MC

• What type of competition characterizes a monopolistically competitive market?

  Imperfect competition
• What do firms in a monopolistically competitive market aim to do in the short run?

  Maximize profits
• What type of products do firms sell in a monopolistically competitive market?

  Non-homogeneous products
• What is the effect of branding in monopolistically competitive markets?

  It leads to product differentiation
• What does a high XED indicate in a monopolistically competitive market?

  There are many close substitutes
• What is the assumption about the number of buyers and sellers in a monopolistically competitive market?

  There are a large number of buyers and sellers
• How does market power of sellers in a monopolistically competitive market compare?

  It is relatively weak
• What type of competition do firms in a monopolistically competitive market primarily use?

  Non-price competition
• Are there barriers to entry in a monopolistically competitive market?

  No, there are no barriers
• What does a downward sloping demand curve indicate for firms in a monopolistically competitive market?

  They can raise prices without losing all customers
• What type of information do buyers and sellers have in a monopolistically competitive market?

  Imperfect information
• At what point do firms profit maximize in the short run?

  At the point MC = MR
• What does the area P1C1AB represent in a monopolistically competitive market?

  Supernormal profits in the short run
• What happens in the long run to firms in a monopolistically competitive market?

  New firms enter the market
• How does the entry of new firms affect the demand for existing firms' products?

  It makes demand more price elastic
• What is the result of the demand curve shifting to the left in the long run?

  Only normal profits can be made
• What is the long run equilibrium point in a monopolistically competitive market?

  P1Q1
• How can firms try to maintain their position in the short run?

  By differentiating their products and innovating
• What are the advantages and disadvantages of monopolistically competitive markets?

  Advantages:

  • Wide variety of choices for consumers
  • More realistic model than perfect competition
  • Short-run supernormal profits may increase dynamic efficiency

  
  

  Disadvantages:

  • Allocatively inefficient (P > MC)
  • Limited dynamic efficiency in the long run
  • Excess capacity and productive inefficiency
  • X-inefficiency due to little cost minimization incentive
• What does allocative inefficiency mean in a monopolistically competitive market?

  P is greater than MC
• Why might dynamic efficiency be limited in the long run for firms?

  Due to lack of supernormal profits
• What does excess capacity indicate about firms in a monopolistically competitive market?

  They do not fully exploit their factors
• How does x-inefficiency affect firms in a monopolistically competitive market?

  Firms have little incentive to minimize costs
• What is the relationship between monopolistically competitive markets and perfectly competitive markets in terms of efficiency?

  Firms are not as efficient as in perfect competition
• How can short-run supernormal profits affect dynamic efficiency?

  They may increase dynamic efficiency through investment