What is required for a market to be considered monopolistically competitive? How does the equilibrium in a monopolistically competitive market resemble that in a perfectly competitive market? How are they different?
What will be an ideal response?
A monopolistically competitive market is one in which many firms produce similar but differentiated products. Each firm gains some market power from product differentiation and thus faces a downward-sloping-but highly elastic-demand curve. Free entry and exit of firms drive long-run profits to zero in both monopolistically competitive and perfectly competitive markets. However, competitive firms use marginal cost pricing, while monopolistically competitive firms charge prices in excess of their marginal costs. Furthermore, a competitive industry's output is produced at the lowest possible cost in long-run equilibrium. This result does not hold in monopolistic competition since firms' demand curves are not perfectly elastic.
You might also like to view...
In the above figure, when the economy is in a long-run equilibrium, real GDP will be
A) $15.5 trillion. B) $16.0 trillion. C) $17.5 trillion. D) $17.0 trillion.
Which of the following represents the best government policy to reduce the deadweight loss associated with a monopolistically competitive market?
a. The government should regulate firms in a manner similar to natural monopolies. b. The government should encourage more firms to enter the industry because without government intervention, there are likely to be "too few" firms. c. The government should encourage some firms to exit the industry because without government intervention, there are likely to be "too many" firms. d. There is no government policy that can reduce deadweight loss without creating other problems.