Deck 17: Monopolistic Competition

Question 1

A similarity between monopoly and monopolistic competition is that,in both market structures,

A)strategic interactions among sellers are important.
B)there are a small number of sellers.
C)sellers are price makers rather than price takers.
D)product differentiation is important.

Answer 1

C

Question 2

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

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

Answer 2

A

Question 3

Figure 17-1

Refer to Figure 17-1.The firm depicted in panel b faces a horizontal demand curve.If panel b depicts a profit-maximizing firm,

A)it could be operating in either a perfectly competitive market or 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 able to choose the price at which it sells its product.
D)the firm can always raise its profit by increasing production since consumers will buy as much as the firm can produce.

Answer 3

B

Question 4

In which of the following market structures are there a large number of sellers? (i) Monopolistic competition
(ii) Perfect competition
(iii) Oligopoly

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

Question 5

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

A)Average revenue exceeds marginal revenue
B)Marginal revenue exceeds average revenue
C)Average revenue is equal to marginal revenue
D)Revenue is always maximized along with profit

Question 6

One way in which monopolistic competition differs from oligopoly is that

A)there are no barriers to entry in oligopolies.
B)in oligopoly markets there are only a few sellers.
C)all firms in an oligopoly eventually earn zero economic profits.
D)strategic interactions between firms are rarely evident in oligopolies.

Question 7

Product differentiation causes the seller of a good to face what type of demand curve?

A)Downward sloping
B)Vertical
C)Horizontal
D)Any of the above could be correct since product differentiation does not affect the shape of the demand curve.

Question 8

Figure 17-1

Refer to Figure 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)not be maximizing its profit.
B)be minimizing its losses.
C)be losing market share to other firms in the market.
D)be operating at excess capacity.

Question 9

A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly competitive market because the firm in the monopolistically competitive market

A)is characterized by market-share maximization.
B)has no barriers to entry.
C)faces a downward-sloping demand curve for its product.
D)faces a horizontal demand curve at the market clearing price.

Question 10

Figure 17-2

Refer to Figure 17-2.Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is earning a positive profit?

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

Question 11

Figure 17-2

Refer to Figure 17-2.Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is doing its best but still losing money?

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

Question 12

Which of the following markets would most likely be represented by monopolistic competition?

A)The market for corn.
B)The market for cable television service.
C)The market for #2 wooden pencils.
D)The market for clothing.

Question 13

Monopolistic competition is characterized by which of the following attributes? (i) Free entry
(ii) Product differentiation
(iii) Many sellers

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

Question 14

Monopolistic competition differs from perfect competition because in monopolistically competitive markets

A)there are barriers to entry.
B)all firms can eventually earn economic profits.
C)each of the sellers offers a somewhat different product.
D)strategic interactions between firms is vitally important.

Question 15

Figure 17-2

Refer to Figure 17-2.Which of the graphs depicts a monopolistically competitive firm in long-run equilibrium?

A)Panel a
B)Panel b
C)Panel c
D)None of the above is correct.

Question 16

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

A)firm in a perfectly competitive market.
B)firm in an oligopoly.
C)monopolist.
D)monopsonist.

Question 17

In which of the following market structures does free entry and exit play an important role in the long-run equilibrium outcome? (i) Perfect competition
(ii) Monopolistic competition
(iii) Monopoly

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

Question 18

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

A)A large number of sellers.
B)Firms are price takers.
C)There is free entry into the market.
D)Sellers offer products that are, in some way, different from their competitors' products.

Question 19

Figure 17-1

Refer to Figure 17-1.Which of the graphs depicts the situation for a profit-maximizing firm in a monopolistically competitive market?

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

Question 20

In a monopolistically competitive industry,firms set price

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

Question 21

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

A)both economic profits and economic losses can persist in the long run.
B)both economic profits and economic losses disappear in the long run.
C)economic profits, but not economic losses, can persist in the long run.
D)economic losses, but not economic profits, can persist in the long run.

Question 22

Figure 17-3
The lines in the figures below illustrate the potential effect of entry and exit in a monopolistically competitive market on either the demand curve or the marginal cost curve of existing firms.

Refer to Figure 17-3.Panel (d)illustrates the change that would occur if existing firms faced

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

Question 23

If firms in a monopolistically competitive market are earning economic profits,which of the following scenarios would best describe the change existing firms would face as the market adjusts to the long-run equilibrium?

