Monopolistic competition

Question 1

What are the key features of a monopolistic competition?

Answer 1

• Relatively large firms
• Freedom of entry
• Like perfect competition but the firms produce differentiated products

Question 2

What is the benefit on being able to produce differentiated products?

Answer 2

• They can raise prices

Question 3

In the short run, what does the equilibrium of the firm depend on?

Answer 3

• Profit depends on elasticity of demand

- Can make supnormal profits

Question 4

In the long run, what does the equilibrium of the firm depend on?

Answer 4

• New firms enter so demand for existing firms fall
• Demand curve shifts left for existing firms until LRAC=AR
• lower demand at every price
• Equilibrium will only be reached when normal profits remain and there is no further incentive for new firms to enter