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### 21 Cards in this Set

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 Monopolistic competition is a market structure in which - a large number of firms compete - each firm produces a differentiated product - firms compete on product quality, price, and marketing - firms are free to enter and exit 4 things What are the 3 implications for the presence of a large number of firms in the industry? Small market share- each firm supplies small part of market No market dominance- no single firm can dictate market conditions or directly affect the actions of other firms. Collusion impossible In mon comp, product differentiation enables a firm to compete with other firms in three areas: Quality, Price and Marketing Since mon comp has no barriers to entry, a firm cannot do what in the long run: make an economic profit. To identify monopolistic competition, economists use what two indexes? The four-firm concentration ratio The Herfindahl-Hirschman index What is four-firm concentration ratio? the percentage of the values of sales accounted for by the four largest firms in an industry. The range of the concentration ratio is from almost zero for perf comp to 100% in monopoly. A four firm conc ratio that exceeds 40 percent is regarded as an indication of oligopoly a four firm conc ratio that is less than 40 is regarded as monopolistic comp The hirfendal-hirschman index is also called HHI, is the square of the percentage market share of each firm summed over the largest 50 firms in a market. If there are 4 firms in a market with market shares of 50%, 15%, 25%, and 10%, what is the HHI? HHI=50^2+25^2+15^2+10^2=3,450 A market in which the HHI is less than 1000 is regared as being .... Competetive A market in which HHI lies b/w 1000 and 1800 is regarded as being moderatly competitive A market in which HHI is over 1800 is regarded as Uncompetative A firm in monopolistic competition makes its output and price decision just as.. a monopoly firm does. In monopolistic competition, a firm maximizes its economic profit by: Producing the quantity at which marg revenue equals marginal cost and charging the highest price possible for that quantity. in mon comp, new entrants of firms... decrease demand for each firms product and shifts the demand curve and marg revenue curve left. Is monopolistic comp efficient? The price exceeds marginal revenue and marginal revenue equals marg cost. So, price exceeds marg cost, this is a sign of inefficiency How does the inefficiency of monopolisic comp arise? from product differentiation what is a firms capacity output? the output at which average total cost is a minimum. Because the demand curve in monopolistic comp slopes downward, the output that maximizes profit is... alway less than capacity output in long run equilibrium. In long run equilibrium, the firm operates with excess capacity