lecture 8

Question 1

Monopolistic competition

Answer 1

large number of firms
-independence in firms
-small market shares

freedom of entry

differentiated product

downwards sloping demand curve
-demand elasticity depends on degree of product differentiation

Question 2

monopolistic competition equilibrium of the firm short and long run

Answer 2

short run :

output where MC = MR

level of supernormal profit depends on demand
-position of demand curve
-elasticity of demand curve

long run;
-firms can enter the industry
-all supernormal profits competed away

Question 3

oligopoly

Answer 3

key features;
-barreris to entry
-interdependence of firms

competition and collusion;
-pressure to compete = to maximise share of industry profits

-pressure to collude = to maximise inustry profits

collusive oligopoly; cartels
- equilibrium of the industry

Question 4

oligopoly tactic collusion

Answer 4

-price leadership ;dominant firm

-price leadership; barometric

-other forms of tactic collusion; rules of thumb
=avarege cost pricing
=price benchamrks

Question 5

factors favouring collusion

Answer 5

-few firms
-open with each other
-similar cost structures and production methods
-similar products
-there is a dominant firm
-significant barriers to entry
-stable market conditions
-no government measures to -curb collusion

+ collusion and the law

Question 6

adv and dis of oligopoly and the consumer

Answer 6

adv:
- countervailing power
Supernormal profits may allow higher R&D
-greater choice for consumers

dis:
-less scope for economies of scale relative to monopoly
-greater use of advertising than under monoploly = costs rise

Question 7

oligopoly and contestable markets

Answer 7

importnace of entry and exit costs

Question 8

in oligopoly firms

Answer 8

by virtue of their size they are able to influence the price regardless of whether or not the product is differentiated or standardised

Question 8

as new firms enter a monopolistic competitive industry, the demand curve facing each existing firms

Answer 8

will shift to the left and be more elastic because there are not more substitutes for its products

Question 9

In which circumstances would a cartel most likely work?

Answer 9

the market for copper, where there are very few producers and the product is standardised

Question 10

a price that is commonly used in an industry is called

Answer 10

benchmark price