wk 3 - Monopolistic Competition

Question 1

What is Monopolistic Competition

Answer 1

1 buyer
Many firms produce imperfect substitutes
(Products are hetrogeneous)

Question 2

4 assumptions in Monopolistic Competition

Answer 2

• Sellers are price makers
• Buyers are price takers
• Sellers don’t behave strategically
• Free entry into market

Question 2

In the LR what happens to supernormal profit

Answer 2

Overcrowding in market causes some firms to suffer losses = forced to leave market

Question 3

what is the excess capacity theorem

Answer 3

It states:
More efficient if output produced by few firms
- however sacrifice variety

Question 4

what happens to the consumer surplus in the Long run

Answer 4

as the number of firms increases, CS will increase at a slower rate
It will plateau eventually

Question 5

What is the formula for surplus in the market

Answer 5

W(n) = n*π(n) + CS(n)

W(n) = Total Surplus

Question 6

Why is Monopolistic Competition less efficient than Perfect Competition

Answer 6

Monopolistic Competition:
- Excess capacity: Q not at minimum ATC
- Markup over MC: P > MC
Perfect Competition:
- Q: at minimum ATC (Efficient)
- P = MC