CHAPTER 16 MONOPOLISTIC COMPETITION ( pg 363 )

(1)Sleek Sneakers Co. is one of many firms in the market for shoes.

a. Assumes that Sleek is currently earning short-run economic profits. On a correctly

labelled diagram, show Sleek’s profit-maximizing output and price, as well as the area
representing profit.

ANSWER:

PRICE (RM)

MC

ATC

10 A

5 B
e
AR=DD
PROFIT

MR
0 20 QUANTITY (UNIT)

PRICE = RM10 ‘

OUTPUT = 20 UNITS

TR = PRICE (P) X QUANTITIES (Q) TC = RM 5 X20

= RM10 X 20 UNITS = RM100
=RM200

PROFIT = TR – TC
=RM200 – RM100
= RM100

 The area of the highlighted box is the profit of Sleek company.

 b. What happens to Sleek’s price, output, and profit in the long run? Explain this

change in words, and show it on a new diagram.

ANSWER:

PRICE (RM)

MC

ATC
10

8
5
E0
E1 AR0=D0D0

AR1=D1D1
MR1 MR0

15 20 QUANTITY (UNIT)
BM

Apabila Sleek mendapat untung lebih normal dalam jangka pendek,firma baru akan
masuk ke pasaran. Sebahagian daripada pelanggan sedia ada akan membeli firma baru
tersebut. Oleh itu, Sleek akan mengalami kekurangan pelanggan dan keluk permintaan firma
tersebut akan mengalih ke kiri dari AR0=D0D0 dan MR0 ke AR1D1D1 dan MR1 sehingga
mendapat untung normal dalam jangka panjang.

Diagram atas menunjukkan penyesuaian untung lebih normal kepada untung normal
dalam jangka panjang kesan kemasukan firma baru ke pasaran.

(a) Dalam jangka pendek, keseimbangan dicapai apabila kos sut sama dengan hasil sut
(MC = MR0) pada titik E0. Pada titik E0, kuantiti output ialah 20 unit dan harga ialah
RM10. Sleek mendapat untung lebih normal sebanyak RM100 (TR(RM200) –
TC(RM100)).

(b) Untung lebih normal yang dinikmati Sleek sedia ada akan menarik firma baru masuk
ke pasaran lalu menyebabkan keluk permintaan dan keluk hasil sut Sleek beralih ke
kiri dari AR0 = D0D0 dan MR0 ke AR1 = D1D1 dan MR1.

(c) Dalam jangka masaa panjang, keseimbangan baru dicapai apabila kos sut sama
dengan hasil sut (MC = MR1) pada titik E1. Pada titik E1, kuantiti output ialah 15 unit
dan harga ialah RM8. Jumlah hasil adalah sama dengan jumlah kos, iaitu RM 120.

Oleh itu, dalam jangka panjang, Sleek akan mendapat untung normal dan tiada firma baru
akan masuk ke pasaran.
BI

When firms in monopolistically competitive market gain super normal profit in the
short term, new firms will enter the market. Some of our existing customers will buy the new
firm. Thus, firms that have supernormal profits would suffer a lack of customers and the firm
demand curve will shift to the left from AR0= D0D0 and MR0 to AR1D1D1 and MR1 until all
firms in monopolistically competitive market make normal profits market in long-term .

Diagram above shows the adjustment of Sleek from supernormal profit to normal
profit in the long term because of the entry of new firms into the market

.
(A) In the short term, the equilibrium reached when marginal costs equal marginal revenue
(MC = MR0) at point E0. At the point E0, the quantity of output is 20 units and the price is
RM10. Sleek have supernormal profit of RM100 (TR (RM200) - TC (RM100)).

(B) The supernormal profits enjoyed by Sleek will attract new firms into the market and
cause the demand curve and marginal revenue curves shift to the left from AR0 = D0D0 and
MR0 to AR1 = D1D1 and MR1.

