Deck 13: Monopolistic Competition

Question 1

The larger the number of firms in an industry and the less the extent of product differentiation, the greater will be the elasticity of the individual seller's demand curve.

Answer 1

True

Question 2

Two industries that have the same four-firm concentration ratio can have significantly different Herfindahl indexes.

Answer 2

True

Question 3

Product differentiation is what allows monopolistically competitive firms to have some market power.

Answer 3

True

Question 4

The economic profits earned by monopolistically competitive sellers are zero in the long run.

Question 5

Monopolistically competitive sellers produce efficiently because they obtain only normal profits in the long run.

Question 6

The larger the number of firms and the less the degree of product differentiation, the greater will be the elasticity of a monopolistically competitive seller's demand curve.

Question 7

The four-firm concentration ratio cannot have a value above 1.0, or 100 percent.

Question 8

The demand curve faced by a monopolistically competitive firm is more elastic than the monopolist's demand curve.

Question 9

The demand curve of a monopolistically competitive producer is less elastic than that of a purely competitive producer.

Question 10

The Herfindahl index is a measure of the degree of product differentiation in an industry.

Question 11

The highest possible value of the Herfindahl index is 1,000.

Question 12

Monopolistically competitive firms have some control over the price of their products.

Question 13

The monopolistically competitive seller maximizes profits by equating price and marginal cost.

Question 14

Monopolistically competitive firms are inefficient because they produce at a point on the rising segment of their average cost curves.

Question 15

Monopolistically competitive firms exist due to high barriers to entry.

Question 16

Brand names and packaging are forms of product differentiation under monopolistic competition.

Question 17

Monopolistically competitive sellers realize economic profits in the long run because entry barriers are significant.

Question 18

We would expect the four-firm concentration ratio of the restaurant industry in a large metropolitan area to be about 0.80, or 80 percent, and higher.

Question 19

The demand curve of a monopolistically competitive firm is more elastic than that of a pure monopolist.

Question 20

The excess capacity problem associated with monopolistic competition implies that fewer firms could produce the same industry output at a lower total cost.

Question 21

In monopolistic competition, short-run positive economic profits of firms in the market will cause the market demand to expand.

Question 22

Long-run profits of individual firms in monopolistic competition will be larger than their short-run profits.

Question 23

In the long run, a typical firm in a monopolistically competitive market earns positive economic profits.

Question 24

Monopolistic competition entails a deadweight loss to society, even if the firms earn zero economic profits.

Question 25

Monopolistic competition provides the benefit of product variety but at the cost of productive inefficiency.

Question 26

As firms exit from a monopolistically competitive industry in the long run, the remaining firms' profits will begin to rise.

Question 27

Industries X and Y both have four-firm concentration ratios of 63 percent, but the Herfindahl index for X is 1,273, while that for Y is 1,197. These data suggest

A)greater market power in Y than in X.
B)greater market power in X than in Y.
C)both industries are monopolistically competitive.
D)that price competition is stronger in X than in Y.

Question 28

"Excess capacity" exists in monopolistic competition but not in pure competition.

Question 29

Product differentiation in a monopolistically competitive market always entails more costs than benefits.

Question 30

In monopolistic competition, easy industry entry and exit drives long-run profits of firms to zero.

Question 31

The amount of excess capacity in pure competition tends to become larger the more elastic the individual firm's demand curve becomes.

Question 32

If the representative firm in a monopolistically competitive industry has an optimal output where P < ATC, the industry will expand in the long run.

Question 33

Industries X and Y both have four-firm concentration ratios of 16 percent, but the Herfindahl index for X is 102, while that for Y is 95. These data suggest

A)greater market power in Y than in X.
B)greater market power in X than in Y.
C)both industries are strongly oligopolistic.
D)that price competition is stronger in X than in Y.

Question 34

An industry having a four-firm concentration ratio of 30 percent

A)approximates pure competition.
B)is an oligopoly.
C)is a pure monopoly.
D)is monopolistically competitive.

Question 35

That one thing that monopolistic competition provides, which is not assured in the other market structures, is product variety.

Question 36

Pure competition results in a lower price but identical output level compared to those in monopolistic competition.

Question 37

The entry of more firms into a monopolistically competitive market tends to increase the excess capacity of firms in the industry in the long run.

Question 38

If we believe that "variety is the spice of life," then we should be more concerned about the excess capacity in monopolistic competition and do our best to eliminate it.

Question 39

Monopolistically competitive firms will achieve the most efficient allocation of society's resources because there are no significant barriers to entry into the industry.

Question 40

As new firms enter a monopolistically competitive market, the demand curves facing existing firms will tend to shift left.

Question 41

The following are the respective numbers for the four-firm concentration ratio and Herfindahl index in an industry. Which set of numbers is most suggestive that the industry is monopolistically competitive?

