Deck 16: Monopolistic Competition

Question 1

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

Answer 1

False

Question 2

Policymakers do not accept the view that advertising enhances the efficiency of markets.

Answer 2

False

Question 3

Like a competitive firm, a monopolistically competitive firm maximises profit by setting P=MC.

Answer 3

False

Question 4

Advertising may impede competition by fostering brand loyalty and allowing firms to increase their mark-up.

Question 5

A firm in a monopolistically competitive market is usually concerned about each additional customer walking through the door, since it will always end up earning additional economic profits.

Question 6

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

Question 7

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

Question 8

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

Question 9

If firms in a monopolistically competitive market are earning positive profits, firms will enter until price equals the minimum of average total cost.

Question 10

Firms in monopolistic competition sell products that are identical to those produced by other firms.

Question 11

Firms in a monopolistically competitive market are operating at their efficient scale.

Question 12

Whenever a monopolistically competitive firm marks price above marginal cost, the firm will make a profit.

Question 13

Advertising only benefits suppliers of a good and has little value to consumers.

Question 14

The Pizza Hut in Agra, India has a very similar menu design, layout and content as the Pizza Hut in Bondi Junction, Sydney.This is an example of a brand name enhancing market efficiency for Australian tourists visiting India.

Question 15

Excess capacity occurs whenever a firm is operating at an output level below where average total cost is minimised.

Question 16

A price mark-up over marginal cost is inconsistent with market attributes of free entry and zero profit.

Question 17

If the long-run price is equal to marginal cost, then the firm must be operating at efficient scale.

Question 18

When McDonald's opens a store in Dhaka, Bangladesh, it will have an incentive to set product quality and customer service consistent with local standards.

Question 19

Perfect competition and monopolistic competition share the attributes of having many sellers and free entry.

Question 20

In the long-run equilibrium in a monopolistic market, a profit-maximising firm will see the price lower than average total cost.

Question 21

In centrally planned economies the usefulness of brand names is demonstrated when brand names allow consumers to identify producers.

Question 22

When poor-quality products are advertised using cheap advertising, consumers learn to ignore such cheap advertising.

Question 23

Critics of advertisements that depict 'beautiful' human bodies as the primary focus of the message are likely to claim that the purpose of the advertisement is to create desires that do not already exist.

Question 24

The profit-maximising rule for a firm in a monopolistically competitive market is to select the quantity at which marginal revenue is equal to long-run average total cost.

Question 25

Monopolistically competitive markets have all the desirable welfare properties of perfectly competitive markets.

Question 26

Brand names can improve product quality because firms will want to avoid the financial loss that would follow a fall in reputation.Firms will thus work harder to maintain high quality.

Question 27

In a monopolistically competitive industry, the profit-maximising firm will produce where marginal costs are equal to average total cost.

Question 28

If firms in a monopolistically competitive market are making accounting profits, this will always encourage more firms to enter the market.

Question 29

If advertising decreases the elasticity of demand for specific brand names of hard liquor, we would expect firms to be more able to exercise market power.

Question 30

If brand names are efficient market mechanisms, banning them will lead to less competition and higher prices in the markets brand names from which they are absent.

Question 31

The 'monopoly' in monopolistically competitive markets is the result of a firm having a monopoly on a product for which there are no substitutes.

Question 32

In the short run, a firm in a monopolistically competitive market operates much like a monopolist.

Question 33

Advertising can be used as a signal of product quality, even if the advertisement contains little information about the product.

Question 34

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

Question 35

Given that firms in monopolistically competitive markets share the attribute of many sellers with firms in perfect competition, it follows that firms in both markets face horizontal demand curves.

Question 36

Brand names can help communicate the quality of a product, even when the consumer has never purchased that product before.

Question 37

The business stealing externality arises because firms post a price above marginal cost and are therefore always eager to sell additional units.

Question 38

Advertising during the Rugby World Cup is an example of providing information in the advertisement's content.

Question 39

From a total welfare perspective, it is possible that too many firms can enter into a monopolistically competitive market.

Question 40

Firms that spend a large amount of money on advertising a particular product are likely to be providing consumers with a signal of product quality.

Question 41

Which of the following are attributes of a monopolistic competitive market?
(i) many firms competing for the same group of sellers
(ii) each firm produces a product that is slightly different from the other firms
(iii) in the long run, entry into the industry is restricted

A)(i) only
B)(i) and (ii) only
C)(ii) and (ii) only
D)(i), (ii), and (iii)

Question 42

Celebrities who endorse a product quality should ensure that the product meets its specifications, as a risk may exist of a fall in reputation.They should not leave this to the firm.

Question 43

The 'competition' in monopolistically competitive markets is most likely a result of:

A)free entry
B)product differentiation
C)strategic interactions among sellers
D)firms facing a downward-sloping demand curve

Question 44

Counterfeiting of goods is a rational market outcome of the success of a brand.

