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

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

Answer 1

the output effect

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.

Answer 2

monopolistically competitive markets.

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.

Answer 3

P = AR > MR.

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

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.

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.

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

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.

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).

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

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.

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.

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.

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.

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.

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

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.

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.

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.

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.

Question 21

There are many cattle ranchers in the world,and there are also many McDonald's restaurants in the world.Why,then,does a McDonald's restaurant face a downward sloping demand curve while a cattle rancher faces a horizontal demand curve?

Question 22

Figure 13-2
Refer to Figure 13-2.Suppose Dell finds the relationship between the average total cost of producing notebook computers and the quantity of notebook computers produced is as shown by Figure 13-2.Dell will maximize profits if it produces ________ notebook computers per month.

A)100,000
B)200,000
C)300,000
D)Not enough information is given to determine the profit-maximizing quantity.

Question 23

Firms in monopolistic competition compete by selling similar,but not identical products.

Question 24

Every firm that has the ability to affect the price of the good or service it sells will

A)have a perfectly elastic demand curve.
B)have a marginal revenue curve that lies below its demand curve.
C)earn a short-run profit but break even in the long run.
D)shut down in the short run.

Question 25

Both monopolistically competitive firms and perfectly competitive firms maximize profits

A)by producing where price equals average total cost.
B)by producing where marginal revenue equals average revenue.
C)by producing where marginal revenue is equal to marginal cost.
D)by producing where price equals average variable cost.

Question 26

The demand curve of a monopolistically competitive firm

A)is horizontal because the firm must cut its price to sell more.
B)is perfectly elastic.
C)is downward-sloping because it sells an identical product.
D)is downward-sloping because it must cut its price to sell more.

Question 27

A monopolistically competitive firm maximizes profit in the short run by producing where

A)price is less than marginal cost.
B)price is less than marginal revenue.
C)price is less than average revenue.
D)price is greater than marginal cost.

Question 28

Suppose that if a local McDonald's restaurant reduces the price of a Big Mac from $4.00 to $3.25,the number of Big Macs it sells per day will increase from 4 to 5.Explain the output effect and the price effect resulting from this change.Using a graph,illustrate both the loss in revenue from selling each of the first 4 Big Macs for $0.75 less and the additional revenue from selling 1 more Big Mac.What is the total change in revenue received which results from this price decrease?

Question 29

Table 13-1
Table 13-1 lists estimated revenues and costs (per week)for plastic vials (100 vials per box)for the Victoria Biological Supplies Company.Victoria sells plastic vials to university and private research laboratories.
Refer to Table 13-1.Based on the data in the table,which of the following statements is true?

A)The table summarizes Victoria's short-run,rather than long-run,market for plastic vials.
B)Victoria could be either a monopolistically competitive or a perfectly competitive firm.
C)Victoria should shut down temporarily.
D)Victoria should advertise more in order to increase the demand for plastic vials.

Question 30

A monopolistically competitive firm chooses

A)both the quantity of output to produce and the price at which it will sell its output.
B)the price of the product it sells but market forces determine the quantity it will be able to sell.
C)the quantity of output to produce but the price of the product it sells is determined collectively by all firms in the industry.
D)the price of the product it sells but the quantity of output to produce is agreed upon by all firms in the industry.

Question 31

One of the assumptions of monopolistic competition is that firms produce differentiated products.What does this assumption imply about the demand curve facing a representative firm?

Question 32

Table 13-1
Table 13-1 lists estimated revenues and costs (per week)for plastic vials (100 vials per box)for the Victoria Biological Supplies Company.Victoria sells plastic vials to university and private research laboratories.
Refer to Table 13-1.Victoria's profit-maximizing quantity sold (Q)and price (P)are:

A)Q = 3; P = $7.
B)Q = 4; P = $6.
C)Q = 5; P = $5.
D)Q = 6; P = $4.

Question 33

New firms are able to enter monopolistically competitive markets because there are low barriers to entry.

Question 34

Which of the following statements is true?

A)The marginal revenue of a monopolistically competitive firm will be positive at high prices and negative at low prices.
B)Because the demand curve for a monopolistically competitive firm is downward-sloping its marginal revenue will be negative.
C)The marginal revenue of a monopolistically competitive firm will be always be positive.
D)The marginal revenue of a monopolistically competitive firm will be positive at low prices and negative at high prices.

