Chapter 11 Study Questions

Chapter 11 Study Questions - Rahim Spencer ECON 203...

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Rahim Spencer ECON 203 Chapter 11 Study Questions 1. Monopolistic competition differs from pure competition in that it has a relatively large number of producers, usually 25-50 firms, differentiated products, and non-price com- petition. It differs from pure monopoly because there is a relatively large number of firms, easy entry and exit, and differentiated products. Product differentiation involves products that have the same or similar functions, but with different attributes such as service, location, and brand names. The entry into these types of firms is easy, and the demand, so the demand curve for these types of firms are highly, but not perfectly elast- ic. In the short run, these firms either have profits or losses, but in the long run these firms only make a normal profit. 2. The elasticity of demand for a monopolistic competitor is highly, but not perfectly elastic. The elasticity for the pure competitor is perfectly elastic.The monopolistic com- petitors demand is not perfectly elastic like that of the pure competitor because the monopolistic competitor has fewer rivals, and its products are differentiated so they are not perfect substitutes. The monopolistic competitor’s demand is more elastic than the demand faced by a pure monopolist because the monopolistically competitive seller has many competitors producing closely substitutable goods, while the pure monopolist has no rivals at all. The monopolistic competitor will only earn a normal profit in the long run, they will only break even. Under pure competition, after all long-run adjustments are completed, product price will be exactly equal to, and production will occur at, each firm- ’s minimum average total cost. Price and output would be equal to minimum average total cost. In monopolistic competition, the demand curve is tangent to the average total cost curve at the profit maximizing output, and the firm is just making a normal profit. In monopolistic competition, neither productive nor allocative efficiency occurs in long-run equilibrium. Under pure competition, firms produce at the minimum average total cost of production, and charge a price that is consistent with that cost; productive efficiency is achieved. In pure competition, allocative efficiency is also reached because firms pro- duce each good or service to the point where price and marginal cost are equal, so so- ciety’s resources are being allocated efficiently. Monopolistically competitive industries are overcrowded with firms, each operating below its optimal capacity. 3.
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This note was uploaded on 12/07/2009 for the course ECON 203 at USC.

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Chapter 11 Study Questions - Rahim Spencer ECON 203...

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