Chapter
15 - 1-2-3-11
This
is a guidance answer ... your actual answer during the exam should be longer
than this answer ...
1. (a) Disagree. There are no barriers to entry in
monopolistic competition, and economic profits are eliminated in the long run.
(b) Disagree. Price does not equal marginal cost
in the short or long run in monopolistically competitive industries.
2. Bands are
an example of monopolistic competition. Firms are small and have some but not
much market power. Better bands are more expensive than lesser-known bands. The
average local band is not likely to be earning economic profit. Clearly, there
is product differentiation as each group tries to attract fans and CD buyers.
Bands advertise and try to improve. Booking agents often serve as barriers to
the entry of new bands. In a way, bands try to achieve market power and
price-setting ability by differentiating their product. A good band has fewer
substitutes than lesser-known bands.
3. The key is
the availability of substitutes. A monopoly is a firm producing a product for
which there is no close substitute. When they were just another band, clubs
could hire a cheap band and consumers didn’t know the difference or care. With
their success, there became fewer substitutes in the minds of consumers.
11. For a
purely competitive firm, price is equal to marginal revenue because the firm
can sell as much output as it chooses at the standardized market price. Because
of this, total revenue will always increase by the amount of the price for each
additional unit sold, so marginal revenue is equal to the price. For a
monopolistically competitive firm to sell additional output, it must lower the
price for each additional unit it wants to sell. Therefore, total revenue
increases as more units are sold, but by less than the price since the decrease
in price applies not only to the additional output but also to all previous
output.
Courtesy
of Case/Fair/Oster, 11th edition, 2014
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