Costs revenue and profits in monopolistic competition

Question 1

Factors that affect pricing power of a firm in monopolistic competition

Answer 1

-Many competitors with similar products or services- PED is price elastic and price is more competitive
-Product differentiation-different prices to reflect unique qualities of product/service
-Low barriers to entry or exit-firm has to price competitively

Question 2

Monopolistic competition in the long run

Answer 2

Barriers to entry are low and supernormal profits are available. Other firms enter and supply increases therefore each incumbent firm loses customers with a lower level of demand

Question 3

LR Equilibrium stability

Answer 3

A stable equilibrium may not be reached as new product come and go and some naturally do better than others. The market may be in a state of constant flux

Question 4

Limitation of monopolistic competition

Answer 4

-In the real world information may be imperfect due to advertising and branding
-Analysis is restricted to each firm due to each firm producing a differentiated product
-Entry barriers may be created by non-price competition e.g. advertising