Reading notes--Principles of Economics (chapter16)

Review

Chapter 16 is Monopolistic Competition. This chapter introduces monopolistic competition, a kind of market structure.

• Monopolistic competition is a market structure in which many firms sell products that are similar but not identical.

Characteristics

• Many sellers: There are many firms competing for the same group of customers.
• Product differentiation: Each firm produces a product that is at least slightly different from those of other firms. Thus, rather being a price taker, each firm faces a downward- sloping demand curve.
• Free entry and exit: Firms can enter or exit the market without restriction. Thus, the number of firms in the market adjusts until economic profits are driven to zero.

• Firms cannot earn economic profits in the long run.
• P > MC
• Profit maximization: sell goods at the quantity where MR = MC

• Efficient scale is the quantity where MC = ATC.
• Excess capacity is the difference between efficient scale and quantity produced.
• Markup is the difference between price and marginal cost.

Definitions

1.Oligopoly– a market structure in which only a few sellers offer similar or identical products

2.Monopolistic competition– a market structure in which many firms sell products that are similar but not identical

Review

There are some exercises in this book. I recorded questions I didn’t answer correctly here.

1. New firms will enter a monopolistically competitive market of_____（Correct answer: D）

a. marginal revenue is greater than marginal cost

b. marginal revenue is greater than average total cost

c. price is greater than marginal cost

d. price is greater than average total cost

My wrong answer: C

2. What is true of a monopolistically competitive market in long-run equilibrium
   (Correct answer: A)

a. Price is greater than marginal cost

b. Price is equal to marginal revenue

c. Firms make positive economic profits

d. Firms produce at the minimum of average total cost

My wrong answer: D

3. Advertising can be a signal of quality_____ (Correct answer: B)

a. if advertising is freely available to all firms

b. if the benefit of attracting customers is greater for firms

c. only if consumers are irrationally attracted to products they see advertised

d. only if the content of the ads contains credible information about the products

My wrong answer: D