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firms in a monopolistically competitive market

"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.

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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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.