Monopolistic

Question 1

Characteristic of monopolistic competition/

definition of monopolistic competition

Answer 1

1. products are differentiated but similar enough to consider as substitutes
2. low barriers to entry and exit
3. many buyers and sellers

Question 2

Types of non-price competition monopolistic firms will aim

Answer 2

1. Improvements in quality of service
2. Performance of product
3. Branding
4. Functionality

Question 3

Examples of monopolistic markets

Answer 3

1. Hair salon
2. Bars and nightclubs

Question 4

Explain why AR and MR decrease in the Long run for monopolistic firms

Answer 4

Supernormal profit attracts new suppliers to offer differentiated products

As more firms enter, more differentiated products, decreases market share for existing firms,

causing inward shift of AR and MR until it is tangent to AC

Firm is profit maximising but only making normal profit

Question 5

What efficiency does monopolistic competition achieve?

Answer 5

Productive efficient? MES reached
Output not large enough for economies of scale

Dynamic efficient? RnD
Non price competition may encourge RnD, but lack of supernormal profit limits

Allocative efficient? when P = MC, resources are optimally allocated to match consumer demand
P > MC but elastic PED reduces pricing power