Market Structures - Monopolistic competition

Question 1

How many firms are likely to exist in an industry in monopolistic competition?

Answer 1

Fragmented market- many competing suppliers

Question 2

What is the nature of the product available to consumers in monopolistic competition?

Answer 2

Differentiated product

Question 3

What are barriers to exit and entry like in monopolistic competition?

Answer 3

No entry barriers

Question 4

How strong is pricing power of firms in monopolistic competition?

Answer 4

Limited pricing power as there are many close substitutes

Question 5

Is it possible to make supernormal profit in the long run in monopolistically competitive markets?

Answer 5

No as supernormal profits are competed away by the entry of new products

Question 6

Is a monopolistically competitive market allocatively efficient?

Answer 6

No as price is greater than marginal cost in the long run.

Question 7

Are firms in a monopolistically competitive market productively efficient

Answer 7

Saturation of the market may lead to businesses being unable to exploit fully internal economies of scale - causing long-run average cost to be higher – therefore not productively efficient

Question 8

Are firms in a monopolistically competitive market dynamically efficient?

Answer 8

Monopolistic competition is associated with lots of consumer choice and widespread innovation suggesting that firms are dynamically efficient.
However, low profit margins in the long run may reduce the funds available for research and innovation