Question 1

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, leading to an increase in competition and a decrease in demand for each firm. This results in a more elastic demand curve for the industry as a whole.

Question 2

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 13-16...

Question 3

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...

Question 4

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 long-run equilibrium, a monopolistically competitive firm produces at the point where P = ATC and the quantity produced corresponds to the point where MR = MC. This ensures that the firm is making normal profits in the long run.

Question 5

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 6

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

The answer of If a store like hhgregg has higher...

Question 7

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

A monopolistically competitive firm can continue to earn economic profits in the long run if it can differentiate its product in a way that is valuable to consumers and difficult for competitors to replicate. By doing so, the firm can maintain some degree of market power and charge a price that exceeds its average total cost, allowing for economic profits to persist. Therefore, finding new ways to differentiate its product is the best option. The other choices are not viable solutions for maintaining long-term economic profits in a monopolistically competitive market.

Question 8

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 monopolistic competition, firms have some degree of market power due to product differentiation. This means that they can charge a price slightly higher than their marginal cost in the short run and earn economic profits. However, in the long run, new firms will enter the market to take advantage of these profits, which will increase competition and decrease the demand for each firm's products. As a result, the firm's demand curve will shift downward and become more elastic, which reduces its ability to charge a higher price. In the long run, firms will only earn normal profits (where total revenue equals total costs) because of the competitive pressures. 
 
However, if a firm adopts new technologies that enable it to lower its cost of production, it can reduce its average total cost and increase its profits even in the long run. This is because a lower average total cost means that the firm can charge a lower price and still earn the same economic profit as before. Therefore, option B is the best choice.

Question 9

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 ________,from...

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

At Q₁, the average cost of production would increase due to diminishing returns to scale, causing the firm to incur an economic loss. While the firm would break even at Q₀, producing at Q₁ would not be profitable.

Question 11

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, monopolistically competitive firms will only be able to charge a price equal to their average total cost. They will not be able to earn economic profits in the long run, as entry of new firms will increase competition and reduce demand for existing firms. Therefore, answer A is incorrect. Economic losses in the short run may cause firms to exit the industry, so answer B is a possibility. However, if the firm stays in business in the long run, it will try to break even by setting its price equal to its average total cost. Therefore, answer C is also incorrect. Answer D is correct because it is not possible for monopolistically competitive firms to charge a price greater than their average total cost in the long run.

Question 12

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

Monopolistically competitive firms cannot increase their profits by deliberately lowering their prices to force out their competitors, as this would lead to a price war and eventually drive all firms to the break-even point in the long run. In monopolistic competition, firms differentiate their products to attract customers, which allows them to charge higher prices and earn economic profits in the short run. However, this attracts new firms to enter the market, increasing competition and driving down profits until the firms are only earning normal profits in the long run.

Question 13

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 14

Figure 13-13 
-Refer to Figure 13-13.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 Figure 13-13 
-Refer to Figure 13-13.If the...

Question 15

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

If some firms exit the market, the supply decreases and the market price will rise, leading to an increase in demand for the remaining firms. This shift in demand curve to the right will result in an increase in quantity demanded and a potential increase in profits for the remaining firms.

Question 16

Figure 13-13 
-Refer to Figure 13-13.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

The answer of Figure 13-13 
-Refer to Figure 13-13.If the...

Question 17

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 point where its marginal revenue (MR) equals marginal cost (MC), which is Q₀. At this output level, the firm is breaking even since its average total cost (ATC) is equal to the price it charges (P). Moreover, in the long run, firms in monopolistic competition earn zero economic profit due to low barriers to entry. Therefore, the firm is in long-run equilibrium and is breaking even.

Question 18

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,the...

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

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...

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

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

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.

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

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 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

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

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.

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?

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

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.

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

Figure 13-13 -Refer to Figure 13-13.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?

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

Figure 13-13 -Refer to Figure 13-13.If the diagram represents a typical firm in the market,what is likely to happen in the long run?

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?

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

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

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?

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?