ECN 212 - CH 16 competitive monopolies
a monopolistically competitive firm
generating zero profits in the long run.
For the economy as a whole, what percentage of firm revenue is spent on advertising? Answer 1 percent 2 percent 4 percent 6 percent 10 percent
2 percent
Monopolistic Competition
A market structure in which many firms sell products that are similar but not identical
Oligopoly
A market structure in which only a few sellers offer similar or identical products
Free Entry
A situation where firms can enter the market without restriction
Which of the following is not put forth as a criticism of advertising and brand names? Answer Advertising manipulates people's tastes to create a desire that otherwise would not exist. Advertising increases competition, which causes unnecessary bankruptcies and layoffs. Advertising increases brand loyalty, causes demand to be more inelastic, and thus, increases markup over marginal cost. Brand names cause consumers to perceive differences that do not exist between goods. All of the above are criticisms of advertising and brand names.
Advertising increases competition, which causes unnecessary bankruptcies and layoffs
Which of the following is not an argument put forth by economists in support of the use of advertising? Answer Advertising provides information to customers about prices, new products, and location of retail outlets. Advertising provides a creative outlet for artists and writers. Advertising increases competition. Advertising provides new firms with the means to attract customers from existing firms.
Advertising provides a creative outlet for artists and writers.
Summarize the arguments in support of advertising and brand names.
Advertising provides information about prices, new products, and the location of retail outlets; provides new firms with the means to attract customers from existing firms; and can be a signal of high quality. Brand names provide information about the quality of the product and provide incentive for the producer to maintain high quality.
What characteristics does monopolistic competition have in common with perfect competition?
Both market structures have many sellers and free entry and exit. Thus, profits are driven to zero in the long run.
What characteristics does monopolistic competition have in common with a monopoly?
Both market structures involve a differentiated product so firms face downward-sloping demand curves, equate MC and MR, and charge a price above MC.
Monopolistic competition is a market structure in which few firms sell similar products.
F monopolistic competition is a market structure in which many firms sell differentiated products.
Advertising must be socially wasteful because advertising simply adds to the cost of producing a product.
F advertising may increase competition, which could increase social welfare.
Economists generally agree that monopolistically competitive firms should be regulated in order to increase economic efficiency.
F it is not clear how one would regulate a monopolistically competitive firm in order to increase efficiency.
In the long run, firms in monopolistically competitive markets produce at the minimum of their average-total-cost curves.
F monopolistic competitors produce in the downward-sloping portion of their ATC curve where the ATC curve is tangent to the demand curve faced by the firm.
In the long run, a monopolistically competitive firm charges a price that exceeds average total cost.
F monopolistically competitive firms charge a price equal to ATC.
In the long run, a monopolistically competitive firm produces at the efficient scale while a competitive firm has excess capacity.
F monopolistically competitive firms have excess capacity while competitive firms produce at the efficient scale.
How does a monopolistically competitive firm choose the quantity and price that maximizes its profits?
It chooses the quantity by equating MC and MR and then uses the demand curve to find the price that is consistent with this quantity (just like a monopolist).
How does the long-run equilibrium in monopolistic competition differ from the long-run equilibrium in perfect competition?
Monopolistic competition has excess capacity because monopolistically competitive firms produce at less than efficient scale and they charge prices in excess of marginal cost. Competitive firms produce at the efficient scale and charge prices equal to marginal cost.
In which market structure—monopoly, oligopoly, monopolistic competition, or perfect competition—would you place each of the following products? Why? Legal services in a metropolitan area
Monopolistic competition, many firms each selling differentiated products.
In which market structure—monopoly, oligopoly, monopolistic competition, or perfect competition—would you place each of the following products? Why? Principles of economics textbooks
Monopolistic competition, many firms each selling differentiated products.
In which market structure—monopoly, oligopoly, monopolistic competition, or perfect competition—would you place each of the following products? Why? Restaurants in a large city
Monopolistic competition, many firms each selling differentiated products.
In which market structure—monopoly, oligopoly, monopolistic competition, or perfect competition—would you place each of the following products? Why? Principles of Economics by N. Gregory Mankiw
Monopoly, only one firm can produce it due to copyright laws.
