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firms in a monopolistically competitive market

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A
"One might expect firms in a monopolistically competitive market to experience greater swings in the price of their products over the business cycle than those in an oligopoly market. However, fluctuations in profits do not necessarily follow the same pattern." Discuss this statement.

B
Market Structure Concepts: Indicate whether each of the following statements is True or False and explain why.

1. Equilibrium in monopolistically competitive markets requires that firms be operating at the minimum point on the long-run average cost curve.

2. A high ratio of distribution cost to total cost tends to increase competition by widening the geographic area over which any individual producer can compete.

3. The price elasticity of demand tends to fall as new competitors introduce substitute products.

4. An efficiently functioning cartel achieves a monopoly price / output combination.

5. An increase in product differentiation tends to increase the slope of firm demand curves.

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Answers:

A. In monopolistic competition, there are many firms vying for control of one market. Each firm offers a product, which is differentiated to each other. Each firm, then, has a monopoly in the market of their own product. Thus, the firms try to advertise their products so people buy more of their product. At the same time, monopolistic competitors do not try to compete so as to undermine other competitors. There are too many other businesses in a monopolistic competition to worry about them; you simply try to get people to buy your own product as opposed to respond to others' tactics.

Monopolistic competition, because there are so many relatively weak firms, there are no barriers to entry. Companies can enter the market relatively easily (although, of course, not as perfectly easy as in perfect competition). This makes for a long-term equilibrium competition of no profit. When there is profit to be made, just as in perfect competition, new companies come in and take that profit away through expanded production and dropping prices. Unlike in perfect competition, though, monopolistic competition has a normal downward-sloping demand curve. The competing companies in monopolistic competition are not so much price takers as price setters and thus the demand curve is sloped, not set constant at the market price.

On the other hand, the primary property of oligopoly is a small number of competing firms. Thus, to be able to best compete, firms make decisions ...

Solution Summary

Firms in a monopolistically competitive market are described thoroughly.

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Micro economics questions

Question 1

Monopolistic competition differs from perfect competition because in monopolistically
competitive markets

a. each of the sellers offers a somewhat different product.
b. there are barriers to entry.
c. all firms can eventually earn economic profits.
d. strategic interactions between firms is vitally important

Question 2
The profit-maximizing rule for a firm in a monopolistically competitive market is to select the
quantity at which

a. average revenue exceeds average total cost
b. marginal revenue is equal to marginal cost.
c. average total cost is minimum.
d. average total cost is equal to marginal revenue.

Question 3
Which of the following is a characteristic of a monopoly market?
a. one firm is the only supplier of a product for which there are no close substitutes
b. entry into the market is blocked
c. the firm can influence market price
d. all of the above

Question 4
A monopolist
a. can raise its price without losing any sales because it is the only supplier in the market.
b. can earn a greater than normal rate of return in the long run.
c. always charges a price that is higher than marginal revenue.
d. both b and c

Question 5
Which of the following would indicate a relatively large amount of market power?
a. Highly price elasticity demand
b. Low cross-price elasticity with other products
c. Low Lerner index
d. all of the above

Question 6
The table shows a monopolist s demand schedule:

Price Quantity

$50 300
40 600
20 800
10 1,000

What is the marginal revenue for a price decrease from $50 to $40?
a. $9,000
b. $24,000
c. $30
d. $20

Question 7
The following table shows a monopolist s demand schedule:
Price Quantity
$50 300
40 600
20 800
10 1,000

If price falls from $20 to $10, then

a. MR = -$10, and demand is inelastic.
b. MR = $10, and demand is elastic.
c. MR = $30, and demand is elastic.
d. MR = -$30, and demand is inelastic.

Question 8
A monopolist will maximize profit by producing the level of output at which
a. the firm's total revenue exceeds total cost by the largest amount.
b. marginal revenue equals marginal cost.
c. the last unit of output produced adds the same amount to total revenue as to total cost.
d. all of the above

Question 9

A monopoly is producing a level of output at which price is $80, marginal revenue is $40, average total cost is $100, marginal cost is $40, and average fixed cost is $10. In order to maximize profit, the firm should
a. produce more.
b. keep output the same.
c. produce less.
d. Shut down

Question 10
A firm facing a downward sloping demand curve is producing a level of output at which price is
$7, marginal revenue is $5, and average total cost, which is at its minimum value, is $3. In order
to maximize profit, the firm should
a. decrease price.
b. keep price the same.
c. decrease output.
d. increase price.

Question 11
A monopolist is currently hiring 5,000 units of labor. At this level, the marginal revenue of
output is $10, the (fixed) wage rate is $300, and the marginal product of labor is 50. In order to
maximize profit, the firm should
a. keep the level of employment the same because the firm is earning a profit of $100,000.
b. hire more labor because the next unit of labor increases profit by $500.
c. hire more labor because the next unit of labor increases profit by $200.
d. hire less labor because the last unit of labor added more to total cost ($300) than to total revenue ($10).

Question 12
A firm with market power will maximize profit by hiring the amount of an input at which the
a. last unit of the input hired adds the same amount to total revenue as to total cost
b. additional revenue from the last unit of the input hired exceeds the additional cost of the last unit by the largest amount.
c.last unit of the input hired adds the same amount to total output as to total cost.
d. additional output from the last unit of the input hired exceeds the additional cost of the last unit by the largest amount.

Question 13
A monopolistically competitive firm chooses
a. price, but output is determined by cartel production quota.
b. the quantity of output to produce and the price at which it will sell its output.
c. the quantity of output to produce, but the market determines price.
d. the price, but competition in the market determines the quantity.

Question 14
Characteristics shared by monopolistically competitive and monopoly markets alike include
a. strategic interactions among sellers.
b. many sellers.
c. firms facing a downward-sloping demand curve.
d. insignificant barriers to entry.

Question 15
When free entry is one of the attributes of a market structure, economic profits are
a. eventually eventually driven to zero.
b. negative for all firms.
c. never above or below zero
d. always positive.

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