Chapter 16 - Monopolistic Competition

Question 1

How do economists measure a market’s domination by a small number of firms?

Answer 1

a statistic called the concentration ratio

Question 2

What is the concentration ratio?

Answer 2

the percentage of total output in the market supplied by the 4 largest firms

Question 3

What is monopolistic competition?

Answer 3

a market structure in which many firms sell products that are similar but not identical

Question 4

What are three elements of monopolistic competition?

Answer 4

1) Many sellers: there are many firms competing for the same group of customers
2) Product differentiation: Each firm produces a product that is at least slightly different from those at other firms
3) Free entry and exit: Firms can enter or exit the market without restriction

Question 5

What happens in a monopolistic competition market in the short run?

Answer 5

• has a downward sloping demand curve

- firms choose price and output by setting MC = MR

Question 6

What happens in a monopolistic competition market in the long run regarding entry and exit?

Answer 6

• Profit encourages entry, and entry shifts the demand curves faced by the incumbent firms to the left
• Losses encourage exit, and exit shifts the demand curves of the remaining firms to the right

Question 7

What is price equal to in a long run monopolistic competition market?

Answer 7

price equals average total cost

P = ATC

Question 8

What is the demand curve tangent to in a long run monopolistic market?

Answer 8

demand curve is tangent to the total cost curve where marginal revenue equals marginal cost

Question 9

Does price exceed marginal cost in a monopolistic competition market?

Answer 9

Yes P > MC

Question 10

Where do firms produce in a monopolistic competition market?

Answer 10

on the downward sloping portion of their average cost curves

Question 11

Do firms produce at excess capacity in monopolistic competition markets?

Answer 11

yes

Question 12

What are the 3 facets of Anti-Trust Policy?

Answer 12

1) Towards price fixing
2) existing structures (bigness)
3) mergers

Question 13

What is the interpretation of the law towards price fixing?

Answer 13

all efforts to collude formally will be prosecuted, if discovered

Question 14

What is the current interpretation of the law towards existing structures?

Answer 14

1) market share of over 70%

2) evidence that the firm used “unfair” (predatory) practices to get that big

Question 15

What is the current interpretation of the law towards mergers?

Answer 15

Generally reject only horizontal mergers where new market share exceeds 30% and only when would cause prices to increase