Exam 15: Monopolistic Competition

Comment on the following statement. "Monopolistically competitive firms will still produce in the short run even if the demand curve is below their average variable cost curve because the firms still maintain a degree of market power."

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Question 1

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This statement is false. If the demand curve lies below the average variable cost curve then monopolistically competitive firms, like any other firms, will find it in their interest to shut down in the short run since this will minimize losses. Market power has no bearing on the decision to shut down or remain in production.

What is meant by product differentiation?

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Question 2

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Product differentiation is a strategy that firms use to achieve market power. It involves producing products that have distinct positive identities in consumers' minds.

What is a commitment device?

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Question 3

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A commitment device represent actions that individuals take in one period to try to control their behavior in a future period.

What is the conclusion that behavioral economists have made about the amount of product variety in the market place?

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Question 4

What arguments can be made against product differentiation and advertising?

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Question 5

List the characteristics of a monopolistically competitive market.

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Question 6

Explain what should happen to the demand curve of monopolistically competitive firms as consumers increasingly perceive their products to be more like commodities. What industrial structure does this lead to?

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Question 7

Using Table 15.1 above fill in the fifth and sixth column by stating what distinguishes each industry from the other and by providing examples of each.

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Question 8

Using Table 15.1 above fill in the third and fourth column by stating whether price is a decision variable or not and the conditions of entry.

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Question 9

Cigarette advertising on our nation's radio and television stations has been prohibited for more than the past three decades by federal law. What is curious about this law is that it came into being not just because of the lobbying efforts of American Medical Association but also by the tobacco industry. Use economic logic to explain this apparent paradox.

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Question 10

Name the four types of market structure in order from most competitive to least competitive.

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Question 11

Using Figure 15.1, identify which demand curve would belong to that of a purely competitive firm and which would belong to a monopolistically competitive firm and explain your reasoning.

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Question 12

Firms owning brand names like Coca-Cola that are so well known continue spending hundreds of millions of dollars on advertising. Since this doesn't seem to be an effort to increase consumer awareness what is the possible explanation for this behavior?

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Question 13

If you travel to Mexico you will often see currency exchange businesses along the way as you approach the border. Even though each of these businesses is essentially "selling" the same product (i.e. Mexican pesos) how is it that some of them are able to charge more for the peso than others?

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Question 14

Comment on the following statement and evaluate it. "Differentiating a product separates you from your competitors so the market will see you as delivering unique benefits. But you don't want to be too different."

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Question 15

Compare perfect competition and monopolistic competition. In what ways are they similar? In what ways are they different?

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Question 16

Explain the characteristics of monopolistic competition. Explain how price and output are determined in monopolistic competition. Illustrate your answer with a graph.

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Question 17

Explain why demand for a monopolistically competitive firm's product is more elastic than the demand curve that a monopolist faces.

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Question 18

Describe three features of monopolistic competition that differentiate it from monopoly.

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Question 19

How do competitive firms try to achieve market power? What is one way they try to accomplish this?

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Question 20

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Comment on the following statement. "Monopolistically competitive firms will still produce in the short run even if the demand curve is below their average variable cost curve because the firms still maintain a degree of market power."

What is meant by product differentiation?

What is a commitment device?

What is the conclusion that behavioral economists have made about the amount of product variety in the market place?

What arguments can be made against product differentiation and advertising?

List the characteristics of a monopolistically competitive market.

Explain what should happen to the demand curve of monopolistically competitive firms as consumers increasingly perceive their products to be more like commodities. What industrial structure does this lead to?

Using Table 15.1 above fill in the fifth and sixth column by stating what distinguishes each industry from the other and by providing examples of each.

Using Table 15.1 above fill in the third and fourth column by stating whether price is a decision variable or not and the conditions of entry.

Name the four types of market structure in order from most competitive to least competitive.

Using Figure 15.1, identify which demand curve would belong to that of a purely competitive firm and which would belong to a monopolistically competitive firm and explain your reasoning.

Firms owning brand names like Coca-Cola that are so well known continue spending hundreds of millions of dollars on advertising. Since this doesn't seem to be an effort to increase consumer awareness what is the possible explanation for this behavior?

If you travel to Mexico you will often see currency exchange businesses along the way as you approach the border. Even though each of these businesses is essentially "selling" the same product (i.e. Mexican pesos) how is it that some of them are able to charge more for the peso than others?

Comment on the following statement and evaluate it. "Differentiating a product separates you from your competitors so the market will see you as delivering unique benefits. But you don't want to be too different."

Compare perfect competition and monopolistic competition. In what ways are they similar? In what ways are they different?

Explain the characteristics of monopolistic competition. Explain how price and output are determined in monopolistic competition. Illustrate your answer with a graph.

Explain why demand for a monopolistically competitive firm's product is more elastic than the demand curve that a monopolist faces.

Describe three features of monopolistic competition that differentiate it from monopoly.

How do competitive firms try to achieve market power? What is one way they try to accomplish this?

The Scope and Method of Economics

The Economic Problem: Scarcity and Choice

Demand, Supply, and Market Equilibrium

Demand and Supply Applications

Elasticity

Household Behavior and Consumer Choice

The Production Process: the Behavior of Profit-Maximizing Firms

Short-Run Costs and Output Decisions

Long-Run Costs and Output Decisions

Input Demand: the Labor and Land Markets

Input Demand: the Capital Market and the Investment Decision

General Equilibrium and the Efficiency of Perfect Competition

Monopoly and Antitrust Policy

Oligopoly

Externalities, Public Goods, and Social Choice

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