Question 45

The use of celebrity endorsements in advertising has enabled firms to differentiate their products.

Question 46

For the purposes of imperfect competition, a "few" firms is defined as:

A)more than one firm but less than five
B)more than five firms but less than 10
C)more than 10 firms but less than 20
D)none of the above, the definition of "few" is open to debate

Question 47

NARRBEGIN: 17-1
Graph 17-1
Refer to Graph 17-1.Which of the following graphs would most likely represent a profit-maximising firm in a monopolistically competitive market?

A)panel a
B)panel b
C)panel c
D)panel d

Question 48

NARRBEGIN: 17-1
Graph 17-1
Refer to Graph 17-1.The firm depicted in panel b faces a horizontal demand curve.If panel b depicts a profit-maximising firm:

A)it would not be operating in a monopolistically competitive market
B)it would not have excess capacity in its production as long as it is earning zero economic profit
C)it is not able to choose the price at which it sells its product
D)all of the above are true

Question 49

The profit-maximising rule for a firm in a monopolistically competitive market is to select the quantity at which:

A)average revenue exceeds average total cost
B)marginal revenue is equal to marginal cost
C)average total cost is minimum
D)average total cost is equal to marginal revenue

Question 50

In a monopolistically competitive market structure, each firm sells a good that is:

A)slightly different from goods sold by other firms
B)produced at minimum average cost
C)identical to other goods sold in the market
D)produced at minimum marginal cost

Question 51

The reason that monopoly remains a root-word for monopolistically competitive market is because of:

A)strategic interactions among sellers
B)there being many sellers
C)sellers being price makers rather than price takers
D)the homogeneous products that are produced

Question 52

NARRBEGIN: 17-1
Graph 17-1
Refer to Graph 17-1.If a firm in a monopolistically competitive market was producing the level of output depicted as Qd in panel d, it would:

A)be minimising its losses
B)be losing market share to other firms in the market
C)be operating at excess capacity
D)not be maximising its profit

Question 53

A profit-maximising firm in a monopolistically competitive market is characterised by which of the following?

A)revenue is always maximised along with profit
B)average revenue exceeds marginal revenue
C)marginal revenue exceeds average revenue
D)average revenue is equal to marginal revenue

Question 54

Which of the following are attributes of an oligopoly market?
(i) a few firms sell differentiated products
(ii) there are many buyers, but only a few sellers
(iii) each firm is concerned with how competitors will react to their decisions

A)(i) only
B)(i) and (ii) only
C)(ii) and (iii) only
D)(i), (ii) and (iii)

Question 55

Suppose that in the short run, a monopolistically competitive firm sells its product for $20 per unit.Its average total cost at the optimal level of output is $30.This means that:

A)the firm makes a loss in the short run and the long run
B)the firm makes a profit in the short run and the long run
C)the firm's demand curve will shift to the left as new firms enter the market
D)the firm's demand curve will shift to the right as firms leave the market

Question 56

When free entry is one of the attributes of a market structure, economic profits are:

A)eventually driven to zero
B)negative for all firms
C)never above or below zero
D)always positive

Question 57

The product-variety externality associated with monopolistic competition arises because in monopolistically competitive markets firms try to mimic the success of other brands and products.

Question 58

Monopolistic competition is characterised by which of the following attributes?
(i) many sellers
(ii) product differentiation
(iii) barriers to entry

A)(i) and (iii) only
B)(i) and (ii) only
C)(ii) and (iii) only
D)(i), (ii) and (iii)

Question 59

Suppose that in the short run, a monopolistically competitive firm sells its product for $35 per unit.Its average total cost at this level of output is $39.This means that:

A)the firm makes a short-run profit of $4 per unit
B)the firm makes a short-run loss of $4 per unit
C)the firm makes a short-run and long-run profit of $4 per unit
D)the firm makes a short-run and long-run loss of $4 per unit

Question 60

In a monopolistically competitive industry, price is:

A)above marginal cost since each firm is a price setter
B)equal to marginal cost since each firm is a price taker
C)below marginal cost since each firm is a price setter
D)always a fraction of marginal cost since each firm is a price setter

Question 61

In a monopolistically competitive market, equilibrium is characterised by:

A)the average total cost curve being tangent to the demand curve
B)marginal cost crossing the demand curve
C)price being equal to the minimum of average total cost
D)firms making a positive economic profit

Question 62

As some incumbent firms exit a monopolistically competitive market, profits of existing firms:

A)decline and product diversity in the market decreases
B)rise and product diversity in the market increases
C)rise and product diversity in the market decreases
D)decline and product diversity in the market increases

Question 63

Free entry into a market drives economic profit to:

