13–278
CHAPTER 13
Monopolistic Competition
A. Short-Answer, Essays, and Problems
1. What are the major features of monopolistic competition compared to pure competition and pure
monopoly?
2. “Pure competition or pure monopoly industries will tend to be one-price industries. Monopolistic
3. How does economic rivalry take place in monopolistic competition? Describe the different aspects of
4. What are “four–firm” concentration ratios? How do economists use them to define monopolistically
5. What are types of firms that exemplify monopolistic competition?
6. What is the Herfindahl index and how is it calculated?
7. How are monopolistically competitive industries identified with concentration ratios?
8. Why is the monopolistic competitor’s demand curve more elastic than a pure monopolist’s, but less elastic
than a pure competitor’s? What factors determine the price elasticity of demand for a monopolistic
9. Assume that the short-run cost and demand data given in the table below confront a monopolistic
competitor selling a given product and engaged in a given amount of product promotion. Compute the
marginal cost and marginal revenue of each unit of output and enter these figures in the table.
Output
Total
cost
Marginal
cost
Quantity
demanded
Price
Marginal
revenue
0
$ 25
0
$60
1
40
$_____
1
55
$_____
2
45
_____
2
50
_____
3
55
_____
3
45
_____
4
70
_____
4
40
_____
5
90
_____
5
35
_____
6
115
_____
6
30
_____
7
145
_____
7
25
_____
8
180
_____
8
20
_____
9
220
_____
9
15
_____
10
265
_____
10
10
_____
(a) At what output level and at what price will the firm produce in the short run? What will be the total
profit?
(b) What will happen to demand, price, and profit in the long run?
13–279
10. Explain why the following graph is likely to represent the long-run equilibrium for a representative firm in
11. In theory, the representative firm in monopolistic competition earns only a normal profit. Why might that
12. Assume that the short-run cost and demand data given in the table below confront a monopolistic
competitor selling a given product and engaged in a given amount of product promotion. Compute the
marginal cost and marginal revenue of each unit of output and enter these figures in the table.
Output
Total
cost
Marginal
cost
Quantity
demanded
Price
Marginal
revenue
0
$ 75
0
$180
1
120
$_____
1
165
$_____
2
135
_____
2
150
_____
3
165
_____
3
135
_____
4
210
_____
4
120
_____
5
270
_____
5
105
_____
6
345
_____
6
90
_____
7
435
_____
7
75
_____
8
540
_____
8
60
_____
9
660
_____
9
45
_____
10
795
_____
10
30
_____
(a) At what output level and at what price will the firm produce in the short run? What will be the total
profit?
(b) What will happen to demand, price, and profit in the long run?
13–280
13. Assume that the short-run cost and demand data given in the table below confronts a monopolistic
competitor selling a given product and engaged in a given amount of product promotion. Compare the
marginal cost and marginal revenue of each unit of output and enter these figures in the table.
Output
Total
cost
Marginal
cost
Quantity
demanded
Price
Marginal
revenue
0
$ 50
0
$60
1
80
$_____
1
55
$_____
2
120
_____
2
50
_____
3
150
_____
3
45
_____
4
170
_____
4
40
_____
5
185
_____
5
35
_____
6
205
_____
6
30
_____
7
235
_____
7
25
_____
8
275
_____
8
20
_____
9
325
_____
9
15
_____
10
385
_____
10
10
_____
14. In the first graph below, illustrate the cost curves and demand conditions for a monopolistically competitive
firm making short-run profits. In the second graph, illustrate what those conditions are most likely to be in
the long run. Explain the major differences in the two graphs.
15. A monopolistically competitive firm is producing 50 units of output in the short run where marginal cost is
$3.00, average total costs are $5.00, price is $4.50, average variable cost is $4.00, and marginal revenue is
16. In the short run, a monopolistically competitive firm calculates that marginal cost is $6.00, average total
costs are $4.00, and marginal revenue is $3.00. The firm is charging a price of $6.00 and producing 200
units of output. How much profit is the firm making? What output recommendation would you make as
the company economist?
17. If monopolistically competitive firms have some control over their prices, why don’t they set price above
average total cost so they will realize an economic profit in the long run?
18. What are two real-world complications with the long-run conclusion about the representative firm in the
model of monopolistic competition?
19. “In monopolistically competitive markets neither allocative nor productive efficiency is realized.” Explain.
