25. By definition, a contestable market is an imperfectly competitive situation

Question

25. By definition, a contestable market is an imperfectly competitive situation that is subject to entry. Even if there is only one producer of a particular good, the market may NOT be contestable because: a. New technology can make the current good obsolete. b. New technology cannot make the current good obsolete. e. Domestic firms can potentially enter the market d. Foreign producers of the good can provide the good to the U.S. market 6 Private ownership of a monopoly may benefit society because the monopoly will have an incentive to e. lower its costs to earn a higher profit. b. price its good according to the intersection of marginal cost and average revenue. c. charge a price that prevents some people from buying. d. charge a price that is consistent with that of a benevolent social planner. 27. Monopolistic competition is characterized by which of the following attributes? ) Free entry; (i) Product differentiation; (ii) Many sellers a. () and (ii) only d. (), (ii), and (ii) b. (1) and (ii) only c. (ii) and (ii) only. 28. When an industry has many firms, the industry is a. an oligopoly if the firms sell differentiated products, but it is monopolistically competitive if the firms sell identical products. b. an oligopoly if the firms sell differentiated products, but it is perfectly competitive if the firms sell identical products. c. perfectly competitive if the firms sell differentiated products, but it is monopolistically competitive if the firms sell identical products d. monopolistically competitive if the firms sell differentiated products, but it is perfectly competitive if the firms sell identical products. 29. Monopolistic competition differs from perfect competition because in monopolistically competitive markets each o offers a somewhat different produc in a perfectly competitive market because the firm in the monopolistically competitive market a. make zero profit in long run. b. faces a horizontal demand curve at the market clearing price c. is characterized by setting the price at PATC. t. Moreover, a profit-maximizing firm in a monopolistically competitive market differs from a d. has no barriers to entry Figure#3:

Explanation / Answer

(25) (b)

If new technology cannot make the product obsolete, no new firms will enter the market, so the market will be non-contestable.

(26) (a)

Since monopolist faces a downward sloping demand curve, lowering cost is beneficial.

(27) (d)

In monopolistic competition, there are many firms in the market with free entry and exit, and each firm sells similar but slightly differentiated product.

(28) (d)

Perfectly competitive firms sell identical products and monopolistic competitive firms sell similar but differentiated products.

(29) All options are wrong.

Both a perfect competitor and monoolistic competitor earns zero profit in long run, with no entry or exit barriers and equates price with ATC in long run equilibrium. However, perfect competitor faces horizontal demand curve and monopolistic competitor faces downward sloping demand curve.

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