Question 1

When a monopolistically competitive firm lowers its price,one good thing happens to the firm.What is this "one good thing" called?
A)the output effect
B)the price effect
C)the income effect
D)the substitution effect

Accepted Answer

A

Question 2

In the United States,the average person mostly patronizes firms that operate in
A)perfectly competitive markets.
B)monopolistically competitive markets.
C)oligopoly markets.
D)monopoly markets.

Accepted Answer

Monopolistically competitive markets are the most common type of market structure in the United States, where there are many firms competing with each other to offer similar but slightly differentiated products or services. Consumers have a wide range of choices and can switch between brands easily, while firms have some degree of control over their prices and marketing strategies. This type of market structure tends to foster innovation and consumer welfare, as firms seek to differentiate themselves and attract loyal customers.

Question 3

For the monopolistically competitive firm,
A)Price (P)= Marginal Revenue (MR)= Average Revenue (AR).
B)P = MR > AR.
C)P = AR > MR.
D)P > MR = AR.

Accepted Answer

In a monopolistically competitive market, firms have some control over the price they charge due to product differentiation. As a result, the demand curve they face is downward-sloping and they can increase sales by lowering the price. However, lower prices also mean lower profits per unit sold. Therefore, a monopolistically competitive firm always faces a trade-off between price and quantity. To maximize profits, the firm will produce up to the point where Marginal Cost (MC) equals Marginal Revenue (MR), but charge a price greater than or equal to Average Revenue (AR) to ensure profitability. This means that in the short run, the firm will set P = AR > MR. In the long run, however, other firms can enter or exit the market, driving down or up the price, respectively, so the firm will only be able to earn normal profits.

Question 4

Because the monopolistically competitive firm faces a ________ demand curve for its product,it ________ the price of its output.
A)downward-sloping; cannot influence
B)horizontal; can influence
C)horizontal; cannot influence
D)downward-sloping; can influence

Accepted Answer

A monopolistically competitive firm faces a downward-sloping demand curve for its product, meaning that it can influence the price of its output. However, the firm does not have complete market power and must consider the prices of competitors.

Question 5

Which of the following characterizes the market that Starbucks competes in?
A)All coffeehouses face horizontal demand curves.
B)Coffeehouses sell identical products.
C)Barriers to entry are low.
D)There are a small number of firms.

Accepted Answer

The answer of Which of the following characterizes the market...

Question 6

Which of the following is not a characteristic of monopolistic competition?
A)There are many buyers and sellers.
B)There are low barriers to entry.
C)Average revenue is equal to price.
D)The products sold by all firms are identical.

Accepted Answer

Monopolistic competition is characterized by many buyers and sellers, low barriers to entry, and differentiation of products. The products sold by each firm are not identical, but rather differentiated in some way, such as through branding or product features. Therefore, choice D, stating that the products sold by all firms are identical, is not a characteristic of monopolistic competition.

Question 7

When a monopolistically competitive firm lowers it price one bad thing happens to the firm.What is this "one bad thing" called?
A)the output effect
B)the income effect
C)the substitution effect
D)the price effect

Accepted Answer

The "one bad thing" that happens to a monopolistically competitive firm when it lowers its price is known as the price effect. This is because when the firm lowers its price, it must lower the price on all units sold, not just the additional units sold. Therefore, the decrease in price causes a decrease in revenue per unit, which in turn lowers the firm's total revenue.

Question 8

When a firm faces a downward-sloping demand curve,marginal revenue
A)must exceed price because the price effect outweighs the output effect.
B)is less than price because a firm must lower its price to sell more.
C)equals price because the firm sells a standardized product.
D)must exceed price because the output effect outweighs the price effect.

Accepted Answer

When a firm faces a downward-sloping demand curve, it must lower its price to sell more, which means marginal revenue (the additional revenue earned from selling one more unit) will be less than the price. This occurs because the firm faces diminishing returns as it produces more and more output and must lower its price to attract additional customers.

Question 9

Figure 13-1 
-Refer to Figure 13-1.The marginal revenue from one additional unit sold is the sum of the gain in revenue from selling the additional unit and the loss in revenue from having to charge a lower price to sell the additional unit.Based on the diagram in the figure,
A)X represents the gain (price effect)and Y the loss (output effect).
B)X + Z represents the loss (output effect)and Y the gain (price effect).
C)Y represents the gain (output effect)and X the loss (price effect).
D)X represents the loss (price effect)and Y + Z the gain (output effect).

