Chapter 14

Question 1

Monopolistic competition

Answer 1

Market structure:

• Large number of firms compete
• Each firm produces a differentiated product
• Firms compete on product quality, price and marketing.
• Firms are free to enter and exit the industry.

Question 2

Three implications of the large number of firms for the industry:

Answer 2

• Small Market Share
• Ignorance towards individual other firms
• Collusion is impossible

Question 3

Collusion

Answer 3

When firms ‘in competition’ conspire to fix a higher price.

Question 4

Product differentiation

Answer 4

The act of making a product that is slightly different from the products of competing firms.

Question 5

Differentiated product

Answer 5

A product that is a close - but not perfect - substitute for the products of other firms.

Question 6

Three areas of competition between firms:

Answer 6

• Product quality
• Price
• Marketing

Question 7

Efficient Scale

Answer 7

The quantity at which average total cost is a minimum.

Question 8

Excess capacity

Answer 8

If a firm produces less than its efficient scale.

Question 9

Markup

Answer 9

The amount by which price exceeds marginal cost.

Question 10

Resources are used efficiently when…

Answer 10

marginal social benefit equals marginal social cost.

Question 11

Marginal social benefit of an innovation

Answer 11

The increase in price that consumers are willing to pay for the innovation.

Question 12

Marginal social cost of an innovation

Answer 12

The amount that the firm must pay to make the innovation.