Topic 9

Question 1

what are the characteristics of a monopolistically competitive market

Answer 1

1. many buyers/sellers
2. products are differentiated (but close subs) therefore PRICE MAKERS
3. relatively free entry/exit
4. information is imperfect (advertising) due to product differentiation

Question 2

what is teh relationship between product differentiation and price elasticity

Answer 2

negative

Question 3

what are the profit possibilities of monopolistically competitive firms in the short run (Drawing a graph for each)

Answer 3

1. Normal Econ Prof (P=ATC)
2. Quasi Loss (ATC > P>AVC)
3. Shutdown (P< AVC)
4. positive econ prof (P>ATC)

Question 4

how do MC firms get ahead in market

Answer 4

profit differentiation through increasing market share and shifting demand rightward. They must increase perceived value to increase degree of market power (shifting demand curve up and make it more inelastic)

Question 5

what are the 2 marketing strategies for success

Answer 5

1. awareness: aimed at shifting demand right

2. marley power: aimed at increasing perceived value and making demand inelastic which may also deter entry

Question 6

draw graphs for a SUCESSFUL marketing campaign and and UNSUCCESFUL marketing campaign, assuming first zero economic profit

Answer 6

atc shifts as you spend on advertising

Question 7

how can you make a profit from advertising

Answer 7

the marginal revenue from increase in demand must be more than the increase in ATC from advertising spending

Question 8

in the long run how much economic profit do MC firms get

Answer 8

0/normal econ profit due to low barriers of entry

Question 9

is 0 econ profit in tHE long run inevtiable

Answer 9

it is only inevitable if existing firm is stationary and doesn’t innovate or differentiate. MC firms race to innovate to prolong period of pos economic profits.

Question 10

draw a graph for MC firms starting in the short run, long run stage 1 and 2 of loss then the long run stable position

Answer 10

fee

Question 11

how do MC firms become perf comp

Answer 11

if firms can no longer differentiate, firms are now price takers and have perfectly elastic demand curve

Question 12

what are the implications of dynamic efficiency

Answer 12

MC firms feature night allocative/productive efficiency but they give us choice

Question 13

draw a graph comparing MC and perf comp

Answer 13

poo