"economics"exercise:monopolistic competition

C is correct. Recognition lag refers to the time required before policymakers realize that a policy action is required because data appear with a considerable lag and are subject to substantial revision. A policy action to spend on infrastructure would occur at the conclusion of this lag and, as a result, the recognition lag is not a constraint on any specific type of policy action.

A is incorrect because the impact lag refers to the length of time required for a policy action to become evident in the economy. When spending on an infrastructure project begins, there will be a delay in judging its effects and making any related adjustments to more effectively stimulate the economy due to the impact lag.

B is incorrect because the action lag refers to the length of time required to actually implement a policy action once it has been decided on. In the case of infrastructure spending, it may take several months of planning before the project is put into action, thereby constraining its near-term stimulative effect.

C is correct. As the name implies, monopolistic competition is a hybrid market structure. The most distinctive factor in monopolistic competition is product differentiation. Although the market is made up of many firms that compose the product group, each producer attempts to distinguish its product from that of the others, and product differentiation is accomplished in a variety of ways.

A is incorrect. Just as with the perfectly competitive market structure, with relatively low entry costs, more firms will enter the market and lure some customers away from the firm making an economic profit. The loss of customers to new entrant firms will drive down the demand for all firms producing similar products. In the long run for the monopolistically competitive firm, economic profit will fall to zero.

B is incorrect. In monopolistic competition, there is no well-defined supply function. The information used to determine the appropriate level of output is based on the intersection of MC and MR. However, the price that will be charged is based on the market demand schedule. The firm’s supply curve should measure the quantity the firm is willing to supply at various prices. That information is not represented by either marginal cost or average cost.