Chapter 7.5

Question 1

What is the demand elasticity for a monopolistically competitive firm like compared to a monopoly and perfectly competitive?

Answer 1

More elastic than a monopolistic firm, less elastic than a perfectly competitive firm

Question 2

Price competition

Answer 2

When a firm lowers its price to attract customers away from rival firms

Question 3

Non-price competition

Answer 3

When firms use methods other than price reductions to attract customers from rivals

Question 4

Why do monopolistically competitive firms always earn normal profit in the long-run?

Answer 4

Profit making industries will attract new entrants, loss making industries will see firms shut down and leave the industry

Question 5

Is the market allocatively efficient in a monopolistically competitive market?

Answer 5

No. Monopolistically competitive markets underproduce relative to the social optimum

Question 6

How is market failure shown in the monopolistically competitive market?

Answer 6

P > MC, or MB > MC, showing that the market underallocates resources to the production of the good

Question 7

Similarities between monopolistic and perfectly competitive markets

Answer 7

Large number of firms
Free entry of firms into an industry
Normal profit in the long run, abnormal profit or loss in the short run

Question 8

Differences between monopolistic and perfectly competitive markets

Answer 8

Market power and the demand curve
Allocative efficiency
Product variety
Economies of scale

Question 9

Similarities between monopolistic competition and monopoly

Answer 9

No allocative efficiency, causes market failure

Question 10

Differences between monopolistic competition and monopoly

Answer 10

Number of producers
Size of firms
Barriers to entry
Normal and abnormal profits
Competition and prices
Market power
Competition and costs
Research and development
Economies of scale and the possibility of natural monopoly
Product variety