Question 1

If some monopolistically competitive firms exit their market after suffering short-run losses, the demand curves of remaining firms will shift to the right.

Accepted Answer

If some firms exit the market, it reduces the number of competitors and can increase the demand for the remaining firms' products. This can cause their demand curves to shift to the right.

Question 2

Figure 13-16
 
-Refer to Figure 13-16.Figure 13-16 depicts a monopolistically competitive barber shop.Use the diagram to answer the following questions.
a.Suppose the average variable cost of production is $15 when output equals 110 haircuts and $15.25 when output equals 140 haircuts.If the firm wants to maximize its profit or minimize its losses, how many haircuts will it produce and what price should it charge? Explain your answer.
b.Calculate the firm's profit or loss.
c.What is likely to happen in this industry over time as it moves to its new long-run equilibrium?
d.Suppose the barber shop depicted in the diagram remains in the industry.Is this barber shop likely to produce this same quantity of haircuts as in part (a)in the long run?

Accepted Answer

The answer of Figure 13-16
 
-Refer to Figure 13-16.Figure 13-16...

Question 3

The economic analysis of monopolistic competition shows that market forces eliminate profits in the long run.However, it is possible for a firm to continue to earn economic profits if the firm

Accepted Answer

Monopolistically competitive firms can continue to earn economic profits in the long-run if they adopt new technologies that enable them to lower their cost of production. This allows the firm to lower prices and increase their market share, while still earning profits. Expanding marketing budgets, expanding product offerings, or reducing prices alone may not be sufficient to sustain economic profits in the long-run.

Question 4

A monopolistically competitive firm that earns economic profits in the short run will be able to expand its market share even if the market size remains constant.

Accepted Answer

In a monopolistically competitive market, new firms are attracted by short-run economic profits, leading to increased competition and a reduction in market share for existing firms if the market size remains constant.

Question 5

For allocative efficiency to hold,

Accepted Answer

Allocative efficiency occurs when price equals the marginal cost of production of the last unit produced. This is because at this point, the benefits (in terms of revenue generated) of producing the last unit are equal to the costs (in terms of marginal production costs) of producing it, indicating an efficient allocation of resources. Option A is incorrect because marginal revenue is not necessarily equal to marginal cost. Option C and D are incorrect because they refer to cost minimization rather than allocative efficiency.

Question 6

Long-run equilibrium under monopolistic competition is similar to that under perfect competition in that

Accepted Answer

In long-run equilibrium under monopolistic competition, firms earn normal profits due to free entry and exit, similar to perfect competition. However, unlike perfect competition, firms do not produce at the minimum point of their average cost curves, and price does not equal marginal cost or marginal revenue.

Question 7

What effect does the entry of new firms in a monopolistically competitive market have on the economic profits of existing firms in the market? How might existing firms attempt to counteract this effect?

Accepted Answer

The answer of What effect does the entry of new...

Question 8

What is the difference between zero accounting profit and zero economic profit?

Accepted Answer

The answer of What is the difference between zero accounting...

Question 9

A monopolistically competitive firm that is profitable in the short run will face competition that will eventually eliminate the firm's profits in the long run.But the firm can stave off competition and continue to earn economic profits if

Accepted Answer

The only way a monopolistically competitive firm can continue to earn economic profits in the long run is if it can differentiate its product from its competitors. By doing so, it creates a loyal customer base that is willing to pay a premium price for that unique product. If the firm continues to innovate and find new ways to differentiate its product, it can stave off competition and continue to earn profits in the long run. The other options (suing competitors, moving to another country, lobbying for a price floor) are not viable solutions to long-term profitability in a monopolistically competitive market.

Question 10

Which of the following will not happen as a consequence of a monopolistically competitive firm suffering economic losses in the short run?

Accepted Answer

In the long run, monopolistically competitive firms will earn zero economic profits, and the price will be equal to the average total cost of production. Therefore, the firm will not be able to charge a price that is greater than its average total cost.

Question 11

The table below shows the demand and cost data facing "Velvet Touches," a monopolistically competitive producer of velvet throw pillows.
  