A)32 and 540
B)48 and 870
C)76 and 1,689
D)95 and 3,542

Question 42

Answer the question on the basis of the following demand and cost data for a specific firm. If columns (1)and (3)of the demand data shown are this firm's demand schedule, economic profit will be

A)$72.
B)$24.
C)$23.
D)$21.1.

Question 43

A monopolistically competitive firm is operating at a short-run level of output where price is $30, average total cost is $27, marginal cost is $20, and marginal revenue is $25. In the short run this firm should

A)increase product price.
B)decrease the level of output.
C)not change the level of output.
D)increase the level of output.

Question 44

Suppose that total sales in an industry in a particular year are $500 million and sales by the top four sellers are $80 million, $25 million, $12 million, and $8 million, respectively. We can conclude that

A)allocative efficiency will be achieved.
B)this industry is monopolistically competitive.
C)the concentration ratio is 35 percent.
D)firms in this industry likely collude with each other.

Question 45

Refer to the data. The Herfindahl index for this industry is

A)97.
B)3,378.
C)9,700.
D)3,369.

Question 46

Answer the question based on the demand and cost schedules for a monopolistically competitive firm given in the table below. What price will this monopolistically competitive firm charge to maximize profits?

A)$16
B)$12
C)$20
D)$8

Question 47

Answer the question on the basis of the following demand and cost data for a specific firm. If columns (1)and (3)of the demand data shown are this firm's demand schedule, the profit-maximizing price will be

A)$10.00.
B)$9.60.
C)$9.10.
D)$10.50.

Question 48

Assume the top six firms comprising an industry have market shares of 21, 17, 16, 11, 9, and 6 percent. The remaining 10 firms each have market shares of 2 percent. The Herfindahl index for this industry is

A)1,107.
B)65.
C)1,264.
D)1,224.

Question 49

Refer to the data. Suppose that firms in this industry split up such that there were 100 firms, each with a 1 percent market share. The four-firm concentration ratio and the Herfindahl index respectively would be

A)100 percent and 10,000.
B)4 percent and 4.
C)100 percent and 16.
D)4 percent and 100.

Question 50

A monopolistically competitive firm is producing at an output level in the short run where average total cost is $4.00, price is $4.50, marginal revenue is $2.50, and marginal cost is $2.50. This firm is operating

A)with a loss.
B)with positive profits.
C)at the break-even point.
D)at a nonoptimal level of output.

Question 51

Answer the question based on the demand and cost schedules for a monopolistically competitive firm given in the table below. What output quantity will the monopolistically competitive firm produce to maximize profits?

A)3
B)5
C)4
D)6

Question 52

Refer to the data. The Herfindahl index for the industry is

A)3,805.
B)2,500.
C)3,810.
D)97.

Question 53

Refer to the data. The four-firm concentration ratio for this industry is

A)70 percent.
B)85 percent.
C)100 percent.
D)indeterminate because we don't know which four firms are included.

Question 54

Refer to the data. If all the firms in the industry merged into a single firm, the Herfindahl index would become

A)100.
B)1,000.
C)10,000.
D)100,000.

Question 55

Refer to the data. If Firm C merged with Firm D, the industry's four-firm concentration ratio would ____ and its Herfindahl index would ____.

A)rise; rise
B)fall; rise
C)remain the same; rise
D)remain the same; fall

Question 56

Answer the question on the basis of the following demand and cost data for a specific firm. Suppose that entry into the industry changes this firm's demand schedule from columns (1)and (3)to columns (2)and (3). Economic profit will

A)fall by $11.50.
B)fall to $8.
C)increase by $15.
D)decline to zero.

Question 57

Suppose the Herfindahl indexes for industries A, B, and C are 672, 450, and 875 respectively. These data imply that

A)market power is greatest in industry A.
B)market power is greatest in industry B.
C)market power is greatest in industry C.
D)industry B is more monopolistic than industry A.

Question 58

Answer the question on the basis of the following demand and cost data for a specific firm. With the demand schedule shown by columns (2)and (3), in long-run equilibrium

A)price will equal average total cost.
B)total cost will exceed total revenue.
C)marginal cost will exceed price.
D)price will equal marginal revenue.

Question 59

Answer the question on the basis of the following demand and cost data for a specific firm. If columns (1)and (3)of the demand data shown are this firm's demand schedule, the profit-maximizing level of output will be

A)8 units.
B)9 units.
C)10 units.
D)11 units.

Question 60

Answer the question based on the demand and cost schedules for a monopolistically competitive firm given in the table below. Suppose that entry into this industry changes this firm's demand schedule from columns (1)and (3)to columns (2)and (3). We can conclude that this industry is

A)a pure monopoly.
B)purely competitive.
C)a constant cost industry.
D)monopolistically competitive.

Question 61

A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from

A)the likelihood of collusion.
B)high entry barriers.
C)product differentiation.
D)mutual interdependence in decision making.

