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Unformatted text preview: Monopolistic Competition and Oligopoly ANSWERS TO END-OF-CHAPTER QUESTIONS 23-1 How does monopolistic competition differ from pure competition in its basic characteristics? From pure monopoly? Explain fully what product differentiation may involve. Explain how the entry of firms into its industry affects the demand curve facing a monopolistic competitor and how that, in turn, affects its economic profit. In monopolistic competition there are many firms but not the very large numbers of pure competition. The products are differentiated, not standardized. There is some control over price in a narrow range, whereas the purely competitive firm has none. There is relatively easy entry; in pure competition, entry is completely without barriers. In monopolistic competition, there is much nonprice competition, such as advertising, trademarks, and brand names. In pure competition, there is no nonprice competition. In pure monopoly there is only one firm. Its product is unique and there are no close substitutes. The firm has much control over price, being a price maker. Entry to its industry is blocked. Its advertising is mostly for public relations. Product differentiation may well only be in the eye of the beholder, but that is all the monopolistic competitor needs to gain an advantage in the marketprovided, of course, the consumer looks upon the assumed difference favorably. The real differences can be in quality, in services, in location, or even in promotion and packaging, which brings us back to where we started: possibly nonexistent differences. To the extent that product differentiation exists in fact or in the mind of the consumer, monopolistic competitors have some limited control over price, for they have built up some loyalty to their brand. When economic profits are present, additional rivals will be attracted to the industry because entry is relative easy. As new firms enter, the demand curve faced by the typical firm will shift to the left (fall). Because of this, each firm has a smaller share of total demand and now faces a larger number of close-substitute products. This decline firms demand reduces its economic profit. 23-2 ( Key Question ) Compare the elasticity of the monopolistically competitors demand curve with that of a pure competitor and a pure monopolist. Assuming identical long-run costs, compare graphically the prices and output that would result in the long run under pure competition and under monopolistic competition. Contrast the two market structures in terms of productive and allocative efficiency. Explain: Monopolistically competitive industries are characterized by too many firms, each of which produces too little. The monopolistic competitors demand curve is less elastic than a pure competitor and more elastic than a pure monopolist. Your graphs should look like Figures 21.12 and 23.1 in the chapters. Price is higher and output lower for the monopolistic competitor. Pure competition: P = MC (allocative efficiency);...
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