Question 1

Which of the following will not happen as a consequence of a monopolistically competitive firm suffering economic losses in the short run?
A) The firm's demand curve will shift to the right if it stays in business in the long run.
B) The firm will exit the industry if it continues to suffer economic losses.
C) The firm will break even if its stays in business in the long run.
D) In the long run, the firm will be able to charge a price that is greater than its average total cost.

Accepted Answer

In the long run, firms in monopolistically competitive markets will be able to charge a price that is equal to their average total cost, as there are no barriers to entry and new firms will enter the market driving down prices. Therefore, the statement that the firm will be able to charge a price greater than its average total cost is false.

Question 2

Despite being in a market with ________, from the mid-1990s to the mid-2000s Starbucks was able to significantly differentiate its products from the products of its competitors.
A) few barriers to entry
B) significant barriers to entry
C) blocked entry
D) no barriers to entry

Accepted Answer

The answer of Despite being in a market with ________,...

Question 3

-Refer to Figure 10-15. It is possible to lower the average cost of production by expanding output beyond Q₀ to Q₁. Why wouldn't a firm expand its output to Q₁? A) The firm wants to maximise accounting profit rather than economic profit. B) The firm would suffer an economic loss at Q₁ while it would break even at Q₀. C) The firm's marginal revenue would be negative at Q₁. D) Demand is not sufficient for consumers to buy Q₁.

Accepted Answer

At Q₁, the firm's average cost of production is higher than the price it can charge for the product, resulting in an economic loss. Therefore, it is not profitable for the firm to expand its output beyond Q₀.

Question 4

If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios best reflects the change a representative firm experiences as the market adjusts to its long-run equilibrium?
A) Demand decreases and becomes less elastic.
B) Demand decreases and becomes more elastic.
C) Demand increases and becomes less elastic.
D) Demand increases and becomes more elastic.

Accepted Answer

The answer of If firms in a monopolistically competitive market...

Question 5

A monopolistically competitive firm that is profitable in the short run will face competition that will eventually eliminate the firm's profits in the long run. But the firm can stave off competition and continue to earn economic profits if
A) it can successfully sue its competitors for copyright infringement.
B) it can move to another country where there is less competition.
C) it can lobby the government to establish a price floor for its product.
D) it can find new ways to differentiate its product.

Accepted Answer

Differentiating its product allows the firm to create a unique brand or product that is distinct from its competitors. This means that customers are willing to pay more for the firm's product, which allows the firm to earn economic profits. However, eventually, competitors may imitate the differentiation strategy, leading to increased competition and reduced profits. Therefore, the firm must continuously find new ways to differentiate its product to stay ahead of the competition and maintain profits in the long run.

Question 6

-Refer to Figure 10-14. Economies of scale are exhausted at which output level? A) Q₁ units B) Q₂ units C) Q₃ units D) more than Q₁units

Accepted Answer

At Q₃ units, the cost per unit is at its lowest point, indicating that economies of scale have been fully utilized. Any additional increase in output would result in an increase in the cost per unit, indicating diseconomies of scale.

Question 7

If a monopolistically competitive firm breaks even, the firm is earning as much in this industry as it could in any other comparable industry.

Accepted Answer

The answer of If a monopolistically competitive firm breaks even,...

Question 8

-Refer to Figure 10-14. What is the output price? A) P₄ B) P₃ C) P₂ D) P₁

Accepted Answer

The output price is P4 because it is the price at which the quantity supplied equals the quantity demanded.

Question 9

When new firms are encouraged to enter a monopolistically competitive market,
A) some existing firms must be earning economic profits.
B) they do so because there is insufficient product differentiation.
C) the demand curve facing an existing firm shifts to the right.
D) the marginal cost curve facing an existing firm shifts downwards.

Accepted Answer

If new firms are entering a monopolistically competitive market, it indicates that there is some level of economic profits to be made. Otherwise, there would be no incentive for these new firms to enter the market. The entry of new firms will increase competition and put pressure on existing firms to differentiate their products and lower their prices, decreasing their economic profits.

Question 10

-Refer to Figure 10-14. If the diagram represents a typical firm in the market, what is likely to happen to its average cost of production in the long run?
A) It will probably fall since the firm must be cost efficient to remain competitive.
B) It will probably fall since the firm will be selling less than its current amount.
C) It will probably rise since the firm will be producing less than its current amount.
D) It will probably rise since its long-run demand is likely to be higher.

Accepted Answer

The answer of 
-Refer to Figure 10-14. If the diagram...

Question 11

Which of the following is true for a monopolistically competitive firm in long-run equilibrium?
A) P = ATC and MR = MC.
B) P = ATC and P = MC.
C) P > ATC and P > MR.
D) P > MR and MC = ATC.

Accepted Answer

In the long-run equilibrium of a monopolistically competitive firm, the firm produces where MR=MC to maximize profits. However, due to the presence of product differentiation, the firm charges a price higher than the minimum average total cost (ATC) to cover its fixed costs. As the firm is earning normal profits, P=ATC. Therefore, the correct answer is A, where both P=ATC and MR=MC in the long-run equilibrium.

Question 12

-Refer to Figure 10-14. If the diagram represents a typical firm in the market, what is likely to happen in the long run?
A) Some firms will exit the market causing the demand to increase for firms remaining in the market.
B) New firms will enter the market causing the demand to decrease for existing firms.
C) Inefficient firms will exit the market and new cost-efficient firms will enter the market.
D) Competition will be intensified as firms strive to make long-run profits.

