EC120 Lecture Notes - Lecture 9: Monopolistic Competition, Profit Maximization, Product Differentiation

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rubyimpala527

14 Dec 2015

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Dsecribes a market where: many sellers many firms competing for same group of customers, product differentiation- each firm produces a good that is slightly different from the other firms. The monopolistic competitive firm allows a monopolists rule for profit maximization: It chooses the quantity at which mr equals mc and then uses its demand curve to find the price consistent with that quantity. Product efficiency- a firm produces a quantity such that it"s at the lowest average cost per unit. Condition for this is the firm is to produce an output where mc is equal to p. output is less that socialally accepted optimum point. Two characterises describe long run equilibrium in a monopolistic competitive market: price exceeds mc, price equals atc, This implies a deadweight lost (similar to that caused by monopolies) The number of firms in the market may not be the ideal one.

Related Questions

21)

Compared to the results in a perfectly competitive market, a monopoly does which of the following?

	It charges a higher price.
	It charges a price greater than the marginal cost.
	It produces less output.
	All of the above
	None of the above

22)

"X-inefficiency" refers to the idea that

	government restrictions on competition create a monopoly, which results in inefficiency.
	the cost of rent-seeking activity should be added to the welfare cost of monopoly.
	Generation X is less efficient due to a lack of competitive spirit.
	a lack of competitive pressure results in a monopoly not keeping its costs down to the lowest possible level.
	price discrimination results in inefficiently low cross-elasticities of demand.

23)

Firms in which of the following market structures can engage in price discrimination?

	monopoly
	oligopoly
	monopolistic competition
	All of the above
	None of the above

24)

Monopolistic competition and perfect competition are in all of the following ways except

	Barriers to entry are low in both
	There are many firms in both
	Firms in both produce the output level where MR=MC
	Nonprice competition is important in both

25)

To get rid of excess capacity from the monopolistic competition in the long run, what would have to be given up?

	Free entry and exit.
	economic rent
	resource allocative efficiency
	differentiated product
	productive efficiency

taupeant454

If I were to open a business, I would choose the monopolistic competitive market.

Under monopolistic competition, with low barriers to entry and low capital requirements, firms are free to enter into or exit from the industry at any time. In addition, in monopolistic competition, large numbers of sellers offer closely related but not homogeneous products. This is the reason why each firm has a limited share of the market and has limited control over the market price. Thus, changes in one firmâs output have only a slight impact on market price or it also means that firms in monopolistic competition are price setters rather than price takers. In the short run, firms can make excess economic profits. However, as barriers to entry are low, other firms have an incentive to enter the market, increasing the competition, until overall economic profit is zero.

In order to yield the greatest profit, a firm engaged in monopolistic competition will focus on product quality, location, service, and advertising, since the major tool of competition is product differentiation. For example, if I opened a restaurant, the restaurant would have a menu with different dishes and different prices to other restaurants nearby and the prices of the dishes also would depend on its location, the food ingredients, the food quality, and the speed of service. With the purpose of gaining profit for the restaurant, I would try to be dynamically efficient, innovative and develop new ways to attract and retain local custom as well as maintain cost efficiency, which could keep the cost below the average profit.

I need a peer reply for this discussion and it should be 250 at least

bronzefrog162

The statements below are about monopolistic competition. Indicate whether each statement is true or false by moving the true or false labels to the appropriate boxes.

1. A monopolistically competitive firm may be able to distinguish itself from other firms by adjusting the physical attributes of its product, by offering a distinctive level of service, or by selecting a convenient location. 2. Product differentiation enables a monopolistically competitive firm to have some control over the price of its product. 3. In the long run each monopolistically competitive firm produces a level of output that results in allocative efficiency. 4. In the long run each monopolistically competitive firm produces a level of output that results in productive efficiency. 5. To maintain a competitive edge and earn economic profits, a monopolistically competitive firm has an incentive to improve its product. 6. Compared with purely competitive markets, under monoplistic competition consumers with a diversity of tastes can benefit from the opportunity to choose from a greater range of products and services. 7. In order to maximize its profits, each monopolistically competitive firm must determine the price of its product, how to differentiate its product, and how much it will spend on advertising.

EC120 Lecture Notes - Lecture 9: Monopolistic Competition, Profit Maximization, Product Differentiation

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