Question

3. Unlike a perfectly competitive firm, the monopolistic competitive firm is able to (a little) control price. Discuss, why, the position of the firm in the long run, is similar to that of a perfectly competitive one. 4. List the characteristics of a monopolistically competitive market structure. 5. Describe the firm's decision in choosing the profit maximizing or loss minimizing level of output. Illustrate.

Answer 1

4) Characteristics of a monopolistically competitive market structure

1) Large number of buyers and sellers in the market, However, the number of sellers are lower than that in the case of perfect competition.

2) There is free entry and exit for each firm and there is no barrier to entry, Each firm behaves independently.

3) The sellers sell differentiated products, which gives them a degree of monopoly power. The differentiation can be in terms of brands, quality and so on.

4) There is selling cost associated with sellers as each seller tries to promote his product to maximise profits. Selling costs may come in the form of advertisements, promotion and so on,

5) There is lack of perfect knowledge, With too many economic agents in the market and a differentiated product, information does not flow perfectly.

6) The factors of production are less mobile between sectors here as compared to perfect competition.

5) A monopolistic firm's decision of profit maximising output depends on several factors. LIke monopoly market, monopolistic firm faces a downward sloping demand curve. The firm will continue producing if Marginal Revenue (MR) of production is greater than the Marginal Cost (MC). The production decisions are same as that of a monopoly as the objective is profit maximisation. The firms will continue producing till MR = MC. AFter deciding the profit-maximising quantity, it looks at the perceived demand curve to determine the price.