Deck 16: Monopolistic Competition

Question 1

A profit-maximizing firm in a monopolistically competitive market charges a price equal to marginal cost.

Answer 1

False

Question 2

A markup of price over marginal cost is inconsistent with free entry and zero profit.

Answer 2

False

Question 3

The market for wheat is most likely considered a monopolistically competitive market.

Answer 3

False

Question 4

There are four basic types of market structure.

Question 5

Monopolistic competition is the only market structure that features many sellers.

Question 6

Oligopoly is characterized by a few sellers offering similar products, whereas monopolistic competition is characterized by many sellers offering differentiated products.

Question 7

Monopolistically competitive firms, like monopoly firms, maximize their profits by charging a price that exceeds marginal cost.

Question 8

Monopolistic competition is characterized by many buyers and sellers, product differentiation, and barriers to entry.

Question 9

A monopolistically competitive market is characterized by barriers to entry.

Question 10

Monopolistic competition and monopoly are examples of a market structure called imperfect competition.

Question 11

The "competition" in monopolistically competitive markets is most likely a result of having many sellers in the market.

Question 12

Monopolistic competition is characterized by a few sellers offering similar products, whereas oligopoly is characterized by many sellers offering differentiated products.

Question 13

For a profit-maximizing firm in a monopolistically competitive market, when price is equal to average total cost, price must lie above marginal cost.

Question 14

Monopolistic competition is characterized by many buyers and sellers, product differentiation, and free entry.

Question 15

Oligopoly and monopolistic competition are examples of a market structure called imperfect competition.

Question 16

The "monopoly" in monopolistically competitive markets is most likely a result of firms having some pricing power due to product differentiation.

Question 17

A profit-maximizing firm in a monopolistically competitive market can earn positive, negative, or zero profits in the short run.

Question 18

Product differentiation always leads to some measure of market power.

Question 19

A firm in a monopolistically competitive market can earn both short-run and long-run profits.

Question 20

To be considered an oligopoly, the market must have a concentration ratio below 50%.

Question 21

The term excess capacity refers to the fact that a firm operates on the upward-sloping portion of its average-total-cost curve.

Question 22

A firm in a monopolistically competitive market is usually indifferent to an additional customer walking through the door, since a sale to that customer will not increase the firm's profit.

Question 23

In the long run, monopolistically competitive firms produce where demand equals average total cost.

Question 24

In the long run, monopolistically competitive firms produce where demand equals marginal cost.

Question 25

When a firm in a monopolistically competitive market earns zero economic profit, its product price must equal marginal cost.

Question 26

When a firm operates with excess capacity, it must be in a monopolistically competitive market.

Question 27

In a monopolistically competitive market, the demand curves faced by incumbent firms are unaffected by the entry of new firms into the market.

Question 28

In a long-run equilibrium, firms in both perfectly competitive markets and monopolistically competitive markets produce a quantity below the efficient scale of production.

Question 29

In a monopolistically competitive market, the number of firms adjusts until economic profits are driven to zero.

Question 30

When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium, marginal cost must lie below average total cost.

Question 31

The product-variety externality states that entry of a new firm conveys a negative externality on consumers.

Question 32

When a monopolistically competitive firm is in a long-run equilibrium, the values of marginal cost, average total cost, and price are all the same.

Question 33

The product-variety externality states the benefits to consumers from the introduction of a new product.

Question 34

In a long-run equilibrium, both perfectly competitive markets and monopolistically competitive markets have price equal to average total cost.

Question 35

When a firm operates at efficient scale, it is producing at the minimum point on its average total cost curve.

Question 36

A monopolistically competitive firm faces a downward-sloping demand curve because there are few firms in the market.

Question 37

A firm in a monopolistically competitive market can earn short-run profits but not long-run profits.

Question 38

Excess capacity characterizes firms in monopolistically competitive markets, even in situations of long-run equilibrium.

Question 39

A firm that would experience higher average total cost by increasing production is operating with excess capacity.

Question 40

The term excess capacity refers to the fact that a firm produces a lower quantity than it would if it operated at the efficient scale.

Question 41

The business-stealing externality states that entry of a new firms imposes a cost on existing firms because they lose customers.

Question 42

Critics of advertising argue that firms use advertising to manipulate consumers' tastes.

Question 43

The product-variety externality and the business-stealing externality are both spillover benefits of new firms entering a monopolistically competitive market.

