monopolistic competition

Question 1

What is monopolistic competition

Answer 1

A market structure in which many firms sell products that are similar, but not identical

Question 2

Assumptions

Answer 2

• Differentiated products (close subs)
• Firms have market power
• No barriers of entry in Long Run
• Collusion isn’t possible

Question 3

Examples of Monopolistic Competition markets

Answer 3

Apartments, Clothing, Fast Food, Night Clubs

Question 4

Profit Maximizing condition

Answer 4

MR = MC

where Prices = Price of Demand

Question 5

What happens if there is high demand (greater than min. average cost curve)?

Answer 5

The firm makes profits

Question 6

What happens in the long run for the market?

Answer 6

Profit = 0 because of entry and exit of firms

If profits hold in SR: New firms enter market → Prices and Profits fall

If losses hold in SR: Some firms exit market, other firms enjoy higher demand → Higher prices and profits may appear

Question 7

Describe the efficiency of Mono. Competition

Answer 7

• The firms produce less than the cost-minimizing quantity
  
  • P > MC

Question 8

Describe the social level of welfare for Mono. Comp.

Answer 8

• Deadweight loss is generated bc P > MC