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Questions and Answers
Assume that the market for cage-free eggs is perfectly competitive. All else equal, as more farmers choose to produce and sell cage-free eggs, what is likely to happen to the equilibrium price of the eggs and profits of these farmers in the long run?
Assume that the market for cage-free eggs is perfectly competitive. All else equal, as more farmers choose to produce and sell cage-free eggs, what is likely to happen to the equilibrium price of the eggs and profits of these farmers in the long run?
- The equilibrium price is likely to increase and profits are likely to increase.
- The equilibrium price is likely to remain unchanged and profits are likely to increase.
- The equilibrium price is likely to decrease and profits are likely to decrease. (correct)
- The equilibrium price is likely to increase and profits are likely to remain unchanged.
Which of the following is not a characteristic of a perfectly competitive market structure?
Which of the following is not a characteristic of a perfectly competitive market structure?
- There are restrictions on exit of firms. (correct)
- All firms sell identical products.
- There are a very large number of firms that are small compared to the market.
- There are no restrictions to entry by new firms.
Perfect competition is characterised by all of the following except:
Perfect competition is characterised by all of the following except:
- Heavy advertising by individual sellers. (correct)
- Sellers are price takers.
- Homogeneous products.
- A horizontal demand curve for individual sellers.
Jason, a high-school student, mows lawns for families in his neighborhood. The going rate is $12 for each lawn-mowing service. Jason would like to charge $20 because he believes he has more experience mowing lawns than the many other teenagers who also offer the same service. If the market for lawn mowing services is perfectly competitive, what would happen if Jason raised his price?
Jason, a high-school student, mows lawns for families in his neighborhood. The going rate is $12 for each lawn-mowing service. Jason would like to charge $20 because he believes he has more experience mowing lawns than the many other teenagers who also offer the same service. If the market for lawn mowing services is perfectly competitive, what would happen if Jason raised his price?
If the market price is $30, the firm's profit-maximizing output level is:
If the market price is $30, the firm's profit-maximizing output level is:
If the market price is $30 and if the firm is producing output, what is the amount of its total variable cost?
If the market price is $30 and if the firm is producing output, what is the amount of its total variable cost?
If the market price is $20, what is the firm's profit-maximizing output?
If the market price is $20, what is the firm's profit-maximizing output?
Many car owners and dealers describe their different cars for sale in the local newspapers and list their asking prices. Many people shopping for a used car consider the different choices listed in the paper. The absence of which condition prohibits this market from being described as perfectly competitive?
Many car owners and dealers describe their different cars for sale in the local newspapers and list their asking prices. Many people shopping for a used car consider the different choices listed in the paper. The absence of which condition prohibits this market from being described as perfectly competitive?
Does a competitive long-run equilibrium require cost-minimization?
Does a competitive long-run equilibrium require cost-minimization?
If children go to school and become productive members of society,
If children go to school and become productive members of society,
Suppose the current market equilibrium output of Q1 is not the economically efficient output because of an externality. The economically efficient output is Q2. In that case, the diagram shows:
Suppose the current market equilibrium output of Q1 is not the economically efficient output because of an externality. The economically efficient output is Q2. In that case, the diagram shows:
The efficient output level is:
The efficient output level is:
The deadweight loss due to the externality is represented by the area:
The deadweight loss due to the externality is represented by the area:
Which of the following would result in a positive externality?
Which of the following would result in a positive externality?
Which of the following is not true about public goods?
Which of the following is not true about public goods?
The figure above shows a nation's production possibilities frontier. If the marginal cost equals the marginal benefit at point A when 4 million pizzas are produced,
The figure above shows a nation's production possibilities frontier. If the marginal cost equals the marginal benefit at point A when 4 million pizzas are produced,
One reason why the coffeehouse market is competitive is that
One reason why the coffeehouse market is competitive is that
The reason that the "fast-casual" restaurant market is monopolistically competitive rather than perfectly competitive is because
The reason that the "fast-casual" restaurant market is monopolistically competitive rather than perfectly competitive is because
The key characteristics of a monopolistically competitive market structure include
The key characteristics of a monopolistically competitive market structure include
A major difference between monopolistic competition and perfect competition is
A major difference between monopolistic competition and perfect competition is
Which of the following is true for a firm with a downward-sloping demand curve for its product?
Which of the following is true for a firm with a downward-sloping demand curve for its product?
A monopolistically competitive firm faces a downward-sloping demand curve because
A monopolistically competitive firm faces a downward-sloping demand curve because
If the firm represented in the diagram is currently producing and selling Qa units, what is the price charged?
If the firm represented in the diagram is currently producing and selling Qa units, what is the price charged?
What is the area that represents the total revenue made by the firm?
What is the area that represents the total revenue made by the firm?
What is the area that represents the total fixed cost of production?
What is the area that represents the total fixed cost of production?
Should the firm represented in the diagram continue to stay in business despite its losses?
Should the firm represented in the diagram continue to stay in business despite its losses?
Which of the following is true of a typical firm in a monopolistically competitive industry?
Which of the following is true of a typical firm in a monopolistically competitive industry?
