Microeconomics chapter 13
If you sum the squares of the market shares of each firm in an industry (as measured by percent of industry sales), you are calculating the
Herfindahl Index
The economic inefficiencies of monopolistic competition may be offset by the fact that
consumers have increased product variety.
Monopolistic competition is characterized by a
large number of firms and low entry barriers.
The monopolistically competitive seller's demand curve will become more elastic the
larger the number of competitors.
A monopolistically competitive industry combines elements of both competition and monopoly. The competition element results from
low entry barriers
Raising the minimum wage in the restaurant industry
makes it more difficult for mom and pop restaurants to compete with highly capitalized chain restaurants.
When a monopolistically competitive firm is in long-run equilibrium,
marginal revenue equals marginal cost and price equals average total cost.
The monopolistically competitive seller maximizes profit by producing at the point where
marginal revenue equals marginal cost.
Suppose the Herfindahl indexes for industries A, B, and C are 1,200, 5,000, and 7,500 respectively. These data imply that
market power is greatest in industry C
In the short run, the price charged by a monopolistically competitive firm attempting to maximize profits
may be either equal to ATC, less than ATC, or more than ATC.
Monopolistically competitive firms
may realize either profits or losses in the short run but realize normal profits in the long run.
The restaurant, legal assistance, and clothing industries are each illustrations of
monopolistic competition
Under monopolistic competition, entry to the industry is
more difficult than under pure competition but not nearly as difficult as under pure monopoly.
Concentration ratios measure the
percentage of total industry sales accounted for by the largest firms in the industry.
In the long run, a monopolistically competitive firm
produces where P=ATC
A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from
product differentiation
In which of these continuums of degrees of competition (highest to lowest) is monopolistic competition properly placed?
pure competition, monopolistic competition, oligopoly, pure monopoly
In which of the following market models do demand and marginal revenue diverge?
pure monopoly, oligopoly, and monopolistic competition
Which of the following is not a basic characteristic of monopolistic competition?
recognized mutual interdependence
The Herfindahl index for a pure monopolist is
10,000
Assume the top six firms comprising an industry have market shares of 10, 8, 8, 5, 5, and 4 percent. The remaining 20 firms each have market shares of 2 percent. The Herfindahl index for this industry is
374
Which of the following is correct for a monopolistically competitive firm in long-run equilibrium?
P exceeds minimum ATC
Which of the following is correct about excess capacity?
The greater the degree of product variation, the greater is the excess capacity problem.
A monopolistically competitive industry combines elements of both competition and monopoly. It is correct to say that the competitive element results from
a relatively large number of firms and the monopolistic element from product differentiation.
In the long run, a profit-maximizing monopolistically competitive firm sets it price
above marginal cost
Nonprice competition refers to
advertising, product promotion, and changes in the real or perceived characteristics of a product.
Monopolistic competition resembles pure competition because
barriers to entry are either weak or nonexistent.
Suppose that Julia receives a $20 gift card for the local coffee shop, where she only buys lattes and muffins. If the price of a latte is $4 and the price of a muffin is $2, then we can conclude that Julia
can buy 5 lattes or 10 muffins if she chooses to buy only one of the two goods.
The price elasticity of a monopolistically competitive firm's demand curve varies
directly with the number of competitors but inversely with the degree of product differentiation.
In long-run equilibrium, both purely competitive and monopolistically competitive firms will
equate marginal cost and marginal revenue.
In the long run, the price charged by a monopolistically competitive firm seeking to maximize profit will
exceed MC, but equal ATC.
The four-firm sales concentration ratio for an industry measures the
extent to which the four largest firms dominate the production of a good.
The monopolistic competition model assumes that
firms will engage in nonprice competition
A significant difference between a monopolistically competitive firm and a purely competitive firm is that the
former sells similar, although not identical, products.
The Herfindahl index
gives much greater weight to larger firms than to smaller firms in an industry.
The less elastic a monopolistic competitor's long-run demand curve, the
greater its excess capacity.
Industries X and Y both have four-firm concentration ratios of 32 percent, but the Herfindahl index for X is 256, while that for Y is 264. These data suggest
greater market power in Y than in X.
A monopolistically competitive firm has a
highly elastic demand curve
A monopolistically competitive firm's marginal revenue curve
is downsloping and lies below the demand curve.
If the four-firm concentration ratio for industry X is 80,
the four largest firms account for 80 percent of total sales.
If an industry evolves from oligopoly to monopolistic competition, we would expect
the four-firm concentration ratio to decrease
If the number of firms in a monopolistically competitive industry increases and the degree of product differentiation diminishes,
the industry would more closely approximate pure competition
Suppose that total sales in an industry in a particular year are $800 million and sales by the top four sellers are $50 million, $40 million, $30 million, and $30 million, respectively. We can conclude that
this industry is monopolistically competitive
In monopolistically competitive markets, resources are
underallocated because long-run equilibrium occurs where price exceeds marginal cost.
In the long run, the price charged by the monopolistically competitive firm attempting to maximize profits
will be equal to ATC.
