Monopolistic Competition - Essay Example

The firm may have little incentive to improve the quality of its products and service since it faces no competition.Gains:With only one firm, there may be efficiency gains. For example, it may be that the firm needs to employ fewer employees to service all of the visitors to Yosemite relative to the combined number of employees given the competition in the market. Hence the average total costs may be lower with only one firm. It is, therefore, possible that the firm posts lower prices and sells more units yielding a surplus to society.

To preserve the natural beauty of the National Parks, it may be desirable to limit the number of food facilities.3. Give two examples of natural monopolies. Should the government set price ceilings in natural monopoly markets? Why? Examples are (a) Electricity and (b) Gas. The government should set price ceilings in natural monopoly markets for “allocative efficiency.”4. Monopolistic competition has some of the same characteristics as a monopoly and some of the same characteristics as perfect competition (hence the name "monopolistic competition").

List a few of these similarities. Monopoly: individual sellers believe that they have some market power, They impose a limit on the prices they can charge and still sell a particular level of output.Perfect Competition: Economic profits tend to be eliminated in the long run, the relatively free entry of new firms, the long‑run price and output behavior, zero long-run economic profits, and have many buyers and sellers.5. Why do monopolistically competitive firms end up making zero economic profits?

The entry and exit of firms in monopolistic competitive firms will eventually cause each firm's economic profits to fall to zero. Hence, eventually, each firm earns normal profits, i.e. profit = 0. When some firms earn positive economic profits at one time, new firms will end up entering the market and the increased competition will reduce all firm's economic profits to zero.6. Why does a monopolistically competitive firm choose the level of output where marginal cost equals marginal revenue?

In order to maximize profit.7. Complete this statement by filling in the blanks with the words "increase" or "decrease": The entry of an additional firm in a mon. comp. market decreases the profit per unit of output because entry increases the price and increases the average cost of production. 8. Consider the Utica Slappers, a hockey team that plays in an arena with 8,000 seats. The only cost associated with staging a hockey game is a fixed cost of $6,000: The team incurs this cost regardless of how many people attend a game.

The demand curve for hockey tickets has a slope of $0.001 per ticket ($1 divided by 1,000 tickets): Each $1 increase in price decreases the number of tickets sold by 1,000. For example, here are some combinations of price and quantity: Price per ticket $4, $5, $6, $7. Quantity of tickets 8,000 7,000 6,000 5,000. The owner's objective is to maximize the profit per hockey game (total revenue minus the $6,000 fixed cost).a. What price will maximize profit? $6b. If the owner picks the price that maximizes profit, how many seats in the arena will be empty? 2000 c. Is it rational to leave some seats empty?

Yes, it is rational, since profits would actually be lower if all seats were sold at a price of $4, i.e. where there are no empty seats.9. There is a wide variety of breakfast cereals on the marketing grocery stores, they usually take up an entire aisle. As a result, it is possible to purchase many bowls of cereal that are highly similar but have small distinguishing characteristics that differentiate them. a. List some cereals that are very close substitutes for one another. Yogurt, bagels (pastries), fruits, etc.b. What does society gain from having all of these varieties of breakfast cereal?

A lower price - competition from an increased variety of breakfast cereal may have increased the supply of cereals and thus driven prices down.c. What does society lose by having all of these varieties of breakfast cereal? Less quality for the product – increase in variety may decrease the price per breakfast cereal, but along with it is a decrease in the quality of production, i.e. lower production cost.