Exam 11: Market Entry and Monopolistic Competition

In long-run equilibrium,a monopolistically competitive firm's price is equal to its marginal cost.

Recall the application on happy hour pricing,each bar has a local monopoly within its neighborhood,but faces competition from other bars outside its neighborhood.The bars respond by decreasing its prices,in what happens to the demand curve facing each bar?

A monopolistically competitive market is characterized by:

In a monopolistically competitive industry,there are many firms because:

What encourages firms to enter markets?

In the long run,which two curves are tangent for a firm in monopolistic competition?

What is meant by product differentiation? Why is it employed by firms?

In monopolistic competition,the firm can increase price and still sell some output because:

As new firms enter an industry the price charged will increase.

Why would Dunkin' Donuts want to keep their product different from Krispy Kreme?

By using celebrities to promote a product,a firm is attempting to:

Which type of profit maximizing firm will choose to produce where price equals marginal cost?

What happens in the long run if firms in a monopolistically competitive industry are earning positive economic profits? Explain.

Which of the following characteristics is shared by both monopolistically competitive markets and perfectly competitive markets?

The main purpose of advertising is to make a product appealing.

Which type of profit maximizing firm will choose to produce where marginal revenue equals marginal cost?

How is it possible that monopolistically competitive firms have market power and yet cannot earn long-run profit?

As a result of product differentiation,a firm in a monopolistically competitive market:

Additional Application For many years North Carolina-based Krispy Kreme Doughnuts have been the choice of many Southerners.But now rival Dunkin' Donuts is working on changing the way Southerners expect a doughnut to taste.The Northeastern-based Dunkin' Donuts has plans to become a national brand in the next 15 years by tripling the number of stores in the U.S.The difference is in the doughnut itself.Krispy Kreme offers a glazed,hot,lighter doughnut while the product of Dunkin' Donuts can be described as "thicker and cakier." Do consumers notice the difference? Rosemary Evans from Alabama states,"Dunkin' Donuts just don't have much flavor." And Jack Lehnhart from Ohio says Krispy Kremes are "wax doughnuts." As the size of the industry grows the efforts to differentiate each product remain strong.Dunkin' Donuts focuses on coffee and baked goods as important components in its long term business plan.When discussing the two companies and their approaches to success,the brand officer at Dunkin' Donuts succinctly said,"We're very different." Just take note of the different ways they spell the product they produce! Source: Beth Rucker,"Dunkin' Donuts Raids Krispy Kreme's Turf," October 22,2006,http://hosted.ap.org/dynamic/stories/D/DONUT_WARS,accessed 10/30/2006. -What market structure best describes the doughnut industry discussed in the article above?

An Italian restaurant is profit-maximizing firm in monopolistic competition differs from a firm in perfect competition because the firm in monopolistic competition: