Deck 11: Market Entry and Monopolistic Competition

Question 1

What encourages firms to enter markets?

A)The diversity of products offered must be small.
B)Firms believe they can violate patent protection with impunity.
C)No firms in the industry can experience losses.
D)Some existing firms in the market must be earning economic profits.

Answer 1

D

Question 2

As more Dunkin' Donuts outlets open in the areas where Krispy Kreme has been dominant,market prices will ________ and profits will ________.

A)increase;increase
B)increase;decrease
C)decrease;increase
D)decrease;decrease

Answer 2

D

Question 3

If there is free entry in a market,then in the long run economic profit will be above average.

Answer 3

False

Question 4

Which of the following characteristics is shared by both monopolistically competitive markets and monopoly markets?

A)free entry
B)identical products across sellers
C)Firms face downward sloping demand curves.
D)Firms are price takers.

Question 5

Which of the following statements is true?

A)An assumption of monopolistic competition is that firms can differentiate their products.
B)An assumption of perfect competition is that firms can differentiate their products.
C)Monopolistic competition is not subject to free entry and exit.
D)An assumption of monopolistic competition is that there are only a few large firms in the industry.

Question 6

Why would Dunkin' Donuts want to keep their product different from Krispy Kreme?

A)They do not want Southerners confusing the two doughnuts.
B)They want to maintain a specific brand identity.
C)They do not have the level of technology to produce a Krispy Kreme-like doughnut.
D)They do not want customers to accuse them of stealing trade secrets.

Question 7

A monopolistically competitive market is characterized by:

A)many firms that sell slightly different products.
B)many barriers to entry and few firms.
C)many firms that sell the same products.
D)few firms that sell the same products.

Question 8

As new firms enter an industry the price charged will increase.

Question 9

In a monopolistically competitive market,product differentiation ensures that in the long run:

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

Question 10

Assume that there is only one firm producing electric toothbrushes and its firm specific demand curve is the same as the market demand curve.If a second firm that also produces electric toothbrushes enters the market,profit of the first firm decreases because:

A)the competition between the two firms causes the price to go down.
B)it produces less electric toothbrushes.
C)its average cost of production raises due to higher demand.
D)A and B are correct.

Question 11

As new firms enter an industry,the demand curve facing each existing firm will shift to the right.

Question 12

Assume that there is a single firm producing toilet paper and the firm specific demand curve is the same as the market demand curve.If a second firm that also produces toilet paper enters the market what will happen to the firm-specific demand curve of the original firm?

A)There is a movement up along the demand curve.
B)There is a movement down along the demand curve.
C)shifts to the right
D)shifts to the left

Question 13

Which of the following characteristics is shared by both monopolistically competitive markets and perfectly competitive markets?

A)no barriers to entry
B)identical products across sellers
C)small number of interdependent sellers
D)firms face downward sloping demand curves

Question 14

No barriers to entry in a market implies that,in the long run,economic profit will be:

A)above average.
B)zero.
C)equal to accounting profit.
D)none of the above.

Question 15

As a result of product differentiation,a firm in a monopolistically competitive market:

A)always has some market power.
B)is very similar to a firm in a perfectly competitive market.
C)faces a perfectly elastic demand curve.
D)is very similar to a monopolist.

Question 16

Empirical studies have shown that entry leads to lower prices and profit.

Question 17

Positive economic profit encourages new firms to enter an industry.

