Study Guide for Microeconomics
Study Guide for Microeconomics
9th Edition
ISBN: 9780134741123
Author: Robert Pindyck, Daniel Rubinfeld
Publisher: PEARSON
Question
Chapter 12, Problem 1RQ
To determine

The characteristics of a monopolistically competitive market and the impact of new and improved product on the equilibrium quantity and price.

Expert Solution & Answer
Check Mark

Explanation of Solution

The monopolistically competitive market is a type of market with the characteristics of both the monopoly and competition. There will be many sellers but each one will be selling the differentiated products in the market. This means that the degree of substitution will be higher between the sellers but not the perfect substitutes. The main characteristics of the monopolistic competition are as follows:

1. The firms competes with each other through selling the differentiated products. The products will be differentiated in their color, smell, shape, and size but the products will be close substitutes for each other firm but not the perfect substitutes.

2. There will be freedom of entry and exit from the market. Even though the producers sell the differentiated products and the prices are different, there is freedom of entry into the market and freedom of exit from the market on the basis of the economic profit prevailing in the market.

When the market witnesses an introduction of a new product or the improved product in the market, the consumers will be attracted toward the new products and as a result of the new trend set by the new product, the demand for the existing goods will fall in the market.

Economics Concept Introduction

Monopolistic competition: The monopolistic competition market is the market structure where there many sellers selling differentiated but close substitutes in the market. There will be freedom of entry and exit from the market.

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