Deck 13: Monopolistic Competition

Question 1

Which statement is true?

A)The product variety effect suggests that there will be too much entry in a monopolistically competitive industry.
B)The product variety effect suggests that a firm in a monopolistically competitive industry is more likely to shut down.
C)The business stealing effect suggests that there is too little entry in a monopolistically competitive industry.
D)Depending on the relative importance of the business stealing and the product variety effects, there can be too much or too little entry in a monopolistically competitive industry.
E)None of the above.

Answer 1

Depending on the relative importance of the business stealing and the product variety effects, there can be too much or too little entry in a monopolistically competitive industry.

Question 2

In the short run in a monopolistically competitive industry:

A)MR = MC; if a firm is making zero economic profits, it will immediately leave the industry.
B)MR = MC; if a firm is making negative economic profits it will immediately leave the industry.
C)MR = MC < P; a firm can make positive, negative or zero economic profits.
D)MR = ATC < P; a firm makes positive economic profits.
E)None of the above.

Answer 2

MR = MC < P; a firm can make positive, negative or zero economic profits.

Question 3

In the short run in a monopolistically competitive industry:

A)Firms can earn positive economic profits.
B)Firms can earn negative economic profits.
C)Firms can earn zero economic profits.
D)Firms are profit maximizers, setting MR = MC if they produce a positive level of output.
E)All of the above statements are true.

Answer 3

All of the above statements are true.

Question 4

In the short run for a firm in a monopolistically competitive industry:

A)P > MC = MR; there is a DWL.
B)P = MC; there is no DWL.
C)P must be equal to ATC, and there is a positive DWL.
D)P < AVC, there is a DWL
E)As the firm faces a perfectly elastic demand curve at the market price, MR = MC = P, and there is no DWL.

Question 5

In a monopolistically competitive industry, which statement is true?

A)MR = MC ≤ P = ATC in the long run
B)ATC is minimized in the long run.
C)MC = P > ATC and a firm can earn positive economic profits in the long run.
D)MC = ATC = P in the long run equilibrium.
E)None of the above.