Question 18

Additional Application
For many years North Carolina-based Krispy Kreme Doughnuts have been the choice of many Southerners.But now rival Dunkin' Donuts is working on changing the way Southerners expect a doughnut to taste.The Northeastern-based Dunkin' Donuts has plans to become a national brand in the next 15 years by tripling the number of stores in the U.S.The difference is in the doughnut itself.Krispy Kreme offers a glazed,hot,lighter doughnut while the product of Dunkin' Donuts can be described as "thicker and cakier." Do consumers notice the difference? Rosemary Evans from Alabama states,"Dunkin' Donuts just don't have much flavor." And Jack Lehnhart from Ohio says Krispy Kremes are "wax doughnuts." As the size of the industry grows the efforts to differentiate each product remain strong.Dunkin' Donuts focuses on coffee and baked goods as important components in its long term business plan.When discussing the two companies and their approaches to success,the brand officer at Dunkin' Donuts succinctly said,"We're very different." Just take note of the different ways they spell the product they produce!
Source: Beth Rucker,"Dunkin' Donuts Raids Krispy Kreme's Turf," October 22,2006,http://hosted.ap.org/dynamic/stories/D/DONUT_WARS,accessed 10/30/2006.
What market structure best describes the doughnut industry discussed in the article above?

A)monopolistic competition
B)monopoly
C)governmental
D)perfect competition

Question 19

As new firms enter an industry the existing firms will decrease their output.

Question 20

Recall the application about satellite vs.cable,how will an existing cable-TV provider respond in most cases to the entry of a firm that provides TV signals via satellite?

A)The cable firm improves the quality of service and leaves the price the same.
B)The cable firm lower the quality of services and lower the price.
C)The cable firm increases the price without any improvements to its service.
D)The cable firm improves the quality of service and decreases its price.

Question 21

Refer to Figure 11.1.If Trollio's T-shirts is in long-run equilibrium it is producing ________ silk-screened T-shirts and selling each T-shirt at a price of ________.

A)20;$5
B)50;$10
C)50;$16
D)60;$15

Question 22

In monopolistic competition,firms can have some market power based on the fact that:

A)they are large in size.
B)there are barriers to entry.
C)there is only one firm in the industry.
D)they produce differentiated goods.

Question 23

The feature that distinguishes monopolistic competition from perfect competition is that monopolistically competitive firms are:

A)large relative to the market.
B)price takers.
C)able to block the entry of other firms.
D)able to differentiate their product.

Question 24

Refer to Figure 11.2.In the long run the monopolistic competitor would generate total revenue equal to the area:

A)0BGD.
B)AHE0.
C)AFGB.
D)0AFD.

Question 25

Assume that the Indian restaurant industry is monopolistically competitive in London.Garam Masala,an Indian restaurant near Piccadilly Circus,lowers its prices by 10%,but all the other Indian restaurants in London keep their prices unchanged.Which of the following is most likely to occur?

A)Garam Masala will not be able to sell any bagels since it was the only bakery to raise its price.
B)Garam Masala will lose some of its customers.
C)Garam Masala's profits will increase.
D)The number of customers served by Garam Masala will increase.

Question 26

Why do existing firms earn smaller profits as new firms enter an industry?

Question 27

On South Street in Philadelphia,there are many Italian restaurants.Each Italian restaurant carries a slightly different menu.In what type of market structure do these Italian restaurants belong?

A)perfect competition
B)monopolistic competition
C)oligopoly
D)monopoly

Question 28

The condition for long-run equilibrium in a monopolistically competitive industry is:

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

Question 29

The demand curve facing a monopolistically competitive firm is:

A)horizontal at the going market price.
B)downward sloping and less than the market demand curve.
C)downward sloping and greater than the market demand curve.
D)the same as the market demand curve.

Question 30

In monopolistic competition,the firm can increase price and still sell some output because:

A)there is no free entry.
B)they are producing a product for which there is no close substitute.
C)they are colluding with other firms to set price.
D)they are producing a product that has some degree of differentiation.

Question 31

If firms in a monopolistically competitive industry are earning economic profits,then in the long run:

A)these firms can continue earning economic profits because entry into the industry is blocked.
B)new firms producing close substitutes will continue to enter the market until economic profit is zero.
C)new firms producing the exact same product will enter the industry and this entry will continue until economic profit is zero.
D)the government will most likely regulate firms in this industry to reduce the economic profits.

Question 32

Which type of profit maximizing firm will choose to produce where price equals marginal cost?

