week 5

Question 1

What are the 3 assumptions of monopolistic competition

Answer 1

1. there are a large number of firms. as a result each firms holds small shares in the market. This means that its actions are unlikely to affect its rivals. this is the assumption of independence
2. freedom of entry of new firms
3. Each firm now produces a product or provides a service that is in some way different from its rivals. This is product differentiation. This gives firms some power as they can raise prices without losing all its customers.

Petrol companies, restaurants, hairdressers and builders are all examples of monopolistic competition

Question 2

short run equilibrium of the firm under monopolistic competition

Answer 2

Just like other market structures profits are maximised where MC - MR. Super normal profit is shown in the shaded area.

Question 3

long run equilibrium of the firm under monopolistic competition

Answer 3

If firms are earning super normal profit it will attract new firms into the industry in the long run. this will cause the demand (AR) curve to shift to the left as customers are take form firms. It will keep shifting left until only normal profits remain as it wont attract firms to the market anymore.

Question 4

what is the formula for marginal physical product (MPP)

Answer 4

Question 5

What is the efficiency frontier

Answer 5

The set optimal portfolios that offer the highest expected return for a defined level of risk or lowest risk for an expected return

Question 6

characteristics of a perfectly competitive industry

Answer 6

Question 7

characteristics of a monopolistic competition industry

Answer 7