Study Guide for Economics

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B. Answers to Short-Answer, Essays, and Problems

1.What are the major features of monopolistic competition compared to pure competition and pure monopoly?

In monopolistic competition, there are a relatively large number of firms, not the thousands of firms as in pure competition. The monopolistically competitive firms produce differentiated products, not the standardized products of pure competition. Product differentiation means that monopolistic competitors engage in some price competition because they have some limited “price making” ability based on the less elastic demand for their particular product. This demand, however, is more elastic than the demand for monopolists’ products. Monopolistic competitors, unlike most monopolists and all purely competitive firms, will engage in nonprice competition that gets reflected in product quality, services, location, advertising, and packaging. Compared with monopoly, the barriers to entry for monopolistically competitive firms are minor. The firms typically are small in size, operate independently, and do not practice collusion. [text: E pp. 486-488; MI pp. 228-230]

2.“Pure competition or pure monopoly industries will tend to be one-price industries. Monopolistic competition, however, is a multiprice industry.” Explain.

Monopolistic competition has the fundamental feature of product differentiation. This gives each firm a slight degree of monopolistic control over price. Consumers have preferences for the products or services of specific sellers and within limits will pay a higher price to satisfy those preferences.

In pure competition the demand curve facing each individual seller is perfectly elastic because all products are standardized. The seller and buyer must accept the market price in buying and selling. At the opposite extreme, a pure monopoly is the only seller and so is able to set the price. [text: E pp. 486-488; MI pp. 228-230]

3.How does economic rivalry take place in monopolistic competition? Describe the different aspects of product differentiation and price competition.

Nonprice competition is the typical type of economic rivalry that occurs in monopolistic competition. There are several forms of nonprice competition. First, firms may compete by offering consumers different product features or by providing products of varying quality. Second, firms differ in the amount of service or support they provide the consumer. Third, in some monopolistic industries such as restaurants or banking, location becomes a critical factor on which firms compete. Fourth, advertising and packaging build loyalty to a particular brand or make one product more appealing to the consumer. Although monopolistic competitors have some degree of control over price, the nonprice competition can be of even greater importance in influencing or meeting consumer tastes and preferences. [text: E pp. 487-488; MI pp. 229-230]

4.What are types of firms that exemplify monopolistic competition?

Most types of retailing in metropolitan areas are handled by monopolistically competitive firms. The retail stores would include gasoline stations, restaurants, clothing stores, shoe stores, and so forth. On the manufacturing side, there would be companies that publish books, make plastic pipes, make cardboard boxes, produce leather goods, or construct wood furniture or cabinets. [text: E p. 488; MI p. 230]

New5.How are monopolistically competitive industries identified with concentration ratios?

The percentage of output produced by firms in a manufacturing industry would be an empirical measure that could be used to judge whether an industry is monopolistically competitive. If the top four or eight firms account for less than a quarter of industry output, then it would be a low-concentrated industry. Even the top twenty firms might only account for about half of the total output in the industry. These data would indicate...
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