Question 1

Samurai Sam's, a producer of frozen sushi, is a monopolistically competitive firm. The firm is currently selling frozen California rolls at a $4 price. Samurai Sam's marginal cost is $1.75 and its marginal revenue is $1.50. The firm should ________ to maximize profits in the short run.

Accepted Answer

Since the marginal cost of producing each unit is only $1.75, and the marginal revenue earned from selling each unit is only $1.5, the firm is not generating as much profit as it could be. By decreasing output to where price equals marginal cost, the firm can increase its profit per unit sold. Therefore, the best choice is for the firm to decrease output to where price just equals marginal cost.

Question 2

If firms in a monopolistically competitive industry are incurring losses, in the long run firms will leave this industry until

Accepted Answer

In the long run, firms incurring losses will leave the industry as they are unable to cover their costs. As some firms leave, the demand for the remaining firms will increase, and they will increase their output until they reach the minimum point of their average total cost curve (ATC). This means that in the long run, the price (P) will be equal to ATC, as there will be no more firms leaving or entering the industry, and the industry will reach its long-run equilibrium. Therefore, the correct choice is B, as this is the point where the firms in the industry will break even and not incur any more losses.

Question 3

Pie-Oh-My, a monopolistically competitive firm, is producing 80 gourmet pies per day and selling each pie for $32. At that production level ATC is $40, AVC is $30, AFC is $10, and both MR and MC are $16. In the short run, this firm should

Accepted Answer

In the short run, the firm should continue producing 80 pies as long as price is greater than average variable cost (AVC) to minimize losses. In this case, the firm is selling each pie for $32 which is greater than the AVC of $30, meaning the firm is covering its variable costs and some of its fixed costs. If the firm were to shut down, it would still have to pay its fixed costs, which would result in greater losses. The firm should only consider shutting down if the price falls below AVC. The answer B is incorrect because producing where price equals marginal cost would result in losses if that point is below the ATC. The answer C is incorrect because producing the level where price equals ATC would result in zero economic profits, but since the firm is covering its variable costs and some of its fixed costs, it is still making a profit. Answer D is incorrect because shutting down is not the best option in this case.

Question 4

As new firms enter a monopolistically competitive industry, the ________ curve facing each existing firm will shift to the left and become more elastic because there are now ________ substitutes for its product.

Accepted Answer

In a monopolistically competitive market, as more firms enter the industry, each existing firm faces more competition because there are more substitutes available for its product. This increases the elasticity of the demand curve for each firm's product, as consumers have more alternatives, and shifts the demand curve to the left, indicating a decrease in demand for each existing firm's product at any given price.

Question 5

In ________ monopolistically competitive equilibrium, there will be neither economic profits nor losses.

Accepted Answer

In the long-run, firms in a monopolistically competitive market will enter or exit until economic profits are eliminated. This means that in the long-run equilibrium, there will be no economic profits or losses.

Question 6

A profit-maximizing monopolistically competitive firm ________ MR = MC.

Accepted Answer

A profit-maximizing monopolistically competitive firm produces where marginal revenue (MR) equals marginal cost (MC). This is because in the short run, a firm's goal is to maximize profits by producing the quantity of output where the marginal revenue gained from selling an additional unit is equal to the marginal cost of producing that unit. This level of output will allow the firm to charge a price higher than marginal cost, but not as high as a monopolist, in order to differentiate its product from competitors and maintain a degree of market power. Shutting down is not a viable option in the short run as fixed costs cannot be recovered, and being completely efficient (producing at minimum average total cost) is not possible in a monopolistically competitive market where firms differentiate their products.

Question 7

A monopolistically competitive firm

Accepted Answer

In a monopolistically competitive market, firms have some degree of market power due to product differentiation. If a firm intends to reduce output, raising its price can help maintain revenue while selling less, as its unique product may still attract buyers despite the higher price. This strategy leverages the firm's market power and the inelastic portion of its demand curve.

Question 8

In the long run, a monopolistically competitive firm that is incurring a loss will ________ if total revenue is less than variable costs.

Accepted Answer

If a monopolistically competitive firm is incurring a loss and total revenue is less than variable costs, it means the firm is not even covering its variable costs. In such a situation, it is best for the firm to shut down and avoid incurring further losses. By shutting down, the firm can minimize its losses to the amount of fixed costs incurred. Continuing to produce its current output would result in further losses for the firm. Increasing output would lead to even higher losses, and decreasing output might not be a viable option for a monopolistically competitive firm that already has difficulty in setting prices due to its market structure. Therefore, the best choice is for the firm to shut down.

Question 9

If ________, then a profit-maximizing, monopolistically competitive firm earns negative economic profits.