Question 62

The restaurant, legal assistance, and clothing industries are each illustrations of

A)countervailing power.
B)homogeneous oligopoly.
C)monopolistic competition.
D)pure monopoly.

Question 63

Answer the question on the basis of the following demand and cost data for a specific firm. If columns 1 and 3 are this firm's demand schedule, the profit-maximizing level of output will be

A)2 units.
B)3 units.
C)5 units.
D)6 units.

Question 64

In which of these continuums of degrees of competition (highest to lowest)is monopolistic competition properly placed?

A)pure competition, oligopoly, pure monopoly, monopolistic competition
B)oligopoly, pure competition, monopolistic competition, pure monopoly
C)monopolistic competition, pure competition, pure monopoly, oligopoly
D)pure competition, monopolistic competition, oligopoly, pure monopoly

Question 65

Answer the question on the basis of the following short run demand and cost data for a specific firm. In the long run, the number of firms in this monopolistic competitive industry will most likely

A)decrease.
B)increase.
C)stay the same.
D)The answer cannot be determined from the given data.

Question 66

Monopolistic competition resembles pure competition because

A)both industries emphasize nonprice competition.
B)in both instances firms will operate at the minimum point on their long-run average total cost curves.
C)both industries entail the production of differentiated products.
D)in both industries barriers to entry are either weak or nonexistent.

Question 67

Assume that the short-run cost and demand data given in the tables below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion. If the firm sells 2 units of output, marginal revenue will be

A)$28.
B)$44.
C)$-4.
D)$92.

Question 68

Answer the question based on the demand and cost schedules for a monopolistically competitive firm given in the table below. At the profit-maximizing level of output, marginal revenue is

A)$14.
B)$42.
C)$10.
D)$1.

Question 69

Nonprice competition refers to

A)competition between products of different industries, for example, competition between aluminum and steel in the manufacture of automobile parts.
B)price increases by a firm that are ignored by its rivals.
C)advertising, product promotion, and changes in the real or perceived characteristics of a product.
D)reductions in production costs that are not reflected in price reductions.

Question 70

Answer the question based on the demand and cost schedules for a monopolistically competitive firm given in the table below. What will be the economic profit (or loss)for this monopolistically competitive firm at the profit-maximizing level of output?

A)$4
B)$20
C)$6
D)$13

Question 71

Assume that the short-run cost and demand data given in the tables below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion. What output and price levels will maximize the firm's profit in the short run?

A)2 units and $24
B)3 units and $21
C)4 units and $18
D)5 units and $15

Question 72

Economic analysis of a monopolistically competitive industry is more complicated than that of pure competition because

A)of product differentiation and consequent product promotion activities.
B)monopolistically competitive firms cannot realize an economic profit in the long run.
C)the number of firms in the industry is larger.
D)monopolistically competitive producers use strategic pricing strategies to combat rivals.

Question 73

Under monopolistic competition, entry to the industry is

A)completely free of barriers.
B)more difficult than under pure competition but not nearly as difficult as under pure monopoly.
C)more difficult than under pure monopoly.
D)blocked.

Question 74

Answer the question on the basis of the following demand and cost data for a specific firm. If columns 1 and 3 are this firm's demand schedule, maximum economic profit will be

A)$115.
B)$300.
C)$185.
D)$35.

Question 75

Which of the following is not a basic characteristic of monopolistic competition?

A)the use of trademarks and brand names
B)recognized mutual interdependence
C)product differentiation
D)a relatively large number of sellers

Question 76

Assume that the short-run cost and demand data given in the tables below confront a monopolistic competitor selling a given product and engaged in a given amount of product promotion. What will the maximum total profits be?

A)$65
B)$90
C)$85
D)$110

Question 77

If the number of firms in a monopolistically competitive industry increases and the degree of product differentiation diminishes,

A)the likelihood of realizing economic profits in the long run would be enhanced.
B)individual firms would now be operating at outputs where their average total costs would be higher.
C)the industry would more closely approximate pure competition.
D)the likelihood of collusive pricing would increase.

Question 78

Monopolistic competition is characterized by a

A)few dominant firms and low entry barriers.
B)large number of firms and substantial entry barriers.
C)large number of firms and low entry barriers.
D)few dominant firms and substantial entry barriers.

Question 79

Monopolistic competition means

A)a market situation where competition is based entirely on product differentiation and advertising.
B)a large number of firms producing a standardized or homogeneous product.
C)many firms producing differentiated products.
D)a few firms producing a standardized or homogeneous product.

Question 80

Answer the question on the basis of the following demand and cost data for a specific firm. Suppose that entry of firms into the industry changes this firm's demand schedule from columns 1 and 3 to columns 2 and 3. Maximum economic profit will

A)decrease by $15.
B)decrease by $150.
C)decrease by $45.
D)decrease to zero.