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Chapter 13 - Monopolistic Competition and Oligopoly
13-1
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Chapter 13 - Monopolistic Competition
McConnell Brue Flynn 21e
DISCUSSION QUESTIONS
1. How does monopolistic competition differ from pure competition in its basic characteristics?
From pure monopoly? Explain fully what product differentiation may involve. Explain how the
entry of firms into its industry affects the demand curve facing a monopolistic competitor and
how that, in turn, affects its economic profit. LO1
2. Compare the elasticity of a monopolistic competitor’s demand with that of a pure competitor
and a pure monopolist. Assuming identical long-run costs, compare graphically the prices and
outputs that would result in the long run under pure competition and under monopolistic
competition. Contrast the two market structures in terms of productive and allocative efficiency.
Explain: “Monopolistically competitive industries are populated by too many firms, each of
which produces too little.” LO2
9.6 (pure competition) and Figure 11.1 (monopolistic competition). Price is higher and
output lower for the monopolistic competitor. Pure competition: P = MC (allocative
Chapter 13 - Monopolistic Competition and Oligopoly
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3. “Monopolistic competition is monopolistic up to the point at which consumers become willing
to buy close-substitute products and competitive beyond that point.” Explain. LO2
4. “Competition in quality and service may be just as effective as price competition in giving
buyers more for their money.” Do you agree? Why? Explain why monopolistically competitive
firms frequently prefer nonprice competition to price competition. LO2
5. Critically evaluate and explain: LO2
a. In monopolistically competitive industries, economic profits are competed away in the long
Chapter 13 - Monopolistic Competition and Oligopoly
13-3
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Answer:
a. The first part of the statement may well be true, but it does not lead logically to the
second part. The criticism of monopolistic competition is not related to the profit level
but to the fact that the firms do not produce at the point of minimum ATC and do not
equate price and MC. This is the inevitable consequence of imperfect competition and
its downward sloping demand curves. With P > minimum ATC, productive efficiency
is not attained. The firm is producing too little at too high a cost; it is wasting some of
its productive capacity. With P > MC, the firm is not allocating resources in
accordance with society’s desires; the value society sets on the product (P) is greater
than the cost of producing the last item (MC).
b. The statement is often true, since competition of close substitutes tends to compete
price of the average firm down to equality with ATC. Thus, there is no economic
profit. However, the firm is producing where its (moderately) monopolistically
downward-sloping demand curve is tangent to the ATC curve, short of the point of
minimum ATC and thus at a higher than purely competitive price. In other words, it is
at a “monopolistic” price.
6. LAST WORD What would you expect to happen to the proportion of big chain restaurants
relative to mom and pop restaurants in a town that lowered its minimum wage? Will the
proportion change due to exits or entrances? Which type of restaurant will see more in the way of
exits or entrances? Why? LO4
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Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
REVIEW QUESTIONS
a. 10.
b. 100.
c. 1,000.
d. 10,000.
2. In the small town of Geneva, there are 5 firms that make watches. The firms’ respective output
b. 70.
d. 100.
3. Which of the following best describes the efficiency of monopolistically competitive firms?
Chapter 13 - Monopolistic Competition and Oligopoly
13-5
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
Answer: D. Neither allocatively efficient nor productively efficient.
Monopolistically competitive firms are neither allocatively efficient nor productively
efficient. Both types of inefficiency have the same cause: product differentiation. That is
true because it is product differentiation that gives each firm in a monopolistically
competitive industry its small share of monopoly power. With that monopoly power
comes a downsloping MR curve that when intersected with the firm’s upsloping MC
curve results in a profit-maximizing output level that is inefficiently low. Productive
efficiency is when the firm produces where price = minimum ATC. Due to product
differentiation these firms produce at a lower quantity. Allocative efficiency is when the
firm produces where P = MC. Due to the downward sloping MC curve, price will be
higher than MC.
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Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written
consent of McGraw-Hill Education.
PROBLEMS
1. Suppose that a small town has seven burger shops whose respective shares of the local
hamburger market are (as percentages of all hamburgers sold): 23%, 22%, 18%, 12%, 11%, 8%,
and 6%. What is the four‐firm concentration ratio of the hamburger industry in this town? What is
the Herfindahl index for the hamburger industry in this town? If the top three sellers combined to
form a single firm, what would happen to the four‐firm concentration ratio and to the Herfindahl
index? LO5
2. Suppose that the most popular car dealer in your area sells 10 percent of all vehicles. If all
other car dealers sell either the same number of vehicles or fewer, what is the largest value that
the Herfindahl index could possibly take for car dealers in your area? In that same situation, what
would the four‐firm concentration ratio be? LO5
Chapter 13 - Monopolistic Competition and Oligopoly
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3. Suppose that a monopolistically competitive restaurant is currently serving 230 meals per day
(the output where MR = MC). At that output level, ATC per meal is $10 and consumers are
willing to pay $12 per meal. What is the size of this firm’s profit or loss? Will there be entry or
exit? Will this restaurant’s demand curve shift left or right? In long‐run equilibrium, suppose that
$8. What is the size of the firm’s profit? Suppose that the allocatively efficient output level in
long-run equilibrium is 200 meals. Is the deadweight loss for this firm greater than or less than
$60? LO5
