Study Guide for Economics Essay example

Words: 7370
Pages: 30

B. Answers to Short-Answer, Essays, and Problems

1. What are the major features of monopolistic competition compared to pure competition and pure monopoly?

In monopolistic competition, there are a relatively large number of firms, not the thousands of firms as in pure competition. The monopolistically competitive firms produce differentiated products, not the standardized products of pure competition. Product differentiation means that monopolistic competitors engage in some price competition because they have some limited “price making” ability based on the less elastic demand for their particular product. This demand, however, is more elastic than the demand for monopolists’ products. Monopolistic competitors, unlike most
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At that level, marginal revenue ($75) is greater than marginal cost ($45), but as close to equality as possible. Total profit will be $270 ($480–$210). (b) The demand for the firm’s product will decrease until price equals average cost and total profits are zero. [text: E pp. 488-490; MI pp. 230-232]

8. In the first graph below, illustrate the cost curves and demand conditions for a monopolistically competitive firm making short-run profits. In the second graph, illustrate what those conditions are most likely to be in the long run. Explain the major differences in the two graphs. In the short run, the firm can earn economic profits. In the long run, the potential for economic profits will be reduced as other firms enter the industry or compete more intensively with product differentiation and development. Only a normal profit is likely to be earned in the long run. Price will also be greater than the minimum of average cost. [text: E pp. 488-490; MI pp. 230-232]

9. A monopolistically competitive firm is producing 50 units of output in the short run where marginal cost is $3.00, average total costs are $5.00, price is $4.50, average variable cost is $4.00, and marginal revenue is $3.00. How much profit is the firm making? What output recommendation would you make for the firm?

The firm should not change