Question 35

Table 13-1
Table 13-1 lists estimated revenues and costs (per week)for plastic vials (100 vials per box)for the Victoria Biological Supplies Company.Victoria sells plastic vials to university and private research laboratories.
Refer to Table 13-1.Victoria's profit-maximizing output is where

A)total profit equals $3.
B)marginal revenue and marginal cost both equal $4.
C)marginal revenue and marginal cost both equal $3.
D)marginal cost is at its minimum value.

Question 36

For a downward-sloping demand curve,marginal revenue decreases as quantity sold increases.

Question 37

Suppose a monopolistically competitive firm sells 25 units at a price of $10.Calculate its marginal revenue per unit of output if it sells 5 more units of output when it reduced its price to $9.

A)$270.
B)$20
C)$4
D)$2.50

Question 38

After selling 1,000 three-ring binders Tony DiFulvio realizes that the marginal revenue from selling the last binder was less than the marginal cost.From this we can conclude that

A)Tony's business earns a short-run economic profit.
B)Tony should shut down his business temporarily.
C)Tony's profit fell after selling his 1,000th three-ring binder.
D)Tony's profit would be greater if he sold an additional three-ring binder.

Question 39

Why are demand and marginal revenue represented by the same curve for a firm in a perfectly competitive market,but by separate curves for a firm in a monopolistically competitive market?

Question 40

Monopolistically competitive firms face a perfectly elastic demand curve.

Question 41

Table 13-2
Table 13-2 shows the demand and cost data facing a monopolistically competitive producer of canvas bags.
Refer to Table 13-2.What are the firm's profit-maximizing or loss-minimizing price and quantity?

A)price = $10; quantity = 5.
B)price = $12; quantity = 4.
C)The firm should shut down temporarily.
D)This cannot be determined from the information given.

Question 42

Suppose a monopolistically competitive firm's output where marginal revenue equals marginal cost is 66 units and the price corresponding to this quantity is $18.If the average total cost at this output is $16.55,then its total profit is

A)$1,188.
B)$1,092.30.
C)$95.70.
D)$1.45.

Question 43

Figure 13-4 Figure 13-4 shows cost and demand curves for a monopolistically competitive producer of iced-tea.
Refer to Figure 13-4.At the profit-maximizing output level the firm will

A)earn a profit of $176.
B)break even.
C)earn a profit of $88.
D)earn a profit of $60.

Question 44

Figure 13-5
Refer to Figure 13-5.Which of the graphs in the figure depicts a monopolistically competitive firm that is earning economic profits?

A)Panel A
B)Panel B
C)Panel C
D)Panel A and Panel B

Question 45

If a perfectly competitive firm maximizes short-run profits,its marginal revenue will be positive and less than its price.

Question 46

If a monopolistically competitive firm is producing 50 units of output where marginal cost equals marginal revenue,total cost is $1,674 and total revenue is $2,000,its average profit is

A)$326.
B)$40.
C)$6.52.
D)impossible to determine without additional information.

Question 47

A profit-maximizing monopolistically competitive firm produces and sells an allocatively efficient quantity of output.

Question 48

Figure 13-3 Figure 13-3 shows short-run cost and demand curves for a monopolistically competitive firm in the footwear market.
Refer to Figure 13-3.Which of the following is the area that represents the profit or loss experienced by the firm?

A)A loss represented by the rectangle P₂uvP₁.
B)A loss represented by the rectangle P₂uwP₀.
C)A loss represented by the rectangle P₁vwP₀.
D)An accounting profit equal to P₁vwP₀.

Question 49

Figure 13-3 Figure 13-3 shows short-run cost and demand curves for a monopolistically competitive firm in the footwear market.
Refer to Figure 13-3.Which of the following statements describes the best course of action for the firm depicted in the diagram?

A)The firm should exit the industry because its price is less than its average total cost.
B)The firm should minimize its losses by producing Q_y units and charging a price of P₀.
C)The firm should minimize its losses by producing Q_y units and charging a price of P₂.
D)The firm should minimize its losses by producing Q_y units and charging a price of P₁.

Question 50

Figure 13-4 Figure 13-4 shows cost and demand curves for a monopolistically competitive producer of iced-tea.
Refer to Figure 13-4.What is the firm's profit-maximizing price?

A)$12
B)$13
C)$14
D)$16

Question 51

Table 13-2
Table 13-2 shows the demand and cost data facing a monopolistically competitive producer of canvas bags.
Refer to Table 13-2.At the profit-maximizing or loss-minimizing output level

A)the firm makes a profit of $12.
B)the firm incurs a loss equal to its fixed cost.
C)the firm makes a profit of $16.
D)the firm incurs a loss of $14.

