Monopolistic competition

Question 1

characteristics of monopolistic competition

Answer 1

many small firms, selling slightly differentiated products, price-setters, low barriers to entry

Question 2

differentiate between the slope of the demand curve for a monopoly vs. a monopolistic diagram.

Answer 2

Monopolistic is less steep (more price elastic) due to more substitutes available.

Question 3

Profit-maximising firms will produce at what point on the graph?

Answer 3

marginal revenue = marginal costs

Question 4

What is price like compared to the average cost of production in a monopolistic graph at profit maximisation?

Answer 4

price is much higher

Question 5

What happens to the economic profit of a monopolistic firm in the long run?

Answer 5

There is an incentive for new firms to join the market so an individual firm’s demand will fall returning to normal profit.

Question 6

The main rule for a normal profit graph of monopolistic competition

Answer 6

P = AC

Question 7

What sort of competition do monopolistic firms engage in?

Answer 7

non-price competition

Question 8

examples of non-price competition

Answer 8

Product differentiation, quality, presentation

Question 9

define non-price competition

Answer 9

strategies that businesses use to attract customers and increase market share without lowering prices.

Question 10

Why are monopolistically competitive firms not productively efficient?

Answer 10

High level of brand loyalty, firms can relax slightly and not be as efficient.

Question 11

Why are monopolistically competitive firms not allocatively efficient?

Answer 11

A firm can restrict supply to the market and make consumers pay a higher price.