chp 13 instructor manual

chp 13 instructor manual - Chapter 13 MONOPOLISTIC...

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Chapter 13 MONOPOLISTIC COMPETITION AND OLIGOPOLY QUESTIONS AND ANSWERS Q13.1 Describe the monopolistically competitive market structure and give some examples. Q13.1 ANSWER Monopolistic competition is a market structure quite similar to perfect competition in that vigorous price competition among a large number of firms and individuals is present. The major difference between these two market structures is that at least some degree of product differentiation is present in monopolistically competitive markets. As a result, firms have at least some discretion in setting prices. However, the presence of many close substitutes limits the price-setting ability of individual firms, and drives profits down to a normal rate of return in the long-run. As in the case of perfect competition, above-normal profits are only possible in the short-run before rivals are able to take effective counter measures. Examples of monopolistically competitive market structures include a broad range of industries producing clothing, consumer financial services, professional services, restaurants, and so on. Q13.2 Describe the oligopoly market structure and give some examples. Q13.2 ANSWER Oligopoly is a market structure where only a few large rivals are responsible for the bulk, if not all, industry output. As in the case of monopoly, high to very high barriers to entry are typical. Under oligopoly, the price/output decisions of firms are interrelated in the sense that direct reactions from leading rivals can be expected. As a result, the decision making of individual firms is based, in part, on the likely response of competitors. This "competition among the few” involves a wide variety of price and nonprice methods of interfirm rivalry, as determined by the institutional characteristics of a particular market setting. Although fewness in the number of competitors gives rise to a potential for excess profits, above-normal rates of return are far from guaranteed. Competition among the few can sometimes be vigorous. Examples of the oligopoly market structure include such industries as: bottled and canned soft drinks, brokerage services, investment banking, long distance telephone service, pharmaceuticals, ready-to-eat cereals, tobacco, and so on. Q13.3 Explain the process by which economic profits are eliminated in a monopolistically competitive market as compared to a perfectly competitive market.
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152 Chapter 13 Q13.3 ANSWER In a monopolistically competitive industry, excess profits are eliminated in the long- run through imperfect emulation of successful product design, production systems, and marketing efforts by both established and new competitors. Excess profits are eliminated in a perfectly competitive industry through expansion by established firms and entry of new firms, both of whom offer identical products that are perfect substitutes. Q13.4
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chp 13 instructor manual - Chapter 13 MONOPOLISTIC...

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