Question 1

The entry of new firms into a monopolistically competitive industry will cause the long-run equilibrium price to rise.

Accepted Answer

The entry of new firms into a monopolistically competitive industry will increase competition and reduce the market power of each firm. This will lead to a decrease in prices in the long run.

Question 2

Most economic activity in the United States is carried out by monopolies.

Accepted Answer

Most economic activity in the United States is carried out by a large number of firms competing in various industries. While some industries may have dominant players, true monopolies are relatively rare in the economy.

Question 3

In the long run,zero economic profit exists in monopolistic competition and perfect competition.

Accepted Answer

In both monopolistic competition and perfect competition, firms earn zero economic profit in the long run due to the entry and exit of firms in the market, which drives profits to normal levels (covering all costs, including opportunity costs).

Question 4

A monopolistic competitor faces a horizontal demand curve.

Accepted Answer

A monopolistic competitor faces a downward sloping demand curve, not a horizontal one. This is because they have market power to set their own price to some extent, but they still face competition from substitutes.

Question 5

In the long run,a monopolistically competitive firm earns small economic profits.

Accepted Answer

In the long run, a monopolistically competitive firm earns zero economic profits due to the entry of new firms, which erodes any initial profits.

Question 6

Monopolistic competition differs from perfect competition only in the number of firms participating in the market.

Accepted Answer

Monopolistic competition differs from perfect competition not only in the number of firms but also in the fact that firms in monopolistic competition have some degree of market power and differentiate their products from those of their competitors.

Question 7

Monopolistic competition is a market structure characterized by many small firms selling a homogeneous product.

Accepted Answer

Monopolistic competition is a market structure characterized by many small firms selling differentiated products.

Question 8

The demand curve for a monopolistic competitor is likely to be flatter than that of a monopolist.

Accepted Answer

A monopolistic competitor faces competition from other firms that offer similar but not identical products, which means they have a limited ability to raise prices without losing customers to their competitors. This leads to a more elastic (flatter) demand curve compared to a monopolist, who faces no competition and can set higher prices without losing customers.

Question 9

Society definitely benefits by reducing the number of monopolistically competitive firms.

Accepted Answer

Monopolistically competitive firms offer a variety of products and services which leads to innovation and consumer choice. Therefore, reducing their number may lead to reduced competition and limited options for consumers.

Question 10

A monopolistic competitor can expect to earn an economic profit in the long run.

Accepted Answer

In the long run, a monopolistic competitor will earn zero economic profit, as entry barriers are low and competition will eventually drive down prices to the point where only normal profit is earned.

Question 11

The cost-revenue diagrams for a monopolist and a monopolistic competitor are similar except that the demand curve for the monopolistic competitor is flatter.

Accepted Answer

The cost-revenue diagrams for both monopolist and monopolistic competitor show a downward sloping demand curve, MR curve, and ATC curve. However, the monopolistic competitor has a more elastic demand curve because there are close substitutes for their product in the market, hence the curve is flatter.

Question 12

Monopolistic competition has at least one similarity to perfect competition: firms are free to enter and leave the industry.

Accepted Answer

Both monopolistic competition and perfect competition allow for free entry and exit of firms in the industry. However, monopolistic competition differs from perfect competition in terms of product differentiation and non-price competition.

Question 13

Under monopolistic competition,profits cannot persist because new firms will be attracted to the market.

Accepted Answer

In monopolistic competition, firms have some control over the price of their product or service, but there are also many competitors offering similar products. This means that if a firm is earning high profits, new firms will be attracted to the market, increasing competition and driving down prices and profits. Therefore, profits cannot persist in the long run under monopolistic competition.

Question 14

For the monopolistic competitor,MR = P.

Accepted Answer

For a monopolistic competitor, MR (Marginal Revenue) is less than the market price or demand, as the firm faces a downward sloping demand curve. Therefore, MR < P.

Question 15

The demand curve for a monopolistic competitor is likely to be steeper than that of a monopolist.

Accepted Answer

The demand curve for a monopolistic competitor is not likely to be steeper than that of a monopolist. In fact, the opposite is generally true. A monopolist has complete control over the market and can set the price at a level that maximizes profits, regardless of the level of demand. In contrast, a monopolistic competitor faces competition from other firms and must be more responsive to changes in demand. As a result, the demand curve for a monopolistic competitor is likely to be flatter than that of a monopolist, indicating that consumers are more sensitive to price changes.

Question 16

The demand curve for a monopolistic competitor has a negative slope.

Accepted Answer

The demand curve for a monopolistic competitor has a negative slope as the price and quantity demanded have an inverse relationship, meaning as the price increases, the quantity demanded decreases.

Question 17

In the long run,a monopolistically competitive firm's demand curve must be tangent to its average cost curve.

Accepted Answer

In the long run, a monopolistically competitive firm will produce where P=MC and charge a price higher than its marginal cost. This means that the firm will earn a positive economic profit in the short run, which will attract new firms to enter the industry. As more firms enter, the demand for each individual firm's product will decrease, causing the firm to shift to a lower point on its demand curve. This process will continue until the firm reaches a point where its demand curve is tangent to its average cost curve, indicating that the firm is earning zero economic profit. This is known as the long-run equilibrium in a monopolistically competitive market.

Question 18

Monopolistically competitive firms can earn large profits in the long run.

Accepted Answer

In the long run, firms in monopolistic competition enter or exit the market until economic profits are zero, due to the ease of entry and exit in such markets.

Question 19

Monopolistically competitive markets feature high barriers to entry.

Accepted Answer

Monopolistically competitive markets have lower barriers to entry compared to pure monopolies or oligopolies, which leads to a larger number of firms operating in the market.

Question 20

Monopolistically competitive markets feature heterogeneous products.

Accepted Answer

Monopolistically competitive markets feature products that are not perfect substitutes for each other, meaning that they can be differentiated and have some degree of uniqueness or variety. This differentiation allows firms to have some market power and charge slightly different prices than their competitors.

Quiz 12: Between Competition and Monopoly