10. monopolistic competition

Question 1

what are the assumptions of a monopolistic market

Answer 1

large number of small firms
sell similar products
low barriers to entry/exit
each business is a price maker as they can make their products different to other firms

Question 2

what is consumer and producer knowledge like in a monopolistic market

Answer 2

it is now imperfect as branding now allows them to make them seem different to other products

Question 3

how can monopolistic firms increase consumer loyalty

Answer 3

advertising/branding
after-sales service
better location
improved quality

Question 4

what profit do monopolistic firmss make

Answer 4

abnormal profits can be made in the short run but normal profits are made in the long run

assume that all firms operate at profit maximising output at MC=MR

Question 5

examples of monopolistic firms

Answer 5

local football league teams
local gyms in a city
local chinese takeaways
local hair salons

Question 6

why do monopolistic firms go from earning abnormal to normal profits

Answer 6

due to low barriers to entry and existence of abnormal profits new firms are incentivised to join

this means incumbent firms AR and MR curves to the left - leading to normal profit

Question 7

are monopolistic firms allocatively efficient

Answer 7

they are allocatively inefficient in the short run and long run as AR is above MC

Question 8

the monopolistic firms productively efficient

Answer 8

as monopolistic firms can set their own prices , they may operate at profit maximisation output (MC=MR)

this output is lower than the productively efficient output (AC=MC) so is not productively efficient in the long run

Question 9

are monopolistic firms x-efficient

Answer 9

yes, more that oligopolies and monopolies as they need to lower AC to make a profit

Question 10

are monopolistic firms dynamically efficient

Answer 10

unlikely to be dynamically effiecient as they do not earn enough profits in the long run to invest