Please complete and send me the online quiz as well.

1. Describe the monopolistic competition market.

A market structure in which many firms sell products that are similar but not identical

2. What is the LR equilibrium for MC? Why?

• LR equilibrium is when price equals ATC and the firm earns 0 profits
• this is because when firms are making profits, new firms enter the market, shifting the demand curve to the left, and when the firms are making losses, their demand curves eventually move to the right
• the free entry and exit drive the profit to zero

3. Compare and contrast PC and MC. Under monopolistic competition firms produce on the downward sloping portion of their ATC curves. Free entry in competitive markets drives firms to produce at the minimum of ATC. In the long run perfectly competitive firms produce at the efficient scale (quantity that minimizes ATC), while monopolistically competitive firms produce below this level. Monopolistically competitive firms could increase the quantity it produces and lower the ATC of production. For a competitive firm price equals marginal cost. For a monopolistically competitive firm price exceeds marginal cost because the firm always has some market power. For a perfectly competitive firm price exactly equals marginal cost so the profit from an extra unit sold is zero. However a monopolistically competitive firm is always eager to get another customer because an extra unit sold at the posted price means more profit.

4. How does MC affect society’s welfare?

• just as monopoly, monopolistic competition creates a dead weight loss
• too much or too little firm entry
• externalities of market entry

- product variety externality = consumers have consumer surplus when new product enters market, so new firm entry is a positive externality for consumers -business stealing externality= other firms lose profits when new competitors enter markets, so entry is a negative externality for firms

• does not always ensure that total surplus is maximized

5. Describe the different scenarios MC can exist in the SR.

• Monopolistic competitors, like monopolist, maximize their profit by producing the quantity at which marginal revenue equals marginal cost. the profit is made when the price and quantity made exceeds the average total cost.

6. Describe the elasticity of demand in MC.

The elasticity is the same as for Monopolies. Where the MR curve crosses the x-axis determines the unit elasticity (draw a vertical line from the MR & x-axis intersection, this equals the unit elastic point) - to the left of this point is elastic - to the right of this point is inelastic