Exam 16: Monopolistic Competition

The Mikati Philippines Hard Rock Cafe has the exact same menu as the Hard Rock Cafe in New York. This is an example of a brand name enhancing market efficiency for U.S. tourists visiting the Philippines.

A profit-maximizing firm in a monopolistically competitive market can earn positive, negative, or zero profits in the short run.

Scenario 16-6 ​ Dean goes to the grocery store to buy chips and soda for a party. He purchases brand name products even though generic versions are available at lower prices. His friend John says he was irrational to spend more for a nearly identical product. His friend Martina agreed with Dean's decision to spend more for the brand name products. -Refer to Scenario 16-6. If Dean bought the brand name because of advertising he saw for the product, a defender of advertising would say

The market structure in which each firm has a monopoly over the product it makes, but many other firms make similar products that compete for the same customers is called

In a long-run equilibrium, firms in both perfectly competitive markets and monopolistically competitive markets produce a quantity below the efficient scale of production.

Considering perfect competition, monopolistic competition, and monopoly, which of the market structures results in production of the welfare-maximizing level of output?

Which market structure(s) is(are) imperfectly competitive?

Professional organizations (for example, the American Medical Association and the American Bar Association) have been active advocates for regulation to restrict the right of professionals to advertise. Describe what economic incentives might exist for existing professionals to restrict advertising.

Figure 16-2 This figure depicts a situation in a monopolistically competitive market. -Refer to Figure 16-2. How much consumer surplus will be derived from the purchase of this product at the monopolistically competitive price?

​In the long run, a monopolistically competitive firm's demand curve becomes more elastic and shifts to the left

Figure 16-11 ​ ​ -Refer to Figure 16-11. Use the letters to identify the area of total cost for this firm.

The "monopoly" in monopolistically competitive markets is most likely a result of firms having some pricing power due to product differentiation.

When a new firm considers entering a market, it takes into account only the profit it would make. What are the two external effects that occur in the market that the firm does not consider?

Scenario 16-3 Consider the problem facing two firms, YumYum and Bertollini, in the frozen food market. Each firm has just come up with an idea for a new "frozen meal for two" which it would sell for $9. Assume that the marginal cost for each new product is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 1.5 million consumers to try its new product. YumYum has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 1.5 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Bertollini's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Bertollini estimates that its initial 1.5 million customers will buy one unit of the product each month in the coming year, for a total of 18 million units. -Refer to Scenario 16-3. If YumYum decides to advertise its product it can expect to

Empirical evidence suggests that advertising usually leads to an increase in the price for advertised products.

Due to free entry and exit in monopolistic competition, in the long run price must be equal to

Figure 16-6 The figure is drawn for a monopolistically competitive firm. ​ -Refer to Figure 16-6. In response to the situation represented by the figure, we would expect

Figure 16-6 The figure is drawn for a monopolistically competitive firm. ​ -Refer to Figure 16-6. If the firm is maximizing profit, the firm is in

Table 16-5 A monopolistically competitive firm faces the following demand schedule for its product. In addition, the firm has total fixed costs equal to 20. Price Quantity \ 30 1 \ 26 2 \ 22 3 \ 18 4 \ 14 5 \ 10 6 \ 6 7 -Refer to Table 16-5. If this firm has a constant marginal cost of $7, what is the profit-maximizing level of output?

Figure 16-9 ​ ​ -Refer to Figure 16-9. If this firm profit-maximizes, how much profit or loss will it earn?