Question

Questions

1. How is monopolistic competition like monopoly? How is it like perfect competition?
2. Draw a diagram depicting a firm that is making a profit in a monopolistically competitive market. In the long-run, do monopolistically competitive firms produce the socially optimal quantity of their product? Why or why not?
3. Why is advertising important in monopolistically competitive markets, but not in perfectly competitive or monopolistic markets?

4. There are four basic solutions to handling monopolies: 1. Break it up (through anti-trust laws); 2. Regulate it; 3. Take it over; or 4. Leave it alone.

   Of these four solutions, which one is superior? Why? If your answer is that "it depends," under what conditions would you favor each possibility?

   Also, are there any redeeming qualities of monopolies? What are they?

Answer 1

It is similar to perfect Competition in the sense that decision taken by one firm does not directly affect decision taken by other firms. Barriers to entry and exit are almost zero. And they have little control over the price. With monopoly, it also faces a downward sloping demand curve. Now in the monopolistic competition firms does not produce socially optimal level of output because AR is greater than MR. Since firms offer similar products, they need to differentiate it in order to sell their product. For this purpose they advertise their product in order to eliminate it's similarity with products of competitive firms. In monopoly their is only one seller hence it doesn't require to advertise. And in perfect Competition there are numerous firms where each is selling identical product.