Question 1

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 2

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

In a monopolistically competitive market, firms can earn short-run economic profits, but in the long run, new firms will enter the market, attracted by these profits, which will erode the market share and profits of existing firms if the market size remains constant.

Question 3

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

Starbucks was able to differentiate its products despite being in a market with few barriers to entry, meaning it faced many competitors but still managed to stand out.

Question 4

Sparkle, one of many firms in the market for toothpaste, is in long-run equilibrium. Sparkle has a small market share and has been in business for a long time.
a. Identify the market structure in which Sparkle operates. Explain your answer.
b. What is Sparkle's profit or loss? Explain your answer. If you cannot determine the profit or loss, explain what information is missing.
c. Draw a diagram showing Sparkle's demand curve, marginal revenue curve, average total cost curve and marginal cost curve. Label your diagram.

Accepted Answer

The answer of Sparkle, one of many firms in the...

Question 5

If a store like hhgregg has higher costs than a comparable Best Buy store, the only way it can have higher profits is if
A) it has more locations than Best Buy.
B) its marginal revenue is lower than Best Buy's.
C) the demand for its goods is higher than Best Buy's.
D) it sells the quantity associated with its minimum average total cost.

Accepted Answer

If hhgregg has higher costs, it can still achieve higher profits if the demand for its goods is higher, allowing it to sell more or at higher prices than Best Buy, offsetting the higher costs.

Question 6

What effect does the entry of new firms in a monopolistically competitive market have on the economic profits of existing firms in the market? How might existing firms attempt to counteract this effect?

Accepted Answer

The answer of What effect does the entry of new...

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

Figure 13-15 
-Refer to Figure 13-15 to answer the following questions.
a. What is the profit-maximizing output level?
b. What is the profit-maximizing price?
c. What is the average total cost at the profit-maximizing output level?
d. What area represents the firm's profit?
e. At which output level are economies of scale exhausted?
f. Does this graph most likely represent the long run or the short run? Why?

Accepted Answer

The answer of Figure 13-15 
-Refer to Figure 13-15 to...

Question 9

When a monopolistically competitive firm breaks even in the long run, this is equivalent to earning a zero accounting profit.

Accepted Answer

The answer of When a monopolistically competitive firm breaks even...

Question 10

Figure 13-14  Figure 13-14 illustrates a monopolistically competitive firm.
-Refer to Figure 13-14. 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 maximize 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

If a firm produced at Q1, it would have higher fixed costs as it would need to produce more to cover for the additional cost of production. This would result in an economic loss at Q1, while the firm would only break even at Q0. Thus, the firm would not expand its output to Q1 to avoid economic losses.

Question 11

The table below shows the demand and cost data facing "Velvet Touches," a monopolistically competitive producer of velvet throw pillows.
  Use the data to answer the following questions.
a. Complete the Total Revenue (TR), Marginal Revenue (MR) and Marginal Cost (MC) columns above.
b. What are the profit-maximizing price and quantity for Velvet Touches?
c. Is the firm making a profit or a loss? How much is the profit or loss? Show your work.
d. Is this firm operating in the long run or in the short run? Explain your answer.
e. If the firm's profit or loss is typical of all firms in the market for throw pillows, what is likely to happen in the future? Will there be more firms or will some existing firms leave the industry? Explain your answer.
f. What will happen to the typical firm's profit or loss after all entry/exit adjustments?

Accepted Answer

The answer of The table below shows the demand and...

Question 12

Figure 13-16 
-Refer to Figure 13-16. Figure 13-16 depicts a monopolistically competitive barber shop. Use the diagram to answer the following questions.
a. Suppose the average variable cost of production is $15 when output equals 110 haircuts and $15.25 when output equals 140 haircuts. If the firm wants to maximize its profit or minimize its losses, how many haircuts will it produce and what price should it charge? Explain your answer.
b. Calculate the firm's profit or loss.
c. What is likely to happen in this industry over time as it moves to its new long-run equilibrium?
d. Suppose the barber shop depicted in the diagram remains in the industry. Is this barber shop likely to produce this same quantity of haircuts as in part (a) in the long run?

Accepted Answer

The answer of Figure 13-16 
-Refer to Figure 13-16. Figure...

Question 13

If some monopolistically competitive firms exit their market after suffering short-run losses, the demand curves of remaining firms will shift to the right.

Accepted Answer

When some monopolistically competitive firms exit the market, the number of firms in the market decreases, leading to a decrease in the supply of goods in the market. As a result, the demand curves of the remaining firms shift to the right due to a decrease in competition.

Question 14

A monopolistically competitive firm can increase its profits beyond the long-run equilibrium break-even level by deliberately lowering its price to force some of its competitors out of the market.

Accepted Answer

The answer of A monopolistically competitive firm can increase its...

Question 15

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

Monopolistic competition allows for some economic profits in the short run due to product differentiation, but in the long run, new firms enter the market and competition increases, driving down profits. However, a firm can continue to earn economic profits if it adopts new technologies that enable it to lower its cost of production, making it more efficient and competitive.

Question 16

Figure 13-14  Figure 13-14 illustrates a monopolistically competitive firm.
-Refer to Figure 13-14. 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 output level where marginal cost equals marginal revenue, indicating that it is maximizing its profits. However, the price it charges is above the minimum of average total cost, implying that the firm is not achieving allocative efficiency. In the long run, new firms may enter the market, increasing competition and putting downward pressure on prices. Thus, this firm is expected to break even in the long run. Therefore, the firm is in long-run equilibrium and is breaking even (option D).

Question 17

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

In monopolistic competition, firms can differentiate their products through branding, advertising, packaging, or features. If a firm can find new ways to differentiate its product, it can maintain its market power and avoid competition, allowing it to earn economic profits in the long run. The other choices are not viable ways for a firm to sustain its economic profits in the long run: suing competitors cannot prevent them from offering similar products, moving to another country can involve significant costs and risks, and lobbying for a price floor could lead to excess supply and reduce demand for the firm's products.

Question 18

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 it 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, monopolistically competitive firms will be able to adjust to the economic losses by lowering their production costs or differentiating their products. As a result, the firm will be able to charge a price that is greater than its average total cost, thereby avoiding further losses. However, options A, B, and C may or may not happen depending on various factors such as the firm's ability to differentiate its product, availability of substitutes, and entry of new firms into the industry.

Question 19

What is the difference between zero accounting profit and zero economic profit?

Accepted Answer

The answer of What is the difference between zero accounting...

Question 20

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, new firms can enter the market, causing an increase in competition and a shift towards a more elastic demand curve for the incumbent firms. This can lead to a decrease in economic profits, as consumers have more substitutes to choose from.

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

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

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.

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.

If a store like hhgregg has higher costs than a comparable Best Buy store, the only way it can have higher profits is if

What effect does the entry of new firms in a monopolistically competitive market have on the economic profits of existing firms in the market? How might existing firms attempt to counteract this effect?

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

When a monopolistically competitive firm breaks even in the long run, this is equivalent to earning a zero accounting profit.

Figure 13-14 Figure 13-14 illustrates a monopolistically competitive firm. -Refer to Figure 13-14. 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 some monopolistically competitive firms exit their market after suffering short-run losses, the demand curves of remaining firms will shift to the right.

A monopolistically competitive firm can increase its profits beyond the long-run equilibrium break-even level by deliberately lowering its price to force some of its competitors out of the market.

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

Figure 13-14 Figure 13-14 illustrates a monopolistically competitive firm. -Refer to Figure 13-14. Which of the following statements describes the firm depicted in the diagram?

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

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

What is the difference between zero accounting profit and zero economic profit?

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