Question 1:
(a) Explain the concept of a concentration ratio. Is the concentration ratio in a monopolistically competitive industry likely to be higher than for a perfectly competitive industry? Explain your answer
(b) Suppose the minimum point on the Long-run Average Cost (LRAC) curve of a soft drink firm's lemonade is $1 per litre. Under conditions of monopolistic competition, will the price of a litre bottle of lemonade in the long-run be above $1, equal to $1, less than $1 or impossible to determine. Illustrate your answer using a diagram
Question 2:
What will happen to the equilibrium price and quantity of butter in each of the following cases? Illustrate with a diagram and explain whether demand or supply (or both) have shifted and in which direction. (In each case, assume ceteris paribus).
(a) A rise in the price of magarine;
(b) A rise in the demand for yoghurt;
(c) A rise in the price of bread;
(d) A rise in the demand for bread;
(e) An expected rise in the price of butter in the near future;
(f) A tax on butter production;
(g) The invention of new, but expensive, process for removing all cholesterol from butter, plus the passing of a law which states that all butter producers must use this process.