Ch. 16 Monopoly Practice Problems
3. Draw a diagram of the long-run equilibrium in a monopolistically competitive market. How is price related to average total cost? How is price related to marginal cost?
Monopolistic competition has a downward sloping demand curve.
Does a monopolistic competitor produce too much or too little output compared to the most efficient level? What practical considerations make it difficult for policymakers to solve this problem?
Monopolistic competition produce little output as compared to the most efficient level. Policymakers have to consider that regulating this kind of market will entail all the problems of regulating monopolies. And monopolistic competition firms are making zero economic profits already, making them to lower their prices further will cause them to make losses and in turn government will have to support these firms by providing subsidies. So, ultimately they may decide it is better to live with this inefficiency than to raise taxes to pay for their subsidies.
Describe the three attributes of monopolistic competition. How is monopolistic competition like monopoly? How is it like perfect competition?
The three attributes of monopolistic competition are: (1) there are many sellers; (2) each seller produces a slightly different product; and (3) firms can enter or exit the market without restriction. Monopolistic competition is like monopoly because firms face a downward-sloping demand curve, so price exceeds marginal cost. Monopolistic competition is like perfect competition because, in the long run, price equals average totalcost, as free entry and exit drive economic profit to zero.
For each of the following characteristics, say whether it describes a perfectly competitive firm, a monopolis- tically competitive firm, both, or neither. a. sells a product differentiated from that of its competitors b. has marginal revenue less than price c. earns economic profit in the long run d. produces at the minimum of average total cost in the long run
a) Monopolistically competitive b) Monopolistically competitive c) Neither d) Both
1. Among monopoly, oligopoly, monopolistic competi- tion, and perfect competition, how would you classify the markets for each of the following drinks? a. tap water b. bottled water c. cola d. beer
a.Tap water is a perfectly competitive market because there are many taps and the product does not differ across sellers.b.Bottled water is a monopolistically competitive market. There are many sellers of bottled water, but each firm tries to differentiate its own brand from the rest.c.The cola market is an oligopoly. There are only a few firms that control a large portion of the market.d.The beer market is an oligopoly. There are only a few firms that control a large portion of the market.
Draw a diagram depicting a firm that is making a profit in a monopolistically competitive market. Now show what happens to this firm as new firms enter the industry.
a.Tap water is a perfectly competitive market because there are many taps and the product does not differ across sellers.b.Bottled water is a monopolistically competitive market. There are many sellers of bottled water, but each firm tries to differentiate its own brand from the rest.c.The cola market is an oligopoly. There are only a few firms that control a large portion of the market.d.The beer market is an oligopoly. There are only a few firms that control a large portion of the market.