Question

1A. Look at these particular goods and determine whether it most likely describes perfect competition or monopolistic competition

1. designer dress
2. pears
3. mystery novel
4. wheat
5. milk
6. TV show
7. microwave

1B. Consider the following scenarios and describe how the monopolistic competitor would be impacted in the short run and the long run. Will there be economic profits or economic losses? What will happen to prices after entry or exit? What will economic profits be in the long run?

1. Romantic movies are less popular with the general public.
2. More people are interested in antique furniture.
3. There is much more interest in eating healthier foods.
4. Less people are listening to rock music.
5. Less people are eating at steakhouses.
6. More people are signing up for gym memberships.

1C. Which of the following industries would be described as an oligopoly?

1. Fast-food restaurants
2. Airline industry
3. Bookstore
4. Fashion boutique

Answer 1

Ans) c) Oligopoly is when there are few large sellers selling homogeneous products. Eg- cigarettes, airlines etc.

Option b (Airlines)

B) In monopolistic competition, when firms earn negative economic profit, some firms will exit the market and vice versa. In long run firms will always earn zero economic profit.

• When Popularity of romantic movies decreases, demand will decrease in short run and firms will earn negative economic profit. As a result, some firms will exit the market and existing firms will earn zero economic profit in long run.
• With increase in popularity of antique furniture, demand will increase and firms will earn positive economic profit in short run. As a result, more firms will enter the market and in long run all the firms will earn zero economic profit.
• With increase in healthy habits, fast food firms will face decreased demand. And firms will earn negative economic profit. As a result, some firms will exit the market. And in long run existing firms will earn zero economic profit.
• d&e) With less demand, firms will earn negative economic profit and some firms will exit the market. As a result existing firms will earn zero economic profit in long run.
• With increased gym membership, gyms will earn positive economic profit. As a result more firms will enter the market and demand for individual gym will decrease and therefore the price will decrease. And hence firms will earn zero economic profit in long run.

A) Designer dress is monopolistic competition.

Pears is perfect competition

Mystery novel is monopolistic competition. As though you may feel that they all have similar stories but still they differ in content.

Wheat and milk are Perfectly competitive

Tv shows and microwaves are monopolistic competition.