Lesson 02: Monopolistic Competition

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AP Microeconomics: Unit on Market Structures
Lesson 02: Monopolistic Competition
Monopolistic Competition
Now that you know a lot about perfectly competitive firms and you have seen
the introductory video on monopolistically competitive firms, see if you can
analyze the graph below and answer the question that follows. Recall from the
video that the biggest different between PC firms and MC firms is that for
MC firms, the Demand curve and the MR curve are separate, and this
seemingly minor difference makes HUGE differences for MC firms in terms
of price, output, and efficiency.
1.
(D)
(E)
(F)
(G)
(H)
Use Figure 40.1 to answer these questions.
(A)
At what level of output will this firm operate?
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(B)
What is marginal revenue at this level of output?
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(C)
What price will this firm charge for its product?
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The area of which rectangle is equal to total revenue?
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What is the firm’s average total cost?
_____________
The area of which rectangle is equal to the firm’s total cost?
_____________
Is the firm making profits or incurring losses?
_____________
The area of which rectangle is equal to profits or losses?
_____________
AP Microeconomics: Unit on Market Structures
Lesson 02: Monopolistic Competition
2.
Would the demand curve for a monopolistic competitor be more or less elastic than the demand
curve for a monopolist? Justify your answer.
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3.
What are the characteristics of a monopolistically competitive market? In what sense is there
“competition” and in what sense is there “monopoly” in this type of market structure?
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4.
What are three examples of monopolistically competitive markets?
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5.
True, false or uncertain, and why? “Monopolistic competition is even better than perfect
competition.” Explain
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6.
True, false or uncertain, and why? “In the long run, monopolistic competitors produce at their most
efficient point.”
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AP Microeconomics: Unit on Market Structures
Lesson 02: Monopolistic Competition
7.
Let’s practice graphing monopolistically competitive firms. Using
the graph template below, replicate the graph of MC firms from
the first page of this handout. Recall that we discussed that this MC
firm was earning an economic profit. Once you have finished
replicating the graph, think about what would happen in a real MC
market if other firms discovered that THIS firm was earning an
economic profit. Draw resulting the long-run position of THIS
firm on the graph and be prepared to explain/defend your answer.