Monopolistic Competition Quiz

Study Notes

Monopolistic Competition in Long-Run Equilibrium

Firms in monopolistic competition earn normal profits in long-run equilibrium, as any economic profit attracts new entrants, leading to decreased market prices.
The demand curve for each firm becomes more elastic as competition increases, resulting in a decline in the firm's market share over time.
In long-run equilibrium, firms produce at a point where price equals average total cost (ATC), and there is zero economic profit.

Characteristics of Oligopolistic Industry

An oligopolistic industry is characterized by a few firms that dominate the market, leading to potential for market power and strategic behavior.
Products in oligopoly can be homogeneous (as in steel production) or differentiated (such as automobiles).

Common Feature of Rivalry in Oligopoly

Rivalry among firms in an oligopoly often involves price competition and non-price competition, such as advertising and product differentiation.
Firms closely monitor competitors' actions, leading to interdependence where each firm’s decisions significantly affect others.

Oligopoly Behavior Model

The Cournot model is one approach that assumes firms decide their output levels independently and ignore the potential for interdependence with rival firms.
In this model, firms focus on maximizing profits based on expected output from competitors without direct collusion or coordination.

Output in Long-Run Equilibrium Under Monopolistic Competition

In long-run equilibrium, output in monopolistic competition may be less than the efficient output level, indicating productive inefficiency.
This inefficiency occurs because firms do not produce at the minimum of their average cost curves, leading to a deadweight loss in the market.

Description

Test your knowledge of monopolistic competition with this quiz. Explore the key characteristics and dynamics of this market structure, including product differentiation, demand curves, entry and exit freedom, and information transparency. Ideal for students and professionals studying economics and business.