Question 1

Economists have long debated whether there is a significant loss of well-being to society in markets that are monopolistically competitive rather than perfectly competitive.Which of the following offers the best reason why some economists believe that monopolistically competitive markets are less efficient than perfectly competitive markets?
A)In contrast to perfectly competitive markets,neither allocative efficiency nor productive efficiency are achieved in monopolistically competitive markets.
B)In contrast to perfectly competitive markets,firms in monopolistically competitive markets earn economic profits in long-run equilibrium.
C)In contrast to perfectly competitive markets,firms in monopolistically competitive markets do not produce where price equals average total cost in long-run equilibrium.
D)In contrast to perfectly competitive markets,firms in monopolistically competitive markets can charge a price greater than average total cost in the short run.

Accepted Answer

Monopolistically competitive markets do not achieve either allocative efficiency or productive efficiency, which means that resources are not allocated and used in the most efficient way possible. In contrast, perfectly competitive markets achieve both allocative and productive efficiency. While options B-D all offer contrasts between perfect competition and monopolistic competition, they do not directly address the issue of efficiency.

Question 2

Economists have long debated whether there is a significant loss of well-being to society in markets that are monopolistically competitive rather than perfectly competitive.Which of the following offers the best reason why some economists believe that monopolistically competitive markets benefit consumers despite any loss of well-being?
A)Although consumers may pay a price greater than marginal cost for a product,the product is produced at the minimum average total cost.
B)Although consumers may pay a price greater than marginal cost and the product is not produced at minimum average total cost,they benefit from being able to buy a differentiated product more closely suited to their tastes.
C)Consumers pay a price equal to the marginal cost of producing a product,even though it is not produced at the minimum average total cost.
D)Consumers are better off choosing from a variety of differentiated products,even though product differentiation causes barriers that restrict entry into monopolistically competitive markets.

Accepted Answer

This choice states that although consumers may pay a price greater than marginal cost and the product is not produced at minimum average total cost, they benefit from being able to buy a differentiated product more closely suited to their tastes. This means that monopolistically competitive markets offer a greater variety of products and allow for more individual preferences to be met, ultimately benefiting consumers despite any loss of well-being.

Question 3

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 faces competition from other firms selling similar but slightly differentiated products. Without successful differentiation, it cannot charge a price premium to cover its higher production costs, and will not earn long-run profits.

Question 4

If a significant number of consumers switch from consuming traditional baked goods to consuming vegan baked goods,a vegan bakery will likely find its demand curve shifting to the ________ and its marginal revenue curve shifting to the ________ as more competitors enter the market.
A)right;right
B)right;left
C)left;right
D)left;left

Accepted Answer

The answer of If a significant number of consumers switch...

Question 5

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, allowing them to charge prices greater than marginal costs. However, since there are many firms offering differentiated products, consumers have the ability to purchase products that are more closely suited to their tastes. This trade-off between price and product differentiation is a key characteristic of monopolistically competitive markets.

Question 6

In what way does long-run equilibrium under monopolistic competition differ from long-run equilibrium under perfect competition?
A)Firms in perfect competition achieve productive and allocative efficiency while firms in monopolistic competition achieve neither allocative nor productive efficiency.
B)The only difference is that in a monopolistically competitive market there are many brands to choose from while in a perfectly competitive market there is one standard product.
C)Firms in perfect competition achieve productive efficiency while firms in monopolistic competition achieve allocative efficiency.
D)Firms in perfect competition achieve allocative efficiency while firms in monopolistic competition achieve brand efficiency.

Accepted Answer

Under perfect competition, firms produce at the minimum point on their average total cost curves, achieving productive efficiency. In addition, the market produces at the point where price equals marginal cost, achieving allocative efficiency. In monopolistic competition, firms do not produce at the minimum point on their average total cost curves, leading to higher costs and less productive efficiency. Moreover, firms in a monopolistically competitive market have some market power, allowing them to charge a price above marginal cost, leading to less allocative efficiency. Therefore, firms in perfect competition achieve both allocative and productive efficiency, while firms in monopolistic competition achieve neither. The option B is incorrect because it only highlights the product differentiation aspect of monopolistic competition and does not cover efficiency differences between the two types of markets. The options C and D are incorrect because they only highlight one type of efficiency achieved by firms in monopolistic and perfect competition, respectively, and do not cover the full picture of efficiency differences between the two types of markets.

Question 7

If a monopolistically competitive firm has excess capacity
A)it has exhausted all economies of scale.
B)it is producing beyond the minimum efficient scale.
C)it is experiencing diseconomies of scale.
D)it produces a level of output that places it on the negatively sloped portion of its average total cost curve.

Accepted Answer

If a monopolistically competitive firm has excess capacity, it means that it is producing at a level of output that is less than the minimum efficient scale, which implies that it is producing a level of output that places it on the negatively sloped portion of its average total cost curve.

Question 8

Monopolistically competitive firms achieve allocative efficiency but not productive efficiency.

Accepted Answer

Monopolistically competitive firms do not achieve productive efficiency, but they also do not necessarily achieve allocative efficiency either. Allocative efficiency occurs when firms produce at the point where marginal cost equals marginal revenue, which results in the socially optimal level of output. However, monopolistically competitive firms may still charge prices above marginal cost and have excess capacity, which makes them not fully allocatively efficient. Additionally, they do not achieve productive efficiency because they do not produce at the lowest average total cost.