(C) In the long term, the new equilibrium reached when marginal costs equal marginal
revenue (MC = MR1) at point E1. At point E1, the quantity of output is 15 units and the price
is RM8. Total revenue is same to the total cost , that is RM 120.

Thus, in the long term, Sleek will make normal profits and no new firms will enter the
market.
c. Suppose that over time consumers become more focused on stylistic differences among
shoe brands. How would this change in attitudes affect each firm’s price elasticity of
demand? Sleek’s price, output, and profits? In the long run, how will this change in demand
affect?

When the consumer become more focused on stylistic differences among shoe brands,
Sleek will use the advertisement to set his or her product apart from the
competition.Advertising is common with differentiated consumer products, and much less
common with homogeneous goods. Buyers are willing to pay more for the shoes because
they view the shoes as being more different than the otherwise would.

If so, it would make markets less competitive and Sleek’s demand curves more
elastic, and this would lead firms to charge higher prices. But, advertising might make easier
for customer to find the Sleek offering the best price, in this case, it would make markets
more competitive and firm’s demand curves more elastic, which would lead to lower price,
so, the output and the profit will increase. In the long run, the demand of the will decrease,
Advertising by all firms might decrease the demand for any one firm’s product and also
demand of Sleek’s shoes, so the demand curves of Sleek’s shoes become more elastic.

d. At the profit-maximizing price you identified in part (c), is Sleek’s demand curve elastic or
inelastic？Explain.

The Sleek’s demand will become more elastic. Because advertising might make easier
for customer to find the Sleek offering the best price, it would make markets more
competitive and firm’s demand curves more elastic, which would lead to lower price.
(2) For each of the following charateristics, say whether it describes a monopoly firm, a

monopolistically competitive firm, both, or neither?

a. Faces a downward-sloping demand curve.

Answer: monopoly firm and monopolistically competitive firm

b. Has marginal revenue less than price.

Answer: monopoly firm and monopolistically competitive firm

c. Faces the entry of new firms selling similar products.

Answer : monopolistically competitive firm

d. Earn economic profit in the long run.

Answer : no one

e. Equates marginal revenue and marginal cost.

Answer : monopoly firm and monopolistically competitive firm

f. Produces the socially efficient quantity of output.

Answer : no one
5. Sparkle is one firm of many in the market for toothpaste, which is in long-run equilibirium.

a. Draw a diagram showing Sparkle’s demand curve, marginal-revenue curve,

average-total-cost curve, and marginal-cost curve. Label Sparkle’s profit-maximizing

output and price.

PRICE (RM)

MC

ATC

10

AR=DD

MR
0 20 QUANTITY (UNIT)

Profit-maximizing output = 20 unit

Profit-maximizing price = RM 10
b. What is Sparkle’s profit? Explain.

Profit = TR – TC

TR = P X Q TC = ATC X Q

=20 X 10 =10 X 20

=RM 200 =RM 200

PROFIT = RM200 – RM 200

=RM 0

BM

Sparkle mendapat untung normal dalam jangka masa panjang ini. Untung normal
berlaku apabila keluk hasil purata atau keluk harga menyentuh dengan keluk kos purata
minimun seperti ditunjukkan pada rajah di atas.

Kuantiti output yang memaksimumkan keuntungan diperoleh apabila kos sut sama
dengan hasil sut pada titik e. Pada titik e, harga ialah RM10 dan output ialah 20 unit. Jumlah
hasil ialah RM200 dan jumlah kos juga ialah RM200, oleh itu untungnya ialah RM 0.

Keadaan ini berlaku kerana dalam pasaran persaingan bermonopoli, firma lama yang
mendapat keuntungan akan menyebabkan firma baru masuk, dan keluk permintaan firma
akan beralih ke kiri. Sebaliknya, firma lama itu yang mengalami kerugian akan
menyebabkan syarikat lama keluar, dan keluk permintaan akan beralih ke kanan. Oleh sebab
peralihan keluk permintaan, akhirnya Sparkle akan menemukan keseimbangan pasaran baru
dalam jangka masa panjang. Oleh itu, Sparkle dalam pasaran peraingan bermonopoli, telah
menemui keseimbangan yang baru apabila harga sama dengan jumlah kos, dan Sparkle
mendapat keuntungan sifar.

