Monopolistic Competition Flashcards
1
Q
firm structure for monopolistic competition
A
- lots of small firms
- perfect information
- freedom of entry and exit
- not identical products
2
Q
firm in the short run
A
- functions like a monopoly
- can pick price according to demand curve
- if p>ATC, econ profit is pos. and entry occurs
- entry makes demand curve shift left, profit shrinks for all firms
3
Q
firm in the long run
A
- LRMC increases constantly
- produce where pXAC, profit=0
- at any other Q profit is neg.
4
Q
perfect vs. monopolistic (Price and MC relationship)
A
- in perfect comp. MC=price
- in monopolistic comp. price>MC
5
Q
excess capacity
A
-gas station example, 3 pumps used and 2 stations rather than 6 pumps at 1 station
6
Q
capacity
A
where AC reaches a min
7
Q
monopolistic vs perfect (excess capacity)
A
monopolistic—> has excess capacity
perfect—> no excess capacity
8
Q
excess capacity in monopolistic competition
A
- total cost of product produced may be bigger than demand
- benefit of variety may exceed production costs
9
Q
does monopolistic competition product the socially efficient # of firms
A
- more variety is a benefit, but increased production costs are a neg.
- impossible to know the answer
- probably inefficient bc pos. externality would need to equal neg. externality
- a new firm creates neg externality (takes money from existing firms) and positive externality (increased consumer surplus)
