Question 1

Most economists believe that consumers would be better off if markets were perfectly competitive rather than monopolistically competitive.

Accepted Answer

The answer of Most economists believe that consumers would be...

Question 2

In long-run equilibrium, compared to a perfectly competitive market, a monopolistically competitive industry produces a ________ level of output and charges a ________ price.

Accepted Answer

In long-run equilibrium, a monopolistically competitive industry produces at a lower output level than a perfectly competitive market due to excess capacity. This excess capacity comes from firms producing at less than minimum efficient scale to differentiate their product. In order to cover their higher fixed costs, monopolistically competitive firms charge a higher price than perfectly competitive markets. Therefore, the correct answer is C.

Question 3

A monopolistic competitor does not earn profits in the long run unless it can successfully differentiate its product in the minds of its consumers.

Accepted Answer

Monopolistic competition is characterized by a large number of firms producing differentiated products. In the long run, new firms may enter the market and imitate the product, driving down demand and eroding profits. Therefore, a monopolistic competitor must continuously differentiate its product and maintain a loyal customer base to earn profits in the long run.

Question 4

If a significant number of consumers switch from ordering food delivery from traditional restaurants to ordering from "ghost restaurants", a "ghost restaurant" will likely find its demand curve shifting to the ________ and its marginal revenue curve shifting to the ________ as more competitors enter the market.

Accepted Answer

The answer of If a significant number of consumers switch...

Question 5

What is meant by "excess capacity"? How does it relate to consumer utility?

Accepted Answer

The answer of What is meant by "excess capacity"? How...

Question 6

In the long-run equilibrium, both the perfectly competitive firm and the monopolistically competitive firm produce the output at which MR=MC and charge a price equal to the average total cost of production.

Accepted Answer

The answer of In the long-run equilibrium, both the perfectly...

Question 7

Monopolistically competitive firms achieve allocative efficiency but not productive efficiency.

Accepted Answer

Monopolistically competitive firms do not achieve either allocative or productive efficiency in the long run.

Question 8

Consumers in monopolistically competitive markets face a trade-off between paying prices greater than marginal costs and purchasing products that are more closely suited to their tastes.

Accepted Answer

In monopolistically competitive markets, firms have some market power and can charge prices above marginal costs. However, consumers still have some choice and can choose products that are more closely suited to their tastes compared to a perfectly competitive market where all products are identical. Therefore, consumers in this market face a trade-off between paying higher prices and getting more differentiated products.

Question 9

Does the fact that monopolistically competitive firms do not achieve productive efficiency or allocative efficiency mean that there is a significant loss in consumer welfare?

Accepted Answer

The answer of Does the fact that monopolistically competitive firms...

Question 10

The long-run equilibrium in a monopolistically competitive market is similar to the long-run equilibrium in a perfectly competitive market in that in both markets, firms

Accepted Answer

The answer of The long-run equilibrium in a monopolistically competitive...

Question 11

Economists have long debated whether there is a significant loss of well-being to society in markets that are monopolistically competitive rather than perfectly competitive. Which of the following offers the best reason why some economists believe that monopolistically competitive markets are less efficient than perfectly competitive markets?

Accepted Answer

Monopolistically competitive markets are generally considered less efficient than perfectly competitive markets because neither allocative efficiency (where resources are allocated in such a way that society's marginal benefit equals its marginal cost) nor productive efficiency (where goods are produced at the minimum average total cost) are achieved. This is because firms in monopolistically competitive markets have some market power and can charge prices higher than their marginal cost, leading to a gap between price and marginal cost, resulting in deadweight loss to society.

Question 12

Economists have long debated whether there is a significant loss of well-being to society in markets that are monopolistically competitive rather than perfectly competitive. Which of the following offers the best reason why some economists believe that monopolistically competitive markets benefit consumers despite any loss of well-being?

Accepted Answer

Some economists believe that monopolistically competitive markets benefit consumers despite any loss of well-being because consumers can buy a differentiated product that is more closely suited to their tastes. This benefit may outweigh the negatives of a higher price and less overall efficiency in the market.

Question 13

In the long-run equilibrium, a monopolistically competitive firm earning normal profit produces the allocatively efficient output level.

Accepted Answer

In the long-run equilibrium of a monopolistically competitive market, firms will produce a quantity where price equals average total cost, which will be greater than marginal cost, resulting in a deadweight loss and not producing the allocatively efficient output level.

Question 14

What is the trade-off that consumers face when buying the product of a monopolistically competitive firm?

Accepted Answer

When buying the product of a monopolistically competitive firm, consumers face the trade-off of paying a price greater than marginal cost, but have the luxury of choices more suited to their tastes. Monopolistically competitive firms differentiate their products and create a perceived difference in quality, which allows them to charge a higher price than their marginal cost. However, consumers benefit from having more choices that are tailored to their preferences and needs, which they likely would not get in a perfectly competitive market.

Question 15

In what way does long-run equilibrium under monopolistic competition differ from long-run equilibrium under perfect competition?

Accepted Answer

In perfect competition, firms achieve both productive and allocative efficiency, which means that they produce at the lowest cost possible and allocate resources to where they are most valued by society. In monopolistic competition, firms do not achieve either efficiency due to product differentiation and market power. There is excess capacity and prices are higher than marginal cost, leading to a deadweight loss. Additionally, monopolistic competition leads to the inefficiency of advertising and other brand-related costs.

Question 16

If a monopolistically competitive firm has excess capacity

Accepted Answer

If a monopolistically competitive firm has excess capacity it means that it is producing at a level of output that places it on the negatively sloped portion of its average total cost (ATC) curve. This indicates that the firm could produce more output at a lower cost, indicating economies of scale still exist. Therefore, A and B are incorrect. Diseconomies of scale would cause the ATC to increase and thus the firm would produce less output, making C incorrect.

Question 17

Monopolistically competitive firms have downward-sloping demand curves. In the long run, monopolistically competitive firms earn zero economic profits. These two characteristics imply that in the long run

Accepted Answer

Monopolistically competitive firms have excess capacity in the long run because they produce at a quantity lower than the one that would minimize their average total cost. This is due to the downward-sloping demand curve, which makes them have a markup over their marginal cost, similar to a monopoly. However, unlike a monopoly, monopolistically competitive firms face competition from other firms producing close substitutes, which erodes their ability to earn economic profits in the long run. As a result, they operate with excess capacity in the long run, which implies that they could produce more and increase their profits, but they don't because they face insufficient demand for their products at higher prices.

Question 18

One way by which firms differentiate their products is to try to anticipate changes in consumer tastes and adapt their products to fit those changed tastes.

Accepted Answer

This statement is true. Firms often conduct market research to identify changing consumer preferences and trends, and then adjust their product offerings to meet those new demands. This can help them differentiate their products from competitors and appeal to a wider customer base.

Question 19

Productive efficiency does not hold for a profit-maximizing, monopolistically competitive firm in the long-run equilibrium because the firm operates along the diseconomies of scale region of its average total cost curve.

Accepted Answer

The answer of Productive efficiency does not hold for a...

Question 20

Only one of the following statements is correct. The statements compare perfectly competitive (PC) markets and monopolistically competitive (MC) markets. Which statement is correct?

Accepted Answer

The answer of Only one of the following statements is...

Quiz 13: Monopolistic Competition: the Competitive Model in a More Realistic Setting