Use the data to answer the following questions.
a.Complete the Total Revenue (TR), Marginal Revenue (MR), and Marginal Cost (MC)columns above.
b.What are the profit-maximizing price and quantity for Velvet Touches?
c.Is the firm making a profit or a loss? How much is the profit or loss? Show your work.
d.Is this firm operating in the long run or in the short run? Explain your answer.
e.If the firm's profit or loss is typical of all firms in the market for throw pillows, what is likely to happen in the future? Will there be more firms or will some existing firms leave the industry? Explain your answer.
f.What will happen to the typical firm's profit or loss after all entry/exit adjustments?

Accepted Answer

The answer of The table below shows the demand and...

Question 12

When a monopolistically competitive firm breaks even in the long run, this is equivalent to earning a zero accounting profit.

Accepted Answer

In the long run, a monopolistically competitive firm breaks even by earning zero economic profit, not zero accounting profit. Zero economic profit means total revenue equals total costs, including opportunity costs, whereas zero accounting profit means total revenue equals explicit costs only.

Question 13

If a monopolistically competitive firm breaks even, the firm is earning as much in this industry as it could in any other comparable industry.

Accepted Answer

In a monopolistically competitive market, breaking even means the firm is covering all its costs, including opportunity costs, indicating it is earning a normal profit comparable to what it could earn in other similar industries.

Question 14

Figure 13-15
 
-Refer to Figure 13-15 to answer the following questions.
a.What is the profit-maximizing output level?
b.What is the profit-maximizing price?
c.What is the average total cost at the profit-maximizing output level?
d.What area represents the firm's profit?
e.At which output level are economies of scale exhausted?
f.Does this graph most likely represent the long run or the short run? Why?

Accepted Answer

The answer of Figure 13-15
 
-Refer to Figure 13-15 to...

Question 15

For productive efficiency to hold,

Accepted Answer

Productive efficiency occurs when the average total cost is minimized in production. This means that resources are being used in the most efficient way possible and that the cost of producing each unit is as low as it can be. This does not necessarily mean that the price charged for each unit is equal to the marginal cost or marginal revenue, although these concepts are important for determining the profit-maximizing level of output.

Question 16

Sparkle, one of many firms in the market for toothpaste, is in a long-run equilibrium.As do all of its competitors, Sparkle has a small market share, and Sparkle has been in business for a long time.
a.Identify the market structure in which Sparkle operates.Explain your answer.
b.What is Sparkle's profit or loss? Explain your answer.If you cannot determine the profit or loss, explain what information is missing.
c.Draw a diagram showing Sparkle's demand curve, marginal revenue curve, average total cost curve, and marginal cost curve.Label your diagram.

Accepted Answer

The answer of Sparkle, one of many firms in the...

Question 17

A monopolistically competitive firm that earns economic profits in the short run will face a more elastic demand curve in the long run.

Accepted Answer

In the long run, other firms can enter the market and offer similar products, making the demand for the firm's product more elastic as consumers have more options to choose from. This increased competition will reduce the firm's market power and lead to a decrease in economic profits.

Question 18

How does the long-run equilibrium of a monopolistically competitive industry differ from that of a perfectly competitive industry?

Accepted Answer

In the long run, monopolistically competitive firms do not produce at the lowest point on their average cost curve due to excess capacity, while perfectly competitive firms produce at the lowest average cost, achieving productive efficiency.

Question 19

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

Accepted Answer

In long-run equilibrium in a monopolistically competitive market, firms do not produce at minimum average total cost due to excess capacity. They produce where average total cost is tangent to the demand curve, which is not at the minimum point of the average total cost curve.

Question 20

A monopolistically competitive firm can increase its profits beyond the long-run equilibrium break-even level by deliberately lowering its price to force some of its competitors out of the market.

Accepted Answer

In monopolistic competition, firms have differentiated products and face downward-sloping demand curves. Lowering prices to force competitors out is more characteristic of oligopolies, and in the long run, new firms can enter the market, restoring the break-even level.

Quiz 13: Monopolistic Competition: the Competitive Model in a