Question 1

The market for plumbing services in a city can be characterized by the model of monopolistic competition.Suppose that the market is initially in long-run equilibrium, and then there is an increase in demand for plumbing services.We expect that in the long run:

Accepted Answer

In the long run, the increase in demand for plumbing services will lead to economic profits for firms in the market. This will attract new firms to enter the market in order to take advantage of the profits. As a result, the number of firms in the market will increase, but each firm will have a smaller market share and lower profit margin due to increased competition. Therefore, the market will still be characterized by monopolistic competition with differentiated products.

Question 2

Product differentiation under monopolistic competition means that each firm:

Accepted Answer

Product differentiation is the key characteristic of monopolistic competition, which means that each firm produces a slightly differentiated product that appeals to a specific group of consumers. As a result, firms can charge different prices for their products based on the perceived differences in quality or features. Therefore, choice A is the correct answer. Choice B is incorrect because monopolistic competition is characterized by many firms in a market, and each firm has only a small market share. Choice C is incorrect because profit maximization occurs where MC=MR, not where MC=P. Choice D is incorrect because the demand curve facing a firm under monopolistic competition is downward-sloping, not horizontal.

Question 3

In monopolistic competition:

Accepted Answer

In monopolistic competition, firms are price setters, meaning they have some market power to set prices above marginal cost (MC). However, to maximize profits, firms still produce where marginal revenue (MR) equals MC. Therefore, choice A is true. Choice B is not true because monopolistically competitive firms produce at a point where price (P) is greater than marginal cost (MC), meaning that reducing output would not necessarily make consumers better off. Choice C is not necessarily true, as increasing output would require the firm to incur additional costs, particularly if they are operating at capacity.

Question 4

Economic profits in the long run are guaranteed for firms under:

Accepted Answer

In the long run, economic profits tend to be zero in both monopolistic competition and perfect competition due to the entry of new firms in the market, which drives down prices and profits.

Question 5

The Case in Point on Craft Brewers suggested that this industry is an example of:

Accepted Answer

The craft brewing industry is an example of monopolistic competition. While there are many brewers in the industry, each has their own unique product and branding, which allows for differentiation. However, there are still barriers to entry and a degree of market power held by larger craft breweries. This fits the characteristics of monopolistic competition.

Question 6

Product differentiation under monopolistic competition means that each firm:

Accepted Answer

Product differentiation means that each firm offers a unique product or service, which results in a downward-sloping demand curve because consumers perceive differences in the products offered. Choices A, B, and D are incorrect because firms under monopolistic competition set prices higher than marginal cost, achieve only normal profits in the long run, and may have economic losses in the short run.

Question 7

A monopolistically competitive industry shares some of the same characteristics as perfect competition, including:

Accepted Answer

Monopolistically competitive markets, like perfectly competitive markets, feature easy entry and exit for firms, allowing them to join or leave the market with relative ease. This contrasts with monopolies or oligopolies where barriers to entry are significant. Unlike perfect competition, however, monopolistically competitive firms do not produce identical products; instead, they differentiate their products to gain a competitive edge.

Question 8

Which of the following is (are) true?

Accepted Answer

All the statements provided are correct. Both perfect and monopolistic competition firms maximize profits where marginal revenue equals marginal cost (MR = MC). In the long run, firms in both types of markets earn zero economic profits due to entry and exit. In perfect competition, price equals marginal cost (P = MC) at equilibrium, while in monopolistic competition, price exceeds marginal cost (P > MC), leading to excess capacity.

Question 9

When the profit-maximizing level of output is less than the output associated with the minimum possible average total cost of production, a firm is said to have:

Accepted Answer

When a firm produces less than the output associated with the minimum possible average total cost of production, it is said to have excess capacity. This means that the firm could potentially produce more and still have lower per-unit costs, but it is choosing not to do so for profit-maximizing reasons. This can occur in markets with high fixed costs, where it may not be profitable to produce at full capacity, or in markets with excess supply where firms are reluctant to increase output due to fears of price competition.

Question 10

The excess capacity in monopolistic competition may be viewed as:

Accepted Answer

Excess capacity in monopolistic competition is the result of firms producing at a smaller scale than what would minimize their long-run average total cost. This is due to the cost of product differentiation and advertising, which is necessary to create brand identity and attract customers in a crowded marketplace. As a result, firms have some unused resources that can be seen as a cost of diversity. This excess capacity is not efficient because it means that some resources are not being utilized to their fullest potential. P = MR = MC is still the profit-maximizing rule in monopolistic competition because firms still need to cover their marginal costs with their prices.

Question 11

In the long run, monopolistically competitive firms tend to experience:

Accepted Answer

In the long run, monopolistically competitive firms tend to experience zero economic profits. This is because in the long run, firms can enter or exit the industry in response to profits or losses, which will lead to more firms entering and competition increasing. As a result, the demand for each firm's product will decrease and the firm's market power will decrease as well. This will eventually lead to the firm earning only enough revenue to cover its cost, resulting in zero economic profits.

