Los 12.c Flashcards
(14 cards)
What is the price/output decision for firms in monopolistic competition based on?
Firms maximize economic profits by producing where marginal revenue (MR) equals marginal cost (MC)
This is illustrated in Panel (A) of Short-Run and Long-Run Output Under Monopolistic Competition.
What does a firm earn when price exceeds average total cost in monopolistic competition?
Positive economic profits
This occurs when P* > ATC*.
What happens to the demand curve when new firms enter the market in monopolistic competition?
It shifts down
This results in price equaling average total cost (P* = ATC*), leading to zero economic profit.
What is established when economic profit is zero in monopolistic competition?
Long-run market equilibrium
At this point, there is no incentive for new firms to enter the market.
What can lead to a similar long-run equilibrium without new firm entry?
Increased marketing spending
This raises ATC until it equals price.
In monopolistic competition, what is true about price in relation to marginal cost?
Price is greater than marginal cost
This allows producers to realize an economic profit.
What is indicated by average total cost not being at a minimum in monopolistic competition?
Excess capacity or inefficient scale of production
This suggests that firms are not producing at the lowest cost.
What characterizes perfect competition compared to monopolistic competition?
No product differentiation
This affects the efficiency of monopolistic competition.
What question arises regarding the efficiency of monopolistic competition?
Is there an economically efficient amount of product differentiation?
This reflects the balance of costs and benefits of product differentiation.
What is a potential benefit of product differentiation in markets like pharmaceuticals?
Different drugs may be more or less effective for various patients
This results in relatively steep demand curves for competing drugs.
Fill in the blank: In monopolistic competition, firms compete by increasing their ________ to enhance or defend market share.
Marketing spending
True or False: In monopolistic competition, firms can earn positive economic profits in the long run.
False
Long-run equilibrium results in zero economic profits.
What does Panel (B) of Short-Run and Long-Run Output Under Monopolistic Competition demonstrate?
Long-run equilibrium for a representative firm after market entry
It shows the adjustment of demand and cost structures.