In which market structure—monopoly, oligopoly, monopolistic competition, or perfect competition—would you place each of the following products? Why? Retail market for electricity
Monopoly, only one firm from which to purchase.
In which market structure—monopoly, oligopoly, monopolistic competition, or perfect competition—would you place each of the following products? Why? Trash collection
Monopoly, only one firm from which to purchase.
Is the long-run equilibrium in monopolistic competition efficient? Explain.
No. Because price exceeds marginal cost, there is underproduction—some units that buyers value in excess of marginal cost are not produced. Also, the number of firms in the market may not be ideal because entry into the industry creates the positive product-variety externality and the negative business-stealing externality.
Is it possible for a monopolistically competitive firm to generate economic profits in the long run? Why or why not?
No. Profits attract new firms to the market, which reduces the demand faced by each of the incumbent firms until the demand faced by each firm is tangent to its ATC curve and profits are zero.
What are the two types of imperfect competition? Describe them.
Oligopoly and monopolistic competition. Oligopoly is a market structure in which only a few sellers offer similar or identical products. Monopolistic competition is when many firms sell products that are similar but not identical.
The market for vitamins and dietary supplements is dominated by five firms. What type of market structure does it represent? Explain.
Oligopoly because there are few firms and the products are similar or identical.
In which market structure—monopoly, oligopoly, monopolistic competition, or perfect competition—would you place each of the following products? Why? Air travel from any one airport
Oligopoly, few airlines from which to choose at any one airport, similar product.
In which market structure—monopoly, oligopoly, monopolistic competition, or perfect competition—would you place each of the following products? Why? Auto tires
Oligopoly, few firms (Goodyear, Firestone, Michelin) selling very similar products.
In which market structure—monopoly, oligopoly, monopolistic competition, or perfect competition—would you place each of the following products? Why? Breakfast cereal
Oligopoly, few firms (Kellogg Company, Post, General Mills, Quaker Oats) selling similar products.
In which market structure—monopoly, oligopoly, monopolistic competition, or perfect competition—would you place each of the following products? Why? Retail market for gasoline
Perfect competition, many firms selling identical products.
In which market structure—monopoly, oligopoly, monopolistic competition, or perfect competition—would you place each of the following products? Why? Gold bullion
Perfect competition, many firms selling identical products. Note: Although monopoly and competition are more easily distinguished, the line between oligopoly and monopolistic competition is not as sharp. For example, b might be considered to be an oligopoly because there are relatively few publishers and economic textbooks may be considered to be very similar, and j might be considered to be monopolistic competition if the products are considered to be differentiated, and so on.
Because a monopolistically competitive firm charges a price that exceeds marginal cost, the firm fails to produce some units that the buyers value in excess of the cost of production, and thus, monopolistic competition is inefficient.
T
Both monopolists and monopolistically competitive firms produce the quantity at which marginal revenue equals marginal cost and then use the demand curve facing the firm to determine the price consistent with that quantity.
T
Critics of advertising argue that advertising decreases competition while defenders of advertising argue that advertising increases competition and reduces prices to consumers.
T
Even advertising that appears to contain little information about the product may be useful because it provides a signal about the quality of the product.
T
Firms that sell highly differentiated consumer products are more likely to spend a large percentage of their revenue on advertising.
T
Policymakers are starting to view restrictions on advertising by professionals such as doctors, lawyers, and pharmacists as anticompetitive.
T
Similar to a monopolist, a monopolistically competitive firm faces a downward-sloping demand curve for its product.
T
Similar to firms in perfectly competitive markets, firms in monopolistically competitive markets can enter and exit the market without restriction so profits are driven to zero in the long run.
T
Which of the following is true regarding the similarities and differences in monopolistic competition and monopoly? Answer The monopolist faces a downward-sloping demand curve while the monopolistic competitor faces an elastic demand curve. The monopolist makes economic profits in the long run while the monopolistic competitor makes zero economic profits in the long run. Both the monopolist and the monopolistic competitor operate at the efficient scale. The monopolist charges a price above marginal cost while the monopolistic competitor charges a price equal to marginal cost.