A)the Nash equilibrium
B)zero
C)the monopoly level
D)the accounting equilibrium

Question 64

NARRBEGIN: 17-3
Graph 17-3 Lines in these figures reflect the potential effect of entry and exit in a monopolistically competitive market on the demand and/or marginal cost curves of incumbent firms.
Refer to Graph 17-3.Panel c in the set of graphs shown depicts the effect on incumbent firms of:

A)a few existing firms exiting the market
B)new entrants in the market
C)long-run economic losses
D)an increase in the diversity of products offered in the market

Question 65

What characteristics describe the long-run equilibrium in a monopolistically competitive market?
(i) price exceeds marginal cost
(ii) price equals average total cost
(iii) quantity produced is at each firm's efficient scale

A)(i) only
B)(i) and (ii) only
C)(ii) and (iii) only
D)(i), (ii) and (iii)

Question 66

NARRBEGIN: 17-2
Graph 17-2
Refer to Graph 17-2.Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is minimising its losses?

A)panel a
B)panel b
C)panel c
D)panel d

Question 67

In the long-run equilibrium, a monopolistically competitive firm makes zero profit because:

A)marginal revenue will equal marginal cost
B)price will equal marginal cost
C)marginal cost intersects the minimum of average total cost
D)price will equal average total cost

Question 68

NARRBEGIN: 17-2
Graph 17-2
Refer to graph 17-2.Which of the graphs shown would be consistent with the firm making short-run profit in a competitive market?

A)panel a
B)panel b
C)panel c
D)panel d

Question 69

NARRBEGIN: 17-3
Graph 17-3 Lines in these figures reflect the potential effect of entry and exit in a monopolistically competitive market on the demand and/or marginal cost curves of incumbent firms.
Refer to the graphs in 17-3.Which panel is consistent with a celebrity announcing her endorsement of a specific brand's product?

A)panel a
B)panel b
C)panel c
D)panel d

Question 70

A monopolistically competitive firm chooses:

A)price, but output is determined by cartel production quota
B)the quantity of output to produce and the price at which it will sell its output
C)the quantity of output to produce, but the market determines price
D)price, but competition in the market determines the quantity

Question 71

The entry and exit of firms in a monopolistically competitive market guarantees that:

A)economic profits and economic losses disappear in the long run
B)economic profits can survive in the long run, but not economic losses
C)economic losses will exist in the long run, but not economic profits
D)both economic profits and economic losses will exist in the long run

Question 72

NARRBEGIN: 17-3
Graph 17-3 Lines in these figures reflect the potential effect of entry and exit in a monopolistically competitive market on the demand and/or marginal cost curves of incumbent firms.
Refer to Graph 17-3.Panel d in the set of figures shown depicts the effect on incumbent firms of:

A)existing firms exiting the market
B)long-run economic losses
C)a decrease in the diversity of products offered in the market
D)new entrants in the market

Question 73

When firms are encouraged to enter monopolistically competitive markets:

A)the diversity of products in the market must be small
B)they are guaranteed economic profits upon entry
C)some firms in the market must be making economic profits
D)no firms can experience economic losses

Question 74

NARRBEGIN: 17-1
Graph 17-1
Refer to Graph 17-1, panel
A)tangent to the demand curve at the market price, Pa

A)Assume the market is monopolistically competitive and in long-run equilibrium.If drawn in, the average total cost curve would be:
B)tangent to the demand curve where marginal cost intersects demand
C)tangent to the marginal revenue curve at the market price, Pa
D)tangent to the marginal revenue curve at the point where marginal cost intersects marginal revenue

Question 75

If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios would best reflect the change facing incumbent firms as the market adjusts to its new equilibrium?

A)a downward shift in their marginal cost curve
B)an upward shift in their marginal cost curve
C)an increase in demand
D)a decrease in demand

Question 76

Economic losses are in a monopolistically competitive markets:

A)a signal to some incumbent firms to exit the market
B)are never possible in the short run
C)a signal for new firms to enter the market
D)only possible if collusion between the firms cannot be maintained

Question 77

If firms in a monopolistically competitive industry are making losses:

A)they will likely be subject to regulation
B)they ought to form a cartel
C)new firms will enter the market
D)some firms must exit the market

Question 78

If firms in a monopolistically competitive market are incurring economic losses, which of the following scenarios would best reflect the change facing incumbent firms (who are able to stay in the market) as the market adjusts to its new equilibrium?

A)a downward shift in their marginal cost curve
B)an upward shift in their marginal cost curve
C)an increase in demand
D)a decrease in demand

Question 79

As new firms enter a monopolistically competitive market, profits of existing firms:

A)decline and product diversity in the market decreases
B)rise and product diversity in the market decreases
C)rise and product diversity in the market increases
D)decline and product diversity in the market increases

Question 80

NARRBEGIN: 17-2
Graph 17-2
Refer to Graph 17-2.Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is making economic profits?

A)panel a
B)panel b
C)panel c
D)panel d