ECON 1000 Lecture Notes - Monopolistic Competition, Product Differentiation, Demand Curve

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Monopolistic competition is a market with the following characteristics: Firms compete on product quality, price, and marketing. Firms are free to enter and exit the industry. Firms in monopolistic competition practice product differentiation, which means that each firm makes a product that is slightly different from the products of competing firms. Product differentiation enables firms to compete in three areas: quality, price, and marketing. Because firms produce differentiated products, each firm has a downward-sloping demand curve for its own product. Differentiated products must be marketed using advertising and packaging. There are no barriers to entry in monopolistic competition, so firms cannot earn an economic profit in the long run. The firm produces the quantity at which marginal revenue equals marginal cost and sells that quantity for the highest possible price. It earns an economic profit (as in this example) when p > atc. In the long run, economic profit induces entry.

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12) Which of the following types of economic regulation is most likely to encourage firms to engage in cost cutting? A) entry and output restrictions B) rate of return regulation C) price cap regulation D) None of the above encourages cost cutting.

13) In monopolistic competition, firms compete on the basis of A) price only. B) price, quality, and marketing.
C) marketing only. D) quality and marketing, but not price.

14) Which of the following statements is FALSE concerning monopolistic competition? A) There are many firms. B) Firms sell a differentiated product. C) Each firm's actions influence rival firms. D) Firms are free to enter and exit.

25. One difference between perfect competition and monopolistic competition is A) firms in a perfectly competitive market produce similar but slightly different products. B) in perfect competition, the product produced has no close substitutes. C) monopolistic competition has barriers to entry, whereas perfect competition has none. D) a small number of firms compete in a monopolistically competitive market and a large number of firms compete in a perfectly competitive market. E) firms in monopolistic competition have some degree of market power.

1. A monopoly market structure is characterized by

a. large number of firms, standardized products, easy entry and exit.

b. large number of firms, differentiated products, easy entry and exit.

C. small number of firms, standardized or differentiated products, difficult entry.

d. one firm, a unique product without close substitutes, and impossible entry.

e. one firm, differentiated product, impossible entry.

2. Which of the following is not a characteristic of monopolistic competition?

a. Differentiated products

b. A downward-sloping demand curve for individual firms

c. Firms that are price makers

d. Impeded entry into the industry

e. A large number of firms

3. One factor that distinguishes oligopoly from other market structures is

a. the ease of entry into the market.

b. the interdependence of firms.

c. the slope of the demand curve.

d. the degree of product differentiation.

e. the amount of advertising expenditures.

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ECON 1000 Lecture Notes - Monopolistic Competition, Product Differentiation, Demand Curve

ECON 1000 Full Course Notes

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