Deck 13: Monopolistic Competition

Question 1

The four-firm sales concentration ratio for an industry measures the

A)geographic concentration of firms.
B)extent to which the four largest firms dominate the production of a good.
C)percentage of the industry's capital facilities owned by the four largest firms.
D)degree of X-inefficiency in the industry.

Answer 1

extent to which the four largest firms dominate the production of a good.

Question 2

Suppose that total sales in an industry in a particular year are $800 million and sales by the top four sellers are $50 million, $40 million, $30 million, and $30 million, respectively.We can conclude that

A)this industry is an oligopoly.
B)this industry is monopolistically competitive.
C)the concentration ratio is 25 percent.
D)firms in this industry likely collude with each other.

Answer 2

this industry is monopolistically competitive.

Question 3

A significant difference between a monopolistically competitive firm and a purely competitive firm is that the

A)former has fewer barriers to entry into the industry.
B)latter recognizes that price must be reduced to sell more output.
C)latter’s demand curve is perfectly elastic.
D)latter differentiates its product.Difficulty: 01 Easy

Answer 3

latter’s demand curve is perfectly elastic.

Question 4

The restaurant, legal assistance, and clothing industries are each illustrations of

A)countervailing power.
B)homogeneous oligopoly.
C)monopolistic competition.
D)pure monopoly.

Question 5

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

A)the use of trademarks and brand names
B)recognized mutual interdependence
C)product differentiation
D)a relatively large number of sellers

Question 6

Industries X and Y both have four-firm concentration ratios of 32 percent, but the Herfindahl index for X is 256, while that for Y is 264.These data suggest

A)greater market power in X than in Y.
B)greater market power in Y than in X.
C)that X is more technologically progressive than Y.
D)that price competition is stronger in Y than in X.

Question 7

A significant difference between a monopolistically competitive firm and a purely competitive firm is that the

A)former does not seek to maximize profits.
B)latter recognizes that price must be reduced to sell more output.
C)former sells similar, although not identical, products.
D)former's demand curve is perfectly inelastic.

Question 8

A monopolistically competitive industry combines elements of both competition and monopoly.The monopoly element results from

A)the likelihood of collusion.
B)high entry barriers.
C)product differentiation.
D)mutual interdependence in decision making.

Question 9

A monopolistically competitive industry combines elements of both competition and monopoly.The competition element results from

A)the likelihood of collusion.
B)product differentiation.
C)low entry barriers.
D)mutual interdependence in decision making.

Question 10

Under monopolistic competition, entry to the industry is

A)completely free of barriers.
B)more difficult than under pure competition but not nearly as difficult as under pure monopoly.
C)more difficult than under pure monopoly.
D)blocked.

Question 11

Monopolistic competition means

A)a market situation where competition is based entirely on product differentiation and advertising.
B)a large number of firms producing a standardized or homogeneous product.
C)many firms producing differentiated products.
D)a few firms producing a standardized or homogeneous product.

Question 12

Nonprice competition refers to

A)competition between products of different industries, for example, competition between aluminum and steel in the manufacture of automobile parts.
B)price increases by a firm that are ignored by its rivals.
C)advertising, product promotion, and changes in the real or perceived characteristics of a product.
D)reductions in production costs that are not reflected in price reductions.

Question 13

An industry having a four-firm concentration ratio of 30 percent

A)approximates pure competition.
B)is an oligopoly.
C)is a pure monopoly.
D)is monopolistically competitive.

Question 14

If the number of firms in a monopolistically competitive industry increases and the degree of product differentiation diminishes,

A)the likelihood of realizing economic profits in the long run would be enhanced.
B)individual firms would now be operating at outputs where their average total costs would be higher.
C)the industry would more closely approximate pure competition.
D)the likelihood of collusive pricing would increase.

Question 15

Monopolistically competitive and purely competitive industries are similar in that

A)both are assured of short-run economic profits.
B)both produce differentiated products.
C)the demand curves facing individual firms are perfectly elastic in both industries.
D)there are few, if any, barriers to entry.

