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Unformatted text preview: B. Price and Output Determination in Monopolistic Competition 1. Product Differentiation and Demand Elasticity: Product differentiation makes demand less elastic. A monopolistically competitive firm faces a downward sloping demand curve. However, demand will be more elastic than the demand curve faced by a monopoly. 2. Price/Output Determination in the Short Run: The firm chooses the price/output combination that maximizes profit. This occurs where MR = MC. Price may or may not be above ATC. * The reasoning behind the derivation of the marginal revenue curve in monopolistic competition is identical to that in monopoly. º 3. Price/Output Determination in the Long Run: Firms earning profits provide an incentive for new firms to enter, which drives down demand for the existing firms. New firms enter until excess profits are eliminated; graphically this is the point at which the demand curve is tangent to the ATC curve. Firms now are just breaking even. 1...
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This note was uploaded on 05/09/2009 for the course ECON 2302 taught by Professor Mcfarlin during the Spring '06 term at University of Texas at Dallas, Richardson.
- Spring '06
- Monopolistic Competition