Exam 13: Monopolistic Competition: the Competitive Model in a More Realistic Setting

In the long-run equilibrium,a monopolistically competitive firm earning normal profit produces the allocatively efficient output level.

Explain the similarities and differences between the long-run equilibrium for a perfectly competitive firm and a monopolistically competitive firm.Illustrate your answer with a graph demonstrating the long-run equilibrium for the two types of firms.

Is a monopolistically competitive firm allocatively efficient?

Economists agree that a monopolistically competitive market structure

For the monopolistically competitive firm

What is the difference between zero accounting profit and zero economic profit?

Only one of the following statements is correct.The statements compare perfectly competitive (PC)markets and monopolistically competitive (MC)markets.Which statement is correct?

Figure 13-14 illustrates a monopolistically competitive firm. -Refer to Figure 13-14.Which of the following statements describes the firm depicted in the diagram?

Quantity Price (dollars) Total Revenue (dollars) Total Variable Cost (dollars) Total Cost (dollars) 0 \ 21 \ 0 \ 0 \ 50 1 20 20 16 66 2 19 38 31 81 3 18 54 45 95 4 17 68 59 109 5 16 80 75 125 6 15 90 93 143 7 14 98 112 162 8 13 104 140 190 9 12 108 180 230 10 11 110 230 280 Table 13-3 shows the demand and cost schedules for a monopolistically competitive firm. -Refer to Table 13-3.What is the amount of the firm's loss at its optimal output level?

When a monopolistically competitive firm cuts its price to increase its sales,it experiences a gain in revenue due to the

Monopolistically competitive firms face a perfectly elastic demand curve.

If a monopolistically competitive firm breaks even,the firm

Both monopolistically competitive firms and perfectly competitive firms maximize profits

A monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing and becoming more elastic in the long run as new firms move into the industry until

Figure 13-16 -Refer to Figure 13-16.Figure 13-16 depicts a monopolistically competitive barber shop.Use the diagram to answer the following questions. a.Suppose the average variable cost of production is $15 when output equals 110 haircuts and $15.25 when output equals 140 haircuts.If the firm wants to maximize its profit or minimize its losses,how many haircuts will it produce and what price should it charge? Explain your answer. b.Calculate the firm's profit or loss. c.What is likely to happen in this industry over time as it moves to its new long-run equilibrium? d.Suppose the barber shop depicted in the diagram remains in the industry.Is this barber shop likely to produce this same quantity of haircuts as in part (a)in the long run?

In both monopolistically competitive and perfectly competitive industries

Monopolistically competitive firms achieve allocative efficiency but not productive efficiency.

A monopolistically competitive industry that earns economic profits in the short run will

If a perfectly competitive firm maximizes short-run profits,its marginal revenue will be positive and less than its price.

Suppose that if a local McDonald's restaurant reduces the price of a Big Mac from $4.00 to $3.25,the number of Big Macs it sells per day will increase from 4 to 5.Explain the output effect and the price effect resulting from this change.Using a graph,illustrate both the loss in revenue from selling each of the first 4 Big Macs for $0.75 less and the additional revenue from selling 1 more Big Mac.What is the total change in revenue received which results from this price decrease?