Chapter 16 - Monopolistic Competition

Question 1

Oligopoly

Answer 1

• only a few sellers offer similar or identical products

- type of imperfect competition

Question 2

Monopolistic Competition

Answer 2

• many firms sell similar but not identical products

- type of imperfect competition

Question 3

Characteristics of Monopolistic Competition

Answer 3

1) Many Sellers
2) Product Differentiation
3) Free entry and exit

• has Market Power

Question 4

Monopolistic Competition in the Short Run

Answer 4

virtually identically to Monopoly (except free entry/exit)

• Q set at MR=MC; P set at demand curve Q
• Above ATC = profit; vice versa
• Profit = some firms enter forcing prices and profits down to zero
• Losses = some firms exit pushing prices and profits up to zero

Question 5

Monopolistic Competition in the Long Run

Answer 5

• entry and exit drive economic profit to zero
• Entry and Exit will occur until P=ATC (ATC and D Curves are tangent)

Markup = P - MC

Question 6

Excess Capacity

Answer 6

• monopolistic competition firms do not produce at the efficient scale (i.e. the ideal Q)