bus econ 1 - module 07, monopolistic competition

monopolistic competition

a market structure in which many companies sell products that are similar but not identical

short-run

in the ____________, there are positive economic profits

zero

in the long-run, profit comes to ____________

monopoly

price > marginal cost

perfect competition

price = marginal cost

monopoly

positive economic profit for the firm and a deadweight loss for society

perfect competition

in the long-run, entry and exit drive economic profit to zero (p = atc)

imperfect competition

a market structure that fails to meet the conditions of perfect competition

oligopoly

a market structure in which only a few sellers offer similar or identical products

monopolistic competition

each firm has a monopoly over the product it makes but many other firms make similar products that compete for the same customers

true

monopolistic competition has the following attributes (1) many sellers; (2) product differentiation; and (3) free entry and exit

many sellers

there are many firms competing for the same group of customers

product differentiation

each firm produces a product that is at least slightly different. thus, they face a downward sloping demand curve

free entry and exit

firms can enter or exit the market without restriction. thus, the number of firms in the market adjusts until economic profits are driven to zero

false

monopolistic competition has the following attributes (1) there are only a few sellers in the market; (2) rigorous competition is less likely; and (3) strategic interaction is important

true

monopolistic competition has the following attributes (1) many sellers, each of which is small; (2) departs from the perfectly competitive ideal because each of the sellers offer a somewhat different product

mr = mc

monopolistic competitors produce in the short run at the point where ____

demand curve

monopolistic competition uses its ________ _________ to find the price at which it can sell that quantity

profit

encourages entry, and entry shifts the demand curve faced by the incumbent firms to the left

as the demand for incumbent firms' product falls, these firms experience declining profit

losses

encourage exit, and exit shifts the demand curve of the remaining firms to the right

as the demand for the remaining firms' products rises, these firms experience rising profits

equilibrium

once the market reaches _______________, new firms have no incentive to enter, and existing firms have no incentive to exit

efficient scale

the quantity of output that minimizes average total cost

efficient scale

perfectly competitive firms produce at the _______________

p = mc

for a perfectly competitive firm, _________

p > mc

for a monopolistically competitive firm, _____________ because the firm has always some market power

zero-profit condition

when p = mc = atc

in the long-run equilibrium, monopolistic competition firms operate on the declining portion of their atc curves so mc is below atc

markup

because of the _____________, some consumers who value the good at more than mc of production will be deterred from buying it

false

a perfect competitive firm has the normal deadweight loss of monopoly pricing.

product-variety externality

new firms offer products that differ from those of the existing firms

business-stealing externality

firms post a price above marginal cost and are always eager to sell additional units

differentiated

firms that sell highly _________________ consumer goods, spend between 10-20% of their revenue on advertising

industrial

firms that sell ___________ products, spend very little on advertising

homogenous

firms that sell __________ products, spend nothing at all for advertising

true

monopolistic competition firms are price-makers

downward

monopolistic competition faces a _________________ sloping demand curve. thus, they follow a monopolist's rule for profit-maximization

zero

the process of entry and exit continues until he firms in the market are making exactly _______ economic profit.

true

once the market reaches equilibrium, new firms have no incentive to enter, and existing firms have no incentive to exit

false

monopolistically competitive firm, p = mc

false

perfectly competitive firm, p > mc because the firm always has some market power

true

a critique of advertising is that it manipulate people's tastes. some argue that ads are psychological rather than informational

competition

advertising impedes __________________. ads convince customers that products are more different than they truly are.

true

arguments from the defense of advertising states that firms use advertising to provide information because it allows customers to make better choices

true

some argue that advertising fosters competition. customers can more easily take advantage of price differences. thus, each firm has less market power. it also allows new firms to enter the more market more easily.

false

the willingness to spend money on advertising does not signal the quality of a firm's produ

true

cheap advertising cannot be effective at signaling quality to consume

false

not all markets have two types of firms namely, (1) products with widely recognized brand; and (2) products with generic substitutes

true

an argument about the economics of brand names state that it causes consumers to perceive differences that do not really exist. consumers' willingness to pay more for the brand name good is a form of irrationality fostered by advertising.

false

brand names do not ensure that the goods are of high quality because it does not provide information about quality.