economics test 3

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what is a characteristic of monopolistic competition?
Large number of firms compete.
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what is a characteristic of monopolistic competition?
Each firm produces a different product.
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what is a characteristic of monopolistic competition?
Firms compete on product quality, price and marketing.
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what is a characteristic of monopolistic competition?
Firms are free to enter and exit.
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What are the three implications of the presence of a large number for firms?
Small market share, ignore other firms and collusion impossible.
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Define small market share?
Firms only have limited power to influence the price of the product and price can deviate from the market price by a small amount.
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Define ignore other firms?
No one firm can deviate the market conditions , so no one firms actions directly affect the actions of the other firms.`
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Define collusion impossible?
Firms would like to be able to conspire to fix higher price (called collusion) but because there are many firms collusion is not possible.
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Define a differentiated product?
is one that is a close substitute but not a perfect substitute for the products of the other firms.
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Define quality?
The quality of a product is the physical attributes that make it different from the products of other firms.
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Define price?
Because of product differentiation, a firm in monopolistic competition falls a downward sloping demand curve, therefore the firm can set both its price and output.
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Define entry (economic profit)?
When existing firms make economic profit, new firms enter the industry. This entry lowers price and eventually eliminates economic profit.
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Define exit (economic loss)?
When existing firms incur economic loses, some firms leave the industry. This exit increases prices and eventually eliminates economic loss.
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What are the two key differences between monopolistic competition and perfect competition?
Excess capacity and mark up.
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Define excess capacity?
A firm has excess capacity if it produces below its efficient scale, which is the quantity at which average total cost is at a minimum.
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Define mark up?
Is the amount by which the price exceeds marginal cost.
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When are resources used efficiently?
When marginal social benefit equals marginal social cost.
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what is a characteristic of monopolistic competition?

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Each firm produces a different product.

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what is a characteristic of monopolistic competition?

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