Chapter 15, Problem 13P

To determine

Concept Introduction:

Monopolistic Competition: Such market has a less degree of competition than perfect competition market. Examples:Detergents, textiles, automobiles, shop, drawings and TV. The features of monopolistic competition are:

• Large number of buyers and sellers: In monopolistic competition market, there are a large number of sellers and buyers.

• Product differentiation: This is one of the most important features of monopolistic competition. The product of the sellers is differentiated but are close substitutes of one another. It can be real or artificial. The demand curve monopolistic firms face is an elastic demand curve.

• Free Entry or Exit: There are no barriers to entry or exit, firms can easily enter or exit the market.

• In case of monopolistic market competition, short run equilibrium is achieved at a point where the marginal revenue is equal to the marginal cost.

• In such markets, the marginal revenue is less elastic than the average revenue curve and both are downward sloping.

• The difference between the average revenue curve that is, the demand curve and the average cost curve gives the net profit

• In the long run, the equilibrium is achieved in a place where the average revenue is equal to the marginal revenue. But the normal profit is zero.

• Since, the point does not have a minimum average cost, hence the monopolistic structure does not show product efficiency as well as allocative efficiency.