20. Draw a graph of the cost curves for a monopolistically competitive firm that clearly illustrates the excess
21. Evaluate this statement: “A monopolistically competitive industry would be more efficient if there were
22. Why do monopolistically competitive firms spend funds for product differentiation and advertising when
this practice only adds to the firm’s costs?
23. Explain how monopolistically competitive producers try to improve on the condition of just breaking even
in the long run. Is this improvement a benefit for consumers?
24. Explain why the economic analysis of monopolistic competition is so complex.
25. (Consider This) Discuss the phrase “variety is the spice of life” in reference to the monopolistically
26. (Consider This) Monopolistically competitive markets are most likely to be found in societies considered to
27. (Last Word) Restaurants operate in monopolistically competitive markets. What characteristics allow them
to differentiate their products?
28. (Last Word) Discuss how an increase in the minimum wage effect a chain restaurant differently than a
small, mom and pop restaurant.
B. Answers to Short-Answer, Essays, and Problems
1. What are the major features of monopolistic competition compared to pure competition and pure
monopoly?
2. “Pure competition or pure monopoly industries will tend to be one-price industries. Monopolistic
competition, however, is a multiprice industry.” Explain.
3. How does economic rivalry take place in monopolistic competition? Describe the different aspects of
4. What are “four–firm” concentration ratios? How do economists use them to define monopolistically
competitive industries and oligopolistic industries?
5. What are types of firms that exemplify monopolistic competition?
6. What is the Herfindahl index and how is it calculated?
7. How are monopolistically competitive industries identified with concentration ratios?
8. Why is the monopolistic competitor’s demand curve more elastic than a pure monopolist’s, but less elastic
than a pure competitor’s? What factors determine the price elasticity of demand for a monopolistic
competitor?
9. Assume that the short-run cost and demand data given in the table below confront a monopolistic
competitor selling a given product and engaged in a given amount of product promotion. Compute the
marginal cost and marginal revenue of each unit of output and enter these figures in the table.
Output
Total
cost
Marginal
cost
Quantity
demanded
Price
Marginal
revenue
0
$ 25
0
$60
1
40
$_____
1
55
$_____
2
45
_____
2
50
_____
3
55
_____
3
45
_____
4
70
_____
4
40
_____
5
90
_____
5
35
_____
6
115
_____
6
30
_____
7
145
_____
7
25
_____
8
180
_____
8
20
_____
9
220
_____
9
15
_____
10
265
_____
10
10
_____
Output
Total
cost
Marginal
cost
Quantity
demanded
Price
Marginal
revenue
0
$ 25
0
$60
1
40
$15
1
55
$55
2
45
5
2
50
45
3
55
10
3
45
35
4
70
15
4
40
25
5
90
20
5
35
15
6
115
25
6
30
5
7
145
30
7
25
−5
8
180
35
8
20
−15
9
220
40
9
15
−25
10
265
45
10
10
−35
(a) The firm will produce 4 units of output. At that level, marginal revenue ($25) is greater than marginal
cost ($15), but as close to equality as possible. Total profit will be $90 ($160 − $70).
(b) The demand for the firm’s product will decrease until price equals average cost and total profits are
zero.
10. Explain why the following graph is likely to represent the long-run equilibrium for a representative firm in
monopolistic competition. What will be the product price, output, and amount of economic profit?
11. In theory, the representative firm in monopolistic competition earns only a normal profit. Why might that
outcome not always occur in the real world of small firms?
13–285
12. Assume that the short-run cost and demand data given in the table below confront a monopolistic
competitor selling a given product and engaged in a given amount of product promotion. Compute the
marginal cost and marginal revenue of each unit of output and enter these figures in the table.
Output
Total
cost
Marginal
cost
Quantity
demanded
Price
Marginal
revenue
0
$ 75
0
$180
1
120
$_____
1
165
$_____
2
135
_____
2
150
_____
3
165
_____
3
135
_____
4
210
_____
4
120
_____
5
270
_____
5
105
_____
6
345
_____
6
90
_____
7
435
_____
7
75
_____
8
540
_____
8
60
_____
9
660
_____
9
45
_____
10
795
_____
10
30
_____
(a) At what output level and at what price will the firm produce in the short run? What will be the total
profit?
(b) What will happen to demand, price, and profit in the long run?
