Chapter 16

Monopolistic competition involves firms selling identical products.

In monopolistic competition, the number of sellers is many, and there is free entry and exit in the market.

In the long run, firms in monopolistic competition earn zero economic profit.

The demand curve facing a firm in monopolistic competition is horizontal.

In the short run, a monopolistic competitor maximizes profit by producing the quantity where marginal revenue equals marginal cost.

If price exceeds average total cost in the short run, a monopolistic competitor earns a profit.

If price is less than average total cost in the short run, the firm will shut down immediately.

In the long run, entry of new firms in monopolistic competition decreases the demand faced by existing firms.

In monopolistic competition, the price is equal to marginal cost in the long run.

In the long run, monopolistic competition results in production at the minimum average total cost.

Highly differentiated products in monopolistic competition can spend up to 10-20% of revenue on advertising.

Homogeneous products such as wheat and milk are advertised heavily.

Advertising creates a perception of product differentiation and fosters brand loyalty.

Advertising has been proven to always waste resources without adding value.

Studies show that eyeglasses are cheaper in states that prohibit advertising.

Brand names are criticized for providing no real differentiation between products.

Defenders of brand names argue they signal quality and incentivize firms to maintain high standards.