HW15: Homework - Ch. 15: Monopolistic Competition and Product Differentiation

Which of the markets is the best example of monopolistic competition?

the fast food industry

Monopolies and monopolistically competitive firms differ in that monopolies

Which of the following makes monopolistic competition different than perfect competition? Monopolistically competitive firms

In comparison to oligopolies, firms in monopolistic competition

Which scenario is an example of an industry in monopolistic competition?

participate in markets where barriers to entry are present.

differentiate their products

face competition from many other firms.

Within walking distance from your home, there are a plethora of fast-food restaurants including Koala Express,Cabo Bob's Burritos, Oodles of Noodles, and Hanz's Hearty Hamburgers.

Product differentiation is a key component of monopolistic competition. Given the scenarios, label them accordingly by how products are differentiated.

GrrrArg! Productions attempts to carve out a niche in the crowded zombie film industry by specializing in movies featuring only finger-puppet zombies.

Jay is a Korean pop star, and as such, he has long, flowing hair. One day, he decides to retire from the singing industry and walks to the local Procuts right outside his apartment, despite it being more expensive than the Supercuts 10 minutes away.

Wayne is a beginning photographer. He is in the market to buy a new camera lens and notes that certain lenses take clearer pictures but they become exponentially more expensive to purchase as the sharpness of the image increases. He chooses to start with the lowest grade lens (i.e., the cheapest).

The video game industry caters to a wide array of people, with games like Final Fantasy to appeal to the role playing type, Tekken for those who like fighting games, Halo for the first person shooters, and Super Mario for the adventurous.

differentiated by style/type

differentiated by location

differentiated by quality

differentiated by style/type

Robert has a passion for making ice cream. Assume that ice cream parlors have a market structure of monopolistic competition. Between the local Amy's, Cold Stone Creamery, Marble Slab, Ben & Jerry's, and Baskin Robbins, he has an uphill battle to break into the local ice cream market.

Robert is considering various strategies to differentiate his ice cream shop, JubJub's, so that he can garner some market power. Indicate the value of each suggestion.

a. Making ice cream using fresh organic milk and fruit, something none of the other competitors are doing, _________ help Robert differentiate his ice cream.

b. Opening JubJub's next to "The Triangle," an area with an elementary school, a middle school, and a high school less than 5 minutes away ______________ help Robert differentiate his ice cream.

c. Carrying only the exact same flavors, with the same names, as his competitors _______________ help Robert differentiate his ice cream.

d. Pricing JubJub's ice cream at $100 a scoop to appeal to the luxury crowd _______________ help Robert differentiate his ice cream.

a. will

b. will

c. will not

d. will

A monopolistic competitor wishing to maximize profit will select a quantity where

If a firm is producing a quantity where marginal revenue exceeds marginal costs, the firm should ____ existing levels of production in order to ____.

If a firm is producing a quantity where marginal cost exceeds marginal revenue, the firm should ____ existing levels of production in order to ____.

marginal revenue equals marginal cost.

expand ; increase profitability

decrease ; increase profitability

The graph shows the curves facing a profit maximizing monopolistic competitor. Label each curve with the appropriate term.

Left - Right Clockwise: Marginal Cost; Average Cost; Demand; Marginal Revenue

The accompanying graph depicts average total cost (ATC), marginal cost (MC), marginal revenue (M), and demand (D) facing a monopolistically competitive firm.

Place point A at the firm's profit maximizing price and quantity.

What is the firm's total cost?

total cost: $ _____________________

What is the firm's total revenue?

total revenue: $ ______________________

What is the firm's total profit?

profit: $ ______________________________

Point A on D-Line, above the intersection MR-Line & MC

1250

1500

250

In 1939, the box office records set by Gone with the Wind and The Wizard of Oz proved to Hollywood studios that investing in Technicolor was worth every penny. Nevertheless, a reversal of fortune hit the film industry as the United States entered World War II. Wartime shortages made celluloid nitrate more costly, so Hollywood studios reverted to primarily black and white. The few Technicolor musicals released only recovered their production costs. The graph shows Metro-Goldwyn-Mayer's (MGM) production of Technicolor movies before World War II. Modify the graph to describe the wartime period for MGM. Assume that nothing changes except the items discussed in the question.

MC-Line Up Left, Under the ATC & D-Line Intercept

ATC Up Left, on top of D-Line

In 1939, the box office records set by Gone with the Wind and The Suppose the accompanying graph depicts a monopolistically competitive firm earning positive economic profits. Please shift the curves to show the effects of long-run competition and then place Point A at the price and quantity at which the firm will produce in the long-run.

MR & D-Line Down 1, Point A on intersection.

Since the products are similar but differentiated and firms are able to freely enter the market, this industry is one of monopolistic competition. In such a market, if firms are making profit, new firms will enter. As more firms split up the market's demand, the demand curve for any incumbent firm in the market shifts to the left.

Note that the zero-profit point is reached when the demand shifts to the left until it becomes tangent to the average total cost. For this to be a profit-maximizing production level, marginal revenue must equal marginal cost at the quantity produced at the point of tangency between demand and average total cost. So, the marginal revenue line shifts to the left, crossing marginal cost at that quantity. The price that the firm can charge is determined by the demand curve, so Point A is where the demand curve crosses the quantity where marginal revenue crosses marginal costs, right at the point of tangency.

This is the long-run equilibrium for monopolistic competition. If the demand curve is to the right of this, positive profits will entice competitors to enter the market, shifting the demand curve to the left. If the demand curve shifted further to the left than this, losses would induce firms to exit the market, shifting the demand curve back to the right. Similar to perfect competition, economic profits (but not accounting profits) are reduced to zero. In contrast to perfect competition, the efficient quantity and price is not achieved (as an exercise, think about where this point would be).

The accompanying graph depicts the long-run costs and revenue for a monopolistically competitive firm. The numbers in parentheses show the output level and the cost, respectively, associated with various points.

Place point A at the profit maximizing price and quantity.

What is the profit-maximizing output of this monopolistically competitive firm?

_________________ Units of Output

What is the level of excess capacity for this monopolistically competitive firm?

_________________ Units of Output

5

3

The graph contains information on the long‑run equilibrium situation faced by Patty's Frozen Pizzas. Use the information to answer the questions.

Notice that quantities in the graph are in thousands.

Determine Patty's profit‑maximizing price and profit‑maximizing quantity.

profit‑maximizing price: $ __________

profit‑maximizing quantity: __________ pizzas

At what level of output is Patty's average total cost minimized?

output that minimizes average total cost: ______________ pizzas

Calculate Patty's excess capacity.

excess capacity: __________ pizzas

5

40,000

60,000

20,000

Which of the statements is true regarding advertising?

Advertising is only potentially effective if a firm has some market power.

Read each statement and determine if it is true or false.

a. A monopolistic competitor, much like a firm in perfect competition, sells its product at a point where the price is equal to the marginal cost.

b. Advertising can play a role as an indirect signal of product quality to customers.

c. Monopolistically competitive industries are more likely to make use of advertising to create products that catch on in mainstream popularity than industries in perfect competition.

d. In the long run, monopolistic competitors make a similar amount of profit to monopolists, since, in both cases, the firm's demand curves are downward sloping, and at the profit maximizing point, the marginal cost is equal to the marginal revenue.

e. In the short term, a monopolistic competitor will make a profit if the demand curve is above the average total cost curve at some point.

a. false

b. true

c. true

d. false

e. true