Microeconomics Chapter 12

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Microeconomics Chapter 12
2010-05-02 17:59:14
Monopolistic competition microeconomics

Monopolistic Competition
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  1. Monopolistic Competition assumptions
    There are many buyers and sellers, low barriers to entry and firms compete by selling similar but differenciated goods and services.
  2. Explain why a monopolistically competitive firm has downward-sloping demand and marginal
    revenue curves.
    • 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.
  3. 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)
  4. 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.
  5. when will the firm’s long run profit be zero?
    When price equals ATC
  6. In the long run, the demand curve of a typical firm will be ...
    tangent to its average total cost curve.
  7. 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.
  8. What firm achieves allocative efficiency and productive efficiency?
    a perfectly competitive firm
  9. What firm Does NOT achieve allocative efficiency or productive efficiency?
    a monopolistically competitive firm