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Monopolistic Competition assumptions
There are many buyers and sellers, low barriers to entry and firms compete by selling similar but differenciated goods and services.
Explain why a monopolistically competitive firm has downward-sloping demand and marginal
- A monopolistically competitive firm is able to raise its price without losing all of its
- customers because the firm either has a favorable location, can offer better service, or has a higher quality product.
Explain how a monopolistically competitive firm maximizes profit in the short run.
- a monopolistically competitive firm produces where price is greater than marginal cost.
- (economic profits if its price exceeds average total cost in the short run)
Analyze the situation of a monopolistically competitive firm in the long run.
- low barriers to entry and short-run profits - lead to - entrepreneurs entering and establishing new firms. entry of new firms shifts demand curves of existing firms to the left - more elastic.
- ... and short-run losses - lead to - firms exiting the industry.
- This will shift the demand curves of remaining firms to the right - more inelastic.
when will the firm’s long run profit be zero?
When price equals ATC
In the long run, the demand curve of a typical firm will be ...
tangent to its average total cost curve.
Compare the efficiency of monopolistic competition and perfect competition.
- (long run) the profit-maximizing level of output M.C. firm occurs where price is greater than marginal cost and the firm is NOT at the minimum point of its average total cost curve.
- Unlike a perfectly competitive firm, a monopolistically competitive firm does NOT achieve allocative efficiency or productive efficiency.
What firm achieves allocative efficiency and productive efficiency?
a perfectly competitive firm
What firm Does NOT achieve allocative efficiency or productive efficiency?
a monopolistically competitive firm