Chapter 25, Problem 25.2SC

To determine

Fill in the blanks

Introduction:

Monopolistic Competition- It is a form of imperfect market structure which combines the elements of the two extreme forms, the perfect competition and monopoly. A firm under the monopolistic competition is illustrated below:

The firm is known to have a downward sloping demand curve. It is more elastic than an AR curve of a monopolist while less elastic than that for a perfectly competitive firm.

Marginal Revenue- It is the additional revenue earned by a seller by selling one more unit of output in the market.

Average Revenue- It is the Total Revenue (TR) divided by the number of units sold or the revenue per unit. Alternatively, it is called the price.

Average Fixed Cost (AFC)- Fixed Cost is the one-time expenditure incurred by a producer which is a liability irrespective of the level of output like rent for the building. Per unit fixed cost is the average fixed cost.

Average Variable Cost(AVC)- It is the cost incurred in producing each unit of output. It varies with the level of output like raw material cost, wages etc. Per unit variable cost is the AVC.

Average Total Cost (ATC)- It is the aggregate of AVC and the AFC.

The defining features of the monopolistically competitive are:

1. A large number of buyers and sellers but less than that in a perfectly competitive market.

2. Free entry and exit of firms into the industry.

3. The firms sell differentiated products and thus resort to sales and promotion expenses to attract consumers to buy their products.

4. Firms have an inelastic demand curve, they are price makers. The firms have a downward sloping demand curve and marginal revenue curve.

5. The firms are productively and allocatively efficient.