question archive The statements below are about monopolistic competition
The statements below are about monopolistic competition
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The statements below are about monopolistic competition. Indicate whether each statement is true or false and why.
1. A monopolistically competitive firm may be able to distinguish its product from other firms by adjusting its style, level of quality, or location offerings.
2. Product differentiation enables a monopolistically competitive firm to have some control over the price of its product.
3. In the long run each monopolistically competitive firm produces a level of output that results in allocative efficiency.
4. In the long run each monopolistically competitive firm produces a level of output that results in productive efficiency.
5. To maintain a competitive edge and earn economic profits, a monopolistically competitive firm has an incentive to improve its product.
6. Compared with perfectly competitive markets, under monopolistic competition consumers with diverse tastes benefit from the opportunity to choose from a greater range of products and services.
7. In order to maximize its profits, each monopolistically competitive firm must determine the price of its product, how to differentiate its product, and how much it will spend on advertising.
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1) True, monopolistically competitive firms use quality and features to distinguish themselves.
2) True, but they do not have total control over price.
3) False, allocative efficiency is achieved when a good or service is produced to the point where marginal cost = marginal benefit for consumers. It's false because
consumer and producer surplus exist in monopolistic competition.
4) False, productive efficiency is when an economy is not able to produce any more of one good without reducing the production of another good. This is false because firms in monopolistic competition can have variable resources and acquire more resources in the long run.
5) True, firms are always competing and thus must maintain an edge on competition.
6) True, consumers have greater freedom of choice and can derive more utility from vast choices.
7) True, firms must comply with prices already set in the industry in order to compete. However, they must also set themselves apart from the competition to stay in business.
