monopolistic competition

• Firms in monopolistic competition can raise prices significantly without losing customers due to high brand loyalty.

  False
• In monopolistic competition, firms are price makers because they sell differentiated goods.
• What is a key characteristic of monopolistic competition?

  Product differentiation
• What type of demand curves do firms in monopolistic competition face?

  Price elastic
• Competition in monopolistic competition is primarily based on non-price factors such as branding, quality, and advertising.
• There are high barriers to entry in monopolistic competition.

  False
• Where do firms in monopolistic competition maximize profits?

  MC = MR
• Steps to draw the long-run diagram for monopolistic competition:

  1️⃣ Draw downward sloping AR and MR curves

  2️⃣ Draw marginal cost

  3️⃣ Show profit maximization where MR = MC

  4️⃣ Draw average cost touching AR
• Firms in monopolistic competition behave the same in the short run and the long run.

  False
• What type of profit do firms in monopolistic competition make in the long run?

  Normal
• Allocative efficiency is achieved in monopolistic competition because price equals marginal cost.

  False
• In the long run, new firms enter the market, shifting the demand curve to the left.
• Why is productive efficiency not achieved in monopolistic competition?

  Not at minimum AC
• Firms in monopolistic competition forego economies of scale due to their unique product differentiation.
• What is the primary reason for dynamic inefficiency in monopolistic competition?

  No supernormal profit
• Compared to perfect competition, monopolistic competition offers greater product variety.
• What consumer trade-off does monopolistic competition involve?

  Lower surplus for variety
• Dynamic efficiency is impossible in monopolistic competition because firms always earn normal profits.

  False
• Firms in monopolistic competition may reinvest short-run supernormal profits to maintain their competitive edge.