3.4.3 Monopolistic Competition

Question 1

Define monopolistic competition

Answer 1

This is where the market is near perfect competition, but products are slightly differentiated.

Question 2

Name 4 assumptions associated with this market structure.

Answer 2

• Differentiated products
• Large number of buyers and sellers
• Near perfect information amongst buyers and sellers
• Low barriers to entry

Question 3

Can firms in this market structure make supernormal profits in:

a) the short run?
b) the long run?

Answer 3

Firms can make supernormal profits in the short run, but not in the long run as firms will enter the market (due to the low barriers to entry) and compete away all the profits.

Question 4

Are in Monopolistic Competition productively and allocatively efficient in the short and long run?

Answer 4

Firms are neither productively or allocatively efficient in the short or long run.