Question 1

When a credit card company offers different services with its card, like travel insurance for air travel tickets purchased with the credit card or product insurance for items purchased with the card, the credit card company is trying to
A) create a barrier to entry for competing firms.
B) create a perfectly competitive market in which to sell its credit card.
C) convince customers that its card has greater value than those offered by rival firms.
D) shift the demand curve for competing firms to the right.

Accepted Answer

By offering additional services such as travel insurance and product insurance, the credit card company is trying to persuade customers that their card is more valuable than those offered by its competitors. This helps to differentiate their product and create a competitive advantage.

Question 2

Explain the similarities and differences between the long-run equilibrium for a perfectly competitive firm and a monopolistically competitive firm. Illustrate your answer with a graph demonstrating the long-run equilibrium for the two types of firms.

Accepted Answer

The answer of Explain the similarities and differences between the...

Question 3

One of your classmates asserts that advertising, marketing research, and brand management are redundant expenditures because a firm can obtain the same information by simply looking at what customers are already buying. Which of the following is not a response you might offer her?
A) Conducting market research is a good way for firms to keep abreast of changing consumer tastes and preferences.
B) Advertising and brand management allow a firm to create an entry barrier which will insulate the firm from competition and from undertaking further product innovations.
C) Marketing research could allow a firm to identify new market opportunities and at least, in the short run, a firm can make a profit supplying products to this market segment.
D) If a firm successfully manages its brand, customers become less price sensitive as they perceive fewer substitutes for the firm's brand.

Accepted Answer

Advertising and brand management can create a strong brand image and customer loyalty, which can insulate the firm from competition and provide a sustainable competitive advantage. This cannot be achieved by simply observing what customers are currently buying.

Question 4

Economists believe that consumers would be better off if markets were perfectly competitive rather than monopolistically competitive.

Accepted Answer

The answer of Economists believe that consumers would be better...

Question 5

What is the trade-off that consumers face when buying the product of a monopolistically competitive firm?
A) Consumers pay higher prices but receive better quality goods compared to the output of perfectly competitive firms.
B) Consumers pay a price greater than marginal cost but have the luxury of choices more suited to their tastes.
C) Consumers pay higher prices but the products are produced by highly efficient firms.
D) Consumers pay lower prices but have fewer choices.

Accepted Answer

In monopolistically competitive markets, firms produce differentiated products, which means consumers have a wider range of options to choose from compared to perfectly competitive markets. However, because firms have some degree of market power, they can charge prices above marginal cost. The trade-off consumers face is that they pay a price greater than marginal cost but have the luxury of choices more suited to their tastes. Therefore, the best answer is B.

Question 6

Productive efficiency does not hold for a profit-maximising, 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

In the long-run equilibrium, a monopolistically competitive firm operates where its demand curve is tangent to its average total cost curve, not necessarily in the diseconomies-of-scale region. Productive efficiency is not achieved because the firm produces at a point where average total cost is not minimized.

Question 7

Does the fact that monopolistically competitive firms do not achieve productive efficiency or allocative efficiency mean that there is a significant loss in consumer welfare?

Accepted Answer

The answer of Does the fact that monopolistically competitive firms...

Question 8

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...

Question 9

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

A monopolistic competitor operates in a market with low barriers to entry and many competitors. This means that if the company cannot differentiate its product enough to create a loyal customer base, competitors can easily enter the market and compete away any profits. Therefore, successful product differentiation is crucial for long-term profitability in a monopolistic competition market.

Question 10

Which of the following statements is true about advertising by a monopolistically competitive firm?
A) Since the monopolistic competitor, like the perfect competitor, makes zero profit in the long run, it is a waste of resources to advertise its products.
B) Advertising could make the monopolistic competitor's demand more inelastic, but advertising has no effect on a perfect competitor's demand.
C) Advertising will be more beneficial if a monopolistic competitor colludes with other firms to advertise the products of the industry as a whole rather than an individual firm's product.
D) Monopolistically competitive firms tend to shun advertising because advertising draws attention to the variety of differentiated products available in the industry.

Accepted Answer

Advertising can make the demand for a monopolistically competitive firm's product more inelastic because it emphasizes the unique qualities of the product and creates a greater perceived difference between it and substitutes. This effect does not apply to a perfect competitor, who sells a homogeneous product that is identical to all others in the market.

Question 11

Monopolistically competitive firms achieve allocative efficiency but not productive efficiency.

Accepted Answer

Monopolistically competitive firms do not achieve either productive or allocative efficiency as they have excess capacity and do not produce at minimum average total cost.

Question 12

A trademark is
A) a legal instrument which grants a firm the right to differentiate its product.
B) a legal right to position a firm's product in high-traffic public areas such as airports and post offices.
C) a patent on a firm's product.
D) a distinguishing attribute such as a sign or logo that allows a firm to uniquely identify its product.

Accepted Answer

A trademark is a distinguishing attribute such as a sign or logo that allows a firm to uniquely identify its product. It helps to differentiate a company's products from those of its competitors and create brand recognition among consumers. Trademarks are registered with the government and give the owner legal protection against infringement.

