Question

5. Why do monopolistically competitive firms end up making zero economic profits? 6. Why does a monopolistically competitive firm choose the level of output where marginal cost equals marginal revenue? 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 _____________ the profit per unit of output because entry _________ the price and _____________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? b. If the owner picks the price that maximizes profit, how many seats in the arena will be empty? c. Is it rational to leave some seats empty? 9. There are a wide variety of breakfast cereals on the marketin grocery stores, they usually take up an entire aisle. As a result, it is possible to purchase many cereals that are highly similar but have small distinguishing characteristics that differentiate them. a. List some cereals that are very close substitutes for one another b. What does society gain from having all of these varieties of breakfast cereal? c. What does society lose by having all of these varieties of breakfast cereal? 10. Briefly differentiate between collusion among firms in an oligopoly and an actual cartel. 11. Give a real world example of a duopoly and a cartel.

Answer 1

5. Why do monopolistically competitive firms end up making zero economic profits?

Monopolistic markets have following charactristics: a. Differentiated product.b. Firms are price makers.c. entry for new firms is not having any barriers.Hence ease of entry/exit.

If a firm is earning abnormal profits (Price charged is greater than minimum Average total cost[ATC])then other firms will enter in the market and prices will go down and firms will charge a price that covers average total cost and will have normal profits.

Refer Following figure :

6. Why does a monopolistically competitive firm choose the level of output where marginal cost equals marginal revenue?

It is a condition where profit will be maximised. Company covers all explicit costs and in economics terms has normal profits at that output. If MC>MR then loss and if MR>MC then company will have abnormal profits and will end up having other firms entering in the market.

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 decreases the price and increases average cost of production.

The reasons are already explained in questions above.