PROBLEMS AND APPLICATIONS

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PROBLEMS AND APPLICATIONS 1. Classify the following markets as perfectly competitive, monopolistic, or monopolistically competitive, and explain your answers. a. wooden no. 2 pencils b. copper 2. For each of the following, say whether it describes a perfectly competitive firm, a monopolistically competitive firm, both, or neither. a. Charges a price equal to marginal cost. b. Has […]

QUESTIONS FOR REVIEW

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QUESTIONS FOR REVIEW 1. Describe the three attributes of monopolistic competition:’ How is monopolistic competition like monopoly? How is it like perfect competition? 2. Draw a diagram depicting a firm in a monopolistically competitive market that is making profits. Now show what happens to this firm as new firms enter the industry . 3. Draw a diagram […]

CONCLUSION

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CONCLUSION Monopolistic competition is true to its name: It is a hybrid of monopoly and competition. Like a monopoly, each monopolistic competitor faces a downward-sloping demand curve and, as a result, charges a price above marginal cost. As in a perfectly competitive market, there are many firms, and entry and exit  drive the profit of each monopolistic […]

BRAND NAMES

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BRAND NAMES Advertising is closely related to the existence of brand names. In many markets, there are two -types of firms. Some firms sell products with widely recognized brand names, while ether firms sell generic substitutes. For example, in a typical drugstore, you can find Bayer aspirin on the shelf next to generic aspirin. In a typical grocery […]

ADVERTISING AS A SIGNAL OF QUALITY

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ADVERTISING AS A SIGNAL OF QUALITY Many types of advertising contain little apparent information about the product being advertised. Consider a firm introducing a new breakfast cereal. A typical advertisement might have some highly paid actor eating the cereal and exclaiming how wonderful it tastes. How much information does the advertisement really provide? The answer is more than […]

CASE STUDY

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CASE STUDY ADVERTISING AND THE PRICE OF EYEGLASSES What effect does advertising have on the price of a good? On the one hand, advertising might make consumers view products as being more different than they otherwise would. If so, it would make markets less competitive and firms’ demand curves less elastic, and this would lead firms to […]

THE DEBATE OVER ADVERTISING

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THE DEBATE OVER ADVERTISING Is society wasting the resources it devotes to advertising? Or does advertising serve a valuable purpose? Assessing the social value of advertising is difficult and often generates heated argument among economists. Let’s consider both sides of the debate. The Critique of Advertising Critics of advertising argue that firms advertise to manipulate people’s tastes. Much […]

ADVERTISING

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ADVERTISING It is nearly impossible to go through a typical day in a modern economy without being bombarded with advertising. Whether you are reading a newspaper, watching television, or driving down the highway, some firm will try to convince you to buy its product. Such behavior is a natural feature of monopolistic competition (as well as some oligopolistic […]

MONOPOLISTIC COMPETITION AND THE WELFARE OF SOCIETY

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MONOPOLISTIC COMPETITION AND THE WELFARE OF SOCIETY Is the outcome in a monopolistically competitive market desirable from the standpoint of society as a whole? Can policymakers improve on the market outcome? There are no simple answers to these questions. One source of inefficiency is the markup of price over marginal cost. Because of the markup, some consumers who […]

MONOPOLISTIC VERSUS PERFECT COMPETITION

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MONOPOLISTIC VERSUS PERFECT COMPETITION Figure 3 compares the long-run equilibrium under monopolistic competition to the long-run equilibrium under perfect competition. (Chapter 14 discussed the equilibrium with perfect competition.) There are two noteworthy differences between monopolistic and perfect competition: excess capacity and the markup. Figure 3 Monopolistic versus Perfect Competition Excess Capacity As we have just seen, entry […]