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Lecture 13

ECON 402 Lecture Notes - Lecture 13: Maybelline, Monopolistic Competition, Marginal Revenue

Course Code
ECON 402
William Crowley

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1.1 Unlike in perfectly competitivemarkets, in monopolistically competitivemarkets, firms facedownward-
sloping demandcurves, and the products competitors sell are differentiated.
For example, apples and oranges are sold in perfectly competitive markets and Maybelline cosmetics and
Ralph Lauren cologne are sold in monopolistically competitive markets.
1.3 With adownward-sloping demandcurve, average revenue is equal to price, because Average revenue
is, by definition, always equal to price: AR =TR /Q =P *Q /Q=P. With adownward-sloping demandcurve,
marginal revenue is below price because the firm must lower its price to sell additional units
2.2 Stephen's profits will change by 68.5-60=8.5dollars
2.3 Profit equals to (3.25-3)*350=87, 5 $
3.2 The entry of new firms cause the demand curve of an existing firm in a monopolistically competitive
market to shift to the left because each will have a smaller share of the existing market and become more
elastic since consumers will have additional choices.
3.4 As new firms enter the market, a monopolistically competitive firm can maintain profits by each will
have a smaller share of the existing market; consumers will have additional choices or discovering new
ways of differentiating its product.
4.2 A monopolistically competitive firm is not productively efficient because it produces a level of output
where average total cost is not at a minimum. A monopolistically competitive firm has excess capacity in
the sense that if it increased output beyond the quantity associated with profit maximization, it could
produce at a lower average cost.
4.3 A monopolistically competitive firm is not allocative efficient because price exceeds marginal cost
5.1 Marketing is all the activities necessary for a firm to sell a product including advertising, product
design, and product distribution.
6.1 Monopolistically competitive firms will be profitable to the extent that they differentiate their product
and produce at lower average cost than competitors.
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