In long-run equilibrium, firms in a monopolistically competitive market will:
In long-run equilibrium, firms in a monopolistically competitive market will:
Which of the following is an example of product differentiation in a monopolistically competitive market?
Which of the following is an example of product differentiation in a monopolistically competitive market?
Compared to perfect competition, monopolistic competition results in:
Compared to perfect competition, monopolistic competition results in:
One advantage of monopolistic competition compared to perfect competition is:
One advantage of monopolistic competition compared to perfect competition is:
Which of the following characteristics is most important in distinguishing between monopolistic competition and oligopoly?
Which of the following characteristics is most important in distinguishing between monopolistic competition and oligopoly?
A significant implication of product differentiation in monopolistically competitive markets is that:
A significant implication of product differentiation in monopolistically competitive markets is that:
In a monopolistically competitive market, firms often engage in advertising and other forms of non-price competition. The primary goal of these activities is to:
In a monopolistically competitive market, firms often engage in advertising and other forms of non-price competition. The primary goal of these activities is to:
Which of the following is a reason why monopolistically competitive firms are allocatively inefficient?
Which of the following is a reason why monopolistically competitive firms are allocatively inefficient?
One reason a monopolistically competitive firm will not produce at the minimum point of average total cost is that:
One reason a monopolistically competitive firm will not produce at the minimum point of average total cost is that:
A monopolistically competitive market is characterized by
A monopolistically competitive market is characterized by
In the short run, a firm in a monopolistically competitive market can experience:
In the short run, a firm in a monopolistically competitive market can experience:
Flashcards
Monopolistic Competition
Monopolistic Competition
A market with many firms selling similar, but not identical, products.
Large Number of Firms
Large Number of Firms
Numerous firms, each with a small portion of the total market share.
Differentiated Products
Differentiated Products
Products are differentiated, but serve a similar purpose.
Low Barriers to Entry/Exit
Low Barriers to Entry/Exit
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Marginal Revenue
Marginal Revenue
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Economic Profit
Economic Profit
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Profit-Maximizing Quantity
Profit-Maximizing Quantity
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Economic Loss
Economic Loss
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Excess Capacity
Excess Capacity
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Allocative Inefficiency
Allocative Inefficiency
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Downward-Sloping Demand Curve
Downward-Sloping Demand Curve
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Normal Profit
Normal Profit
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Advantage for Producers
Advantage for Producers
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Advantage for Consumers
Advantage for Consumers
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Cost for Producers
Cost for Producers
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Cost for Consumers
Cost for Consumers
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Study Notes
Monopolistic Competition Market Structure
- Monopolistic competition is a market structure featuring numerous firms selling similar but not identical products.
- Products are differentiated.
- There are many firms.
- There is a low barrier to entry/exit.
Characteristics of Monopolistic Competition
- A large number of firms implies each has a small market share and limited influence on price.
- Firms make products slightly different from competitors through product differentiation.
- Firms compete on quality, price, and marketing
- In monopolistic competition, there are low barriers to entry; therefore, firms can't sustain economic profit in the long run.
Industry Examples
- Plumbers and restaurants are examples of monopolistic competition.
- Many prescription drugs and local water companies are monopolies.
Short-Run Equilibrium: Economic Profit
- Firms produce at the quantity where marginal revenue equals marginal cost (MR=MC).
- In one example, this occurs at a quantity of 125 units.
- The corresponding market price is $75.00.
- Profit is calculated as Total Revenue (TR) minus Total Cost (TC)
- The presence of economic profit/supernormal profits means Total Revenue is more than Total cost,
Short-Run Equilibrium: Economic Loss
- The firm produces the quantity at which marginal revenue equals marginal cost (MR=MC).
- The market price occurs at $40.00
- The firm will incur an economic loss when Price is less than Average Total Cost (ATC).
Long-Run Equilibrium
- Economic profit induces entry.
- As new firms enter, each existing firm loses market share causing the demand for each firm's product to decrease.
- The demand curve shifts leftward.
- The decrease in demand lowers the quantity at which MR = MC, decreasing the maximum price.
- Prices and quantitiy falls until P = ATC, and TR = TC so firms earn zero profits aka a normal profit/breakeven.
Advantages and Disadvantages of Monopolistic Competition
- Producers are able to set higher prices.
- There is enhanced ability to improve products through research and development.
- Disadvantage for producers: wasteful resources due to ads, and low entry barrier
- Advantage consumers: Variety to chose from
- Disadvantage consumers: Spend more for products
Economic Efficiency
- Profit-maximization occurs when MC=MR i.e. at 75 quantity.
- Firms have excess capacity because they produce less than the quantity at which ATC is at a minimum.
- Efficient scale occurs at output when Q is 100 in this example, and ATC is at minimized.
- Firms operate with excess capacity in the long run
- Productive inefficiencies occur when forms produce an output below minimum average cost
- Allocatively inefficient (Mark up)
- Firms operate such that their price (P) exceeds marginal cost (MC).
- The markup represents the amount by which price exceeds marginal cost (P > MC).
- In this example the markup is $15, where price is $25 and MC is $10.
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