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Chapter 16

Monopolistic Competition

Educators

EA
YT

Problem 1

Among monopoly, oligopoly, monopolistic competition, and perfect competition, how would you classify
the markets for each of the following drinks?
a. tap water
b. bottled water
c. cola
d. beer

Heather D.
Numerade Educator

Problem 2

Classify the following markets as perfectly competitive, monopolistic, or monopolistically competitive,
and explain your answers.
a. wooden no. 2 pencils
b. copper
c. local electricity service
d. peanut butter
e. lipstick

EA
Erwin A.
Numerade Educator

Problem 3

For each of the following characteristics, say whether it describes a perfectly competitive firm, a monopolistically competitive firm, both, or neither.
a. sells a product differentiated from that of its competitors
b. has marginal revenue less than price
c. earns economic profit in the long run
d. produces at the minimum of average total cost in the long run
e. equates marginal revenue and marginal cost
f. charges a price above marginal cost

Prathmesh G.
Numerade Educator

Problem 4

For each of the following characteristics, say whether it describes a monopoly firm, a monopolistically
competitive firm, both, or neither.
a. faces a downward-sloping demand curve
b. has marginal revenue less than price
c. faces the entry of new firms selling similar products
d. earns economic profit in the long run
e. equates marginal revenue and marginal cost
f. produces the socially efficient quantity of output

Fuzail S.
Numerade Educator

Problem 5

You are hired as a consultant to a monopolistically competitive firm. The firm reports the following
information about its price, marginal cost, and average total cost. Can the firm possibly be maximizing profit? If not, what should it do to increase profit? If the firm is maximizing profit, is the market in a long-run equilibrium? If not, what will happen to restore long-run equilibrium?
a. $P < MC, P > ATC$
b. $P > MC, P < ATC$
c. $P = MC, P > ATC$
d. $P > MC, P = ATC$

YT
Yared T.
Numerade Educator

Problem 6

Sparkle is one of the many firms in the market for toothpaste, which is in long-run equilibrium.
a. Draw a diagram showing Sparkle's demand curve, marginal-revenue curve, average-total-cost curve, and marginal-cost curve. Label Sparkle's profit-maximizing output and price.
b. What is Sparkle's profit? Explain.
c. On your diagram, show the consumer surplus derived from the purchase of Sparkle toothpaste. Also show the deadweight loss relative to the efficient level of output.
d. If the government forced Sparkle to produce the efficient level of output, what would happen to the firm? What would happen to Sparkle's customers?

EA
Erwin A.
Numerade Educator

Problem 7

Consider a monopolistically competitive market with $N$ firms. Each firm's business opportunities are described by the following equations:
Demand: $Q = 100/N - P$
Marginal Revenue: $MR = 100/N - 2Q$
Total Cost: $TC = 50 = Q^2$
Marginal Cost: $MC = 2Q$
a. How does $N$, the number of firms in the market, affect each firm's demand curve? Why?
b. How many units does each firm produce? (The answers to this and the next two questions depend on $N$.)
c. What price does each firm charge?
d. How much profit does each firm make?
e. In the long run, how many firms will exist in this market?

EA
Erwin A.
Numerade Educator

Problem 8

The market for peanut butter in Nutville is monopolistically competitive and in long-run equilibrium.
One day, consumer advocate Skippy Jif discovers that all brands of peanut butter in Nutville are identical. Thereafter, the market becomes perfectly competitive and again reaches its long-run equilibrium. Using an appropriate diagram, explain whether each of the following variables increases, decreases, or stays the same for a typical firm in the market.
a. price
b. quantity
c. average total cost
d. marginal cost
e. profit

EA
Erwin A.
Numerade Educator

Problem 9

For each of the following pairs of firms, explain which firm would be more likely to engage in advertising.
a. a family-owned farm or a family-owned restaurant
b. a manufacturer of forklifts or a manufacturer of cars
c. a company that invented a very comfortable razor
or a company that invented a less comfortable razor

EA
Erwin A.
Numerade Educator

Problem 10

Sleek Sneakers Co. is one of many firms in the market for shoes.
a. Assume that Sleek is currently earning short-run economic profit. On a correctly labeled diagram,
show Sleek's profit-maximizing output and price, as well as the area representing profit.
b. What happens to Sleek's price, output, and profit in the long run? Explain this change in words, and
show it on a new diagram.
c. Suppose that over time consumers become more focused on stylistic differences among shoe brands. How would this change in attitudes affect each firm's price elasticity of demand? In the long
run, how will this change in demand affect Sleek's price, output, and profit?
d. At the profit-maximizing price you identified in part (c), is Sleek's demand curve elastic or
inelastic? Explain.

EA
Erwin A.
Numerade Educator