ECON FINAL REVIEW CH 26

ECON FINAL REVIEW CH 26 - b Each separate differentiated...

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Chapter 26 Outline 1) There are four characteristics of the theory of monopolistic competition , which was developed simultaneously by Edward Chamberlin and Joan Robinson in 1933. a) A significant number of sellers in a highly competitive market b) Differentiated products c) Sales promotion and advertising d) Easy entry of new firms in the long run 2) Although there are many sellers in a monopolistically competitive industry, there are not as many as there are in the perfect competition model; each monopolistic competitor has a little control over its price, but collusion is difficult and each firm acts independently of the others. 3) Perhaps the most important feature of a monopolistically competitive industry is product differentiation . a) Differentiation refers to differences in physical characteristics
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Unformatted text preview: b) Each separate differentiated product has close substitutes 3) It is possible to predict the optimal price-output combination of the monopolistic competitor. a) The monopolistic competitor’s demand curve is downward sloping; thus its marginal revenue curve lies below its demand curve. b) Short-run equilibrium exists where MR=MC; economic profits or losses are possible in the short run. c) In the long run, because of free entry, the monopolistic competitor must earn exactly zero economic profits. Nevertheless, social inefficiency exists in the long run because the price of its product exceeds marginal cost, and its rate of output lies to the left of the minimum point on the ATC curve....
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