A)An increase in demand for each firm
B)A decrease in demand for each firm
C)A downward shift in the marginal cost curve for each firm
D)An upward shift in the marginal cost curve for each firm

Question 24

In monopolistically competitive markets,free entry and exit suggests that

A)the market structure will eventually be characterized by perfect competition in the long run.
B)all firms earn zero economic profits in the long run.
C)some firms will be able to earn economic profits in the long run.
D)some firms will be forced to incur economic losses in the long run.

Question 25

When a firm's demand curve is tangent to its average total cost curve,the

A)firm's economic profit is zero.
B)firm must be earning economic profits.
C)firm must be incurring economic losses.
D)firm must be operating at its efficient scale.

Question 26

Figure 17-4

Refer to Figure 17-4.Panel (a)shows a profit-maximizing monopolistically competitive firm that is

A)earning zero economic profit.
B)likely to exit the market in the long run.
C)producing its efficient scale of output.
D)not maximizing its profit.

Question 27

Figure 17-4

Refer to Figure 17-4.Panel (b)is consistent with a firm in a monopolistically competitive market that is

A)not in long-run equilibrium.
B)in long-run equilibrium.
C)producing its efficient scale of output.
D)earning a positive economic profit.

Question 28

Figure 17-4

Refer to Figure 17-4.Which of the panels depicts a firm in a monopolistically competitive market earning positive economic profits?

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

Question 29

In monopolistically competitive markets,positive economic profits

A)suggest that some existing firms will exit the market.
B)suggest that new firms will enter the market.
C)are sustained through government-imposed barriers to entry.
D)are never possible.

Question 30

If firms in a monopolistically competitive market are earning positive profits,then

A)firms will likely be subject to regulation.
B)barriers to entry will be strengthened.
C)some firms must exit the market.
D)new firms will enter the market.

Question 31

A profit-maximizing firm operating in a monopolistically competitive market that is in a long-run equilibrium has

A)minimized average total cost.
B)chosen to produce where demand is unitary elastic.
C)produced the efficient scale of output.
D)chosen a quantity of output where average revenue equals average total cost.

Question 32

Figure 17-4

Refer to Figure 17-4.Which of the panels shown could illustrate the short-run situation for a monopolistically competitive firm?

A)Panel a
B)Panel b
C)Panel c
D)All of the above are correct.

Question 33

As firms exit a monopolistically competitive market,profits of remaining firms

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

Question 34

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

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

Question 35

Figure 17-3
The lines in the figures below illustrate the potential effect of entry and exit in a monopolistically competitive market on either the demand curve or the marginal cost curve of existing firms.

Refer to Figure 17-3.Which of the diagrams illustrates the impact of some existing firms leaving the market?

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

Question 36

When a profit-maximizing firm in a monopolistically competitive market is producing the long-run equilibrium quantity,

A)its average revenue will equal its marginal cost.
B)its marginal revenue will exceed its marginal cost.
C)it will be earning positive economic profits.
D)its demand curve will be tangent to its average-total-cost curve.

Question 37

If firms in a monopolistically competitive market are incurring economic losses,which of the following scenarios would best describe the change existing firms (who are able to stay in the market)would face as the market adjusts to the long-run equilibrium?

A)A downward shift in the marginal cost curve for each firm
B)An upward shift in the marginal cost curve for each firm
C)A decrease in demand for each firm
D)An increase in demand for each firm

Question 38

A monopolistically competitive firm chooses

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

Question 39

In monopolistically competitive markets,economic losses

A)suggest that some existing firms will exit the market.
B)suggest that new firms will enter the market.
C)are minimized through government-imposed barriers to entry.
D)are never possible.

Question 40

When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium,

A)the demand curve will be perfectly elastic.
B)price exceeds marginal cost.
C)marginal cost must be falling.
D)marginal revenue exceeds marginal cost.

Question 41

If regulators required firms in monopolistically competitive markets to set price equal to marginal cost,

A)firms would respond by lowering their costs.
B)firms would require a subsidy to stay in business
C)new firms that enter the market would operate at efficient scale.
D)the most efficient firms would not be affected.

Question 42

In a long-run equilibrium,a firm in a monopolistically competitive market operates

A)where marginal revenue is zero.
B)where marginal revenue is negative.
C)on the rising portion of its average total cost curve.
D)on the declining portion of its average total cost curve.

Question 43

If regulators required firms in monopolistically competitive markets to set price equal to marginal cost,

A)firms would most likely experience economic losses.
B)firms would also operate at their efficient scale.
C)new firms would likely to enter the market.
D)the most efficient firms would not likely to be affected.

