Question 1

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

Accepted Answer

In monopolistic competition, firms have some pricing power due to product differentiation, resulting in downward-sloping demand curves. In the long run, firms will produce where their demand curves are tangent to their long-run average total cost curves, resulting in excess capacity. This means that firms are not producing at the minimum point on their average total cost curves, which would eliminate any excess capacity. Marginal revenue equals marginal cost in all market structures in order to maximize profit, but this does not directly relate to excess capacity. Low barriers to entry do not necessarily lead to excess capacity, but may result in more competition and lower prices in the long run.

Question 2

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 competitive...

Question 3

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 degree of market power, allowing them to charge prices above marginal costs. However, consumers can choose from a variety of differentiated products that are more closely suited to their tastes, which can justify paying higher prices. This creates a trade-off between price and product differentiation.

Question 4

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 not at the allocatively efficient output level. The quantity produced is still less than the socially optimal level, resulting in a welfare loss.

Question 5

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 6

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

Accepted Answer

The answer of Excess capacity is a characteristic of monopolistically...

Question 7

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 8

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

Allocative efficiency and productive efficiency are two key criteria for measuring the efficiency of markets. Perfectly competitive markets achieve both allocative and productive efficiency, while monopolistically competitive markets do not. In monopolistically competitive markets, firms have some market power to set prices higher than marginal costs, resulting in a less efficient allocation of resources. Additionally, firms in monopolistically competitive markets often engage in non-price competition, which can lead to inefficiencies in production. Therefore, some economists argue that monopolistically competitive markets are less efficient than perfectly competitive markets.

Question 9

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 the long-run equilibrium of a monopolistically competitive industry, there is excess capacity due to the differentiation of products. This means that firms are producing below the minimum efficient scale and as a result, have higher costs per unit of output. This leads to a lower level of output compared to a perfectly competitive market. Additionally, in order to cover these higher costs, monopolistically competitive firms charge a higher price than perfectly competitive firms. Therefore, the correct answer is C, lower level of output and higher price.

Question 10

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 11

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 continuously try to anticipate changes in consumer tastes and preferences in order to stay ahead of their competitors and retain their customers. Adapting products to fit changed tastes is a common strategy used by firms for product differentiation.

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

Economists who argue that monopolistically competitive markets benefit consumers despite any loss of well-being typically support the idea that consumers benefit from being able to buy a differentiated product that more closely suits their tastes, even if it comes at a slightly higher price than the minimum average total cost of production. This differentiation allows for a wider range of products to choose from and provides consumers with a greater level of satisfaction than they would have with homogenous products that are produced at minimum cost, but do not meet their individual preferences or needs.

Question 13

Monopolistically competitive firms achieve allocative efficiency but not productive efficiency.

Accepted Answer

Monopolistically competitive firms do not achieve productive efficiency because they have some degree of market power which allows them to charge prices higher than their marginal costs. However, they can achieve allocative efficiency by producing at a point where marginal revenue equals marginal cost, ensuring that resources are allocated to the production of goods and services that are most valued by consumers.

Question 14

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

Accepted Answer

In the long-run equilibrium, firms in perfect competition achieve both productive and allocative efficiency by producing at minimum average total cost and charging a price equal to marginal cost. However, firms in monopolistic competition do not achieve either productive or allocative efficiency as they produce at a point where marginal revenue equals marginal cost, which is lower than the minimum average total cost, and charge a price higher than marginal cost. Moreover, firms in monopolistic competition spend on advertising and differentiating products to create brand loyalty, which further adds to the inefficiency.

Question 15

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 16

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 that is less than what would minimize their average total cost, which means they are not fully utilizing their resources. Additionally, they earn zero economic profits in the long run because new firms can easily enter the market and compete away any profits. Therefore, neither productive efficiency nor allocative efficiency is achieved in the long run in monopolistically competitive markets.

Question 17

If a monopolistically competitive firm has excess capacity

Accepted Answer

If a monopolistically competitive firm has excess capacity, it means that the firm is producing less than the output level that would minimize its average total cost. This indicates that the firm is operating on the negatively sloped portion of its average total cost curve, where increasing output would result in decreasing average total cost. Therefore, the correct answer is D. Option A is incorrect because having excess capacity does not necessarily imply an absence of economies of scale. Option B is incorrect because the minimum efficient scale refers to the lowest level of output at which a firm can achieve the lowest long-run average cost. Option C is incorrect because diseconomies of scale occur when the firm experiences rising average total cost as output increases beyond a certain level, which is not the case here.

Question 18

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 involves a large number of firms selling differentiated products. In the long run, new firms can enter the market and compete away any profits earned by existing firms. Therefore, a monopolistic competitor must continually differentiate its product to maintain its customer base and avoid downward pressure on prices. Without successful product differentiation, a monopolistic competitor will not be able to earn profits in the long run.

Question 19

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 20

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

Accepted Answer

In a monopolistically competitive market, firms have some market power to set prices above marginal cost, leading to higher prices for consumers. However, since firms differentiate their products, consumers have a greater variety of options available to them that are better suited to their tastes and preferences. This creates a trade-off between price and variety. Consumers can choose between paying a higher price for a product they prefer over other options, or paying a lower price for a product that may not be their ideal choice. Overall, consumers benefit from having more options in a monopolistically competitive market.

Quiz 11: Monopolistic Competition and Oligopoly