Chapter 67, Problem 3CYU

a)

To determine

Whether the statement is true or false when in a monopolistically competitive market, a company will sell a good for any price that is equal to or higher than its marginal cost.

Explanation of Solution

This statement is false because perfectly competitive firms operate in a market where their prices are equal to their marginal costs, whereas monopolistically competitive firms sell their output at a price above the marginal costs. Since a monopoly's marginal revenue is always below the demand curve, the price will always be greater than the marginal cost at equilibrium as it further results in an economic profit for the business.

Economics Concept Introduction

Introduction: Monopolistic competition refers to an imperfect competition where multiple manufacturers compete with one another yet sell distinct products that are not exact substitutes. When every firm in the market is selling the same goods and prices remain unaffected by the company's market share, this is referred to as perfect competition.

b)

To determine

Whether the statement is true or false when all the companies in an industry with excess capacity (monopolistically competitive in long-term equilibrium) combined into one and produced just one thing, everyone would benefit, but it's unclear whether customers would gain anything.

Explanation of Solution

This statement is true because if businesses in monopolistically competitive industries merged to form a single company with a single product, they could all make profit more. Since all of the smaller businesses had extra capacity, the average total cost would be lower if a single business produced a bigger volume. But the impact on customers is unclear. They would have fewer options. But customers might see lower prices with the monopoly if consolidation significantly decreased industrial average total cost and increased industrial output.

Economics Concept Introduction

Introduction: Monopolistic competition refers to an imperfect competition where multiple manufacturers compete with one another yet sell distinct products that are not exact substitutes. When every firm in the market is selling the same goods and prices remain unaffected by the company's market share, this is referred to as perfect competition.

c)

To determine

Whether the statement is true or false when industries with monopolistic competition or oligopoly are more prone to have fads and trends than those with perfect competition or monopoly.

Explanation of Solution

This statement is true because oligopolies and monopolistically competitive industries tend to have fads and fashions, whereas monopolies and perfectly competitive industries do not. This is because fads and fashions are promoted by advertising. Moreover, there is a need for product distinction, therefore, in contrast to perfect competition or oligopoly, monopolistic competition or oligopoly is more likely to experience fads and trends

Economics Concept Introduction

Introduction: Monopolistic competition refers to an imperfect competition where multiple manufacturers compete with one another yet sell distinct products that are not exact substitutes. When every firm in the market is selling the same goods and prices remain unaffected by the company's market share, this is referred to as perfect competition.