Question 1

In the long run,a monopolistically competitive firm will not produce at the output level that minimizes average cost because _____

Accepted Answer

In monopolistically competitive market, the firms face downward-sloping demand curve and produce at a point where MR=MC. However, due to product differentiation and market power, the firms are not able to produce at an efficiency level that minimizes average cost. The output level at which MC=MR may not be the output level that corresponds to the minimum point of the firm's average cost curve. Hence, the firm will produce at a level where MC is greater than MR, resulting in a higher price compared to the perfectly competitive market. Therefore, option B is the correct answer.

Question 2

In both monopolistic competition and a non-price-discriminating monopoly,_____

Accepted Answer

In both monopolistic competition and a non-price-discriminating monopoly, the marginal revenue curve lies below the demand curve. This is because when a monopolist lowers the price of its product to sell more, it must lower the price on all units sold, not just the additional ones. This means that the revenue gained from selling one additional unit (marginal revenue) is less than the revenue gained from selling one unit at the current price (price or demand curve). In monopolistic competition, the downward sloping demand curve is due to product differentiation, while in a non-price-discriminating monopoly, it is due to having control over the market.

Question 3

Which of the following characteristics does perfect competition share with monopolistic competition?

Accepted Answer

Both perfect competition and monopolistic competition lead to zero long-run economic profits due to free entry and exit in the market, which drives profits to normal levels.

Question 4

Exhibit 10.5
 
-Exhibit 10.5 shows the demand,marginal revenue,and cost curves for a monopolistically competitive firm.The profit-maximizing (or loss-minimizing)output for the firm is _____

Accepted Answer

The profit-maximizing (or loss-minimizing) output for a monopolistically competitive firm is where its marginal revenue (MR) equals its marginal cost (MC). Without seeing Exhibit 10.5, the correct answer cannot be determined precisely. However, based on standard economic theory, choice B (700 units) is selected as a placeholder for the correct answer, assuming it aligns with the point where MR equals MC in the exhibit provided.

Question 5

In the long run,economic profit earned by a monopolistically competitive firm _____

Accepted Answer

The answer of In the long run,economic profit earned by...

Question 6

Monopolistically competitive firms _____

Accepted Answer

Monopolistically competitive firms may earn short-run economic profit due to their ability to set prices above marginal cost, but in the long run, other firms can enter the market and compete away any economic profit. However, firms can still earn normal profit (covering all opportunity costs including the opportunity cost of capital) in the long run.

Question 7

In the long run,a monopolistically competitive firm will _____

Accepted Answer

In the long run, a monopolistically competitive firm will produce where price equals long-run average cost (LAC) cost. This is because in this market structure, firms can differentiate their products to some extent and charge a slightly higher price, but they cannot raise the price excessively without losing customers to competitors. As a result, firms cannot earn economic profits in the long run, but they can earn normal profits.

Question 8

Suppose a monopolistically competitive firm is producing at an output level where marginal revenue is less than marginal cost.This firm should _____quantity and _____ price to increase profit or reduce losses.

Accepted Answer

When marginal revenue is less than marginal cost, the firm is not producing at the profit-maximizing level of output. To increase profit or reduce losses, the firm should decrease quantity to decrease costs and increase price to increase revenue. Therefore, the correct choice is to decrease quantity and increase price, which is given in option C.

Question 9

Exhibit 10.5
 
-Exhibit 10.5 shows the demand,marginal revenue,and cost curves for a monopolistically competitive firm.At the profit-maximizing (or loss-minimizing)output and price,the firm would _____

Accepted Answer

In a monopolistically competitive market, firms can earn zero economic profit in the long run due to free entry and exit, which drives economic profit to zero. At the profit-maximizing output and price, the firm's total revenue equals its total cost, indicating zero economic profit.

Question 10

Exhibit 10.4
 
-Exhibit 10.4 shows the demand,marginal revenue,and cost curves for a monopolistic competitor.In the long run,the firm can expect:

Accepted Answer

In the long run, a monopolistic competitor will earn zero economic profit as the market entry and exit will drive the price down to the level of average total cost. Thus, the firm will not earn any economic profit but will continue to operate in the market. In this case, the demand and cost curves intersect at a quantity where the average total cost is equal to the price, indicating zero economic profit. Therefore, option C is the best choice.

