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ECON 1B03 Lecture Notes - Lecture 10: Monopolistic Competition, Demand Curve, Profit Maximization

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jadekangaroo683
4 Apr 2016
School
McMaster University
Department
Economics
Course
ECON 1B03
Professor
Hannah Holmes

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ECON 1B03 Full Course Notes
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ECON 1B03 Full Course Notes
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Document Summary

Firms are price setters to some degree: there are many sellers, products are slightly different, no barriers to entry. Encourages new firms to enter the market. Increases the number of products offered: decreases the demand of existing firms, left shift in existing firms mr and demand curve, decreases profits. Encourages firms to exit the market: decreases the number of products offered. Increases the demand of remaining firms: right shift in remaining firms mr and demand curve. Firms continue to enter/exit: until firms make zero. Economic profits: occurs when p = atc. Demand curve is tangent to atc curve: cant intersect with min atc, demand curve is downward sloping portion. Similar to a monopoly: p > mc (selling price, mr = mc (profit maximization, mr < p (because of downward slope) Similar to perfect competition: p = atc (lr equilibrium, zero economic profits (dree entry and exit) Different from perfect competition: q produced in the lr.

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Related Questions

1) When positive economic profits exist in an industry:

the market price of the good produced by the industry is less than the marginal cost faced by the industry.
the market price of the good produced by the industry is less than the average total cost of the industry.
there is an exit of firms from the industry.
resources flow from less productive uses to that particular industry.

2) When price is less than the firms' minimum average total cost, ________.

firms' profits are likely to be maximum
prices are likely to fall further
new firms will enter the market
existing firms will leave the market

3) The entry of new firms into a perfectly competitive market will cause:

an increase in the profitability of existing firms.
a decrease in the profitability of existing firms.
a right shift of the demand curve of the good being produced by the firms.
a left shift of the demand curve of the good being produced by the firms.

4) Entry of new firms into an existing market causes:

a downward movement along the market supply curve.
a leftward shift of the market supply curve.
an upward movement along the market supply curve.
a rightward shift of the market supply curve.

5) The incentive for new firms to enter into a perfectly competitive market is primarily the:

high level of government intervention in the market.
large number of buyers in the market.
large number of existing firms in the market.
positive profits observed for the existing firms in the market.


1.
If firms in a monopolistically competitive market are earningpositive profits,
A) firms will likely be subject to regulation.
B) barriers to entry will be strengthened.
C) some firms must exit the market.
D) new firms will enter the market.
2.

Panel c in the set of figures shown is consistent with a firm in amonopolistically competitive market that is


A) earning profit and is in both short-run and long-runequilibrium.
B) earning economic profit and is in short-run equilibrium, but notlong-run equilibrium.
C) earning profit and is in long-run equilibrium, but not short-runequilibrium.
D) earning a negative profit and is not in equilibrium.
3.
When a profit-maximizing firm in a monopolistically competitivemarket is producing the long-run equilibrium quantity,
A) its marginal revenue will exceed its marginal cost.
B) its average revenue will equal its marginal cost.
C) it will be earning positive economic profits.
D) its demand curve will be tangent to its average-total-costcurve.
4.
Monopolistic competition differs from perfect competition becausein monopolistically competitive markets
A) each of the sellers offers a somewhat different product.
B) strategic interactions between firms is vitally important.
C) there are barriers to entry.
D) all firms can eventually earn economic profits.
5.
The free entry and exit of firms in a monopolistically competitivemarket guarantees that
A) economic losses can persist into the long run, but not economicprofits.
B) both economic profits and economic losses can persist into thelong run.
C) economic profits can persist into the long run, but not economiclosses.
D) both economic profits and economic losses disappear in the longrun.
6.


Panel (a) shows a profit-maximizing monopolistically competitivefirm that is

A) All answers are correct
B) earning a zero profit.
C) charging a price that is equal to average total cost.
D) in long-run equilibrium.
7.
Since a firm in a monopolistically competitive market faces a
A) perfectly elastic demand curve, it will always operate withexcess capacity.
B) downward-sloping demand curve, it will always operate atefficient scale.
C) perfectly inelastic demand curve, it will always operate atefficient scale.
D) downward-sloping demand curve, it will always operate withexcess capacity.
8.
In a monopolistically competitive market,
A) firms can enter or exit the market without restriction.
B) each firm takes the price of its product as given.
C) each firm produces a product that is essentially identical tothe products of other firms in the market.
D) there are only a few sellers.
9.
The fact that there is a great deal of advertising of men’s shavingproducts indicates that
A) it costs firms very little to produce those products.
B) the market for those products is perfectly competitive.
C) those products are highly differentiated.
D) All answers are correct
10.
A profit-maximizing firm in a monopolistically competitive marketdiffers from a firm in a perfectly competitive market because thefirm in the monopolistically competitive market
A) has no barriers to entry.
B) faces a downward-sloping demand curve for its product.
C) faces a horizontal demand curve at the market clearingprice.
D) is characterized by market share maximization.

13. If a monopolistic competitor is producing an output for which marginal revenue is $40 and the marginal cost is $32, to maximize profits the firm should
A. decrease the level of output.
B. keep the level of output constant.
C. continue to make $8 per unit.
D. increase the level of output.

14. A monopolistic competitor will not make an economic profit unless
A. it engages in price discrimination.
B. its marginal revenue is greater than its marginal cost.
C. it faces an inelastic demand curve.
D. its price is greater than its average total cost.

15. The definition of monopolistic competition includes
A. few firms and ease of entry and exit.
B. few firms and barriers to entry and exit.
C. many firms and barriers to entry and exit.
D. many firms and ease of entry and exit.

16. Characteristics of monopolistic competition include all of the following except
A. significant barriers to entry.
B. a relatively large number of sellers and buyers.
C. small market share for each seller.
D. differentiated products.