Question 13

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 of a monopolistically competitive market, firms will produce at a quantity where marginal revenue equals the marginal cost, which is not at the level of allocative efficiency. In fact, there will be excess capacity due to the presence of product differentiation and non-price competition. Therefore, monopolistically competitive firms will not produce at the allocatively efficient level in the long run.

Question 14

Brand management refers to
A) picking a brand name for a new product that will attract attention.
B) the efforts to maintain the differentiation of a product over time.
C) efforts to reduce the cost of production.
D) selling the right to use a brand name in a particular market.

Accepted Answer

Brand management is the ongoing process of maintaining the differentiation of a product or service over time. It involves developing and implementing strategies to strengthen the brand's reputation, increase brand awareness, and create a positive association with the brand in the minds of customers. It includes activities such as brand positioning, brand messaging, brand identity, brand equity, and brand loyalty. The goal of brand management is to create a strong, sustainable brand that can effectively compete in the marketplace.

Question 15

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 and can charge prices greater than marginal costs, but they also differentiate their products to better match consumers' preferences. Therefore, consumers in these markets face a trade-off between paying higher prices and getting products that more closely suit their tastes.

Question 16

What is meant by 'excess capacity'? How does it relate to consumer utility?

Accepted Answer

The answer of What is meant by 'excess capacity'? How...

Question 17

Although advertising raises the price of a monopolistic competitor's product, it does confer a benefit to consumers. Which of the following is a benefit to consumers?
A) Advertising acts as a barrier to entry.
B) Advertising engenders brand loyalty.
C) Advertising could provide consumers with useful information about new products and enable them to comparison shop.
D) Advertised products tend to be of higher quality so consumers feel special when they consume advertised products.

Accepted Answer

Advertising can provide consumers with useful information about new products and enable them to comparison shop. This can help consumers make more informed decisions and possibly find better deals.

Question 18

Which of the following is a disadvantage of trademarking a firm's product?
A) A trademark differentiates a firm's product.
B) A trademark conveys information about the product to the public.
C) A trademark may become so widely used to denote a particular type of product that the trademark may no longer be a legally protected brand name.
D) A trademark does not affect demand for the firm's product.

Accepted Answer

If a trademark becomes so widely used that it becomes a generic term for a particular type of product, it may no longer be a legally protected brand name. This can dilute the value of the trademark and make it less effective for the firm in terms of branding and differentiation.

Question 19

Both the perfectly competitive firm and the monopolistically competitive firm produce at the output where marginal revenue equals marginal cost (MR = MC) but only the perfectly competitive firm achieves allocative efficiency. Explain why this is the case.

Accepted Answer

The answer of Both the perfectly competitive firm and the...

Question 20

One way by which firms differentiate their products is to find a market niche.

Accepted Answer

Finding a market niche allows firms to distinguish their products from competitors and cater to a specific group of customers with unique needs or preferences. This differentiation strategy can help firms to gain a competitive advantage and increase their market share.

Quiz 10: Monopolistic Competition : The Competitive Model in More Realistic Setting

When a credit card company offers different services with its card, like travel insurance for air travel tickets purchased with the credit card or product insurance for items purchased with the card, the credit card company is trying to

Explain the similarities and differences between the long-run equilibrium for a perfectly competitive firm and a monopolistically competitive firm. Illustrate your answer with a graph demonstrating the long-run equilibrium for the two types of firms.

One of your classmates asserts that advertising, marketing research, and brand management are redundant expenditures because a firm can obtain the same information by simply looking at what customers are already buying. Which of the following is not a response you might offer her?

Economists believe that consumers would be better off if markets were perfectly competitive rather than monopolistically competitive.

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

Productive efficiency does not hold for a profit-maximising, monopolistically competitive firm in the long-run equilibrium because the firm operates along the diseconomies-of-scale region of its average total cost curve.

Does the fact that monopolistically competitive firms do not achieve productive efficiency or allocative efficiency mean that there is a significant loss in consumer welfare?

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.

A monopolistic competitor does not earn profits in the long run unless it can successfully differentiate its product in the minds of its consumers.

Which of the following statements is true about advertising by a monopolistically competitive firm?

Monopolistically competitive firms achieve allocative efficiency but not productive efficiency.

A trademark is

In the long-run equilibrium, a monopolistically competitive firm earning normal profit produces the allocatively efficient output level.

Brand management refers to

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.

What is meant by 'excess capacity'? How does it relate to consumer utility?

Although advertising raises the price of a monopolistic competitor's product, it does confer a benefit to consumers. Which of the following is a benefit to consumers?

Which of the following is a disadvantage of trademarking a firm's product?

Both the perfectly competitive firm and the monopolistically competitive firm produce at the output where marginal revenue equals marginal cost (MR = MC) but only the perfectly competitive firm achieves allocative efficiency. Explain why this is the case.

One way by which firms differentiate their products is to find a market niche.