A)perfect competition
B)perfect competition and monopolistic competition
C)monopolistic competition
D)all types of firms

Question 33

What causes firms to want to enter a monopolistically competitive market?

Question 34

What effect does the absence of barriers to entry in a monopolistically competitive industry have on the existing firms' demand and marginal revenue curves?

A)The demand and marginal revenue curves begin to shift to the right.
B)The demand curve begins to shift to the right,but the marginal revenue curve shifts to the left.
C)Both curves shift to the left.
D)The demand curve shifts to the left,but the marginal revenue curve shifts to the right.

Question 35

For monopolistically competitive firms in long-run equilibrium:

A)the demand curve must intersect average total cost at its minimum.
B)the demand curve must be tangent to the average total cost curve at its minimum.
C)at the profit-maximizing quantity,the demand curve must intersect the average total cost curve quantity.
D)at the profit-maximizing quantity,the demand curve must be tangent to the average total cost curve.

Question 36

To maximize profit,a monopolistically competitive firm will produce where:

A)marginal revenue exceeds price.
B)price is less than marginal cost.
C)price equals average total cost.
D)marginal revenue equals marginal cost.

Question 37

The demand for a product of a monopolistically competitive firm is:

A)price inelastic.
B)price elastic.
C)unit elastic.
D)undefined.

Question 38

Which type of profit maximizing firm will choose to produce where marginal revenue equals marginal cost?

A)perfect competition
B)perfect competition and monopolistic competition
C)monopolistic competition
D)all types of firms

Question 39

In a monopolistically competitive industry,there are many firms because:

A)there are relatively large economies of scale.
B)there are relatively small economies of scale.
C)individual firms are not distinguishable from the total market.
D)products are easily produced.

Question 40

In the short run in monopolistic competition there can be:

A)economic profits,but not losses.
B)economic profits,losses or break even.
C)no economic profits,but losses
D)no economic profits or losses.

Question 41

Which of the following is a characteristic of monopolistic competition?

A)Many firms compete for essentially the same customers,but each firm produces a slightly different product.
B)Competitors have some price-setting power but it is limited because of the many close substitutes available.
C)Entry is relatively inexpensive.
D)all of the above

Question 42

Recall the application about opening a Dunkin' Donuts shop and the small barriers to entering the donut business.Which of the following is NOT required to operate a Dunkin' Donuts franchise?

A)paying a franchise fee
B)earning an economic profit
C)paying a royalty rate on profits
D)selling a specific brand of donuts

Question 43

Monopolistic competition is NOT characterized by:

A)slightly different products.
B)many sellers.
C)firms with no control over price.
D)no barriers to entry.

Question 44

When a profit-maximizing firm in monopolistic competition is producing its long-run equilibrium quantity:

A)it will be earning economic profit.
B)its marginal revenue will exceed its marginal cost.
C)its price will equal its marginal cost.
D)its price will be equal to its average total cost.

Question 45

Firms in monopolistically competitive markets sell identical products.

Question 46

Refer to Figure 11.2.In the long run the monopolistic competitor would generate total cost equal to the area:

A)0AFD.
B)AHE0.
C)AFGB.
D)0BGD.

Question 47

Under a monopolistically competitive market structure,firms will continue to enter the market until the economic profit is eliminated.

Question 48

In the long run,which two curves are tangent for a firm in monopolistic competition?

A)marginal cost and marginal revenue
B)marginal cost and demand
C)average total cost and demand
D)average total cost and marginal revenue

Question 49

In some monopolistically competitive markets,differentiation is obtained simply by location.Which of the followings is NOT a good sample of differentiation by location?

A)gas stations
B)movie theaters
C)music stores
D)restaurants

Question 50

Refer to Figure 11.2.In the long run the monopolistic competitor would charge a price of ________ per unit.