Question 44

A business-stealing externality

A)is an externality that is likely to be punished under antitrust laws.
B)is the negative externality that occurs when one firm attempts to duplicate exactly the product of a different firm.
C)is an externality that is considered to be an explicit cost of business in monopolistically competitive markets.
D)is the negative externality associated with entry of new firms in a monopolistically competitive market.

Question 45

When consumers are exposed to additional choices that result from the introduction of a new product,

A)their satisfaction is likely to be lowered as a result of their having to make additional choices.
B)a product-variety externality is said to occur.
C)an advertising externality is said to occur.
D)consumers are likely to experience negative consumption externalities.

Question 46

Monopolistically competitive markets may be socially inefficient because

A)most firms produce inferior products.
B)government programs cannot effectively regulate price.
C)firms earn zero economic profit.
D)the market may have too much or too little entry by new firms.

Question 47

In the long run,a firm in a perfectly competitive market operates

A)at its efficient scale and a monopolistically competitive firm operates at efficient scale.
B)at its efficient scale and a monopolistically competitive firm operates with excess capacity.
C)with excess capacity and a monopolistically competitive firm operates with excess capacity.
D)with excess capacity and a monopolistically competitive firm operates at its efficient scale.

Question 48

When a profit-maximizing firm in a monopolistically competitive market charges a price higher than marginal cost,

A)the firm must be earning a positive economic profit.
B)the firm may be incurring economic losses
C)there is a deadweight loss to society, but it is exactly offset by the benefit of excess capacity.
D)new firms will necessarily wish to enter the market in the long run.

Question 49

The administrative burden of regulating price in a monopolistically competitive market is

A)small due to economies of scale.
B)large because price is usually below marginal cost.
C)large because of the large number of firms that produce differentiated products.
D)small because firms produce with excess capacity.

Question 50

In the long run,a profit-maximizing firm in a monopolistically competitive market operates at

A)efficient scale.
B)a level of output at which average total cost is rising.
C)a level of output at which average total cost is falling.
D)the level of output at which total revenue is maximized.

Question 51

Hotels in New York City frequently experience an average vacancy rate of about 20 percent (i.e.,on an average night,80 percent of the hotel rooms are full).This kind of excess capacity is indicative of what kind of market?

A)Monopoly
B)Perfect competition
C)Monopolistic competition
D)Oligopoly

Question 52

Since a firm in a monopolistically competitive market faces a

A)downward-sloping demand curve, it will always operate with excess capacity.
B)downward-sloping demand curve, it will always operate at its efficient scale.
C)perfectly elastic demand curve, it will always operate with excess capacity.
D)perfectly inelastic demand curve, it will always operate at efficient scale.

Question 53

The product-variety externality is associated with

A)the producer surplus that accrues to incumbent firms in a monopolistically competitive industry.
B)loss of consumer surplus from exposure to additional advertising.
C)the consumer surplus that is generated from the introduction of a new product.
D)the opportunity cost of firms exiting a monopolistically competitive industry.

Question 54

Product differentiation in monopolistically competitive markets ensures that,for profit-maximizing firms,

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

Question 55

The deadweight loss that is associated with a monopolistically competitive market is a result of

A)price falling short of marginal cost in order to increase market share.
B)price exceeding marginal cost.
C)the firm operating in a regulated industry.
D)excessive advertising costs.

Question 56

A monopolistically competitive market could be considered inefficient because

A)marginal revenue exceeds average revenue.
B)price exceeds marginal cost.
C)the efficient scale of production is only achieved in the long run, but not in the short run.
D)markup pricing does not occur in any other market structure.

Question 57

Regulation of a firm in a monopolistically competitive market

A)usually implies a very small administrative burden.
B)will lower the firm's costs.
C)is commonly used to enhance market efficiency.
D)is unlikely to improve market efficiency.

Question 58

Before a new firm enters a monopolistically competitive market with a new product,it considers

A)the profit opportunities.
B)the business-stealing externality.
C)the product-variety externality.
D)Both b and c are correct.

Question 59

When a firm operates with excess capacity,

A)additional production would lower the average total cost.
B)additional production would increase the average total cost.
C)it must be a perfectly competitive firm.
D)it must be a monopolistically competitive firm.

Question 60

When existing firms lose customers and profits due to entry of a new competitor,a

A)predatory-pricing externality occurs.
B)consumption externality occurs.
C)business-stealing externality occurs.
D)product-variety externality occurs.

Question 61

Because a monopolistically competitive firm has some market power,in the long-run the price of its good exceeds its

A)average revenue.
B)average total cost.
C)marginal cost.
D)profit per unit.

Question 62

Which of the following goods are not likely to be sold in monopolistically competitive markets?