Accepted Answer

The answer of Figure 13-1 
-Refer to Figure 13-1.The marginal...

Question 10

Which of the following is the best example of a firm that competes in a monopolistically competitive market?
A)the U.S.Postal Service
B)Microsoft
C)a movie theater
D)an automobile manufacturer

Accepted Answer

A movie theater competes in a monopolistically competitive market because there are many other movie theaters that offer similar but slightly differentiated products. Each theater may have slightly different features such as different seating arrangements or special promotions, but ultimately they all provide the same basic service- the opportunity to watch a movie on the big screen.

Question 11

The marginal revenue of a monopolistically competitive firm
A)cannot be negative because the price the firm charges will always be greater than zero.
B)can be negative if the firm charges a high price.
C)can be negative if the firm charges a low price.
D)will equal average revenue.

Accepted Answer

In monopolistic competition, the firm faces a downward-sloping demand curve, meaning it must lower its price in order to sell more units. However, the additional revenue gained from selling one more unit (marginal revenue) will be less than the price for that unit because the price must be lowered for all units sold. This means the marginal revenue can be negative if the firm lowers its price too much. Therefore, Option C is correct. Option A is incorrect because while the firm's price will be greater than zero, the marginal revenue can still be negative. Option B is incorrect because while the firm will have a lower marginal revenue if it charges a high price, it will not necessarily be negative. Option D is incorrect because the marginal revenue will generally be less than the average revenue due to the downward-sloping demand curve.

Question 12

Monopolistic competition is a market structure in which
A)firms produce and sell products for which there are no close substitutes.
B)the demand curve for a typical firm is horizontal.
C)firms cannot influence the market price.
D)barriers to entry are low.

Accepted Answer

Monopolistic competition is characterized by low barriers to entry, meaning that new firms can easily enter the market and compete with existing firms. This leads to a large number of firms operating in the market, each producing similar products but with some differentiation. The demand curve for a typical firm in a monopolistically competitive market is downward sloping, indicating that firms have some degree of market power and can influence the price of their product. However, this power is limited due to the presence of close substitutes from other firms. Therefore, Option D is the correct answer as it correctly identifies the low barriers to entry as a key characteristic of monopolistic competition.

Question 13

Which of the following is not a characteristic of monopolistic competition?
A)Firms are price takers.
B)There are many buyers and sellers.
C)Barriers to entry are low.
D)Firms sell similar,but not identical,products.

Accepted Answer

In monopolistic competition, firms have some degree of market power and are able to influence the price of their product, rather than being price takers.

Question 14

If a monopolistically competitive firm lowers its price and,as a result,its total revenue decreases then
A)the output effect of the price change was less than the price effect.
B)the output effect of the price change was greater than the price effect.
C)the firm's demand curve must have decreased.
D)the substitution effect of the price change was greater than the income effect.

Accepted Answer

In a monopolistically competitive market, a firm faces a downward-sloping demand curve, which means that when it lowers its price, it will sell more units (output effect). However, because the market is monopolistically competitive, the firm's products are not perfect substitutes for those of its competitors, so some customers may switch to other firms' products when the firm lowers its price (price effect). If the price effect is greater than the output effect, the firm's total revenue will decrease. Therefore, choice A is correct, as it suggests that the output effect was smaller than the price effect.

Question 15

In San Francisco there are many restaurants that specialize in a wide variety of cuisines.Patronage at these restaurants is influenced by factors such as tastes,price and location.This market is
A)perfectly competitive.
B)monopolistically competitive.
C)oligopolistic.
D)monopolistic.

Accepted Answer

The presence of many restaurants specializing in different cuisines suggests that the market is monopolistically competitive. Each restaurant offers a slightly differentiated product (e.g. different types of food, different atmospheres), and therefore has some degree of market power. However, there is also free entry and exit into the market, which limits the individual restaurant's power.

Question 16

Figure 13-1 
-Refer to Figure 13-1.What is the marginal revenue of the sixth unit of output?
A)$4
B)$5
C)$9
D)$54

Accepted Answer

The marginal revenue is the additional revenue from selling one more unit. If the sixth unit increases total revenue by $4, then the marginal revenue is $4.