A)0A
B)0B
C)0F
D)BA

Question 51

Since a firm in monopolistic competition has some market power,its long-run price will be greater than its:

A)average total cost.
B)marginal cost.
C)total cost.
D)none of the above

Question 52

Refer to Figure 11.2.In the long run the monopolistic competitor would produce ________ units.

A)0C
B)0D
C)0E
D)none of these

Question 53

The toothpaste industry with 5 firms is a monopolistic competition,if a sixth firm decides to entry the market,what will happen to firms' specific demand curve?

A)shifts to the right
B)shifts to the left
C)stays the same
D)none of the above

Question 54

In the short run,a firm in monopolistic competition operates much like a:

A)monopolist.
B)firm in perfect competition.
C)price taker.
D)all of the above

Question 55

Recall the application regarding opening a Dunkin' Donuts shop and the small barriers to entering the donut business.What should an owner of a Dunkin' Donut shop expect in a monopolistically competitive market?

A)total revenue equal to total cost
B)keen competition for consumers
C)his economic profit to be zero
D)all of the above

Question 56

Firms in a monopolistically competitive industry have small economies of scale which causes no barriers to entry.

Question 57

In monopolistic competition,the presence of free entry suggests that:

A)some firms will earn economic profits in the long run.
B)some firms will be forced to incur losses in the long run.
C)all firms will earn zero economic profit in the long run.
D)all firms will earn zero economic profit in both the short run and the long run.

Question 58

When a profit-maximizing firm in monopolistic competition is in long-run equilibrium:

A)the demand curve it faces will be perfectly elastic.
B)its marginal cost will be falling.
C)its price will be greater than its marginal cost.
D)its marginal revenue will be greater than its marginal cost.

Question 59

Which of the following goods are NOT sold in a monopolistically competitive market?

A)computer software
B)toothpaste
C)toilet paper
D)oil

Question 60

Refer to Figure 11.2.In the long run the monopolistic competitor would earn an economic profit equal to the area:

A)0AFD.
B)AHE0.
C)0BGD.
D)none of these.

Question 61

In some monopolistically competitive markets,products are differentiated by location.

Question 62

Why does a firm in monopolistic competition face a downward sloping demand curve?

Question 63

What happens in the long run if firms in a monopolistically competitive industry are earning positive economic profits? Explain.

Question 64

There are patents and regulations that can prevent firms from entering a monopolistically competitive market.

Question 65

Provide four examples of goods that are sold in monopolistically competitive markets.

Question 66

A monopolistically competitive firm maximizes profit by producing where marginal revenue is less than marginal cost.

Question 67

How is it possible that monopolistically competitive firms have market power and yet cannot earn long-run profit?

Question 68

A monopolistically competitive firm influences market price by virtue of its size.

Question 69

List four ways in which product differentiation can be achieved.

Question 70

The demand for a product of a monopolistically competitive firm is very price inelastic.

Question 71

What is meant by product differentiation? Why is it employed by firms?

Question 72

Explain the characteristics of monopolistic competition.Explain how price and output are determined in monopolistic competition.

Question 73

One key difference between profit maximizing firms in monopolistic competition versus perfect competition is that:

A)monopolistically competitive firms will earn a positive profit in the long run.
B)perfectly competitive firms break even in the long run,but monopolistically competitive firms do not.
C)monopolistically competitive firms charge a price greater than marginal revenue.
D)none of the above

Question 74

Explain the conditions that must be satisfied for a monopolistically competitive industry to be in long-run equilibrium.

Question 75

Like firms in perfect competition,firms in monopolistic competition will earn zero economic profit in the long run.

Question 76

Under monopolistic competition,the typical firm maximizes profit at the point where marginal revenue equals marginal cost.

Question 77

Explain the process by which long-run equilibrium will be achieved in a monopolistically competitive industry if some firms are incurring losses.

Question 78

In a monopolistically competitive market,price will be equal to minimum average total cost in the long run.

Question 79

Firms in monopolistic competition sell their products at a price equal to marginal cost.

Question 80

Firms gain control over price in monopolistic competition by differentiating their products.