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What happens to a firm’s pricing strategy when it possesses monopoly power?
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A firm with monopoly power can set prices above marginal cost, leading to higher prices and lower quantities sold than in competitive markets.
Give an example of a market that operates under monopolistic competition.
The shoe market is an example, with many sellers offering differentiated products and competing on factors other than price.
How does the marginal revenue curve relate to the demand curve in imperfect competition?
In imperfect competition, the marginal revenue curve lies below the demand curve and has twice the slope.
Describe the efficiency of perfectly competitive firms in the long run.
Perfectly competitive firms are allocatively efficient and produce at the level where marginal cost equals marginal benefit, leading to no deadweight loss.
What are the key characteristics of a monopoly?
A monopoly is characterized by a single seller, high barriers to entry, a unique product with no close substitutes, and significant pricing power.
Explain why imperfectly competitive firms are not allocatively efficient.
Imperfectly competitive firms produce where MR = MC but price at the demand curve, resulting in a price above marginal cost and leading to allocative inefficiency and deadweight loss.
Why do monopolistically competitive firms earn zero economic profit in the long run?
They earn zero economic profit in the long run because new firms can easily enter the market, increasing competition and driving profits down.
Why is a perfectly competitive firm considered allocatively efficient?
A perfectly competitive firm is allocatively efficient because it prices at marginal cost (MR = MC), meaning it produces where marginal cost equals marginal benefit (demand curve).
What is meant by 'pricing power' in the context of imperfectly competitive markets?
Pricing power refers to the ability of firms in imperfectly competitive markets to influence the price of their products, unlike perfectly competitive firms which are price takers.
How does the demand curve for a monopolistically competitive firm differ from that of a perfectly competitive firm?
A monopolistically competitive firm has a downward-sloping demand curve, whereas a perfectly competitive firm has a horizontal demand curve.
What defines monopolistic competition?
Monopolistic competition involves many sellers offering differentiated products, low barriers to entry, zero economic profit in the long run, and some pricing power for firms.
Describe the market structure of an oligopoly.
An oligopoly is dominated by a few large firms, has high barriers to entry, and the firms have significant pricing power due to limited competition.
How do high barriers to entry affect market structure and competition?
High barriers to entry limit the number of new firms that can enter the market, reducing competition and allowing existing firms to maintain pricing power.
Why do firms in monopolistically competitive markets face a downward-sloping demand curve?
They face a downward-sloping demand curve because their products are differentiated, so they can raise prices slightly without losing all their customers, but higher prices still reduce quantity sold.
What factors contribute to high barriers to entry in oligopolistic markets?
High barriers to entry in oligopolistic markets include high startup costs, government regulations, and customer loyalty.
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