Question 16

The monopolistic competition model assumes that

A)allocative efficiency will be achieved.
B)productive efficiency will be achieved.
C)firms will engage in nonprice competition.
D)firms will realize economic profits in the long run.

Question 17

Monopolistic competition is characterized by a

A)few dominant firms and low entry barriers.
B)large number of firms and substantial entry barriers.
C)large number of firms and low entry barriers.
D)few dominant firms and substantial entry barriers.

Question 18

Concentration ratios measure the

A)geographic location of the largest corporations in each industry.
B)degree to which product price exceeds marginal cost in various industries.
C)percentage of total industry sales accounted for by the largest firms in the industry.
D)number of firms in an industry.

Question 19

Monopolistic competition resembles pure competition because

A)both industries emphasize nonprice competition.
B)in both instances firms will operate at the minimum point on their long-run average total cost curves.
C)both industries entail the production of differentiated products.
D)barriers to entry are either weak or nonexistent.

Question 20

In which of these continuums of degrees of competition (highest to lowest) is monopolistic competition properly placed?

A)pure competition, oligopoly, pure monopoly, monopolistic competition
B)oligopoly, pure competition, monopolistic competition, pure monopoly
C)monopolistic competition, pure competition, pure monopoly, oligopoly
D)pure competition, monopolistic competition, oligopoly, pure monopoly

Question 21

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

A)MC = ATC.
B)MC exceeds MR.
C)P exceeds minimum ATC.
D)P = MC.

Question 22

Monopolistically competitive firms

A)realize normal profits in the short run but losses in the long run.
B)incur persistent losses in both the short run and long run.
C)may realize either profits or losses in the short run but realize normal profits in the long run.
D)persistently realize economic profits in both the short run and long run.

Question 23

If you sum the squares of the market shares of each firm in an industry (as measured by percent of industry sales), you are calculating the

A)four-firm concentration ratio.
B)Herfindahl index.
C)degree of collusion.
D)Lerner index.

Question 24

In the short run, a profit-maximizing monopolistically competitive firm sets it price

A)equal to marginal revenue.
B)equal to marginal cost.
C)above marginal cost.
D)below marginal cost.

Question 25

When a monopolistically competitive firm is in long-run equilibrium,

A)production takes place where ATC is minimized.
B)marginal revenue equals marginal cost and price equals average total cost.
C)normal profit is zero and price equals marginal cost.
D)economic profit is zero and price equals marginal cost.

Question 26

The larger the number of firms and the smaller the degree of product differentiation, the

A)greater the divergence between the demand and the marginal revenue curves of the monopolistically competitive firm.
B)larger will be the monopolistically competitive firm's fixed costs.
C)less elastic is the monopolistically competitive firm's demand curve.
D)more elastic is the monopolistically competitive firm's demand curve.

Question 27

In the long run, economic theory predicts that a monopolistically competitive firm will

A)earn an economic profit.
B)realize all economies of scale.
C)equate price and marginal cost.
D)have excess production capacity.

Question 28

In the long run, the price charged by the monopolistically competitive firm attempting to maximize profits

A)must be less than ATC.
B)must be more than ATC.
C)may be either equal to ATC, less than ATC, or more than ATC.
D)will be equal to ATC.

Question 29

When a monopolistically competitive firm is in long-run equilibrium,

A)P = MC = ATC.
B)MR = MC and minimum ATC > P.
C)MR > MC and P = minimum ATC.
D)MR = MC and P > minimum ATC.

Question 30

The monopolistically competitive seller's demand curve will become more elastic the

A)more significant the barriers to entering the industry.
B)greater the degree of product differentiation.
C)larger the number of competitors.
D)smaller the number of competitors.

Question 31

The monopolistically competitive seller maximizes profit by producing at the point where

A)total revenue is at a maximum.
B)average costs are at a minimum.
C)marginal revenue equals marginal cost.
D)price equals marginal revenue.

Question 32

In the long run, the price charged by a monopolistically competitive firm seeking to maximize profit will

A)be less than both MC and ATC.
B)exceed ATC but equal MC.
C)exceed MC but equal ATC.
D)exceed both MC and ATC.

