Module 13: Monopolistic Competition

In a monopolistically competitive market, the large number of firms implies that each firm has a small _____.

market share

What is meant by 'product differentiation' in the context of monopolistic competition?

The distinguishing of products by brand name, color, and other minor attributes to make them appear different from competitors' products.

How does successful product differentiation affect a monopolistically competitive firm's control over price?

The more successful a firm is at differentiation, the more control it has over the price of its product.

If a producer's product differentiation is perfect, what market structure does the firm operate in?

The producer is considered a monopoly.

What is the primary profit-maximizing condition for a firm in monopolistic competition?

The firm should produce at the quantity where Marginal Revenue (MR) equals Marginal Cost (MC).

What is the formula for calculating a firm's economic profit?

Profit = Total Revenue (Price * Quantity) – Total Cost (Average Total Cost * Quantity).

A firm in monopolistic competition earns a positive economic profit in the short run if the price (P) is _____ the Average Total Cost (ATC).

greater than (P > ATC)

What market condition occurs in the short run if a monopolistically competitive firm's Average Total Cost (ATC) is greater than its price (P)?

The firm experiences a negative economic profit, also known as an economic loss.

What is the long-run consequence in a monopolistically competitive market when firms are earning positive economic profits?

New firms will enter the market, attracted by the profits.

What is the long-run consequence in a monopolistically competitive market when firms are sustaining economic losses?

Some existing firms will leave (exit) the market.

In the long run, what is the level of economic profit for a firm in monopolistic competition?

Zero economic profit.

What is the relationship between price (P) and Average Total Cost (ATC) for a monopolistically competitive firm in long-run equilibrium?

The price will be equal to the Average Total Cost (P = ATC).

At what point should a firm cease to increase its advertising spending?

When the additional revenue from one more dollar of advertising just equals that one dollar of marginal cost.

Name one of the three forms of advertising mentioned in the source material.

Direct marketing, mass marketing, or interactive marketing.

Comparing market structures, which two (out of Perfect Competition, Monopolistic Competition, Oligopoly, and Pure Monopoly) do not have long-run economic profits?

Perfect Competition and Monopolistic Competition.

How is entry and exit characterized in a perfectly competitive market?

Entry and exit are unrestricted.

How much ability does a firm in perfect competition have to set its price?

None; firms are price takers.

Which market structure is characterized by having only a few sellers and partial barriers to entry?

Oligopoly.

Toothpaste, toilet paper, and retail trade are given as examples of which market structure?

Monopolistic Competition.

According to the comparison table, which market structure features a product that is unique?

Pure Monopoly.

The large number of firms in monopolistic competition leads to a lack of _____ among them.

collusion

What happens to the demand curve of a surviving firm in monopolistic competition if other firms exit the market due to short-run losses?

The surviving firm's demand line increases as it captures market share from the exiting firms.