Untung normal merupakan untung yang memadai bagi sebuah firma untuk
meneruskan operasinya. Pada tahap ini, pasaran tidak menggalakkan kemasukan firma baru.
Kos terhadap untung normal telah mengambil kira kos melepas. Ini bermakna firma masih
mendapat keuntungan dan tidak mengalami kerugian.
BI

Sparkle gain normal profit in the long term. Normal profit occurs when the yield
curve or the average price curve touches the minimum average cost curve as shown in the
diagram above.
The quantity of output that maximizes the profits obtained by firms when marginal
cost (MC) equals marginal revenue (MR) at the point e. At point e, the price is RM10 and
output is 20 units. Total revenue (TR) is RM200 and the total cost (TC) is RM200, so the
profit is RM 0.

In a monopolistically competitive market, it firms are making profit, new firms enter,
and the demand curves for the incumbent firms shift to the left. Similiarly, it firms are
making losses, old firms exit, and the demand curves of the remaining firms shift to the right.
Because of these shifts in demand, a monopolistically competitive firm eventually finds itself
in the long-run equilibirium shown here. In this long-run equribirium, price equals average
total cost, and the firm earns zero profit.

Normal profit means profit is enough for a firm to continue operations. At this point,
the market does not encourage the entry of new firms. The cost of normal profit already
consists of opportunity cost, this means that firms still make a profit and don’t have any loss.
c. On you diagram, show the consumer surplus derived from the purchase of Sparkle
toothpaste. Also show the deadweight loss relative to the efficient level of output.

The deadweight loss is represented by the area of the triangle between the demand curve
( which reflects the value of the good to consumer) and the marginal-cost curve ( which
reflects the costs of the monopoly.

PRICE (RM)

MC

ATC

10

Deadweight loss AR=DD

MR
0 20 efficiency of output QUANTITY (UNIT)

Deathweight loss

Consumer suplus

d. If the government forced Sparkle to produce the efficient level of output, what
would happen to the firm? What would happen to Sparkle’s customer?
If the giovernment forced Sparkle to produce the efficient level of output, Sparkle
need to increase their product and decrease the price because the efficient level of
output is found where the demand curves and the marginal cost intersect. This lower
price would give customer an accurate signal about the cost of producing the goods,
so the customer would buy the efficient quantity.
(6) Classify the following market as perfectly competitive, monopolistic, or monopolistically
competitive, and explain your answers.

a. wooden no.2 pencils

Perfectly competitive market. It is because wooden no.2 pencils is a standardized or

homogeneous product. There have many subtitude goods which can replace it.
Example of the subtitude goods is wooden no.3 pencils.

b.copper

Perfectly competitive market. It is because copper a standardized or homogeneous

product. There also have many subtitude goods which can replace it. For the
examples of these subtitudes good is steel, iron, or other metals which also have the
charateristic of good conductor same as copper.

c. local telephone service

Monopolistic. Because the local telephone got one only in our country, that is,
Telekom Malaysia (TM). The government gives the single firm an exclusive right to
produce the sevices. So that’s why got only one local telephone service in our country
because of the rights of the producers have to be protected.

d. peanut butter

Monopolistically competitive. Because peanut butter is a differentiated product. That

means product are same but different in quality, price and marketing. They may be
difference in design, package, reliability, service, ease of access to the product, price,
and advertising. So, there have many brands of peanut petter such as Lady Choice,
Skippy, Nutella and so on.

e. lipstick

Monopolistically competitive. Because lipstick is a differentiated product. That

means product are same but different in quality, price and marketing. They may be
difference in design, package, reliability, service, ease of access to the product, price,
and advertising. So, there have many brands of lipstick such as Silky Girl, Maybeline,
Revlon and the list goes on.