A)Compact discs
B)Books
C)Cookies
D)Wheat

Question 63

When the loss from a business-stealing externality exceeds the gain from a product-variety externality,

A)firms are more likely to operate at efficient scale.
B)there are likely to be too many firms in a monopolistically competitive market.
C)market efficiency is likely to be enhanced by the entry of new firms.
D)the market structure is likely to be in transition.

Question 64

A firm in a monopolistically competitive market is similar to a monopoly in the sense that (i) they both face downward-sloping demand curves.
(ii) they both charge a price that exceeds marginal cost.
(iii) free entry and exit determines the long-run equilibrium.

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

Question 65

A monopolistically competitive firm's choice of output level is virtually identical to the choice made by

A)a perfectly competitive firm.
B)a duopolist.
C)a monopolist.
D)an oligopolist.

Question 66

New firms will likely enter a monopolistically competitive market when price exceeds

A)marginal revenue.
B)average revenue.
C)marginal cost.
D)average total cost.

Question 67

The entry of new firms into a monopolistically competitive market is accompanied by

A)both positive and negative externalities.
B)only positive externalities.
C)only negative externalities.
D)only private profit opportunities (no externalities).

Question 68

Scenario 17-1
Vacation Inns of America (VIA) has recently announced intentions of building a new hotel/resort complex in Myrtle Beach, South Carolina. Assume that the hotel/resort market in Myrtle Beach is characterized by monopolistic competition.
Refer to Scenario 17-1.Existing hotels,motels,and lodging facilities in Myrtle Beach are likely to experience what kind of externality as a result of the new VIA hotel/resort?

A)Product-variety
B)Business-stealing
C)Competitive
D)Advertising

Question 69

Which of the following markets impose deadweight losses on society? (i) Perfect competition
(ii) Monopolistic competition
(iii) Monopoly

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

Question 70

Scenario 17-1
Vacation Inns of America (VIA) has recently announced intentions of building a new hotel/resort complex in Myrtle Beach, South Carolina. Assume that the hotel/resort market in Myrtle Beach is characterized by monopolistic competition.
Refer to Scenario 17-1.As a result of the new VIA hotel/resort,tourists who stay in Myrtle Beach are likely to experience a

A)product-variety externality, which harms consumers.
B)product-variety externality, which benefits consumers.
C)business-stealing externality, which harms consumers.
D)business-stealing externality, which benefits consumers.

Question 71

When a firm exits a monopolistically competitive market,the individual demand curves faced by all remaining firms in that market will

A)shift in a direction that is unpredictable without further information.
B)shift to the right.
C)shift to the left.
D)remain unchanged.It is the supply curve that will shift.

Question 72

The product-variety externality associated with monopolistic competition arises because in monopolistically competitive markets,

A)firms produce with excess capacity.
B)firms try to differentiate their products.
C)firms would like to produce homogeneous products, but the large number of firms prohibits it.
D)entry and exit is not restricted.

Question 73

When a new firm enters a monopolistically competitive market,the individual demand curves faced by all existing firms in that market will

A)shift to the left.
B)shift to the right.
C)shift in a direction that is unpredictable without further information.
D)remain unchanged.It is the supply curve that will shift.

Question 74

In the long run,a monopolistically competitive firm produces a quantity that is

A)equal to the efficient scale.
B)less than the efficient scale.
C)greater than the efficient scale.
D)consistent with diseconomies of scale.

Question 75

In a monopolistically competitive industry,firms' demand curves also represent

A)marginal revenue.
B)marginal cost.
C)average revenue.
D)profit.

Question 76

Monopolistically competitive markets differ from perfectly competitive markets due to (i) the number of sellers.
(ii) the barriers to entry.
(iii) the product differentiation among the sellers.

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

Question 77

Which of the following goods are likely to be sold in a monopolistically competitive market?

A)Compact discs
B)Wheat
C)Corn
D)Postage stamps

Question 78

Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to

A)a change in the technology that the firm utilizes.
B)a shift of its demand curve.
C)a shift of its supply curve.
D)an increase in the firm's average cost of production.

Question 79

Which two curves are tangent to each other in a monopolistically competitive market with zero economic profit?

A)Demand and average variable cost
B)Demand and average total cost
C)Marginal revenue and average variable cost
D)Marginal revenue and average total cost

Question 80

A downward-sloping demand curve

A)is a feature of all monopolistically competitive firms.
B)means that the firm in question will never experience a zero profit.
C)causes marginal revenue to exceed price.
D)prohibits firms from earning positive economic profits in the long run.