Question 12

The market for plumbing services in a city can be characterized by the model of monopolistic competition.Suppose that the market is initially in long-run equilibrium, and then there is an increase in demand for plumbing services.We expect that in the long run the economic profits of typical firms in the industry will be:

Accepted Answer

In the long-run equilibrium under monopolistic competition, firms earn zero economic profit. This is because new firms enter the market when existing firms are making a profit, increasing the supply of services and driving down prices until profits are eliminated.

Question 13

Oligopoly is a market structure that is characterized by a:

Accepted Answer

Oligopoly is characterized by a small number of interdependent firms, meaning that the actions of one firm can have a significant impact on the others. These firms may produce identical products, as in the case of a homogeneous oligopoly (e.g. oil producing companies), or differentiated products, as in the case of a differentiated oligopoly (e.g. automobile manufacturers). Option A is the only choice that accurately describes the characteristics of an oligopoly.

Question 14

Because monopolistically competitive firms charge a P > MC:

Accepted Answer

Monopolistically competitive firms charge a price above marginal cost, which means they are not producing at the socially optimal level of output where price equals marginal cost. This results in inefficiency, as some potential consumers who value the product above the marginal cost are not buying due to the higher price, resulting in a deadweight loss to society.

Question 15

Monopolistic competition within an industry results in:

Accepted Answer

Monopolistic competition results in product differentiation and non-price competition, leading to firms operating with excess capacity in order to maintain their differentiated products. This results in chronic excess capacity within the industry. Option A is incorrect because overutilization of plants would suggest that there is not enough capacity, which would lead to perfect competition. Option C is incorrect because firms in monopolistic competition tend to invest more in advertising to differentiate themselves from their competitors. Option D is incorrect because in monopolistic competition, firms have some degree of market power, allowing them to charge higher prices than in perfect competition.

Question 16

The main characteristic that distinguishes monopolistic competition from perfect competition is:

Accepted Answer

Monopolistic competition is characterized by firms producing differentiated products. In perfect competition, firms are homogeneous and identical, resulting in less product differentiation. Easy entry and exit and many firms exist in both types of markets, while the maximization of profits where MR = MC is a general rule for all types of markets.

Question 17

Which of the following is (are) true?

Accepted Answer

All the statements are true regarding monopolistic competition. It is criticized for not being as efficient as perfect competition due to product differentiation, which leads to inefficiencies. However, the text suggests that these inefficiencies might be considered a small price for the benefit of having a wide variety of products.

Question 18

Assuming identical production functions and cost curves, the long-run equilibrium of a monopolistically competitive firm, as compared with a perfectly competitive firm, is such that, for the former, price is:

Accepted Answer

In the long run, monopolistically competitive firms earn zero economic profit, but they have some market power to charge a price above their marginal cost. Therefore, in comparison to a perfectly competitive firm, a monopolistically competitive firm will have a higher price. However, due to the presence of close substitutes and competition, the monopolistically competitive firm cannot charge a price as high as a pure monopoly. Therefore, the monopolistically competitive firm will have a smaller output level in comparison to a perfectly competitive firm which charges a lower price and produces a higher output level.

Question 19

An industry dominated by a few firms, where each of those firms recognizes that its own choices will affect the choices of its rivals and that its rivals' choices will affect it, is a(n):

Accepted Answer

An oligopoly is an industry where a few firms dominate the market and their decisions significantly affect each other. This leads to interdependence among firms and strategic behavior, such as price-fixing, collusion, and non-price competition. Monopoly refers to a single seller controlling the entire market, while monopolistic competition involves many firms selling differentiated products with some degree of market power. Perfect competition, on the other hand, assumes numerous small firms selling identical products with no entry barriers, no market power, and perfect information.

Question 20

Which of the following is (are) true?

Accepted Answer

The statement in option A is not mentioned in the text. Option B is true as excess capacity is a feature of monopolistic competition. Option C is incorrect as monopolistic competition in the long run results in zero economic profits due to entry of new firms. Hence, only option B is true.

Quiz 11: The World of Imperfect Competition

The market for plumbing services in a city can be characterized by the model of monopolistic competition.Suppose that the market is initially in long-run equilibrium, and then there is an increase in demand for plumbing services.We expect that in the long run:

Product differentiation under monopolistic competition means that each firm:

In monopolistic competition:

Economic profits in the long run are guaranteed for firms under:

The Case in Point on Craft Brewers suggested that this industry is an example of:

Product differentiation under monopolistic competition means that each firm:

A monopolistically competitive industry shares some of the same characteristics as perfect competition, including:

Which of the following is (are) true?

When the profit-maximizing level of output is less than the output associated with the minimum possible average total cost of production, a firm is said to have:

The excess capacity in monopolistic competition may be viewed as:

In the long run, monopolistically competitive firms tend to experience:

Oligopoly is a market structure that is characterized by a:

Because monopolistically competitive firms charge a P > MC:

Monopolistic competition within an industry results in:

The main characteristic that distinguishes monopolistic competition from perfect competition is:

Which of the following is (are) true?

Assuming identical production functions and cost curves, the long-run equilibrium of a monopolistically competitive firm, as compared with a perfectly competitive firm, is such that, for the former, price is:

An industry dominated by a few firms, where each of those firms recognizes that its own choices will affect the choices of its rivals and that its rivals' choices will affect it, is a(n) :

Which of the following is (are) true?