4.3 Monopolistic Competition

Question 1

What is monopolistic competition

Answer 1

Competitive market structure with a downward-sloping demand curve and the ability for a firm to make supernormal profits in the short run

Question 2

What are the characteristics of monopolistic competition?

Answer 2

Many firms 
differentiated products
Few barriers to entry and exit 
No dominant firm 
A downward-sloping demand curve

Question 3

Show a diagram for short run and long run monopolistic competition and explain

Answer 3

Import image page 88

Question 4

Explain efficiency in monopolistic competition

Answer 4

Neither productively nor allocatively efficient

Question 5

What are the advantages of monopolistic competition ?

Answer 5

Greater choice of products than a monopoly

Since there is some product differentiation, there is incentive for firms to innovate

Question 6

What are the disadvantages of monopolistic competition ?

Answer 6

Can be lack of economies of scale, leading to higher-priced products
Excessive advertising may be seen as waste
Neither productively nor allocatively efficient in short or long run