Question 1

The traditional view of monopolistic competition holds that this type of industrial structure is inefficient because

Accepted Answer

The traditional view of monopolistic competition is based on the idea that firms in this market structure do not operate at the output level that minimizes average costs, leading to inefficiencies in production. This is because firms in monopolistic competition have some market power, which allows them to charge prices above marginal cost, but not enough market power to fully capture monopoly profits. As a result, they produce at a level that allows them to differentiate their products and maintain some market power, but not at the level that minimizes average costs. This leads to higher prices and lower output than would be optimal from a social welfare standpoint.

Question 2

Monopolistic competition differs from perfect competition because in monopolistically competitive markets

Accepted Answer

The answer of Monopolistic competition differs from perfect competition because...

Question 3

The use of the word "monopoly" in the name of the market structure called "monopolistic competition" refers to the fact that

Accepted Answer

The use of the word "monopoly" in the name of the market structure called "monopolistic competition" refers to the fact that a monopolistically competitive firm faces a downward sloping demand curve for its differentiated product, and so does a monopolist. This is the main similarity between monopolistic competition and monopoly. However, there are also significant differences, such as the fact that monopolistically competitive markets have free entry and exit, and firms in these markets do not produce at the efficient scale.

Question 4

Product differentiation allows the firm to

Accepted Answer

Product differentiation allows the firm to create a unique product or brand that is perceived as being different from its competitors. This creates a sense of exclusivity among consumers, allowing the firm to raise prices without experiencing a substantial loss of sales. As a result, choice B is the best option.

Question 5

Carmen's Café is a monopolistic competitor. If Carmen is currently producing at the output level where her average total cost is minimised and the café is earning economic profits, then in the long run output will

Accepted Answer

In the long run, other firms will enter the market and compete with Carmen's Café, which will decrease demand for her product. As a result, Carmen's Café will have to decrease its output to maintain its market power, causing average total cost to increase. Therefore, output will decrease and average total cost will increase in the long run.

Question 6

One source of inefficiency in monopolistic competition is that

Accepted Answer

Monopolistically competitive firms have market power and can charge prices above marginal cost. This leads to inefficiency because some units that buyers value in excess of the cost of production are not produced, causing a deadweight loss. Additionally, monopolistically competitive firms may produce beyond their efficient scale, which also leads to inefficiency. However, it is not necessarily true that monopolistically competitive firms earn economic profits in the long run, as they may face competition from other firms entering the market. Finally, while surplus is redistributed from buyers to sellers due to the pricing power of the firm, this alone is not a source of inefficiency.

Question 7

There are several reasons why demand curves may become more price elastic. Among them are

Accepted Answer

When goods become less differentiated and more firms enter the industry, consumers have more options to choose from and thus become more price sensitive. This leads to a more elastic demand curve.

Question 8

Which of the following is true with regard to monopolistically competitive firms' scale of production and pricing decisions? Monopolistically competitive firms produce

Accepted Answer

Monopolistically competitive firms produce with excess capacity because they have differentiated products and are not producing at the lowest possible average total cost. They charge a price above marginal cost because they have some market power due to product differentiation.

Question 9

Which of the following is not put forth as a criticism of advertising and brand names?

Accepted Answer

While the other choices are criticisms of advertising and brand names, option B argues that advertising increases competition, which can be seen as a positive aspect of advertising.

Question 10

-If the monopolistic competitor firm described by the graph above is producing at the profit-maximising (loss-minimising) level of output, it

Accepted Answer

The answer of 
-If the monopolistic competitor firm described by...

Question 11

Which of the following firms is most likely to spend a large percentage of their revenue on advertising?

Accepted Answer

A producer of a highly differentiated consumer product is likely to spend a large percentage of their revenue on advertising to create brand awareness and differentiate their product from competitors.

Question 12

Perhaps it's not a problem at all, but if "too much choice" were a problem for consumers, it would occur in which market structure(s)?

Accepted Answer

Monopolistic competition involves many firms producing slightly differentiated products, giving consumers a wide range of choices. This could potentially lead to the "too much choice" problem for consumers. Perfect competition would not have enough product differentiation, so the problem would not arise. In a monopoly, there would be no choice at all for consumers.

Question 13

Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilibrium?

Accepted Answer

The answer of Which of the following conditions is characteristic...

Question 14

The graph below depicts a monopolistically competitor firm, which is

Accepted Answer

The answer of The graph below depicts a monopolistically competitor...

Question 15

In the long run, under monopolistic competition, when firms advertise,

Accepted Answer

In the long run, under monopolistic competition, firms earn zero economic profit due to the entry of new firms attracted by any short-term profits, which erodes those profits over time. Advertising can increase demand or market share temporarily, but it does not prevent new entrants from driving profits to zero.

Question 16

To maximise its profit, a monopolistically competitive firm chooses its level of output by looking for the level of output at which

Accepted Answer

A monopolistically competitive firm will choose its level of output where marginal revenue (MR) equals marginal cost (MC) because this is the point where the firm can maximise its profit. If MR is greater than MC, the firm can increase its profit by producing and selling more. If MR is less than MC, the firm can increase its profit by reducing its output. Therefore, the best choice is B.

Question 17

The use of the word "competition" in the name of the market structure called "monopolistic competition" refers to the fact that

Accepted Answer

Monopolistic competition involves many sellers and free entry and exit, similar to a competitive market, which is why "competition" is part of the term.

Question 18

-The monopolistically competitive firm shown in the graph above will, in the long run,

Accepted Answer

The answer of 
-The monopolistically competitive firm shown in the...

Question 19

Which of the following is true regarding the production and pricing decisions of monopolistically competitive firms? Monopolistically competitive firms choose the quantity at which marginal cost equals

Accepted Answer

Monopolistically competitive firms, like all firms, aim to produce at a quantity where marginal cost equals marginal revenue to maximize their profits. However, because monopolistically competitive firms have some control over the price due to product differentiation, they use the demand curve to determine the price consistent with the quantity they have chosen. Therefore, monopoly competitive firms choose the quantity at which marginal cost equals marginal revenue and then use the demand curve to determine the price consistent with this quantity.

Question 20

When firms enter a monopolistically competitive market and the business-stealing externality is larger than the product variety externality, then

Accepted Answer

When the business-stealing externality is larger than the product variety externality, firms entering the market will lead to more competition and lower prices, thereby reducing profits for all firms in the market. As a result, there may be too many firms in the market, leading to inefficiencies such as excess capacity and higher prices. Therefore, market efficiency could be increased if some firms exit the market.

Quiz 15: Market Structures Ii: Monopolistic Competition