Practice Problems

1. Consider each of the following statements and tell whether they are TRUE or FALSE. Explain why. While answering each part of the question, USE GRAPHS!!!

Comparing monopoly to monopolistic competition, we can tell that…

a. …in both cases the firm is facing a downward sloping demand curve.

b. …in both cases the firm will earn economic profit in the long run.

c. …allocation of resources in both market structures is inefficient.

2. In the long run, firms in monopolistic competition
a. produce at the point where the average total cost curve is tangent to the demand curve.
b. earn positive economic profits.
c. produce at the minimum point of their average total cost curves.
d. face steeper demand curves than in the short run.
e. produce at a point where MC>MR.

3. What is the major difference between perfect competition and monopolistic competition? How does this difference explain the shape of the demand curve faced by firms in each of these two market structures?

4. Suppose there are five firms in the market for thingumabobs, each producing an equal share of the entire market output.
a. Calculate the four-firm concentration ratio for the thingumabob industry.

b. Calculate the Herfindahl index for this industry.

c. What market structure does this industry represent? Draw the demand curve each firm typically faces in this market structure and explain why the curve has this shape.

5. Is it easier to collude in a monopolistically competitive industry or in an oligopolistic industry? Explain.



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