Powerpoint Chapter 12 - Monopolistic Competition

What are the key characteristics of Monopolistic Competition?

• Relatively large number of sellers

• Product Differentiation

• Easy entry and exit

• Nonprice Competition

What is an example of nonprice competition?

Advertising.

How is industry concentration measured in Monopolistic Competition?

By the 4-Firm Concentration Ratio and Herfindahl Index

What is the formula for the 4-Firm Concentration Ratio?

Output of four largest firms divided by total output in the industry.

What is the formula for the Herfindahl Index?

(%S₁)² + (%S₂)² + (%S₃)² + … + (%S_n)²

What is the condition for a firm in Monopolistic Competition to produce efficiently in the short run?

Produce where Marginal Revenue (MR) equals Marginal Cost (MC).

What occurs in the long run for firms in Monopolistic Competition?

Only a normal profit is achieved.

What is the condition for productive inefficiency in Monopolistic Competition?

Price (P) is greater than Minimum Average Total Cost (ATC).

What indicates allocative inefficiency in Monopolistic Competition?

Price (P) is greater than Marginal Cost (MC).

How does Monopolistic Competition benefit consumers?

By offering a greater array of choices and better products.

What impact does a higher minimum wage have on big hamburger chains?

It does not affect them much as they are capital intensive.

Why might mom and pop restaurants be more negatively affected by a higher minimum wage?

They are labor intensive and may struggle to cover increased costs.

Demand curve in Monopolistic Competition

Is highly elastic.