CHAPTER REVIEW

FACTS AND TOOLS

Question 17.5

1. Though its name can sometimes cause confusion for students, the market structure we call “monopolistic competition” is so named because it has some features of monopoly and some features of competition.

  1. In what ways is a monopolistically competitive market like a monopoly? In what ways is it like competition?

  2. Which of the outcomes of monopolistically competitive markets is a direct result of its monopoly-like features? Which outcome is a result of its competitive features? Can you summarize these results, so that they can be applied to product markets in general?

Question 17.6

2. In a city like New York, the market for stand-up comedians is likely to be monopolistically competitive. Explain why this is so. If the market is monopolistically competitive, then what can be said about prices, output, and profits in this market?

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Question 17.7

3. Fill in the blanks with “=,” “<,” or “>” as appropriate to describe the long-run outcome in a monopolistically competitive market.

  1. MC _____ AC

  2. P _____ AC

  3. MR _____ MC

  4. P _____ MC

Question 17.8

4. For each of the following items, describe how the market that these sellers participate in resembles monopolistic competition. For bonus points (if your professor agrees), describe briefly the strategies that sellers in the market use in order to differentiate their products.

  1. New car dealerships

  2. Real estate agents

  3. Landscapers

THINKING AND PROBLEM SOLVING

Question 17.9

1. As you read in the chapter, the requirements for an industry to be considered monopolistically competitive are that there are many firms and those firms are producing unique, or differentiated, products. One industry in which we find differentiated products is the recording industry. Not only are there many genres of music (iTunes lists almost 50), but within each genre there are countless artists as well.

Over the past few decades, technology has reduced the fixed costs of recording and the marginal costs of distributing music. In 1979, for example, the average studio bill for an album was more than $30,000 ($170,000 in today’s dollars). Nowadays, with digital recording technology, an artist or band can record an entire album for a few thousand dollars and the album can be distributed at low cost as MP3s on the Internet, with no record store involved.

  1. What do you expect to happen to the music industry because of the evolution of much cheaper recording technology? What do you expect to happen to the number of recording artists?

  2. Suppose there are initially only two recording artists in all of the record industry: the Decemberists (an indie rock band) and Yo-Yo Ma (a famous cellist). How many MP3s will they each be able to sell? Who would buy MP3s from the Decemberists? What about from Yo-Yo Ma? Will anybody buy MP3s from both?

  3. Now suppose that another artist joins the industry: Isobel Campbell (an indie rock cellist!). What will happen to the demand curves for MP3s that the Decemberists and Yo-Yo Ma face? Will they keep all of their fans? Will they keep any of their fans? What do you think will happen to the total number of MP3s sold in the industry?

  4. Generally speaking, as technology makes it cheaper and cheaper to produce MP3s, and as more and more bands join the music industry, what will happen to the total number of MP3s downloaded by music fans? What will happen to the MP3s sold by each individual band? What will happen to the profits of each band?

Question 17.10

2. In a famous article on advertising,9 Gary Becker and Kevin Murphy wrote about advertisements that run during television programs: “One can say either that advertising pays for the programming—the usual interpretation—or that programming compensates for the advertising, which is our preferred interpretation.” Viewing ads during a television program (or hearing them during a radio broadcast) makes consumers worse off, so they must be compensated (with programming) for having experienced the ads. On the other hand, print ads in newspapers and magazines can be avoided by consumers, so these ads must make consumers better off; otherwise, no one would ever read them. Use this theory to answer the following questions:

  1. Think about the different types of advertisements discussed in the chapter (informative, signaling, part of the product). Which type is more likely to appear on TV? Which type is more likely to appear in a newspaper or magazine? Often you’ll see television commercials, especially for pharmaceuticals, that say: “See our ad in such-and-such magazine.” What does this say about the difference between television and print ads?

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  2. Becker and Murphy wrote their article before TiVo and other DVR systems became popular. Nowadays, ads on television are avoidable (to a degree), just like ads in a newspaper. What impact do you think this new technology has on the types of ads you see on TV?

Can you see the influence of TIVO in this picture?
THE KOBAL COLLECTION AT ART RESOURCE, NY

Question 17.11

3. Why do you think chain restaurants like Chili’s, Applebee’s, and TGI Fridays are always changing their menus—introducing new appetizers, new entrees, and new cocktails? Are they all just trying to find the perfect menu, or is there something else going on?

Question 17.12

4. Wrigley’s spends around $30 million per year on intense, over-the-top commercials that claim to showcase what it feels like to chew 5® Gum—Wrigley’s second most popular gum brand. Despite claiming in a tongue-in-cheek way to provide information about the gum to viewers, it is obvious that very little information is embedded in the high-concept, visually stimulating commercials. So what is the point of the advertising? How would an economist view this type of advertising? How do you view it? Would it be better to have a perfectly competitive market in gum?

Question 17.13

5. Many restaurants are not 100% full all day long, especially in the late morning and during the afternoon. Economists call this “excess capacity” and it is a characteristic result of monopolistic competition. What would restaurants have to do in order to be closer to 100% full all of the time? Why won’t they do this?

!launch! WORK IT OUT

Let’s compare monopolistic competition with perfect competition.

  1. Do competitive firms make profits in the short run? How about in the long run?

  2. Do monopolistically competitive firms make profits in the short run? How about in the long run?

  3. Is there a difference in profits between competition and monopolistic competition? If so, what accounts for it?

  4. Examine Figure 17.2. In the figure, what are the differences between monopolistic competition and competition?

  5. In Figure 17.2, one specific point represents the price we pay for product differentiation. What is it?