Monopolistic Competition

Question 1

Describe the point of short-run profit maximization for a firm in monopolistic competition.

Answer 1

Short-run profit is maximized where marginal revenue is equal to rising marginal cost (provided price > average total cost).

Question 2

What is the shape of the demand curve for a firm in monopolistic competition?

Answer 2

Downward-sloping and highly elastic (because there are close substitutes for the good or service offered).

Question 3

How are long-run profits determined for a firm in monopolistic competition?

Answer 3

There are no long-run profits possible in a monopolistic competition. If profits are made in the short-run, more firms will enter the market and lower the demand for each firm until each just breaks even.

Question 4

List the characteristics of monopolistic competition.

Answer 4

A large number of sellers;
Firms sell a differentiated product or service (similar but not identical), for which there are close substitutes;
Firms can enter or leave the market easily.

Question 5

Under monopolistic competition, what determines whether or not a firm makes a profit?

Answer 5

The relationship between the price (P) that can be charged and the firm’s average total cost (ATC). If ATC < P, the firm will make a profit. Otherwise, it will either breakeven (ATC = P) or have a loss (ATC > P).