5. Chapter 16

Question 1

What is oligopoly?

What is vine creation ratio?

Answer 1

Oligopoly is a market structure which only a few sellers offer similar or identical products
Concentration ratio is what economists use to measure a markets domination by a small number of firms
It is the percentage of total output supplied by 4 largest firms
Oligopolys have high percentage four-form concentration ratios
Ex: tennis balls, cigarettes

Question 2

What is monopolistic competition?

Answer 2

A market structure in which many firms sell products that are similar but not identical
Each firm has monopoly over the product it makes, but many other firms make similar products that compete for same customers
Ex: novels and movies

Question 3

What are the 3 attributes of a monopolistic competition market?

Answer 3

1. Many sellers- many firms for same group of customers
2. Product differentiation- every firm produces product slightly different than the others
3. Free entry and exit- firms can enter or exit without restriction

Question 4

How does a monopolistically competitive form choose its quantity?

Answer 4

Same as monopoly, chooses to produce quantity at which marginal revenue equals marginal cost and then uses demand curve to find price at which it can sell that quantity
Graphs on page 334

Question 5

What are the two characteristics that describe the long run equilibrium in a monopolistically competitive market?

Answer 5

1. Price exceeds marginal cost. Profit maximization requires marginal revenue to equal marginal cost and downward sloping demand curve makes marginal revenue higher than the price (demand curve is tangent to ATC curve)
   Like monopoly market
2. Price equals average total cost. Free entry and exit drove economic profit to zero
   Like competitive market
   Graph on page 335

Question 6

What are the two noteworthy differences between monopolistic and perfect competition?

Answer 6

1. Excess capacity- monopolistically competitive firm could increase quantity it produces and lower average total cost
2. Markup over marginal cost- since price exceeds marginal cost, a monopolistically competitive firm always wants more customers

Question 7

What are the two sources of inefficiency for monopolistic competitive markets?

Answer 7

1. Markup of price over marginal cost- Monopoly competitive market has normal deadweight loss since some consumers who value a good at more that marginal cost may be deterred from buying
2. Number of firms in the market may not be ideal- too much or too little entry

Question 8

What two effects that are external to the firm would an entry of a firm have?

Answer 8

1. The product-variety externality- consumers get some consumer surplus from new product, entry of new firm coneys a positive externality on consumers
2. The business-stealing externality- other girls lose customers and profits with entry of new competitor, entry of firm imposes a negative externality on existing firms

Question 9

How is advertising critiqued?

Answer 9

Firms advertise to manipulate taste using psychology rather than information
Advertising impedes competition, convinces consumers that products are more different than they truly are (makes consumers less concerned with price differences)

Question 10

What is the defence of advertising?

Answer 10

Firms use advertising to provide info to customers (gives prices, options, etc)
Firms foster competition, consumers are fully informed of all firms in the market
The fact that a firm can advertise is conveying info about how good the product is

Question 11

What are pros and cons to brand names?

Answer 11

Brand names can cause consumers to perceive differences that don’t exist
Brand names can be bad for economy
Brand names can also ensure the product consumers are buying is high quality
Give consumers information and forms incentive to keep high quality

Question 12

What are brand names and advertising a result of?

Answer 12

Product differentiation inherent in monopolistic competition