Accepted Answer

In a monopolistically competitive market, firms differentiate their products, which creates a downward-sloping demand curve. Therefore, the firm has some power to set its price. However, the firm faces competition from other similar firms, which limits its market power. In the long run, if the firm earns positive economic profits, other firms will enter the market, increasing competition and driving down prices. This will reduce the firm's demand and revenues, leading to negative economic profits. If the firm sets its price below average total cost (ATC) to try to increase its market share, it will earn revenues that are less than its costs, leading to negative economic profits. Therefore, if P < ATC, a profit-maximizing, monopolistically competitive firm earns negative economic profits. Choices A and C are not always the case in a monopolistically competitive market and do not guarantee negative economic profits.

Question 10

If ________, then a profit-maximizing, monopolistically competitive firm earns positive economic profits.

Accepted Answer

If P > ATC, the firm is able to charge a price higher than its average total cost, allowing for positive economic profits. In a monopolistically competitive market, firms are able to differentiate their products to some extent, giving them some market power to set prices above their marginal cost. If the firm is able to successfully differentiate its product and attract customers at a higher price, it can earn positive economic profits. P < ATC would result in losses and P = ATC would result in zero economic profits. All of the above being possible does not provide a specific answer.

Question 11

If firms in a monopolistically competitive industry are ________, then in the long run new firms producing close substitutes will enter the industry.

Accepted Answer

In a monopolistically competitive industry, if firms are earning economic profits, it attracts new firms to enter the market, producing close substitutes, in pursuit of those profits.

Question 12

For a monopolistically competitive firm ________ at the profit-maximizing quantity, the demand curve must be tangent to the average total cost curve.

Accepted Answer

In long-run equilibrium, the firm earns zero economic profit, which means that the price equals the average total cost at the profit-maximizing quantity. Therefore, the demand curve must be tangent to the average total cost curve.

Question 13

A monopolistically competitive firm that is incurring a loss will ________ as long as its revenue covers variable costs.

Accepted Answer

In the short run, a monopolistically competitive firm that is incurring a loss will continue to produce as long as its revenue covers variable costs. This is because the firm can still contribute towards covering its fixed costs, which cannot be avoided in the short run. However, in the long run, the firm may need to adjust its production or exit the industry if it is unable to earn enough revenue to cover both variable and fixed costs.

Question 14

A monopolistically competitive firm ________ where marginal revenue equals marginal cost.

Accepted Answer

A monopolistically competitive firm aims to maximize profits by producing where marginal revenue equals marginal cost. This is because at this output level, the firm is able to sell its products at a price higher than its marginal cost, thus earning additional profits. Minimizing average total cost or average variable cost may not necessarily lead to profit maximization, while maximizing revenues may not take into account the costs of production.

Question 15

Speedy Flowers competes in the monopolistically competitive flower delivery industry in a city. The firm raises its prices by 5% while all other florists keep their prices the same. Which of the following is most likely to occur? Speedy Flowers will

Accepted Answer

In a monopolistically competitive market, firms have some market power and are able to differentiate their products. Therefore, if Speedy Flowers raises its prices while all other florists keep their prices the same, it is likely to lose some of its customers to competitors who offer lower prices. This will result in a decrease in sales and potentially lower profits for Speedy Flowers.

Question 16

Esmerelda's Egg Emporium is a monopolistically competitive firm. Its marginal revenue curve ________ its demand curve, intersecting the quantity axis ________ the point at which the demand curve intersects it.

Accepted Answer

In a monopolistically competitive market, the firm faces a downward-sloping demand curve, meaning that the marginal revenue curve will always lie below the demand curve. The point where the demand curve intersects the quantity axis represents the quantity demanded at a price of zero, which is the minimum point at which the firm can sell its product. Therefore, the marginal revenue curve will intersect the quantity axis at a point that is midway between the origin and the point at which the demand curve intersects it. Hence, the correct choice is C.

Question 17

A monopolistically competitive firm minimize its losses by producing where MR = MC as long as ________.

Accepted Answer

A monopolistically competitive firm will only continue to produce and minimize its losses if the price it receives (P) is greater than the average variable cost (AVC) of production. This is because if the price is less than the AVC, the firm will not be able to cover its variable costs and will need to shut down in the short run. Therefore, only choice A is the best choice for this question.

Question 18

Pie-Oh-My, a monopolistically competitive firm, is baking 80 gourmet pies per day and selling each pie for $25. At that production level ATC is $40, AVC is $30, AFC is $10, and both MR and MC are $16. This firm should

Accepted Answer

The answer of Pie-Oh-My, a monopolistically competitive firm, is baking...

Question 19

To maximize profit, a ________ firm will produce where marginal revenue equals marginal cost.

Accepted Answer

All types of firms, including monopolistically competitive, perfectly competitive, and monopolistic firms, aim to maximize profit by producing at the point where marginal revenue equals marginal cost. This principle is a fundamental concept in microeconomics that applies across different market structures.

Question 20

As firms ________ a monopolistically competitive industry the demand and marginal revenue curves facing each firm begin to shift to the ________.

Accepted Answer

The answer of As firms ________ a monopolistically competitive industry...

Quiz 15: Monopolistic Competition