Economics 100

Assignment no. 3
Question : . What are the assumptions defining the model of monopolistic competition?
Answer : The three main assumptions of the monopoly are as under :
 Single firm
In a Monopoly, there is a single firm which produces all the output of the industry. In
other words, the firm and the industry are synonymous.
 Unique Firm
Unlike perfect competition, the monopolist produces the only product. In other
words, there are no close substitutes being produced by other firms. This means that
the customers can only buy output from one firm.
 Barriers to entry
One of the main reasons why monopolies arise and are sustained, is that barriers to
competition exist – more specifically, barriers to entry and exit.

2. List some examples of monopolistically competitive firms in your neighborhood.

Answer : Some examples of monopolistically competitive firms in my neighborhood

are as under :
Bakeries such as Gourmet, Cakes & bakes etc, coffee shops such as Gloria Jeans,
Second Cup etc, General stores, Furniture stores etc.

3. In what ways is a monopolistically competitive firm like a firm in perfect

competition and monopoly?
Answer : Perfect competition and Monopolistic competition:
- In both markets there are large number of buyers and sellers.
- Barriers to entry and exit are zero or very low.
- Both firms earn only normal profit in long run.
- Equilibrium is established at MR=MC.

Monopoly and Monopolistic competition:

- Firms are price makers.
- Equilibrium is established at MR=MC.
- AR/Demand curve is downward sloping and MR curve is below it in both
competitions.
- In both situations the equilibrium point is below the price line (AR).
- There is excess capacity in both types of market.