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1. Assuming that this firm is profitable in the short term, what will happen to it over the long-term? Why?

Over the long-run, its economic profit will begin to fall, as more competition enters the market. The firmís only hope is to continue to innovate and lower its own production costs, as its demand becomes more and more elastic.

2. Why does this firm need a marketing plan, if itís in a competitive industry?

This industry is not really competitive, since this and competing firms are selling differentiated products. It needs a marketing plan to help it increase demand for its product.

3. Based on the information in the article, what characteristics does the market for footwear have that makes it monopolistically competitive?

Small firm among many selling a differentiated product, easy entry into the market.

Multiple Choice/True False Questions

1. Assuming that this market is monopolistically competitive, the firm that produces the Graffeeti shoes is a price-taker.
  1. True
  2. False
     ANS. B

2. The initial development costs discussed in the article can be considered

  1. Fixed costs
  2. Variable costs
  3. External costs
  4. Opportunity costs
     ANS. A

3. Assuming this is a monopolistically competitive industry, in the long run, this firmís profit will be
  1. The same as its short-run profit.
  2. Positive
  3. Negative
  4. Zero
     ANS. D

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