Case Study Monopolistic Competition
a). Suppose that company A is the only producer of Vitamin D and act as a monopolist.Suppose the company produces 40 units of Vitamin D at $4/unit. If the company decidesto produce 10 units more, what is the price effect? What is the quantity effect? Would thecompany then have an incentive to produce 10 more units?If BASF produces 10 moretons, it now produces 50 tons and the price would fall to $3 per ton. On each of the40 tons it was already producing, it would lose $1. So the price effect is 40 × (−$1) =−$40. Since BASF produces an additional 10 tons and sells them at $3, the quantityeffect is 10 × $3 = $30. So BASF gains $30 revenue from producing 10 additionaltons, but it loses $40 revenue from producing those 10 additional tons. Since …show more content…
A farmer who produces soybeans
1. The three conditions for monopolistic competition are (1) a large number of producers, (2) differentiated products, and (3) free entry and exit.
a. There are many bands that play at weddings, parties, and so on. There are no significant barriers to entry or exit. And products are differentiated by quality (for instance, some bands have better musicians or better electronic equipment) or by style (for instance, different bands play different types of music). All three conditions for monopolistic competition are fulfilled.
b. The industry for individual-serving juice boxes is dominated by a few very large firms (for example, Minute Maid, Welch’s, and Kool Aid), and there are significant barriers to entry, in part because of the large costs (for example, advertising) involved in gaining any market share of the national market. Products are, however, differentiated—in some cases, the only differences are in the minds of consumers. Because of the small number of competitors, the industry is closer to oligopoly.
c. There are a large number of dry cleaners, and each produces a product differentiated by location: customers are likely to prefer to use the dry cleaner closest to their home or workplace. Finally, there are no significant barriers to entry. This is a monopolistically competitive