Question 33

The demand curve of a monopolistically competitive producer is

A)less elastic than that of either a pure monopolist or a pure competitor.
B)less elastic than that of a pure monopolist, but more elastic than that of a pure competitor.
C)more elastic than that of a pure monopolist, but less elastic than that of a pure competitor.
D)more elastic than that of either a pure monopolist or a pure competitor.

Question 34

In the short run, the price charged by a monopolistically competitive firm attempting to maximize profits

A)must be less than ATC.
B)must be more than ATC.
C)may be either equal to ATC, less than ATC, or more than ATC.
D)must be equal to ATC.

Question 35

The price elasticity of a monopolistically competitive firm's demand curve varies

A)inversely with the number of competitors and the degree of product differentiation.
B)directly with the number of competitors and the degree of product differentiation.
C)directly with the number of competitors but inversely with the degree of product differentiation.
D)inversely with the number of competitors but directly with the degree of product differentiation.

Question 36

If an industry evolves from oligopoly to monopolistic competition, we would expect

A)the four-firm concentration ratio to increase.
B)the four-firm concentration ratio to decrease.
C)the four-firm concentration ratio to remain the same.
D)barriers to entry to strengthen.

Question 37

Long-run equilibrium for a monopolistically competitive firm where economic profits are zero results from

A)rising marginal costs.
B)a perfectly elastic product demand curve.
C)relatively easy entry.
D)product differentiation and development.

Question 38

The Herfindahl index

A)tells us the degree to which monopolistically competitive firms are differentiating their products.
B)is another name for the four-firm concentration ratio.
C)tells us whether oligopolistic firms are engaging in collusion.
D)gives much greater weight to larger firms than to smaller firms in an industry.

Question 39

A monopolistically competitive firm's marginal revenue curve

A)is downsloping and coincides with the demand curve.
B)coincides with the demand curve and is parallel to the horizontal axis.
C)is downsloping and lies below the demand curve.
D)does not exist because the firm is a "price maker."

Question 40

If some firms leave a monopolistically competitive industry, the demand curves of the remaining firms will

A)be unaffected.
B)shift to the left.
C)become more elastic.
D)shift to the right.

Question 41

Keely says that he’s glad that his morning coffee is sold in a monopolistically competitive market rather than a purely competitive market.If this is true for most things Keely buys, it suggests that he

A)is most concerned about paying the lowest price possible.
B)cares most about allocative efficiency.
C)is willing to pay extra for product variety.
D)is a creature of habit who always buys the same type of a particular good.

Question 42

In long-run equilibrium, a monopolistically competitive producer achieves

A)neither productive efficiency nor allocative efficiency.
B)both productive efficiency and allocative efficiency.
C)productive efficiency but not allocative efficiency.
D)allocative efficiency but not productive efficiency.

Question 43

An important similarity between a monopolistically competitive firm and a purely competitive firm is that

A)both face perfectly elastic demand schedules.
B)economic profit tends toward zero for both.
C)both realize productive efficiency.
D)both realize allocative efficiency.

Question 44

Monopolistically competitive industries are inefficient because

A)they realize diseconomies of scale.
B)advertising costs retard technological advance and product development.
C)they are overpopulated with firms whose plants are underutilized.
D)monopolistically competitive sellers engage in misleading advertising.

Question 45

For a monopolistically competitive firm in long-run equilibrium,

A)price will equal marginal cost.
B)price will equal average total cost.
C)marginal revenue will exceed marginal cost.
D)price will equal the minimum average total cost.

Question 46

Other things equal, if more firms enter a monopolistically competitive industry,

A)the demand curves facing existing firms would shift to the right.
B)the demand curves facing existing firms would shift to the left.
C)the demand curves facing existing firms would become less elastic.
D)losses would necessarily occur.

Question 47

(Consider This) The main point of the 1987 Wendy’s commercial depicting a Soviet fashion show was to

A)show Wendy’s product differentiation from its competitors.
B)grow its international customer base.
C)emphasize the efficiency of its production model.
D)highlight the dependability of its reliable and consistent standardized product.

