Deck 26: Product Differentiation and Innovation in Markets

Question 1

Since firms outside an industry cannot have an incentive to enter the industry in equilibrium, firms inside a monopolistically competitive equilibrium must be making zero profit.

Answer 1

False

Question 2

In a monopolistically competitive equilibrium, firms outside the industry could make at most zero profit by entering the industry.

Answer 2

True

Question 3

Bertrand price competitors can recover some market power when they differentiate their products.

Answer 3

True

Question 4

Suppose the industry producing good x is perfectly competitive, and good x can be produced only in integer quantities; i.e.you can't produce fractions of units.Each firm only uses labor as an input, and the marginal product of labor is diminishing throughout.a.
a.Draw marginal and average cost curves for a firm in this industry.
b.In a perfectly competitive equilibrium in which X* unit are sold at price p*, how many firms are operating?
c.Now suppose there is a recurring fixed cost FC.How does that change your picture from part (a)?
d.How does firm output, industry output, equilibrium price and the number of firms in the industry change as FC increases assuming the market continues to be perfectly competitive?
e.In what sense might it become unreasonable to assume competitive (i.e.price-taking) behavior as FC gets large? If firms were to "think strategically" and price is the strategic variable, what happens to profit as FC increases?
f.How would your answers to (d) and (e) change if firms produced different varieties of x?
g.What is the highest possible FC that would result in x still being produced (assuming no firm can ever price-discriminate)? Assume market demand is linear and illustrate the firm's cost curves, output quantity and price.

Question 5

Since firms within a monopolistically competitive industry set output where marginal revenue is equal to marginal cost, the size of the fixed entry cost does not impact the equilibrium price.

Question 6

Information advertising might provide information about prices in stores, or it might provide information about product characteristics that consumers might not know about.Which one do you think is more likely to be efficient?

Question 7

In the circle model with constant marginal cost, each point on the circle will contain a firm in equilibrium if fixed entry costs are zero.

Question 8

Without price competition, there is no incentive for product differentiation.

Question 9

Under monopolistic competition, the number of firms increases as fixed entry costs fall and as demand for the type of good produced in the market increases.

Question 10

Comment on the following statement: "Since product differentiation allows price competitors to establish some market power, it would be more efficient to not permit product differentiation."

Question 11

Government may actually establish temporary monopolies by the issuance of patents and copyrights.

Question 12

If price is regulated in a 2-firm oligopoly modeled along the Hotelling line, firms will compete by differentiating their products.

Question 13

Most firms produce where marginal revenue is equal to marginal cost, but firms in a monopolistically competitive industry instead choose output where average cost is equal to demand.

Question 14

In a monopolistically competitive market with Dixit-Stiglitz preferences, the number of firms in the differentiated product market falls as goods in that market become less substitutable.

Question 15

In a monopolistically competitive market with Dixit-Stiglitz preferences, equilibrium price falls as the goods in the differentiated product market become more substitutable.

Question 16

Describe the tradeoffs involved when thinking about setting the time over which a patent grants an innovator exclusive monopoly rights.