Principle of Economics

Principle of Economics

Question for Review

  1. Describe the three attributes of monopolistic competition. How is monopolistic competition like monopoly? How is it like perfect competition?

Answer:

The three attributes of monopolistic competition:

  1. Many sellers: there are many firms competing for the same group of customers
  2. Product differentiation: each firm has at least slightly different product. Thus, rather than being a price taker each firm faces the downward-sloping demand curve.
  3. Free entry and exit: firms can entry and exit market without restriction. Thus, the number of firms in the market adjusts until the economic profits are zero.

The monopolistic competition is like monopoly in the product differentiation, each firm’s product have at least slight difference. So, like in the monopoly, firms in monopolistic competition aren’t price taker thus they face downward-sloping demand curve.

The monopolistic competition is like perfect competition in the number of sellers in a market and the easiness to entry and exit the market. Both monopolistic competition and perfect competition have many sellers for a market.

  1. Explain two benefits that might arise from the existence of brand names.

Answer:

  1. Brand names provide consumers quality information when quality can’t be easily judged in advance of purchase
  2. Brand names give the firm incentives to maintain their product quality because they have to keep their brand names.

Problems and Applications (Page 345)

  1. For each of the following characteristics, say whether it describes a perfectly competitive firm, a monopolistically competitive firm, both, or neither.
  2. sells a product differentiated from that of its competitors
  3. has marginal revenue less than price
  4. earns economic profit in the long run
  5. produces at the minimum of average total cost in the long run
  6. equates marginal revenue and marginal cost
  7. charges a price above marginal cost

Answer:

  1. monopolistically competitive firm
  2. monopolistically competitive firm
  3. neither perfectly competitive firm nor monopolistically competitive firm
  4. perfectly competitive firm
  5. both perfectly competitive firm and monopolistically competitive firm
  6. monopolistically competitive firm
  1. For each of the following characteristics, say whether it describes a monopoly firm, a monopolistically competitive firm, both, or neither.
  2. faces a downward-sloping demand curve
  3. has marginal revenue less than price
  4. faces the entry of new firms selling similar products
  5. earns economic profit in the long run
  6. equates marginal revenue and marginal cost
  7. produces the socially efficient quantity of output

Answer:

  1. Both monopoly firm and monopolistically competitive firm
  2. Both monopoly firm and monopolistically competitive firm
  3. Monopolistically competitive firm
  4. Monopoly firm
  5. Both monopoly firm and monopolistically competitive firm
  6. Neither monopoly firm nor monopolistically competitive firm
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