Chapter 12: Monopolistic Competition

Question 1

What are the characteristics Monopolistic Comepetition?

Answer 1

-Relatively large number of sellers​ (not as big as in perfect competition)

-Product differentiation​

-Easy entry and exit​ (not as easy as in perfect competition)

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-Nonprice competition like advertising, reduces competition and gives firms greater pricing power.​

Question 2

What is Product differentiation​?

Answer 2

In monopolistic competition, firms can differentiate their products by the product attributes, by service, with location, or with brand names and packaging. There is relatively easy entry and exit, just not as easy as with perfect competition.

Question 3

What is Market/Industry Concentration?

Answer 3

It is the measure of how well the distribution of a given market is among the participating companies is.

Question 4

How is Industry Concentration measured in a Monopolisitcally Competitive Industry?

Answer 4

Measured by 4-firm concentration ratio (CR): Percentage of sales by 4 largest firms

Question 5

4-firm Concentration Ration (CR) =

Answer 5

Output of Four Largest Firms ÷ Total Output in the Industry

Question 6

What is the Herfindahl index (HI):

Answer 6

Sum of squared market shares​.

Question 7

What does the Herfindahl index (HI) measure?

Answer 7

It is another way to find a market concentration

Question 8

What is the equation for what does the Herfindahl index (HI)

Answer 8

HI = (%S1)2 + (%S2)2 + (%S3)2 + …. + (%Sn)2

Question 9

What does a higher index (close to 10,000) mean for the Herfindahl Index (HI)?

Answer 9

Less competition meaning Highly Concentrated

Question 10

What does a lower index (below 1,500) mean for the Herfindahl Index (HI)?

Answer 10

More competition meaning low concentration.

Question 11

If an index is between 2,500-1,500, what level of concentration exists in the Herfindahl Index (HI)?

Answer 11

Moderately Concentrated
Moderately Squared

Question 12

Highly Concentrated means what?

Answer 12

One or a few companies dominate the majority of a market meaning their market share is very high.

Question 13

Lower Concentration means what?

Answer 13

An industry has a large number of smaller companies, all containing small percentages of the overall market share.

Question 14

True or False? The firm’s demand curve in a monoplistic competition is highly, but not perfectly, elastic.

Answer 14

true

Question 15

True or False? the demand curve in a monopolistic competition is less elastic than in pure competition?

Answer 15

True because the seller’s product is differentiated from its rivals, so the firm has some control over price.​

Question 16

True or False: In the short-run situation, a monopolistic competition firm will maximize profits or minimize losses by producing where marginal cost and marginal revenue are equal (MR=MC), as was true in pure competition and monopoly.

Answer 16

true

Question 17

is it possible to make profits or inccur loess in Short-Run for the Monopolistically Competitive Firm?
​

Answer 17

Yes

Question 18

what is the formula for Econmic Profit in the short run for a Monopolistically Competitive Firm?

Answer 18

(Price - ATC) * Q where Q is profit maximizing output value

Question 19

when do we know a Monopolistically Competitive Firm is incurring losses in the Short Run when?

Answer 19

when Price (P) is less than Average Total Cost (ATC).

Question 20

A Monopolistically Competitive Firm in the Long Run will continue to produce when…

Answer 20

MR=MC

Question 21

In the Long Run a Monopolistically Competitive Firm will enter the industry if…

Answer 21

economic profits were enjoyed, shifting demand left and causing profits to fall.

Question 22

In the Long Run a Monopolistically Competitive Firm will exit the industry if…

Answer 22

if there are economic losses, shifting demand to the right and causing losses to shrink. This will continue until the price settles where it equals ATC at the MR = MC output. At this price, the monopolistically competitive firm earns a normal profit, and long run equilibrium is established.

Question 23

When is equilibrium is established in the Long Run for a monopolistically competitive firm?

Answer 23

When price settles where it equals ATC at the MR = MC output. At this price, the monopolistically competitive firm earns a normal profit, and long run equilibrium is established.

Question 24

When is Monopolistic Competitive firm at a productive
inefficiency?

Answer 24

P > min ATC is condition for productive inefficiency.

Question 25

What is P > MC a condition for?

Answer 25

allocative inefficiency.​

Question 26

Productive efficiency means that the firm is…

Answer 26

producing in the least costly way and is found when P = minimum ATC.​

Question 27

Allocative efficiency means that the firm is …

Answer 27

producing the right amount of product and is found when P = MC.​

Question 28

When there is excess capacity in the industry, which means…

Answer 28

that the plant and equipment are underutilized because firms are producing below minimum ATC output.​

Question 29

In long-run equilibrium, a monopolistic competitor achieves neither…

Answer 29

productive nor allocative efficiency

Question 30

Why is Productive Efficiency not realized in Monopolistic Competiton?

Answer 30

because production occurs where the average total cost (A3) exceeds the minimum average total cost (A4).

Question 31

Why is Allocative Efficiency is not achieved?

Answer 31

because the product price (P3) exceeds the marginal cost

Question 32

What does it mean when Product and Allocative effects are not realized?

Answer 32

There is an under allocation of resources as well as an efficiency loss and excess production capacity for every firm in the industry.

Question 33

In Monopolistic Competition Product Variety means…

Answer 33

The firm constantly manages price, product, and advertising:​

Better product differentiation​

Better advertising

Question 34

Higher minimum wage favors big hamburger chains because…

Answer 34

Big chain restaurants are capital intensive, so an increase in the minimum wage doesn’t affect them much.​

Question 35

An increase in the minimum wage for Mom-and-Pop restaurants can do what?

Answer 35

Can put them out of business Mom-and-pop restaurants are labor intensive, so an