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Chap17 - are earning zero economic profits so forcing them...

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Questions for Review 1. The three attributes of monopolistic competition are: (1) there are many sellers; (2) each seller  produces a slightly different product; and (3) firms can enter or exit the market without restriction.  Monopolistic competition is like monopoly because firms face a downward-sloping demand curve,  so price exceeds marginal cost. Monopolistic competition is like perfect competition because, in  the long run, price equals average total cost, as free entry and exit drive economic profit to zero. 4. Because, in equilibrium, price is above marginal cost, a monopolistic competitor produces too  little output. But this is a hard problem to solve because: (1) the administrative burden of  regulating the large number of monopolistically competitive firms would be high; and (2) the firms 
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Unformatted text preview: are earning zero economic profits, so forcing them to price at marginal cost means that firms would lose money unless the government subsidized them. 6. Advertising with no apparent informational content might convey information to consumers if it provides a signal of quality. A firm will not be willing to spend much money advertising a low-quality good, but may be willing to spend significantly more to advertise a high-quality good. 7. The two benefits that might arise from the existence of brand names are: (1) brand names provide consumers information about quality when quality cannot be easily judged in advance; and (2) brand names give firms an incentive to maintain high quality to maintain the reputation of their brand names. 79 MONOPOLISTIC COMPETITION 17...
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