Monopolistic Competition

Question 1

Characteristics on monopolistic competition

Answer 1

1. Many sellers
2. Differentiated produces
3. Low barriers to entry and exit
4. They engage in non-price competition
5. Limited price control
6. No SNP in the long run
7. Imperfect information

Question 2

Long run monopolistic competition

Answer 2

1. If the firm is making SNP, new firms will be attracted to the market. Increase in competition
2. As more firms enter, demand for an individuals firm decreases, decrease in demand curve for each firm
3. In the LR, firms SNP will be reduced to just normal.

Question 3

evaluation of monopolistic competition

Answer 3

1. Price is above MC so allocative inefficiency
2. ATC is above minimum s productive inefficiency
3. Consumers not exploited as only earn normal profit
4. Dynamic inefficiency, firms may be too small develop new technology to reduce average costs