Economics Homework

Pg. 482 # 2, 4, 5
2.
The elasticity of the monopolistic competitors demand is highly, but not perfectly elastic. This is
because the product produced by firms in monopolistic competition is differentiated. The elasticity of a
pure competitors demand is perfectly elastic, while the elasticity of a pure monopolists demand is
perfectly or very highly inelastic.
In the long run under pure competition, allocative efficiency occurs because price=MC. In the long run
under monopolistic competition, allocative efficiency does not occur because price>MC. In the long run
under PC, productive efficiency occurs because price=minimum ATC. In the long run under MC,
productive efficiency does not occur because the price exceeds the lowest ATC.
The statement, Monopolistically competitive industries are characterized by too many firms, each of
which produces too little, means that there are many firms in the market and it is very easy to enter or
exit the market. While an individual firm may make an economic profit in the short run, monopolistic
competitors only make a normal profit in the long run. This is because while their product is
differentiated from others which gives the consumer incentive to buy it, it is only differentiated to a
certain extent and other aspects come into play such as the price the consumer is willing and able to be
for the product.
4.
I agree with this statement because when consumers buy a product, unless the product is
homogeneous, they have other things in mind besides the price. Also, while something may have a low
price such as food at a restaurant, if the food is low quality and if the people who work there provide
less service, it is not worth going there. People are willing to pay more for things like quality and service,
so in order for the consumer to maximize their benefits for their choice in product, they must look at
things other than price.
Monopolistically competitive firms frequently prefer non-price competition because non-price
competition makes their product more differentiated, causing the demand curve to turn more inelastic.
Producers aim for more inelastic demand because they will be able to charge higher prices. If the firm
was to only focus on price competition, they would never make a profit because the demand for their
product would be more elastic.




5.
A. This statement is saying that in monopolistic competition, due to the large number of firms and the
fact that each firm has a differentiated product there is a low output for each individual firm. If the
industry experiences profits, firms enter. If the industry experiences losses, firms leave. This means that
in the long run, monopolistic competitors will only make a normal profit, so the efficiency and
performance of the industry itself does not matter.
B. This statement is saying that while the firms go through price competition, this competition does not
spur profits due to the large number of firms. In monopolistic competition, firms do not need to change
their price immediately because they offer a differentiated product which the consumer chooses
depending on personal preferences.