3.4.3

Question 1

Name 4 of the 6 characteristics of monopolistic competition

Answer 1

• Large number of small firms
• Profit maximisers
• Low barriers to entry and exit into the market
• Super-normal profit can be made in the short-run
• Products are differentiated
• Some ability to set the price

Question 2

Label a monopolistic diagram for subnormal profit

Answer 2

• Y axis labelled as “Price”
• Marginal cost line labelled as “MC”
• Average cost line labelled as “Average cost” and Average cost line labelled above the demand line
• Demand line labelled as “D=AR”
• Marginal revenue line labelled as “MR”
• X axis labelled as “Output”
• Subnormal profit shaded in and labelled

Question 3

Label a monopolistic diagram for normal profit

Answer 3

• Y axis labelled as “Price”
  Marginal cost line labelled as “MC”
• Average cost line labelled as “Average cost” and Average cost line labelled on the demand line
• Demand line labelled as “D=AR”
• Marginal revenue line labelled as “MR”
• X axis labelled as “Output”