Monopolistic Competition - AP Microeconomics

1. What is the relationship between MR and D in monopolistic competition?

   $MR < D$. Downward-sloping demand makes marginal revenue less than price.

2. What is the role of advertising in monopolistic competition?

   To differentiate products. Creates perceived differences to build customer loyalty.

3. What happens to economic profits in the long run in monopolistic competition?

   They become zero. New firms enter until no excess profits remain.

4. What is excess capacity in monopolistic competition?

   Producing below minimum ATC. Firms don't operate at the efficient scale of production.

5. What is the profit-maximizing condition for monopolistic competition?

   $MR = MC$. Standard profit-maximizing rule for all market structures.

6. How does entry of new firms affect the demand curve in monopolistic competition?

   It shifts the demand curve left. New entrants reduce each firm's market share and demand.

7. What is the reason for zero economic profit in long run?

   Entry and exit of firms. Market forces eliminate above-normal profits over time.

8. What happens to a firm's profits if it fails to differentiate in monopolistic competition?

   Profits decrease. Similar products reduce competitive advantage and pricing power.

9. What is the impact of new entrants on existing firms' profits?

   Profits decrease. Additional competition reduces demand for existing firms.

10. How does a firm in monopolistic competition decide its output level?

    Where $MR = MC$. Produces where additional revenue equals additional cost.

11. What does non-price competition involve?

    Advertising and service. Competition through quality, service, and brand building.

12. Identify a key feature of monopolistic competition.

    Product differentiation. Allows firms to have some pricing power unlike perfect competition.

13. What is the typical shape of a firm's marginal cost curve?

    Upward sloping. Reflects increasing variable costs as output expands.

14. What is the demand curve shape for a firm in monopolistic competition?

    Downward sloping. Product differentiation gives firms some pricing control.

15. What is the role of non-price competition in monopolistic competition?

    To differentiate products. Competition beyond price through quality and features.

16. How does a firm in monopolistic competition determine its pricing strategy?

    Based on product differentiation. Unique features allow premium pricing above competitors.

17. How is long-run equilibrium achieved in monopolistic competition?

    Firms enter or exit until zero profit. Free entry and exit drive economic profits to zero.

18. What happens to prices when a monopolistic competitor exits the market?

    Prices may increase. Reduced competition allows remaining firms more pricing power.

19. Which curve represents the firm's perceived demand in monopolistic competition?

    The demand curve. Each firm faces its own downward-sloping demand curve.

20. How does price compare to marginal cost in monopolistic competition?

    Price is greater than marginal cost. Market power allows pricing above marginal cost.

21. What happens to consumer surplus in monopolistic competition compared to perfect competition?

    It is lower. Inefficiency from pricing above marginal cost reduces surplus.

22. How does product differentiation impact market power?

    Increases market power. Unique products reduce substitutability and price sensitivity.

23. What is monopolistic competition?

    A market structure with many firms selling differentiated products. Combines competitive elements with monopoly-like product control.

24. Identify one way monopolistic competition benefits consumers.

    Greater variety of products. Product differentiation creates diverse consumer options.

25. What does a downward-sloping demand curve indicate about a firm's pricing power?

    Some pricing power. Can charge above marginal cost without losing all customers.

26. In monopolistic competition, what is the effect of brand loyalty?

    Reduces elasticity of demand. Customer loyalty makes demand less responsive to price.

27. What is a firm's goal in monopolistic competition?

    Maximize profit. Standard objective for firms in any market structure.

28. Identify the market power of firms in monopolistic competition.

    Limited market power. Product differentiation provides some control over price.

29. What is a major source of inefficiency in monopolistic competition?

    Excess capacity. Underutilized productive capacity wastes resources.

30. What type of efficiency is not achieved in monopolistic competition?

    Allocative efficiency. Price exceeds marginal cost, creating deadweight loss.

31. What is the effect of excess capacity on costs?

    Higher average costs. Underutilized capacity increases per-unit production costs.

32. Identify the type of curve that is tangent to the demand curve in long-run equilibrium.

    Average Total Cost (ATC) curve. Long-run equilibrium condition where price equals average cost.

33. What is the relationship between average cost and price in long-run equilibrium?

    Price equals average cost. Zero economic profit condition in long-run equilibrium.

34. How does product variety affect consumers in monopolistic competition?

    Increases consumer choice. Product differentiation offers more options to consumers.

35. State the formula for total revenue (TR).

    $TR = P \times Q$. Total revenue equals price multiplied by quantity sold.

36. What is the typical result of a firm offering a unique product feature?

    Increased market share. Differentiation attracts customers from competitors.

37. What is a characteristic of the short run in monopolistic competition?

    Firms can earn profits or losses. Fixed costs prevent immediate market adjustments.

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