Chapter 17

Question 1

there are two extremes:

Answer 1

• Perfect competition: many firms, identical products
• Monopoly: one firm

Question 2

Imperfect competition – in between the extremes:

Answer 2

• Oligopoly: only a few sellers offer similar or identical products.
• Monopolistic competition: many firms sell similar but not identical products.

Question 3

Measures of Concentration

Answer 3

To determine the market structure of an industry, economists measure the extent to which a small number of firms dominate the market.

Question 4

Economists use two measures of market concentration:

Answer 4

The Four-Firm concentration ratio
The Herfindahl–Hirschman index (HHI)

Question 5

The four-firm concentration ratio

Answer 5

is the percentage of the total industry sales accounted for by the four largest firms in the industry.

( - The range of the concentration ratio is from almost zero for perfect competition to 100 percent for monopoly.
- This ratio is the main measure used to assess market structure.
- A low concentration ratio indicates a high degree of competition, and a high concentration ratio indicates an absence of competition.)

Question 6

Highly concentrated industries include

Answer 6

the market for major household appliances (which has a concentration ratio of 90 percent),
tires (91 percent),
light bulbs (92 percent),
soda (94 percent), and
wireless telecommunications (95 percent).

Question 7

Oligopoly

Answer 7

A market structure in which only a few sellers offer similar or identical products

Question 8

When deciding how much to produce and what price to charge, each firm in an oligopoly is concerned with

Answer 8

What its competitors are doing
How its competitors would react to what it might do

Question 9

characteristics of Monopolistic Competition

Answer 9

• Many sellers
• Product differentiation; products that are similar but not identical
• Not price takers; downward sloping D curve
• Free entry and exit
• Zero economic profit in the long run

Question 10

Examples of monopolistic competition:

Answer 10

Apartments, books, bottled water, clothing, fast food, night clubs

Question 11

The Monopolistically Competitive Firm in the Short Run

Answer 11

• Profit Maximization
• Produce the quantity where MR = MC
• Uses demand curve to find price
  – If P > ATC: Profit
  – If P < ATC: Loss
• Similar to monopoly

Question 12

The Long-Run Equilibrium:
When firms are making profits,

Answer 12

new firms have incentive to enter the market
- Demand curve shifts left
- Firms experience declining profits
- Each firm’s profit declines to zero

Question 13

When firms are making losses,

Answer 13

firms have incentive to exit
Demand curve shifts right
Firms experience greater profits

Question 14

Process of entry and exit continues until the firms in the market make

Answer 14

zero economic profit

Question 15

Why Monopolistic Competition Is 
Less Efficient than Perfect Competition
( monopolistic competition)

Answer 15

Excess capacity: quantity is not at minimum ATC (it is on the downward-sloping portion of ATC)
Markup over marginal cost: P > MC

Question 16

Why Monopolistic Competition Is 
Less Efficient than Perfect Competition
( perfect competition)

Answer 16

Quantity: at minimum ATC (efficient scale)
P = MC

Question 17

Under monopolistic competition, firms produce on

Answer 17

the downward-sloping portion of their average-total-cost curves.

Question 18

A monopolistically competitive firm, unlike a perfectly competitive firm, could

Answer 18

increase the quantity it produces and lower the average total cost of production.

Question 19

Amount of Advertising:
When firms sell differentiated products and charge prices above marginal cost,

Answer 19

each firm has an incentive to advertise to attract more buyers