CS100 Lecture 19: Chapter 16

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Monopolistic competition: a market structure in which many firms sell products that are similar but not identical. Earning profits in the short run: the firm faces a downward-sloping d curve, at each q, mr < p, to maximize profit, firm produces q where mr = mc, the firm uses the d curve to set p. Losses in the short run: for this firm, p < atc at the output where mr = mc, the best this firm can do is to minimize its losses. Short run: under monopolistic competition, firm behavior is very similar to monopoly. In the long run: entry and exit occurs until p = atc and profit = zero, 1. Excess capacity: the monopolistic competitor operates on the downward-sloping part of its atc curve, produces less than the cost-minimizing output, under perfect competition, firms produce the quantity that minimizes atc. This quantity of output is defined as efficient scale of production: 2.

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