Question

Monopolistic competition is like monopoly in that:

price changes are dictated by changes in supply.

both industries represent price-taking firms.

both industries represent price-making firms

both industries have high barriers to entry.

neither industry has high barriers to entry.

Question 26

Which is a dynamic under monopolistic competition in the long run?

Profits tend towards zero because of competition and low barriers to entry

Firms will operate at the lowest possible average total cost

Expenditures on advertising approaches zero

All of the above are correct

Answer 1

25. ans A

as we can rule out all the other 4 options.

monopoly is PRICE MAKING whereas MONOPOLISTIC COMPETITION is PRICE TAKING.

monopoly has BARRIERS TO ENTRY but monopolistic competition has NO BARRIERS TO ENTRY.

thus the only correct option is A , because changes in supply lead to changes in prices in both the markets

26. ans A

Monopolistic Competition in the Long-run. ... Thus, in the long‐run, the competition brought about by the entry of new firms will cause each firm in a monopolistically competitive market to earn normal profits, just like a perfectly competitive firm.  Unlike a perfectly competitive firm, a monopolistically competitive firm ends up choosing a level of output that is below its minimum efficient scale. When the firm produces below its minimum efficient scale, it is under‐utilizing its available resources. In this situation, the firm is said to have excess capacity because it can easily accommodate an increase in production. This excess capacity is the major social cost of a monopolistically competitive market structure.