Question 9

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 competitive...

Question 10

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

Accepted Answer

Firms can differentiate their products by targeting a specific, specialized market segment or niche that is not currently or effectively served by competitors. This can involve tailoring the product to meet the specific needs and preferences of the niche market, and using targeted marketing strategies to reach and communicate with this market segment.

Question 11

Productive efficiency does not hold for a profit-maximizing,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

The answer of Productive efficiency does not hold for a...

Question 12

Monopolistically competitive firms have downward-sloping demand curves.In the long run,monopolistically competitive firms earn zero economic profits.These two characteristics imply that in the long run
A)monopolistically competitive markets achieve productive efficiency.
B)monopolistically competitive markets achieve allocative efficiency.
C)monopolistically competitive firms earn economic profits.
D)monopolistically competitive firms have excess capacity.

Accepted Answer

In the long run, monopolistically competitive firms earn zero economic profits, which means they are not allocatively efficient. Additionally, their downward-sloping demand curves imply that they have excess capacity, as they could produce more output at a lower average cost if they were producing at a larger scale. Therefore, the best choice is D, as monopolistically competitive firms have excess capacity in the long run.

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 firm, the firm produces at a point where price exceeds marginal cost, which results in an output level lower than the allocatively efficient level. Therefore, the firm does not produce the allocatively efficient output level.

Question 14

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 15

Long-run equilibrium in a monopolistically competitive market is similar to long-run equilibrium in a perfectly competitive market in that in both markets,firms
A)produce at the minimum point of their average total cost curves.
B)produce where price equals marginal cost.
C)break even.
D)produce where price equals marginal revenue.

Accepted Answer

The answer of Long-run equilibrium in a monopolistically competitive market...

Question 16

In long-run equilibrium,compared to a perfectly competitive market,a monopolistically competitive industry produces a ________ level of output and charges a ________ price.
A)higher;lower
B)lower;lower
C)lower;higher
D)higher;higher

Accepted Answer

In long-run equilibrium, a monopolistically competitive industry produces a lower level of output because it produces where marginal revenue equals marginal cost, which is less than where price equals marginal cost in a perfectly competitive market. Therefore, the monopolistically competitive industry charges a higher price than a perfectly competitive market.

Question 17

Excess capacity is a characteristic of monopolistically competitive firms.What does excess capacity mean?
A)It means that firms do not produce the output level that corresponds to the minimum point on their average total cost curves.
B)It means that firms hire more than the minimum number of workers needed to produce the profit-maximizing level of output.
C)It means that firms produce with inefficient combinations of resources.
D)It means that firms build plants that are not large enough to achieve minimum efficient scale.

Accepted Answer

Excess capacity means that firms do not produce the output level that corresponds to the minimum point on their average total cost curves, resulting in lower production levels than what they are capable of producing with their resources.

Question 18

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

Monopolistically competitive firms have some market power and can set prices above marginal cost. However, they also differentiate their products to better suit the preferences of consumers. This differentiation gives consumers more choices but at a cost of paying a higher price than they would in a perfectly competitive market. Therefore, the trade-off that consumers face when buying from a monopolistically competitive firm is paying a price greater than marginal cost, but having a wider variety of choices that better suit their preferences.

Question 19

Only one of the following statements is correct.The statements compare perfectly competitive (PC)markets and monopolistically competitive (MC)markets.Which statement is correct?
A)Productive efficiency is achieved in both PC and MC markets.Allocative efficiency is achieved only in MC markets.
B)Allocative efficiency is achieved in both PC and MC markets.Productive efficiency is achieved only in PC markets.
C)Productive efficiency and allocative efficiency are both achieved in PC markets.Neither is achieved in MC markets.
D)Allocative efficiency is achieved only in PC markets.Productive efficiency is achieved only in MC markets.

Accepted Answer

The answer of Only one of the following statements is...

Question 20

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

Accepted Answer

The answer of Most economists believe that consumers would be...

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

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

If a significant number of consumers switch from consuming traditional baked goods to consuming vegan baked goods,a vegan bakery will likely find its demand curve shifting to the and its marginal revenue curve shifting to the as more competitors enter the market.

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.

In what way does long-run equilibrium under monopolistic competition differ from long-run equilibrium under perfect competition?

If a monopolistically competitive firm has excess capacity

Monopolistically competitive firms achieve allocative efficiency but not productive efficiency.

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.

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

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

Monopolistically competitive firms have downward-sloping demand curves.In the long run,monopolistically competitive firms earn zero economic profits.These two characteristics imply that in the long run

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

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?

Long-run equilibrium in a monopolistically competitive market is similar to long-run equilibrium in a perfectly competitive market in that in both markets,firms

In long-run equilibrium,compared to a perfectly competitive market,a monopolistically competitive industry produces a level of output and charges a price.

Excess capacity is a characteristic of monopolistically competitive firms.What does excess capacity mean?

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

Only one of the following statements is correct.The statements compare perfectly competitive (PC) markets and monopolistically competitive (MC) markets.Which statement is correct?

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