Question

how would you fill out this graph?

Perfect Competition Competition Monopolistic Monopoly Oligopoly Goal of firmsMaximize Profit Rule for maximizing profit MR-MC Can earn economic profits in the short run? Yes Can earn economic profits in the long run? Yes Price taker? Sometimes P2MC Sometimes Price & MC Produces welfare maximizing output? Number of firms? Few 3. (1 point) Consider a world where only blank t-shirts are produced. Draw hypothetical Demand faced by a firm, MR, MC, and ATC curves for a firm in the market for t-shirts assuming the market is in a long run perfectly competitive equilibrium. Assume this firrm now has the revolutionary idea of putting the phrase "Cool People wear these T-Shirts" on all their t-shirts, and through advertising effectively convinces many buyers that their t-shirt makes them seem cooler than any other t-shirt. lllustrate how this change could affect the Demand faced by the firm and MR curves (½ point) How will the firm's quantity produced change after it differentiates its product (increase or decrease)? How will the price the firm charges change after it differentiates its product (increase or decrease)? 4. 5. (1 point) Suppose the deadweight loss generated as in the previous 2 questions is 100. Suppose the business stealing externality is 0. Let the value society places on variety of t-shirts be V. For what values of V is product differentiation beneficial to society? For what values of V is product differentiation harmful to society?

Answer 1

2.

Oligopoly Perfect Competition Competition Monopolistic Monopoly Goal of firmsMaximize Profit Maximize profit Maximize profit Maximize profit Rule for maximizing profit MR=MC MR MC MR MC Can earn economic profits in the short run? Yes Yes Yes Yes Can earn economic profits in the long run? Yes Yes No yes Price taker? Sometimes PzMC Sometimes Yes No No Price & MC P>MC P > MC Produces welfare maximizing output? Number of firms? No No Yes Many Many single Few

Perfect Competition is a form of market structure with free entry and exit of firms and firms are selling homogeneous and identical products in the market. Firms are price takers rather than price makers. Industry determines the equilibrium price from the demand and supply curve intersection. Sellers can sell any unit of commodity at that price and firms does not have any price control over the commodity. If one seller try to charge higher price then it will lose all his customers because all firms are selling similar products in every respect like color, shape, brand, etc.

Monopoly is a market structure with a single seller who sold goods which does not have close substitutes. There are barrier in the entry of new firms. The firm is a price maker because it determines the price for its product. Firm has free control over the supply of the product. A monopolist firm faces a market demand curve which is negatively sloped. Demand curve of a firm under monopoly is less elastic because the product has no close substitutes. Railways is an example of monopoly industry in India.

Monopolistic competition is a market situation in which there are large number of buyers and sellers selling closely related or differentiated products but not identical product. The products are close substitutes of each other. Product differentiation is the important feature of monopolistic competition. Each firm under monopolistic competition enjoys the monopoly over the brand of the commodity and thus the firm has the control over the price of the commodity. Under this form of competition, MR < AR and AR and MR curve slope downwards and MR curve lies below AR curve. But these curves are more elastic than curves under monopoly. Example: Firms producing different brands of soaps like Dove, lux, lifebuoy, etc. Monopolistic competition possesses features of monopoly and perfect competition.

Oligopoly is a market structure with few large firms who produces homogeneous or differentiated products intensely competing against each other. There is interdependence of firms in decision-making. Under this form of market, prices are normally rigid as firms are afraid of immediate reactions of the rival firms which may start price war. The demand curve facing an oligopoly firm is indeterminate because of high degree of interdependence among oligopolistic firms. Example: Auto-producers in the Indian market; Hyundai, Honda, Tata, Ford are some well-known brand names.