Question 48

Which of the following is correct?

A)The excess capacity problem diminishes as the monopolistically competitive firm's demand curve becomes less elastic.
B)The excess capacity problem means that monopolistically competitive firms typically produce at some point on the rising segment of their average total cost curve.
C)The greater the degree of product variation, the lesser is the excess capacity problem.
D)The greater the degree of product variation, the greater is the excess capacity problem.

Question 49

A significant benefit of monopolistic competition compared with pure competition is

A)less likelihood of X-inefficiency.
B)improved resource allocation.
C)greater product variety.
D)stronger incentives to achieve economies of scale.

Question 50

An important similarity between a monopolistically competitive firm and a pure monopolist is that both

A)realize an economic profit in the long run.
B)achieve allocative efficiency.
C)face demand curves that are less than perfectly elastic.
D)achieve productive efficiency.

Question 51

The economic inefficiencies of monopolistic competition may be offset by the fact that

A)advertising expenditures shift the average cost curve upward.
B)available capacity is fully utilized.
C)resources are optimally allocated to the production of the product.
D)consumers have increased product variety.

Question 52

The less elastic a monopolistic competitor's long-run demand curve, the

A)greater its excess capacity.
B)lower its price relative to that of a pure competitor having the same cost curves.
C)higher its long-run economic profit.
D)lower its average total cost at its equilibrium level of output.

Question 53

The less elastic a monopolistic competitor's long-run demand curve, the

A)less its excess capacity.
B)higher its price relative to that of a pure competitor having the same cost curves.
C)higher its long-run profits.
D)lower its average total cost at its equilibrium level of output.

Question 54

Dequam likes product variety, while Natasha is most concerned about paying the lowest price possible for a good.This suggests that

A)Dequam cares more about allocative efficiency, while Natasha cares more about productive efficiency.
B)Dequam cares more about productive efficiency, while Natasha cares more about allocative efficiency.
C)Dequam prefers monopolistically competitive industries, while Natasha prefers purely competitive industries.
D)Dequam prefers purely competitive industries, while Natasha prefers monopolistically competitive industries.

Question 55

In monopolistically competitive markets, resources are

A)overallocated because long-run equilibrium occurs where price exceeds marginal cost.
B)underallocated because long-run equilibrium occurs where price exceeds marginal cost.
C)overallocated because long-run equilibrium occurs where marginal cost exceeds price.
D)underallocated because long-run equilibrium occurs where marginal cost exceeds price.

Question 56

The more elastic a monopolistic competitor's long-run demand curve, the

A)greater its excess capacity.
B)higher its price relative to that of a pure competitor having the same cost curves.
C)lower its long-run economic profit.
D)lower its average total cost at its profit-maximizing level of output.

Question 57

Which of the following statements is correct? Learning Objective: 13-04 Relate how the ability of monopolistic competition to deliver product differentiation helps to compensate for its failure to deliver economic efficiency.Test Bank: I Topic: Product Variety

A)There is a trade-off between product variety and allocative efficiency.
B)Product variety and allocative efficiency are complementary; increasing one enhances the other.
C)There is no relationship between product variation and allocative efficiency.
D)Greater excess capacity reduces firms’ ability to differentiate products.

Question 58

In the long run, a monopolistically competitive firm

A)earns an economic profit.
B)produces where P = ATC.
C)produces where MR exceeds MC.
D)achieves allocative efficiency.

Question 59

In long-run equilibrium, both purely competitive and monopolistically competitive firms will

A)produce at minimum average total cost.
B)earn economic profits.
C)achieve allocative efficiency.
D)equate marginal cost and marginal revenue.

Question 60

Which of the following statements is correct?

A)Purely competitive firms, monopolistically competitive firms, and pure monopolies all earn zero economic profits in the long run.
B)Purely competitive firms, monopolistically competitive firms, and pure monopolies all earn positive economic profits in the long run.
C)In the long run, purely competitive firms and monopolistically competitive firms earn zero economic profits, while pure monopolies may or may not earn economic profits.
D)Monopolistically competitive firms earn zero economic profits in both the short run and the long run.