Output
Total
cost
Marginal
cost
Quantity
demanded
Price
Marginal
revenue
0
$ 75
0
$180
1
120
$ 45
1
165
$ 165
2
135
15
2
150
135
3
165
30
3
135
105
4
210
45
4
120
75
5
270
60
5
105
45
6
345
75
6
90
15
7
435
90
7
75
−15
8
540
105
8
60
−45
9
660
120
9
45
−75
10
795
135
10
30
−105
(a) The firm will produce 4 units of output. At that level, marginal revenue ($75) is greater than marginal
cost ($45), but as close to equality as possible. Total profit will be $270 ($480 − $210).
(b) The demand for the firm’s product will decrease until price equals average cost and total profits are
zero.
13–286
13. Assume that the short-run cost and demand data given in the table below confronts a monopolistic
competitor selling a given product and engaged in a given amount of product promotion. Compare the
marginal cost and marginal revenue of each unit of output and enter these figures in the table.
Output
Total
cost
Marginal
cost
Quantity
demanded
Price
Marginal
revenue
0
$ 50
0
$60
1
80
$_____
1
55
$_____
2
120
_____
2
50
_____
3
150
_____
3
45
_____
4
170
_____
4
40
_____
5
185
_____
5
35
_____
6
205
_____
6
30
_____
7
235
_____
7
25
_____
8
275
_____
8
20
_____
9
325
_____
9
15
_____
10
385
_____
10
10
_____
(a) At what output level and at what price will the firm produce in the short run? What will be the total
profit?
(b) What will happen to demand, price, and profit in the long run? How will the market adjust to achieve
this?
Output
Total
cost
Marginal
cost
Quantity
demanded
Price
Marginal
revenue
0
$ 50
0
$60
1
80
$30
1
55
$ 55
2
120
40
2
50
45
3
150
30
3
45
35
4
170
20
4
40
25
5
185
15
5
35
15
6
205
20
6
30
5
7
235
30
7
25
−5
8
275
40
8
20
−15
9
325
50
9
15
−25
10
385
60
10
10
−35
(a) The firm will produce 5 units at a price of $35. At this price and output level, MC=MR. The firm will
have a loss, or negative profit, of $10.
(b) Demand for the product and the price of the product will increase as firms exit the market due to the
incurred losses. This situation will ultimately increase the demand for the product until price equals
average cost and firms receive normal profits.
14. In the first graph below, illustrate the cost curves and demand conditions for a monopolistically competitive
firm making short-run profits. In the second graph, illustrate what those conditions are most likely to be in
the long run. Explain the major differences in the two graphs.
15. A monopolistically competitive firm is producing 50 units of output in the short run where marginal cost is
$3.00, average total costs are $5.00, price is $4.50, average variable cost is $4.00, and marginal revenue is
$3.00. How much profit is the firm making? What output recommendation would you make for the firm?
16. In the short run, a monopolistically competitive firm calculates that marginal cost is $6.00, average total
costs are $4.00, and marginal revenue is $3.00. The firm is charging a price of $6.00 and producing 200
units of output. How much profit is the firm making? What output recommendation would you make as
the company economist?
17. If monopolistically competitive firms have some control over their prices, why don’t they set price above
average total cost so they will realize an economic profit in the long run?
18. What are two real-world complications with the long-run conclusion about the representative firm in the
model of monopolistic competition?
In the long run, the representative firm in monopolistic competition should break even and earn only a
19. “In monopolistically competitive markets neither allocative nor productive efficiency is realized.” Explain.
20. Draw a graph of the cost curves for a monopolistically competitive firm that clearly illustrates the excess
capacity that arises in the long run. Explain why this excess capacity arises.
21. Evaluate this statement: “A monopolistically competitive industry would be more efficient if there were
fewer firms.”
22. Why do monopolistically competitive firms spend funds for product differentiation and advertising when
this practice only adds to the firm’s costs?
13–289
23. Explain how monopolistically competitive producers try to improve on the condition of just breaking even
in the long run. Is this improvement a benefit for consumers?
24. Explain why the economic analysis of monopolistic competition is so complex.
25. (Consider This) Discuss the phrase “variety is the spice of life” in reference to the monopolistically
competitive market structure.
Monopolistically competitive markets allow for product differentiation. When goods are differentiated
consumers have the ability to purchase goods that better meet their wants. For example, one consumer may
place significant weight on the price of a product, and not care as much about quality. The reverse may be
26. (Consider This) Monopolistically competitive markets are most likely to be found in societies considered to
27. (Last Word) Restaurants operate in monopolistically competitive markets. What characteristics allow them
to differentiate their products?
28. (Last Word) Discuss how an increase in the minimum wage effect a chain restaurant differently than a
small, mom and pop restaurant.