Week 9 pt2 - Monopolistic competition

Question 1

When does monopolistic competition occur?

Answer 1

when there are many buyers and many sellers, and sellers can differentiate their products. This puts a downward slope on each firm’s
demand curve.

Question 2

When are profits made in monopolistic competition?

Answer 2

Profits may be earned in the short run, but these are competed away by entry so that in the long run equilibrium supernormal profits are zero. The equilibrium involves lower
output and a higher price than under perfect competition.

Question 3

Is the surplus in monopolistic competition greater or smaller than perfect competition?

Answer 3

smaller causing it to be inefficient because in perfect competition they always produce at lower costs causing the surplus to be greater