Question 44

Economists are unanimous in their belief that advertising is socially inefficient.

Question 45

Defenders of advertising argue that firms use advertising as a signal of quality, even if the advertising delivers little helpful information about the product.

Question 46

One thing that both critics of advertising and defenders of advertising agree on is that advertising fosters competition.

Question 47

The Mikati Philippines Hard Rock Cafe has the exact same menu as the Hard Rock Cafe in New York. This is an example of a brand name enhancing market efficiency for U.S. tourists visiting the Philippines.

Question 48

Economists who argue that advertising enhances market efficiency suggest that celebrity advertising signals inferior product quality.

Question 49

When advertising is used to relay information about price, each firm is able to enhance market power.

Question 50

When McDonald's opens a store in Dhaka, Bangladesh, it has a strong incentive to enforce product quality consistent with stores in the United States.

Question 51

The debate over whether advertising serves a valuable purpose in society is definitively answered by economists who study the tastes and preferences of individuals.

Question 52

Critics of advertising argue that advertising leads to less elastic demand for products and a larger markup of price over marginal cost.

Question 53

Advertising during the Super Bowl is an example of information about quality contained primarily in the existence and expense of the advertising.

Question 54

The product-variety externality and the business-stealing externality are both spillover costs of new firms entering a monopolistically competitive market.

Question 55

The claim that advertising reduces the elasticity of demand is likely to be made by a defender of advertising.

Question 56

Brand names are rarely used to convey information about product quality.

Question 57

If advertising decreases the elasticity of demand for specific brand names of hard liquor, we would expect firms to be able to charge a larger markup over marginal cost.

Question 58

The government of Italy will not allow any Hard Rock Cafe restaurants to open in Italy. Defenders of the efficiency of brand-name markets would argue that this has hindered restaurant market efficiency in Italy.

Question 59

Policymakers have generally come to accept the view that advertising enhances the efficiency of markets.

Question 60

Empirical evidence suggests that advertising usually leads to an increase in the price for advertised products.

Question 61

Suppose there is a market in which the firms hold the following market shares: 25%, 20%, 18%, 15%, 8%, 7%, 4%, 2%, 1%. What is the concentration ratio for this market?

Question 62

​A monopolistically competitive firm is a price-taker.

Question 63

​A monopolistically competitive firm cannot earn an economic profit in the long run.

Question 64

There is general disagreement among economists about the role of advertising, but there is widespread agreement about the role of brand names on market efficiency.

Question 65

Table 16-5
A monopolistically competitive firm faces the following demand schedule for its product. In addition, the firm has total fixed costs equal to 20.

Refer to Table 16-5. When this firm profit maximizes and faces a constant marginal cost of $7, what is the amount of its markup over marginal cost?

Question 66

Consider two industries in which firms hold the following market shares:
Industry A: 25%, 20%, 18%, 15%, 8%, 7%, 4%, 2%, 1%
Industry B: 30%, 10%, 9%, 8%, 8%, 8%, 8%, 6%, 6%, 5%, 2%
What are the concentration ratios for each industry? Which is more competitive?

Question 67

Which market structure(s) is(are) imperfectly competitive?

Question 68

The market structure in which each firm has a monopoly over the product it makes, but many other firms make similar products that compete for the same customers is called

Question 69

Table 16-5
A monopolistically competitive firm faces the following demand schedule for its product. In addition, the firm has total fixed costs equal to 20.

Refer to Table 16-5. If this firm has a constant marginal cost of $7, what is the profit-maximizing level of output?

Question 70

Which type of market structure has the fewest number of firms?

Question 71

​In the long run, a monopolistically competitive firm's demand curve becomes more elastic and shifts to the left

Question 72

Free entry eliminates long-run profits for firms in competitive and monopolistic industries.

Question 73

​If a monopolistically competitive firms incurs an increase in fixed costs, its price will rise and its output will fall.

Question 74

Firms in monopolistically competitive markets and monopolies can earn long-run profits due to barriers to entry.

Question 75

Which market structure(s) is(are) considered highly concentrated?

Question 76

Economists measure a market's domination by a small number of firms with a statistic called the

Question 77

The government may not be able to improve the inefficiencies of a monopolistically competitive market.

Question 78

​In the long run, a monopolistically competitive firm produces at efficient scale.

Question 79

Which market structure(s) include(s) many firms with differentiated products who can enter and exit the market freely?

Question 80

Describe the shape of the monopolistically competitive firm's demand curve.