Microeconomics Chapter 12

  1. Monopolistic Competition assumptions
    There are many buyers and sellers, low barriers to entry and firms compete by selling similar but differenciated goods and services.
  2. Explain why a monopolistically competitive firm has downward-sloping demand and marginal
    revenue curves.
    • A monopolistically competitive firm is able to raise its price without losing all of its
    • customers because the firm either has a favorable location, can offer better service, or has a higher quality product.
  3. Explain how a monopolistically competitive firm maximizes profit in the short run.
    • a monopolistically competitive firm produces where price is greater than marginal cost.
    • (economic profits if its price exceeds average total cost in the short run)
  4. Analyze the situation of a monopolistically competitive firm in the long run.
    • low barriers to entry and short-run profits - lead to - entrepreneurs entering and establishing new firms. entry of new firms shifts demand curves of existing firms to the left - more elastic.
    • ... and short-run losses - lead to - firms exiting the industry.
    • This will shift the demand curves of remaining firms to the right - more inelastic.
  5. when will the firm’s long run profit be zero?
    When price equals ATC
  6. In the long run, the demand curve of a typical firm will be ...
    tangent to its average total cost curve.
  7. Compare the efficiency of monopolistic competition and perfect competition.
    • (long run) the profit-maximizing level of output M.C. firm occurs where price is greater than marginal cost and the firm is NOT at the minimum point of its average total cost curve.
    • Unlike a perfectly competitive firm, a monopolistically competitive firm does NOT achieve allocative efficiency or productive efficiency.
  8. What firm achieves allocative efficiency and productive efficiency?
    a perfectly competitive firm
  9. What firm Does NOT achieve allocative efficiency or productive efficiency?
    a monopolistically competitive firm
Card Set
Microeconomics Chapter 12
Monopolistic Competition