Question 1

A monopolistically competitive firm is said to produce with excess costs in the long run because

Accepted Answer

In the long run, firms in a monopolistically competitive market will have excess costs because they are producing a differentiated product, which means they have some market power to set prices above marginal cost. This results in a higher average total cost of production compared to a perfectly competitive market, where firms produce at minimum average total cost in the long run.

Question 2

In the long run, a monopolistically competitive firm

Accepted Answer

In the long run, a monopolistically competitive firm makes a normal profit. This is because the firms in this market structure have some degree of market power to set prices above marginal cost, but still face competition from other firms producing similar products. As a result, they cannot sustain economic profits in the long run as new firms will enter the market and decrease their market power. Instead, they will earn just enough profit to cover their opportunity costs and remain in business, which is referred to as a normal profit.

Question 3

Which of the following statements is not true regarding a monopolistically competitive firm in the short run?

Accepted Answer

In monopolistically competitive market, firms maximize profits where MR=MC, not where P=MC. Therefore, statement D is incorrect as it suggests that the firm maximizes profits at the price equal to marginal cost.

Question 4

Suppose that A-Mart sells fashion clothing in a shopping mall along with many other fashion retail stores. If A-Mart earns economic profits in the short run, then in the long run

Accepted Answer

When a firm earns economic profits, it signals to other potential entrants that there are opportunities for profit in that market. As a result, new firms are likely to enter the market, increasing competition. This increased competition for A-Mart would likely lead to a decrease in its market share and a leftward shift in its demand curve as customers have more alternatives.

Question 5

Exhibit 11-1 
-Refer to Exhibit 11-1. The firm will maximize profits at the price of

Accepted Answer

At the output level where marginal cost equals marginal revenue, the price is $75 per unit, which is also the profit-maximizing price. Any higher price would result in lower total revenue, as fewer units would be sold, while any lower price would result in lower marginal revenue than marginal cost, leading to lower profits.

Question 6

A monopolistic competitor behaves like a monopoly in the short run.

Accepted Answer

In the short run, a monopolistic competitor can act like a monopoly by setting prices above their marginal cost and earning economic profits. However, in the long run, other firms can enter the market and compete which reduces the market power of the monopolistic competitor.

Question 7

If additional firms enter a monopolistically competitive industry, the demand facing a typical firm increases.

Accepted Answer

If additional firms enter a monopolistically competitive industry, the market becomes more competitive and the demand facing a typical firm decreases, as there are now more substitutes available for consumers to choose from.

Question 8

As new firms enter a monopolistically competitive industry, the demand curve facing a typical firm will most likely

Accepted Answer

As new firms enter a monopolistically competitive industry, the market becomes more competitive, resulting in a larger supply of products. This, in turn, shifts the demand curve faced by a typical firm to the left, reducing the demand for its products. Hence, the best choice is E, which is "shift to the left."

Question 9

If a monopolistically competitive firm is in long-run equilibrium, then

Accepted Answer

In long-run equilibrium in a monopolistically competitive market, the firm produces at a level where P = ATC (i.e. it earns zero economic profit) and P > MC (i.e. it has some market power). Therefore, choice C is the correct answer. The other choices are incorrect as they do not accurately describe the conditions for long-run equilibrium in a monopolistically competitive market.

Question 10

In the long run, a monopolistically competitive firm produces with excess capacity because the

Accepted Answer

The answer of In the long run, a monopolistically competitive...

Question 11

Firms leave a monopolistically competitive industry when

Accepted Answer

When average total cost is greater than price, the firm is incurring losses. This means that it is not covering all of its costs with the revenue it is earning. In the long run, firms cannot sustain losses and will eventually leave the industry.

Question 12

If a monopolistically competitive firm is earning above-normal profits, then in the long run its demand will shift to the right and become more elastic.

Accepted Answer

In the long run, other firms will enter the market, increasing competition and reducing the monopolistically competitive firm's market power. This will cause the demand curve to shift to the left, making it less elastic. Therefore, the firm will not be able to maintain above-normal profits in the long run.

Question 13

When firms leave a monopolistically competitive industry, remaining firms' demands increase because

Accepted Answer

When firms leave a monopolistically competitive industry, customers who were previously buying from the exiting firms will now start buying from the remaining firms, leading to an increase in demand for the remaining firms' products.

Question 14

Monopolistic competitors can always prevent entry and exit of other firms over time.

Accepted Answer

Monopolistic competitors cannot always prevent entry and exit of other firms over time because barriers to entry and exit are relatively low in these types of markets.

Question 15

Exhibit 11-1 
-Refer to Exhibit 11-1. The profit-maximizing output is ____ units.

Accepted Answer

The profit-maximizing output occurs where marginal revenue equals marginal cost (MR = MC). From the graph, we can see that this occurs at an output of approximately 30 units. At this output level, the firm would charge a price of $50 per unit and incur a total cost of $1,200, resulting in a profit of $600 (($50 - $30) x 30). Therefore, the best choice is E) 30 units.

Question 16

Exhibit 11-1 
-Refer to Exhibit 11-1. The profit-maximizing, monopolistically competitive firm as represented in the figure

Accepted Answer

The firm is producing at the quantity where marginal revenue equals marginal cost (Q1) and charging a price higher than marginal cost (P1). Therefore, it is earning an economic profit in the short run. However, in the long run, new firms will enter the market due to the positive economic profit, causing a shift in the demand curve and decreasing the firm's market share. As a result, the firm will see a decrease in its profit margins, and in the long run, it will only earn a normal profit.

Question 17

For a monopolistically competitive firm, the demand curve is more elastic in the long run than in the short run.

Accepted Answer

In the short run, a monopolistically competitive firm may have some degree of market power that allows it to set a price above its marginal cost. However, in the long run, other firms can enter the market and provide similar products, making the demand curve more elastic as consumers have more substitutes to choose from. This increased competition results in the price being pushed down towards the firm's average total cost, reducing the firm's market power and making the demand curve more elastic.

Question 18

Exhibit 11-1 
-Refer to Exhibit 11-1. In the long run,

Accepted Answer

In the long-run, firms will enter the market to take advantage of the economic profits being made by the existing firm. This increased competition will eventually drive down prices and reduce economic profits to zero, leading to long-run equilibrium.

Question 19

In the long run, a monopolistically competitive firm charges a price that is

Accepted Answer

In the long run, a monopolistically competitive firm produces where marginal revenue (MR) equals marginal cost (MC), but sets a price above the minimum average total cost (ATC) to earn profits. This is because it has some degree of market power and can differentiate its product from competitors, allowing it to charge a higher price than perfect competition. Therefore, the correct answer is C, as it is the only option that reflects this pricing behavior.

Question 20

In the long run, a monopolistically competitive firm sets output so that

Accepted Answer

In the long run, monopolistically competitive firms aim to maximize profits by setting output where marginal revenue (MR) equals marginal cost (MC). This is because MR represents the change in revenue from selling one more unit of output, while MC represents the change in cost from producing one more unit of output. By setting output at the point where MR = MC, the firm is producing the level of output where the additional cost of producing one more unit is equal to the additional revenue gained from selling one more unit. This ensures that the firm is maximizing its profits.

Quiz 11: Product Differentiation, Monopolistic Competition, and Oligopoly