Question

In: Economics

1.The main difference between pure competition and monopolistic competition is: a. there are no differences b....

1.The main difference between pure competition and monopolistic competition is:

a. there are no differences

b. in monopolistic competition there are a large number of firms

c. in monopolistic competition it is easy for firms to enter and exit

d. in monopolistic competition firms' products are differentiated

2. Firms in monopolistic competition may advertise in hopes of:

a. increasing demand and making it more inelastic

b. increasing demand and making it more elastic

c. decreasing demand and making it more inelastic

d. decreasing demand and make it more inelastic

3 In an Oligopoly structure firms’ decisions affect each other.

a. true

b. false

4 .Factors that affect the ability of firms to successfully collude include:

a. the gains from cheating

b. players' discount rates

c. legality

d. all of the above

Expert Solution

1) D

In perfect competition there are a large number of firms.

In perfect competition, there are no exit and entry barriers. Hence, free entry and exit. But, in monopolistic competition, there will be a few barriers for entry and exit.

In perfect competition, all goods will be same. But in monopolistic competition, goods will be slightly differentiated.

2) A

The first goal from advertisements is to increase the demand for the product. At the same time, advertisements are aimed also at reducing the elasticity (or to make it inelastic). In a monopolistically competetive market, most firms will be facing a highly elastic demand. Consumers will switch products if they increase the price. By advertising, firms hope to reduce the elasticity and increase the price.

3) A

In an oligopoly, the decisions of firms affect each other. For example, suppose the inverse demand curve is given by, P=100-Q. The price prevailing in market will be dependant on the production by all the firms.

4) D

More the gains from cheating, more likely for the firms to cheat. Discount factor determines how much the firm is willing to risk in the coming periods to gain now. Strong legal framework prevent collusion.

Rahul Sunny answered 2 years ago

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