Chapter 16: Monopolistic Competition

Question 1

Define ‘Oligopoly’.

Answer 1

A market structure in which only a few sellers offer similar or identical products. (Imperfect competition)

Question 2

Define ‘Monopolistic competition’.

Answer 2

A market structure in which many firms sell products that are similar but not identical. (Imperfect competition)

Question 3

What are the 3 attributes that characterize a monopolistically competitive market?

Answer 3

1. Many firms
2. Differentiated products
3. Free entry

Question 4

What are the two related ways in which the equilibrium in a monopolistically competitive market differs from that in a perfectly competitive market?

Answer 4

1. Excess capacity, thus operates on the downward-sloping portion of the ATC curve (Recall: Firms operate at efficient scale at lowest point on ATC curve)
2. Charges a price above MC

Question 5

What are the ways in which monopolistic competition differs from perfect competition in terms of desirable properties?

Answer 5

1. Standard deadweight loss caused by markup price over MC

2. Number of firms (and thus variety of products) can be too large or too small.

Question 6

Can policymakers do much to correct the inefficiencies of monopolistic competition?

Answer 6

No.

Question 7

The product differentiation inherent in monopolistic competition leads to the use of advertising and brand names. What do critics say? Defenders?

Answer 7

Critics: Firms use them to take advantage of consumer irrationality and to reduce competition.
Defenders: Firms use them to inform consumers and to compete more vigorously on price and product quality.

Question 8

What are the features that all 3 market structures (perfect competition, monopolistic competition, monopoly) share?

Answer 8

• Goal to maximize profits
• Maximizing profits at MR=MC
• Can earn economic profits in the short run

Question 9

What are the features that only monopoly and monopolistic competition share?

Answer 9

• Not a price taker
• P > MC
• Doesn’t produce welfare-maximizing level of output

Question 10

What are the features that only perfect competition and monopolistic competition share?

Answer 10

• Many firms
• Entry in long-run
• Earn zero economic profits in long-run

Question 11

What is the concentration ratio (oligopoly)?

Answer 11

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