Accepted Answer

In the long run, if a typical firm in a competitive market is making profits, new firms will be attracted to the market. This increases the supply of the product, which tends to lower the price. As the price decreases, the demand for the products of existing firms decreases because consumers have more options to choose from. This process continues until economic profits are zero, meaning that firms are making just enough profit to cover their opportunity costs.

Question 13

Long-run equilibrium under monopolistic competition is similar to long-run equilibrium under perfect competition in that
A) firms produce at the minimum point of their average cost curves.
B) price equals marginal cost.
C) firms break even.
D) price equals marginal revenue.

Accepted Answer

In the long-run equilibrium, both monopolistic and perfect competition result in firms breaking even, meaning they earn zero economic profit.

Question 14

-Refer to Figure 10-14. What is the profit-maximising output level? A) Q₁ units B) Q₂ units C) Q₃ units D) Q₄ units

Accepted Answer

The answer of 
-Refer to Figure 10-14. What is the...

Question 15

A monopolistically competitive industry that earns economic profits in the short run will face a more elastic demand curve in the long run.

Accepted Answer

In the long run, other firms may enter the market and offer similar products, increasing competition and causing the demand curve to become more elastic. This reduces the market power of each individual firm, leading to lower prices and decreased economic profits.

Question 16

The economic analysis of monopolistic competition shows that market forces eliminate profits in the long run. However, it is possible for a firm to continue to earn economic profits if the firm
A) expands its marketing budget.
B) adopts new technologies that enable it to lower its cost of production.
C) expands its product offerings to appeal to a wider range of consumers.
D) reduces its price to expand its market.

Accepted Answer

In the long run, firms in monopolistic competition will only earn normal profits due to the entry of new firms that increase competition. However, if a firm adopts new technologies that lower its cost of production, it can maintain its economic profits in the long run. This allows the firm to lower its prices and potentially attract more consumers while still earning a profit. Expanding marketing budgets, product offerings, or reducing prices alone may not be enough to sustain economic profits in the long run.

Question 17

-Refer to Figure 10-15. Which of the following statements describes the firm depicted in the diagram? A) The firm is making no economic profit and will exit the industry. B) The firm is suffering an economic loss by producing at Q₀ but will break even it increases its output to Q₁. C) The firm achieves productive efficiency by producing at Q₀. D) The firm is in long-run equilibrium and is breaking even.

Accepted Answer

The firm is producing at the point where MR=MC, which is also the point where ATC is tangent to demand. This implies that the firm is in long-run equilibrium and is breaking even, as P=ATC. There is no incentive for the firm to exit the industry or adjust its output level in the short run.

Question 18

-Refer to Figure 10-14. What is the area that represents the firm's profit? A) profit = 0 B) P₄edP₂ C) P₄eaP₁ D) P₃baP₂

Accepted Answer

The area that represents the firm's profit is the area above the average total cost curve and below the price line. In this case, that area is P4edP2.

Question 19

The entry and exit of firms in a monopolistically competitive market guarantee that
A) marginal revenue equals marginal cost, and average total cost is minimised.
B) firms can earn economic profits in the long run.
C) price equals average total cost in the long run.
D) firms can earn economic profits in the short run.

Accepted Answer

In a monopolistically competitive market, the entry and exit of firms ensure that in the long run, firms earn zero economic profit, meaning price equals average total cost.

Question 20

A monopolistically competitive industry that earns economic profits in the short run will be able to expand its market share even if the market size remains constant.

Accepted Answer

The answer of A monopolistically competitive industry that earns economic...

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

Which of the following will not happen as a consequence of a monopolistically competitive firm suffering economic losses in the short run?

Despite being in a market with ________, from the mid-1990s to the mid-2000s Starbucks was able to significantly differentiate its products from the products of its competitors.

-Refer to Figure 10-15. It is possible to lower the average cost of production by expanding output beyond Q0 to Q1. Why wouldn't a firm expand its output to Q1?

If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios best reflects the change a representative firm experiences as the market adjusts to its long-run equilibrium?

A monopolistically competitive firm that is profitable in the short run will face competition that will eventually eliminate the firm's profits in the long run. But the firm can stave off competition and continue to earn economic profits if

-Refer to Figure 10-14. Economies of scale are exhausted at which output level?

If a monopolistically competitive firm breaks even, the firm is earning as much in this industry as it could in any other comparable industry.

-Refer to Figure 10-14. What is the output price?

When new firms are encouraged to enter a monopolistically competitive market,

-Refer to Figure 10-14. If the diagram represents a typical firm in the market, what is likely to happen to its average cost of production in the long run?

Which of the following is true for a monopolistically competitive firm in long-run equilibrium?

-Refer to Figure 10-14. If the diagram represents a typical firm in the market, what is likely to happen in the long run?

Long-run equilibrium under monopolistic competition is similar to long-run equilibrium under perfect competition in that

-Refer to Figure 10-14. What is the profit-maximising output level?

A monopolistically competitive industry that earns economic profits in the short run will face a more elastic demand curve in the long run.

The economic analysis of monopolistic competition shows that market forces eliminate profits in the long run. However, it is possible for a firm to continue to earn economic profits if the firm

-Refer to Figure 10-15. Which of the following statements describes the firm depicted in the diagram?

-Refer to Figure 10-14. What is the area that represents the firm's profit?

The entry and exit of firms in a monopolistically competitive market guarantee that

A monopolistically competitive industry that earns economic profits in the short run will be able to expand its market share even if the market size remains constant.

-Refer to Figure 10-15. It is possible to lower the average cost of production by expanding output beyond Q₀ to Q₁. Why wouldn't a firm expand its output to Q₁?