The monopolist makes economic profits in the long run while the monopolistic competitor makes zero economic profits in the long run.
Efficient Scale
The quantity that minimizes average total cost
Summarize the arguments in opposition to advertising and brand names.
The use of advertising and brand names manipulates people's tastes, impedes competition, and creates brand loyalty when there is no difference among goods. This allows for a higher markup over marginal cost and increases inefficiency.
The use of the word "monopoly" in the name of the market structure called "monopolistic competition" refers to the fact that Answer a monopolistically competitive firm faces a downward-sloping demand curve for its differentiated product and so does a monopolist. monopolistically competitive markets have free entry and exit just like a monopolistic market. monopolistically competitive firms charge prices equal to their marginal costs just like monopolists. monopolistically competitive firms produce beyond their efficient scale and so do monopolists.
a monopolistically competitive firm faces a downward-sloping demand curve for its differentiated product and so does a monopolist.
Which of the following firms has the least incentive to advertise? Answer a manufacturer of home heating and air conditioning a manufacturer of breakfast cereal a wholesaler of crude oil a restaurant
a wholesaler of crude oil
One source of inefficiency in monopolistic competition is that Answer because price is above marginal cost, surplus is redistributed from buyers to sellers. because price is above marginal cost, some units are not produced that buyers value in excess of the cost of production and this causes a deadweight loss. monopolistically competitive firms produce beyond their efficient scale. monopolistically competitive firms earn economic profits in the long run.
because price is above marginal cost, some units are not produced that buyers value in excess of the cost of production and this causes a deadweight loss.
Brand names allow firms to make economic profits in the long run because they are able to sell inferior products based on the apparent connection of those products to the firm's unrelated high-quality products.
brand names give the firm incentive to maintain high quality.
Which of the following products is least likely to be sold in a monopolistically competitive market? Answer video games breakfast cereal beer cotton
cotton
Defenders of the use of brand names argue that brand names Answer provide information about the quality of the product. give firms an incentive to maintain high quality. are useful even in socialist economies such as the former Soviet Union. do all of the above.
do all of the above.
If the monopolistic competitor described by Exhibit 3 is producing at the profit-maximizing (loss-minimizing) level of output, it
is generating losses
Which of the following is not a characteristic of a monopolistically competitive market? Answer many sellers differentiated products long-run economic profits free entry and exit
long-run economic profits
Expensive television commercials that appear to provide no specific information about the product being advertised Answer are most likely used by firms that are perfect competitors. should be banned by regulators because they add to the cost of the product without providing the consumer with any useful information about the product. may be useful because they provide a signal to the consumer about the quality of the product. only affect the buying habits of irrational consumers.
may be useful because they provide a signal to the consumer about the quality of the product.
In the short run, if the price is above average total cost in a monopolistically competitive market, the firm makes Answer losses and firms enter the market. losses and firms exit the market. profits and firms enter the market. profits and firms exit the market.
profits and firms enter the market.
Which of the following firms is most likely to spend a large percentage of their revenue on advertising? Answer the manufacturer of an undifferentiated commodity a perfect competitor the manufacturer of an industrial product the producer of a highly differentiated consumer product the producer of a low-quality product that costs the same to produce as a similar high-quality product.
the producer of a highly differentiated consumer product
The use of the word "competition" in the name of the market structure called "monopolistic competition" refers to the fact that Answer monopolistically competitive firms charge prices equal to the minimum of their average total cost just like competitive firms. monopolistically competitive firms face a downward-sloping demand curve just like competitive firms. the products are differentiated in a monopolistically competitive market just like in a competitive market. there are many sellers in a monopolistically competitive market and there is free entry and exit in the market just like a competitive market.
there are many sellers in a monopolistically competitive market and there is free entry and exit in the market just like a competitive market.
When firms enter a monopolistically competitive market and the business-stealing externality is larger than the product-variety externality, then Answer there are too many firms in the market and market efficiency could be increased if firms exited the market. there are too few firms in the market and market efficiency could be increased with additional entry. the number of firms in the market is optimal and the market is efficient. the only way to improve efficiency in this market is for the government to regulate it like a natural monopoly.
there are too many firms in the market and market efficiency could be increased if firms exited the market.
