Monopolistic Competition

Question 1

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

Answer 1

The relationship between the price ℗ that can be charged and the firm’s average total cost (ATC). If ATC<p></p>

Question 2

What is the shape of the demand curve for a firm in a 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

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

Question 5

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

Answer 5

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