Economics Chapter 12 Homework Product differentiation is necessary for monopolistic competition in order for each firm to have some market power

Unlock access to all the studying documents.

View Full Document

where MR “ MC and charges the highest price on

the demand curve at that quantity. So, the firm

can earn profits in the short run, like a mono poly.

However, because there are no barriers to

entry (as in perfect competition), there are zero

acts more like a competitive market. Because there

are no barriers to entry, profits are competed away,

and there are zero profits in the long run.

3. Recall that the most efficient scale of production

MR “ MC. At this point, P # MC, which means

there are still people willing to buy the unit for

more than the cost of production. So, the monop-

olistically competitive firm is producing too little

in terms of efficiency.

4. In the short run, it’s pos si ble for a monopolistic

Questions for Review

1. Product differentiation is necessary for monopo-

listic competition in order for each firm to have

some market power. This way, each firm faces a

downward- sloping demand curve.

restaurants, Chinese restaurants, steak houses, and

so forth. These restaurants all differ by the types

of food they serve. Even two restaurants that

serve the same type of food— say, Chinese— could

differ by location. A restaurant in the heart of the

Hints and Common Errors: Sometimes,

it’s useful to think about why assumptions exist

for dif fer ent markets and how they come into

play. This can help you keep the dif fer ent markets

straight. For example, to remember why product

differentiation exists in monopolistic competition

2. Monopolistic competition takes some aspects

from perfect competition and some aspects from

mono poly. In monopolistic competition, there are

several firms, but each firm faces a downward-

sloping demand curve (like a mono poly). Within

its own market, each firm acts like a small mono-

poly and has some market power. It produces

Solutions to Chapterfi12 Text Prob lems

Quantity

goods are homogeneous, and there are plenty of

perfectly elastic because there are more limited

substitutes for a firm’s product in comparison to

perfect competition. However, the demand is not

as inelastic as in a mono poly because there are

some substitutes in the market, even though they

aren’t perfect substitutes.

Hints and Common Errors: When

comparing dif fer ent types of markets, try not to

7. Advertising can benefit society by informing con-

sumers about products or product characteristics

that they wouldn’t other wise know about. This

gives consumers more information so they are

better able to make decisions about what to buy.

Advertising can be harmful because it

8. From a firm’s point of view, selling the same

product both under its own name and, more

cheaply, as a generic is an opportunity to practice

price discrimination by charging brand- conscious

customers a premium. Of course the firm will

want to keep quiet about this practice to protect

Study Prob lems

2. a. Local corn farmers would be considered a com-

petitive market, not monopolistic competition.

There are lots of sellers of corn, and this good

does not vary much from farm to farm.

However, in the long run, because there are no barriers

ELR

P = ATC

Price

ATCMC

5. It’s true that monopolistic competition produces

an inefficient result, and monopolistically com-

petitive firms do not produce at a level where

P “ MC. However, because there are no barriers to

entry, none of these firms can make profits in the

Price

The previous graph shows typical firm demand

curves for the three dif fer ent markets. The mono–

poly faces the most inelastic demand curve

because there are no good substitutes for the

product it produces. The perfectly competitive

firm faces the most elastic demand curve because

will be producing at the lowest point of the

ATC curve. This means it has no excess capac–

ity. A firm in monopolistic competition, in

contrast, does not produce at the minimum of

ATC. Because it faces this downward- sloping

listically competitive firm has excess capacity.

Because a monopolistically competitive firm

has excess capacity, this means that it is not

operating at the minimum of ATC. A perfectly

competitive firm, in contrast, operates at the

demand for that product in general might

increase, but demand for the par tic u lar firm’s

product won’t increase by much. In contrast,

it makes a lot more sense for a monopolisti-

cally competitive firm to advertise. If this firm

tricity com pany to compete against the TVA.

c. Pizza delivery can be considered monopolistic

competition. There are many dif fer ent firms

that produce slightly differentiated products.

There might be a local pizza joint that serves

Kroger, in contrast, is known for low prices.

Trader Joe’s, a specialty store, is known for its

frozen food and snack se lection. Each grocery

store has a dif fer ent style and may appeal to a

dif fer ent demographic.

3. a. The markup will be higher for a monopolisti-

cally competitive firm. Remember that the

markup is the difference between price and

marginal cost. Because a firm in monopolistic

competition faces a downward- sloping

charges the highest price it can, which comes

offof the demand curve. However, because

D # MR, this means P # MC at the profit–

maximizing point.

5. a.

QMC

Econo burgers

ATC

Price

Quantity

burgers and forces the firm to produce at the

efficient level, then it will force the firmto

produce Qe at price Pe. The price will be

lower, and the output will be higher. Also,

atthis point, the price the firm charges will

be lower than the average cost, which means

the firm will be earning a negative economic

profit.

7. D1 is the demand curve consistent with a

competitive firm facing demand D2 would be

making positive profits, which is pos si ble for the

firm only in the short run. Though D3 indicates

a firm that makes zero profits, D3 is a perfectly

elastic demand curve. A perfectly elastic

potential firms that this industry is popu lar,

and resources should be devoted here. Firms

enter, pushing down price and driving profits

to zero. This happens in both monopolistic

competition and perfect competition because

there are no barriers to entry.

g. Perfect competition is efficient; monopolistic

competition is not. Remember that an effi-

cient market produces where P “ MC. In the

more like perfect competition, which is

efficient.

Hints and Common Errors: All these

characteristics are easier to see graphically. Take

that this demand must be tangent to the ATC

curve. In perfect competition, demand is

perfectly elastic. In the long run, because there

are zero profits, this demand must equal the

minimum of ATC.

4. In both competitive markets and monopolistic

competition, firms maximize profits. They do this

by setting MR “ MC.

For competitive markets, P “ MR “ D for the

firms. This is because there are lots of buyers and

settingMC “ P. This is why P “ MC in competitive

markets.

Now let’s consider monopolistic competition.

A firm in monopolistic competition has some

market power and faces a downward- sloping

demand curve. Like a mono poly, the MR curve is

c. Titleist has a much stronger incentive to main-

tain quality control in the production pro cess

9. A small- town restaurant serves a small popula-

tion, whereas a restaurant in a large town enjoys

a higher demand since it has a larger population

to serve. As a result, there is not much incentive

for a business owner to open a restaurant in a

small town because he or she would evaluate its

competitors before entering the market. This lets

Taste of India act as a mono poly, or gives it more

market power. On the other hand, Indian Cuisine

in a large town faces competition as more and

more restaurants try to tap customers’ dollars. So

8. a.

Price

Quantity

Price

(generic

golf balls)

MC LRATC