Question 1

In contrast with perfect competition,excess capacity characterizes monopolistic competition.Excess capacity is due to which of the following?

Accepted Answer

Monopolistically competitive firms face downward-sloping demand curves and have some market power to set prices above marginal cost. In the long run, firms produce where their demand curves are tangent to their long-run average total cost curves, which results in excess capacity. This means that firms are producing less than the efficient scale of production, resulting in unused resources and higher costs per unit produced. Therefore, choice B is the correct answer. Choices A, C, and D are not directly related to the concept of excess capacity in monopolistic competition.

Question 2

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

Economists who believe that monopolistically competitive markets benefit consumers despite any loss of well-being argue that consumers benefit from being able to buy a differentiated product more closely suited to their tastes, even if the price is greater than marginal cost or the product is not produced at minimum average total cost. This variety of differentiated products is considered a form of consumer surplus that compensates for any inefficiencies in the market structure.

Question 3

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

Accepted Answer

In monopolistically competitive markets, firms are able to differentiate their products and offer a wider range of options to consumers. This means that consumers are able to find products that more closely fit their preferences, but at a slightly higher price than they would pay in a perfectly competitive market. This trade-off is the result of the increased competition and product differentiation, which allow firms to charge slightly higher prices while still retaining customers.

Question 4

If a significant number of smokers switch from smoking tobacco cigarettes to e-cigarettes,a company like NJOY 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 smokers switch...

Question 5

Consumers in monopolistically competitive markets face a tradeoff 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 degree of market power, which allows them to charge prices greater than marginal costs. However, consumers may still choose to purchase these products because they may better meet their preferences or needs compared to the products of other firms. This results in a tradeoff between price and product differentiation.

Question 6

Long-run equilibrium in a monopolistically competitive market is similar to long-run equilibrium in a
Perfectly competitive market in that in both markets,firms

Accepted Answer

In the long-run equilibrium, firms in both monopolistic and perfect competition markets earn zero economic profit, meaning they break even.

Question 7

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 downward-sloping demand curves, which means they have some market power to set prices above marginal cost. However, in the long run, due to free entry and exit, other firms can enter the market and offer close substitutes, which will drive down demand for the original firm and force them to lower their prices. As a result, in the long run, monopolistically competitive firms earn zero economic profits. This implies that they have excess capacity, meaning they could produce more output and decrease their average costs, but they choose not to in order to maintain their perceived quality and brand differentiation.

Question 8

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, a monopolistically competitive firm produces at a point where marginal revenue equals marginal cost, which is lower than the output level that would achieve allocative efficiency (where the price equals the marginal cost). Thus, monopolistic competition leads to a suboptimal allocation of resources compared to perfect competition.

Question 9

In the long run firms in both monopolistically competitive markets and perfectly competitive markets earn zero economic profits,but unlike perfectly competitive firms in the long run,monopolistically competitive firms

Accepted Answer

In the long run, both monopolistically competitive and perfectly competitive firms earn zero economic profits. However, monopolistically competitive firms do not produce at minimum average total cost as they have some degree of market power and are able to charge a price above marginal cost. This results in a higher cost of production compared to perfectly competitive firms which produce at minimum average total cost. Therefore, choice (C) is correct.

Question 10

One way by which firms differentiate their products is to find a market niche.

Accepted Answer

Finding a market niche involves identifying a specific and unique segment of the market and developing products or services that cater to the specific needs and preferences of that segment. This differentiation strategy can differentiate a firm's products from those of its competitors and create a competitive advantage.

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 less efficient than perfectly competitive markets because neither allocative efficiency (where production is at the lowest cost possible and goods and services are allocated to those who value them the most) nor productive efficiency (where goods and services are produced at the lowest cost possible) are achieved in monopolistically competitive markets. This inefficiency leads to a loss of well-being to society.

Question 12

In both monopolistically competitive and perfectly competitive industries

Accepted Answer

The answer of In both monopolistically competitive and perfectly competitive...

Question 13

If a monopolistically competitive firm has excess capacity

Accepted Answer

The answer of If a monopolistically competitive firm has excess...

Question 14

Which of the following is not a characteristic of a monopolistically competitive firm in long-run equilibrium?

Accepted Answer

In long-run equilibrium, a monopolistically competitive firm produces at a point where price is greater than marginal cost, leading to excess capacity. Therefore, price is not equal to marginal cost in a monopolistically competitive firm in long-run equilibrium. Choices (A) and (B) are characteristics of any firm in long-run equilibrium, while choice (C) is a characteristic specific to monopolistically competitive firms.

Question 15

Which of the following statements is true about monopolistically competitive firms?

Accepted Answer

Monopolistically competitive firms have some degree of market power due to product differentiation, allowing them to raise prices without losing all customers.

Question 16

Excess capacity is a characteristic of monopolistically competitive firms.What does excess capacity mean?

Accepted Answer

Excess capacity means that firms do not produce the output level that corresponds to the minimum point on their average total cost curves. This occurs because in monopolistic competition, firms differentiate their products to make them slightly different from their competitors, which allows them to charge a slightly higher price. However, this differentiation also means that they do not operate at the minimum efficient scale, which results in excess capacity.

Question 17

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...

Question 18

Compared to a perfectly competitive firm,the demand curve facing a monopolistically competitive firm is

Accepted Answer

The answer of Compared to a perfectly competitive firm,the demand...

Question 19

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 allocative and productive efficiency, meaning they produce at the lowest cost possible and produce the amount of goods that consumers demand at the lowest possible price. In contrast, in monopolistic competition, firms do not achieve either allocative or productive efficiency because they have some market power to charge higher prices and do not produce at the lowest cost possible. Instead, they differentiate their products to create a loyal consumer base and try to maximize their profits. Therefore, long-run equilibrium under monopolistic competition differs from long-run equilibrium under perfect competition because of the inefficiencies present in monopolistic competition.

Question 20

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, monopolistically competitive firms will produce a lower level of output compared to perfectly competitive firms because they face downward-sloping demand curves, which means they can charge a higher price for their differentiated product. However, this also means that their price will be higher than the price in a perfectly competitive market. Therefore, in monopolistically competitive market, a lower level of output is produced and a higher price is charged compared to a perfectly competitive market in long-run equilibrium.

Quiz 11: Monopolistic Competition and Oligopoly