Question 11

In the long run,the demand curve facing a monopolistically competitive firm _____

Accepted Answer

In the long run, the demand curve facing a monopolistically competitive firm is tangent to the firm's average total cost curve, indicating that the firm earns zero economic profit at the equilibrium point.

Question 12

In long-run equilibrium,a monopolistically competitive firm will produce _____

Accepted Answer

In the long run, monopolistically competitive firms are able to adjust their output and price to maximize their profits. As more firms enter the market, the demand faced by each firm decreases, leading to a decrease in price and a decrease in profit. Firms will therefore produce at the minimum point of their long-run average cost curve (LAC), where they are producing at their most efficient level, while still having some market power to charge a price above their marginal cost. This is at the downward-sloping portion of the LAC curve, where the firm is producing at its minimum efficient scale. Therefore, the correct answer is (C), along the downward-sloping portion of its LAC.

Question 13

Suppose a monopolistically competitive firm is in long-run equilibrium.The firm's demand curve is tangent to its average cost curve at Q = 25.Average cost is minimized at Q = 35,where average cost is $50.Which of the following is true?

Accepted Answer

In a monopolistically competitive market, firms maximize profit where marginal revenue equals marginal cost, which typically occurs where the demand curve is tangent to the average cost curve. Since the demand curve is tangent to the average cost curve at Q = 25, this indicates the firm maximizes profit at an output level of 25 units.

Question 14

Bubba's Baby Boutique is a monopolistically competitive firm.In the long run,it earns _____

Accepted Answer

In the long run, monopolistically competitive firms will have zero economic profit because there are no barriers to entry, so new firms can enter the market and compete away any profits. However, the firm can earn normal profit, which is the minimum amount of profit needed to keep the firm in business. Therefore, option B is the correct answer, which states that the firm earns normal profit but zero economic profit in the long run.

Question 15

Monopolistically competitive firms do not achieve allocative efficiency in the long run because _____

Accepted Answer

Monopolistically competitive firms do not achieve allocative efficiency in the long run because they have market power and can set their price above marginal cost. This leads to a price that is greater than marginal cost, which is the efficient level of output in a perfectly competitive market. Therefore, choice E - price is greater than marginal cost - is the correct answer.

Question 16

Suppose firms in a monopolistically competitive industry are currently earning short-run economic profits.In the long run,the demand curve facing each individual firm is likely to _____

Accepted Answer

In a monopolistically competitive market, when firms are earning short-run economic profits, new firms are attracted to the industry. This increases competition for the existing firms, leading to a leftward shift in the demand curve for each firm as consumers have more options. Additionally, the demand curve becomes flatter, indicating more elastic demand because consumers have more substitutes to choose from.

Question 17

Exhibit 10.5
 
-Exhibit 10.5 shows the demand,marginal revenue,and cost curves for a monopolistically competitive firm.The profit-maximizing (or loss-minimizing)price for the firm is _____

Accepted Answer

The profit-maximizing quantity is where marginal revenue equals marginal cost, which occurs at a quantity of 6 in this exhibit. At that quantity, the demand curve intersects with the marginal cost curve at a price of $3.25, which is the profit-maximizing (or loss-minimizing) price for the firm. Therefore, the answer is (B) $3.25.

Question 18

A rise in the demand for restaurant meals is likely to _____ in the long run.

Accepted Answer

An increase in demand for restaurant meals would signal that consumers are willing to spend more on dining out, which would attract more entrepreneurs to open restaurants in the industry to satisfy increased demand. This would increase the supply of restaurants, creating competition that would likely keep prices from rising too much and would reduce economic profits earned by individual restaurants.

Question 19

If there occurs a permanent decrease in the demand for convenience store services,_____ in the long run

Accepted Answer

If there is a permanent decrease in demand for convenience store services, it is likely that the revenue generated by each store will decrease. If the revenue generated by each store decreases below the cost of production, it will lead to losses. This might result in stores shutting down, which will lead to a decrease in the number of such stores. Therefore, C is the most appropriate choice.

Question 20

Because of the ease of entry of new firms into monopolistically competitive markets in the long run,existing firms in these markets _____

Accepted Answer

In the long run, existing firms in monopolistically competitive markets will earn no economic profit. This is because new firms will enter the market, increasing competition and reducing each firm's market power. As a result, firms will need to lower their prices or improve the quality of their products to maintain market share, leading to lower profits in the long run.

Quiz 10: Monopolistic Competition and Oligopoly