Less elastic than a pure competitor and more elastic than a pure monopolist. Your graphs should look like Figures 23-12 and 25-1 in the chapters. Price is higher and output lower for the monopolistic competitor. Pure competition: P = MC (allocative efficiency); P = minimum ATC (productive efficiency). Monopolistic competition: P . MC (allocative inefficiency) and P . minimum ATC (productive inefficiency). Monopolistic competitors have excess capacity meaning that fewer firms operating at capacity (where P = minimum ATC) could supply the industry output.

A four-firm concentration ratio of 60 percent means the largest four firms in the industry account for 60 percent of sales; a four-firm concentration ratio of 90 percent means the largest four firms account for 90 percent of sales. Shortcomings: (1) they pertain to the nation as a whole although relevant markets may be localized; (2) they do not account for interindustry competition; (3) the data are for U.S. products -- imports are excluded; and (4) they don't reveal the dispersion of size among the top four firms.

Herfindahl index for A: 2400 (= 900 + 900 + 400 + 100 + 100). For B: 4300 (= 3600 + 625 + 25 + 25 + 25). We would expect Industry A to be more competitive than Industry B where one firm dominates and two firms control 85 percent of the market.

The matrix shows the four possible profit outcomes for each of two firms depending on which of two price strategies each follows. Example: If C sets price at $35 and D at $40 C's profits will be $59 000 and D's $55 000.

(a) C and D are interdependent because their profits depend not just on their own price but also on the other firm's price.

(b) Likely outcome: Both firms will set price at $35. If either charged $40 it would be concerned the other would undercut the price and its profit by charging $35. At $35 for both C's profit is $55 000; D's $58 000.

(c) Through price collusion -- agreeing to charge $40 -- each firm would achieve higher profit (C = $57 000; D = $60 000). But once both firms agree on $40 each sees it can increase its profit even more by secretly charging $35 while its rival charges $40.

Assumptions: (1) Rivals will match price cuts; (2) Rivals will ignore price increases. The gap in the MR curve results from the abrupt change in the slope of the demand curve at the going price. Firms will not change their price because they fear that if they do their total revenue and profits will fall. Shortcomings of the model: (1) It does not explain how the going price evolved in the first place; (2) it does not allow for price leadership and other forms of collusion.

Effect (1): Advertising may increase demand allowing the firm to expand output and achieve economies of scale meaning a lower ATC. Effect (2): Advertising is a business expense implying a higher ATC. If (1) . (2) ATC will fall and consumers may benefit through lower prices. If (1) (2) per unit cost will rise and consumers will likely face higher prices.