1. What is monopolistic competition?
Monopolistic competition is a market structure with some of the characteristics of monopoly and some of the characteristics of perfect competition. Like perfect competition, there are a large number of firms, and entry into the market is easy. Because entry into the market is easy, monopolistically competitive firms earn a normal profit in the long run.
The difference between monopolistic competition and perfect competition is in type of product sold: a standardized product in perfect competition and a differentiated product in monopolistic competition.
Because price does not equal marginal cost, monopolistically competitive firms are not economically efficient. This inefficiency is the price consumers pay for variety.
2. What behavior is most common in monopolistic competition?
In monopolistic competition, the most common behavior is product differentiation, not price competition. Among the nonprice elements that differentiate products are quality, color, style, location, size, safety features, taste, and packaging.
3.What is oligopoly?
Oligopoly is a market structure in which there are a few large firms and entry is difficult but not impossible. Oligopolies can produce identical products, like steel and cement, or differentiated products, like automobiles and colas. Oliogopoly is different from other market structures because firms are interdependent: any action taken by one firm usually provokes a reaction by other firms.
4. In what form does rivalry occur in an oligopoly?
In oligopolies, strategic behavior is the rule. When asking their decisions, firms have to predict how their rivals will respond. The kinked demand curve is evidence that competitors match price decreases but ignore price increases. Even when a decision is not related to price, strategic behavior comes into play. For example, a dominant strategy produces results whatever a competitor does.
5. Why does competition among rivals occur most often in oliogopolies?
Cooperation is difficult among the large numbers of firms in perfectly competitive or monopolistically competitive markets: too many sellers have to be organized to make cooperation practical. Cooperation is an integral part of oligopoly because there are only a few interdependent firms. In a price-leadership oligopoly, a dominant firm decides on prices and price changes and other firms follow along. In a cartel, independent firms organize themselves and agree on prices and production limits.
6. What occurs when the perfect information assumption is relaxed?
In the absence of perfect information, the unobservable qualities that differentiate products and firms are misvalued. What happens? Low-quality consumers or producers force higher-quality consumers or producers out of the market�a process called adverse selection. Down payments and deductibles are methods firms use to overcome adverse selection. Imperfect information can also create opportunity for moral hazards for people altering their behavior unanticipated ways after an agreement has been struck.
Chapter 15/Monopoly1168ANS:BDIF:1REF:16-1NAT:AnalyticLOC:Monopolistic competitionTOP:Monopolistic competition| Perfect competitionMSC:Interpretive61.In both perfect competition and monopolistic competition, each firma.has some monopoly power.b.sells a product that is at least slightly different from those of other firms.c.faces a downward-sloping demand curve.d.has many competitors.ANS:DDIF:1REF:16-1NAT:AnalyticLOC:Monopolistic competitionTOP:Monopolistic competition| Perfect competitionMSC:Definitional62.Which of the following conditions distinguishes monopolistic competition from perfect competition?a.the number of sellers in the marketb.the freedom of entry and exit by firms in the marketc.the size of firms in the marketd.product differentiationANS:DDIF:1REF:16-1NAT:AnalyticLOC:Monopolistic competitionTOP:Monopolistic competition| Perfect competitionMSC:Interpretive63.A similarity between monopoly and monopolistic competition is that in both market structuresa.strategic interactions among sellers are important.b.there are a small number of sellers.c.sellers are price makers rather than price takers.d.there are only a few buyers but many sellers.ANS:CDIF:2REF:16-1NAT:AnalyticLOC:Monopolistic competitionTOP:Monopolistic competition| MonopolyMSC:Interpretive