Question 17

The Jeans Store sells 7 pairs of jeans per day when it charges $100 per pair.It sells 8 pairs of jeans per day at a price of $90 per pair.The marginal revenue of the eighth pair of jeans is
A)$20.
B)$90.
C)$100.
D)$700.

Accepted Answer

The answer of The Jeans Store sells 7 pairs of...

Question 18

A monopolistically competitive market is described as one in which there are
A)a few firms producing an identical product.
B)a large number of firms selling similar,but not identical,products.
C)a few firms producing differentiated products.
D)one large firm and many small firms producing identical products.

Accepted Answer

A monopolistically competitive market is characterized by a large number of firms that produce products that are slightly differentiated from one another. This means that each firm has a degree of market power, which allows them to influence the price, but they are still subject to some competition from other firms in the market. Option A describes a perfectly competitive market, option C describes an oligopoly, and option D describes a pure monopoly.

Question 19

Which of the following describes a difference between the marginal revenue and demand curves of a perfectly competitive firm and a monopolistically competitive firm?
A)The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies above its demand curve.
B)The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies below its demand curve.
C)The monopolistically competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a perfectly competitive firm lies below its demand curve.
D)The marginal revenue curve of a monopolistically competitive firm lies below its demand curve; the marginal revenue curve of a perfectly competitive firm lies above its demand curve.

Accepted Answer

In perfect competition, the firm is a price taker, so its demand curve is perfectly elastic and identical to its marginal revenue curve. In monopolistic competition, the firm faces a downward sloping demand curve, meaning that it must decrease its price to sell more units. This results in a marginal revenue curve that lies below the demand curve. Therefore, the correct answer is B, which states that the perfectly competitive firm's marginal revenue and demand curves are the same, while the marginal revenue curve of a monopolistically competitive firm lies below its demand curve.

Question 20

Starbucks started out small in 1971,but by 1993 Starbucks was a national chain and had coffeehouses in 38 countries.A key to the company's success was the realization by executives that
A)there was a demand for coffeehouses where consumers could sit and drink high-quality coffee.
B)coffee prices would have to be cut in order for Starbucks to compete with other stores that sold coffee.
C)they had to keep their stores open longer hours to attract a large number of customers.
D)their stores should be located close to other stores that sold similar products.

Accepted Answer

The passage states that a key to Starbucks' success was the realization by executives that there was a demand for coffeehouses where consumers could sit and drink high-quality coffee. This suggests that the company's success was based on meeting a consumer need, rather than simply cutting prices, extending hours or strategically locating stores.

Quiz 13: Monopolistic Competition: the Competitive Model in a More Realistic Setting

When a monopolistically competitive firm lowers its price,one good thing happens to the firm.What is this "one good thing" called?

In the United States,the average person mostly patronizes firms that operate in

For the monopolistically competitive firm,

Because the monopolistically competitive firm faces a demand curve for its product,it the price of its output.

Which of the following characterizes the market that Starbucks competes in?

Which of the following is not a characteristic of monopolistic competition?

When a monopolistically competitive firm lowers it price one bad thing happens to the firm.What is this "one bad thing" called?

When a firm faces a downward-sloping demand curve,marginal revenue

Figure 13-1 -Refer to Figure 13-1.The marginal revenue from one additional unit sold is the sum of the gain in revenue from selling the additional unit and the loss in revenue from having to charge a lower price to sell the additional unit.Based on the diagram in the figure,

Which of the following is the best example of a firm that competes in a monopolistically competitive market?

The marginal revenue of a monopolistically competitive firm

Monopolistic competition is a market structure in which

Which of the following is not a characteristic of monopolistic competition?

If a monopolistically competitive firm lowers its price and,as a result,its total revenue decreases then

In San Francisco there are many restaurants that specialize in a wide variety of cuisines.Patronage at these restaurants is influenced by factors such as tastes,price and location.This market is

Figure 13-1 -Refer to Figure 13-1.What is the marginal revenue of the sixth unit of output?

The Jeans Store sells 7 pairs of jeans per day when it charges $100 per pair.It sells 8 pairs of jeans per day at a price of $90 per pair.The marginal revenue of the eighth pair of jeans is

A monopolistically competitive market is described as one in which there are

Which of the following describes a difference between the marginal revenue and demand curves of a perfectly competitive firm and a monopolistically competitive firm?

Starbucks started out small in 1971,but by 1993 Starbucks was a national chain and had coffeehouses in 38 countries.A key to the company's success was the realization by executives that