Monopolistic Competition 99-102

Question 1

Monopolistic Competition Market Characteristics

Answer 1

Large # independent seller; relatively small market share (no pricing power); Avg market price, ignore individual competitors; No collusion (price fixing)

Differentiatied products; close substitutes

Firms compete on price, qulity, marketing; Quality is most important and marketing puts it out there

Low barriers to entry; Free exit and enter, new entrants upon econ profit

Question 2

Price searcher;monopolistic comp

Answer 2

Down-slope demand, highly elastic (close subs, competition)

Question 3

Price/Output decision for monopolistic competitor in short-run

Answer 3

MAx econ profit: Q, = MR = MC
P, = Qd at Qs, where MR=MC

Economic Profits: P > ATC ; at this point, entrants enter

Question 4

LR P/Q characteristics of monop. competition (PErfect comp is CHARACTERIZED by no product differentiation)

Answer 4

LR indicates the P/Q combo for a representative firm post entrants

New entrants shift the Demand curve, to the point where P=ATC; economic profit = 0, where entrants no longer enter, and LR eq. is est. Q still = MR=MC

SR: Q, MR = MC, sell that quantity at P which is > ATC in SR (markup in SR: P>ATC)

LR: New entrants shifts demand curve to where Q = MR = MC, P = D = ATC

Question 5

Question of efficiency of monopolistic competition

Answer 5

“Is there an economically efficient amount of product differentiation?”

Question 6

Monop comp. v Perfect comp

Answer 6

Mono comp D is -P

Per comp D is perfectly elastic

Monop comp Q = MR = MC, P = ATC = D

Perf comp Q = MC = ATC = P = D

Question 7

Necessary activity for a firm in monop. comp

Answer 7

Product Innovation (pursure econ profit)

-New, innovative products present less-elastic D >less elastic D = +P = Econ profit = entrants = substitutes = continual search for new, innovative products

Question 8

Optimal innovation spending

Answer 8

MC of innov = MR of innov

Question 9

Advertising Expenses

Answer 9

Advertising for monop. comp is greater than perfect comp and even monopolies

Adv. costs +ATC, but ATC will - as +Q (assumes advertising worked)

Question 10

Brand Names

Answer 10

Brand names provide information to consumers by providing them with signals about the quality of the branded product

Reputation as “BMW” for “High quality” is so valuable that the firm has an added incentive not to damage it by producing “vehicles of low quality”