Monopolistic Competition

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390 Part 5 . PRICES, PROFITS, AND INDUSTRY PERFORMANCE• CHECKPOINT 15.3 Product Development and Marketing1a. The increase in demand will increase the number of cookies sold and mostlikely increase the price she charges. (The effect on the price depends on theprecise manner in which the demand curve shifts, but most likely her pricewill rise.) Her economic profit will increase.1b. If additional advertising enables sales to increase so that total revenue increasesmore than total cost, she can increase economic profit.
Chapter 15 . <strong>Monopolistic</strong> <strong>Competition</strong> 391ANSWERS TO CHAPTER CHECKPOINT EXERCISES1a. The cable television market is not an example of monopolistic competition.1b. The wheat market is not an example of monopolistic competition.1c. The athletic shoe market is an example of monopolistic competition. Thereare several producers of athletic shoes, with extensive product differentiationand competition on quality, price, and marketing.1d. The soda market is not an example of monopolistic competition.1e. The shaving cream market is an example of monopolistic competition.There are several producers of shaving cream, with product differentiationand competition on quality, price, and marketing.1f. The toothbrush market is an example of monopolistic competition. Thereare many producers of toothbrushes, with extensive product differentiationand competition on quality, price, and marketing.1g. The ready‐mix concrete market is not an example of monopolistic competition.2. The audio equipment market is an example of monopolistic competition.3a. Lite and Kool produces 125 pairs of shoes a week because this is the quantityat which marginal revenue equals marginal cost.3b. Lite and Kool charges a price of $75 a pair of shoes.3c. Lite and Kool’s price is $75 a pair of shoes and its marginal cost is $50 apair of shoes. So, Lite and Kool’s markup is $75 a pair of shoes − $50 a pairof shoes, which is $25 a pair of shoes.3d. Lite and Kool’s price is $75 a pair of shoes and its average total cost is $35 apair of shoes. So Lite and Kool makes an economic profit of $75 a pair ofshoes − $35 a pair of shoes, which is $40 a pair of shoes. Lite and Kool produces125 pairs of shoe a week, so its weekly economic profit is $40 × 125,which is $5,000 a week.3e. Firms in monopolistic competition do not always have excess capacity inthe short run.3f. Lite and Kool does not have excess capacity. Its efficient scale, where itsaverage total cost is at its minimum, is less than 125, so Lite and Kool isproducing beyond its efficient scale.3g. Firms enter the market because the existing firms, of which Lite and Koolis one, are earning an economic profit.
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Monopolistic Competition

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