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Exam 15: Monopolistic Competition

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Question 21

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Explain the strategy of product differentiation?

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It is a strategy that firms us...

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Question 22

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According to its advocates, what are four advantages product differentiation and advertising provide to consumers?

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Product differentiation satisfies the va...

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Question 23

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Comment on the following statement: "The demand facing a firm in perfect competition is less elastic than the demand facing a firm in monopolistic competition."

Using Table 15.1 above fill in the first two columns by identifying the number of firms and the types of products produced by each industry structure.

What arguments can be made in favor of product differentiation and advertising?

Critics of advertising argue that advertising by its very nature imposes a cost on society. Explain what these costs are.

Draw a graph showing the demand curve faced by a perfectly competitive firm. On the same graph, draw the demand curve faced by a monopolistically competitive firm.

It is often argued that gas stations operate inefficiently because they have "excess capacity" in the form of more pumping stations than they would otherwise need if they were operating under conditions of perfect competition. However, can you think of any reason why a gas station franchise owner would wish to install more pumps than he knows will rarely if ever be fully utilized at any one time? Can you explain the economic logic of this "apparent" wastefulness?

Define horizontal differentiation.

Many people have observed that retail gas stations tend to operate very closely to one another. Explain the logic behind having a gas station at each corner of an intersection.

What is behavioral economics?