differentiated, downward-sloping
According to the graph, the firm in question is a monopolistically competitive firm:
in long-run equilibrium as indicated by the equality of price and average cost
A monopolistically competitive firm is characterized by the existence of many firms in the market, differentiated products and:
low barriers to entry
According to the graph, the loss in revenue from decreasing price is greater than the gain in revenue from increasing price whenever marginal revenue is:
negative
For what type of market structure is the demand curve the same as marginal revenue?
perfect competition
If a monopolistically competitive firm's demand curve is above its average total cost curve, then this firm is making:
positive economic profit
Which of the following best describes how the product differentiation of monopolistically competitive firms may benefit consumers?
product differentiation can locate firms more conveniently to consumers and offer versions of a product or service that better fit their needs
A firm may opt to pay millions of dollars for celebrity endorsements in order to:
signal to consumers that the advertised product is appealing and likely to be popular
Monopolistically competitive firms have some control over price because
the products they produce are differentiated. Since the products are not identical, the demand for each firm's goods is elastic, but not perfectly elastic. However, if the firm increases price it will lose some sales as customers switch to competing products and if the firm lowers price it will gain some customers. The barriers to entry are low but that fact has limited impact on pricing. There are large numbers of firms competing in this market structure.
Does the fact that monopolistically competitive markets are not allocatively or productively efficient mean that there is a significant loss in economic well-being to society in these markets? 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.
Consider the graph at right: At the profit-maximizing level of output, how much economic profit is this firm earning? Which of the following statements is true? Which of the following statements is true?
Zero, because at the profit-maximizing output level, the price equals average total cost. The firm is not productively efficient because the profit-maximizing price is not at the minimum of average total cost. The firm is not allocatively efficient because the profit-maximizing price exceeds marginal cost. Explanations in Notes
In the figure to the right, consider the marginal revenue of the eighth unit sold. When the firm cuts the price from $6.00 to $5.60 to sell the eighth unit, the area in the graph denoting the output effect is given by ____ In dollars, this effect is $ ____ When the firm cuts the price from $6.00 to $5.60 to sell the eighth unit, the area in the graph denoting the price effect is given by _____ The marginal revenue of the eighth unit is therefore equal to $____
C, $ 5.60 (b/c the output effect is the extra revenue from selling one more unit, in this case the eighth. Since the price was reduced to $5.60 to sell this unit, the additional revenue it brings, the output effect, must be $5.60.) B, $ 2.80 = (6x7 - 5.6x7) (b/c the price effect is the "bad thing" that happens when the firm cuts its price from $6.00 to $5.60. By doing so, the firm is receiving $0.40 less for each of the units it previously sold at the original (higher) price. In the graph this lost revenue is the price change (a "height") times the original amount sold (a "base"). The area ("height" ×"base") depicting this is labeled B. $2.80 = (5.6 -2.8) (b/c the marginal revenue of the eighth unit is simply the output effect less the price effect. This gives $5.60−$2.80 = $2.80. Alternatively, the marginal revenue can be computed as the difference between the total revenue earned from the sale of 8 units ($44.80) less the total revenue from the sale of 7 units ($42.00). This too gives (as it must) $2.80.
Suppose Angelica opens a small store near campus, selling beef brisket sandwiches. Use the graph to the right, which shows the demand and cost for Angelica's beef brisket sandwiches, to answer the questions that follow. a. If Angelica wants to maximize profits, she should sell ____ beef brisket sandwiches per day and charge $_____ b. At the above price and quantity she is making an economic profit (or loss) of $____ c. What is Angelica likely to do in the long run?
a. 55 beef brisket sandwiches, charge $4.50. (b/c that is where MC=MR) b. -$55 (b/c Profit/Loss = [(P-ATC)*Quantity] = (4.50-5.50)* 55 = -$55. c. Exit the industry
Maria manages a bakery, that specializes in ciabatta bread, and has the following information on demand and costs: a. To maximize profits, Maria should sell _____ loaves of cibatta bread per hour. b. Maria should charge a price of $ c. Maria's maximum profit is $ d. The marginal revenue when selling the profit-maximizing number of loaves of ciabatta bread is $____ The marginal cost when selling the profit-maximizing number of loaves of ciabatta bread is $____.
a. 6 b. $3.00 c. $4.50 d. .50 and .50 To find total profit, subtract total cost from total revenue at the profit-maximizing level of output, which was previously found to be where marginal revenue is equal to marginal cost. Recall that all firms use the same approach to maximize profits: They produce where marginal revenue is equal to marginal cost. Find marginal revenue by calculating revenue at each quantity, which is equal to P×Q. Find marginal cost using the total cost column. Then find the quantity where marginal revenue equals marginal cost.
Define marketing. Is marketing just another name for advertising? Marketing is
all the activities necessary for a firm to sell a product including advertising, product design, and product distribution.
Which of the following types of firms use the marginal revenue equals marginal cost approach to maximize profits?
both perfectively competitive and monopolistically competitive
Any action the firm takes to maintain product differentiation over time is known as:
brand management