Question 61

Which of the following is a characteristic of monopolistic competition?

A)standardized product
B)a relatively small number of firms
C)absence of nonprice competition
D)relatively easy entry

Question 62

(Last Word) Which of the following best explains why an increase in the minimum wage is more problematic for mom and pop restaurants than for big chain restaurants?

A)Chain restaurants are exempt from minimum wage laws.
B)Mom and pop restaurants have more difficulty attracting workers when wages rise.
C)Mom and pop restaurants are more dependent on labor relative to chain restaurants.
D)Chain restaurants have more monopoly pricing power and can more easily raise prices than mom and pop stores.

Question 63

Which of the following assumptions is part of the model of monopolistic competition?

A)Firms make identical or homogeneous products.
B)There is no mutual interdependence among firms.
C)There are significant barriers to entry into the market.
D)Firms have no control over their products' prices.

Question 64

(Consider This) In Wendy’s 1987 commercial depicting a Soviet fashion show, one objective was to portray McDonald’s and Burger King products as

A)all the same and not very appealing.
B)produced inefficiently.
C)unpredictable in terms of features and quality.
D)only appealing to old women.

Question 65

The larger the number of firms and the less the degree of product differentiation, the greater will be the elasticity of a monopolistically competitive seller's demand curve.

Question 66

The highest possible value of the Herfindahl index is 1,000.

Question 67

Monopolistically competitive firms are inefficient because they produce at a point on the rising segment of their average cost curves.

Question 68

The economic profits earned by monopolistically competitive sellers are zero in the long run.

Question 69

Monopolistically competitive sellers realize economic profits in the long run because entry barriers are significant.

Question 70

(Consider This) Which of the following statements is most accurate about the difference between goods produced under the old central planning model of the Soviet Union versus those produced by American capitalism?

A)Soviet markets were purely competitive, while U.S.markets were more monopolistically competitive.
B)Soviet production employed mass production techniques, while American capitalism did not.
C)Soviet production put greater emphasis on efficiency, while American capitalism allowed for much more product differentiation.
D)Product differentiation in the Soviet Union was carefully integrated into the central plan, while differentiation in American capitalism occurs haphazardly and with little forethought.

Question 71

Monopolistically competitive sellers produce efficiently because they obtain only normal profits in the long run.

Question 72

The demand curve of a monopolistically competitive producer is less elastic than that of a purely competitive producer.

Question 73

The excess capacity problem associated with monopolistic competition implies that fewer firms could produce the same industry output at a lower total cost.

Question 74

(Last Word) Raising the minimum wage in the restaurant industry

A)affects mom and pop and chain restaurants about the same.
B)benefits both mom and pop and chain restaurants by boosting demand.
C)makes it more difficult for mom and pop restaurants to compete with highly capitalized chain restaurants.
D)gives mom and pop restaurants a competitive advantage over highly capitalized chain restaurants.

Question 75

(Last Word) If the minimum wage in the restaurant industry increases over time, eventually we would expect

A)the restaurant industry to expand as higher wages drive up demand.
B)there to be fewer of all types of restaurants, but no change in the proportion of mom and pop restaurants relative to chain restaurants.
C)the ratio of mom and pop restaurants to highly capitalized chain restaurants to increase.
D)the ratio of highly capitalized chain restaurants to mom and pop restaurants to increase.

Question 76

The monopolistically competitive seller maximizes profits by equating price and marginal cost.

Question 77

The demand curve of a monopolistically competitive firm is more elastic than that of a pure monopolist.

Question 78

A monopolistically competitive industry is like a purely competitive industry in that

A)each firm produces a standardized product.
B)nonprice competition is a feature in both industries.
C)neither industry has significant barriers to entry.
D)firms in both industries face a horizontal demand curve.

Question 79

In the long run, monopolistically competitive firms make normal profits because they are forced to operate at the minimum point on their average total cost curve.

Question 80

Two industries that have the same four-firm concentration ratio can have significantly different Herfindahl indexes.