Question 52

Figure 13-4 Figure 13-4 shows cost and demand curves for a monopolistically competitive producer of iced-tea.
Refer to Figure 13-4.What is the profit-maximizing output level?

A)22 cases
B)24 cases
C)30 cases
D)38 cases

Question 53

Unlike a perfectly competitive firm,a monopolistic competitor does not have a short-run shut-down point.

Question 54

Table 13-1
Table 13-1 lists estimated revenues and costs (per week)for plastic vials (100 vials per box)for the Victoria Biological Supplies Company.Victoria sells plastic vials to university and private research laboratories.
Refer to Table 13-1.At Victoria's profit-maximizing output

A)profit equals $2.
B)total revenue equals $24 and total cost equals $20.
C)total revenue equals $25 and total cost equals $22.
D)total revenue equals $21 and total cost equals $17.

Question 55

A monopolistically competitive firm is producing an output level where marginal revenue is greater than marginal cost.What should this firm do to increase its profit or reduce its losses?

A)The firm should raise its price.
B)The firm should decrease its fixed costs.
C)The firm should increase its implicit costs.
D)The firm should lower its price.

Question 56

Figure 13-4 Figure 13-4 shows cost and demand curves for a monopolistically competitive producer of iced-tea.
Refer to Figure 13-4.Based on the diagram,one can conclude that

A)some existing firms will exit the market.
B)new firms will enter the market.
C)the industry is in long-run equilibrium.
D)firms achieve productive efficiency.

Question 57

A monopolistically competitive firm should lower its price if its marginal revenue exceeds its marginal cost.

Question 58

Figure 13-6
Refer to Figure 13-6.Suppose the above graph represents the relationship between the average total cost of producing notebook computers and the quantity of notebook computers produced by Dell.On a graph,illustrate the demand,MR,MC,and ATC curves which would represent Dell maximizing profits at a quantity of 100,000 per month and identify the area on the graph which represents the profit.

Question 59

The profit-maximizing rule for a monopolistically competitive firm is to select the quantity at which

A)marginal revenue equals marginal cost.
B)average revenue exceeds marginal cost by the greatest amount.
C)price equals marginal cost.
D)average revenue equals average total cost.

Question 60

Figure 13-5
Refer to Figure 13-5.Which of the graphs in the figure depicts a monopolistically competitive firm that is minimizing its losses?

A)Panel A
B)Panel B
C)Panel C
D)Panel A and Panel C

Question 61

One reason Starbucks experienced a decline in sales in the late 2000s is because

A)the product they offered was becoming less differentiated from their competitors' products.
B)the coffeehouse market transitioned from being monopolistically competitive to perfectly competitive.
C)barriers to entry became more restrictive in the coffeehouse market.
D)the number of competitors in the market declined dramatically.

Question 62

Figure 13-8 Figure 13-8 illustrates a monopolistically competitive firm.
Refer to Figure 13-8.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.

Question 63

A monopolistically competitive firm that earns an accounting profit in the short run

A)must also earn an economic profit in the short run.
B)does not earn enough to earn an economic profit in the short run.
C)could earn an economic profit,break even or suffer an economic loss in the short run.
D)could earn an economic profit or break even,but could not suffer an economic loss in the short run.

Question 64

Central Grocery in New Orleans is famous for its muffaletta,a large round sandwich filled with deli meats and topped with a tangy olive salad.Suppose the following table represents cost and revenue data for Central Grocery.Fill in the columns for TR,MR,MC,ATC,and profit.If Central Grocery wants to maximize profits,what price should it charge for a muffaletta,what quantity should it sell,and what will be the amount of its total profit?

Question 65

The entry and exit of firms in a monopolistically competitive market guarantee that

A)marginal revenue equals marginal cost and average total cost is minimized.
B)firms can earn economic profits in the long run.
C)price equals average total cost in the long run.
D)firms can earn economic profits in the short run.

Question 66

Figure 13-8 Figure 13-8 illustrates a monopolistically competitive firm.
Refer to Figure 13-8.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.

Question 67

Figure 13-7
Refer to Figure 13-7.What is the profit maximizing output level?

A)Q₁ units
B)Q₂ units
C)Q₃ units
D)Q₄ units

Question 68

In the long run,if the demand curve of a monopolistically competitive firm is tangent to its average total cost curve then

A)the firm would break even.
B)the firm would shut down temporarily.
C)the firm would earn enough revenue to cover its variable costs,but not its fixed costs.
D)the firm would earn an economic profit.

Question 69

If firms in a monopolistically competitive industry are making profits in the short run,

A)barriers to entry will be erected to keep out rivals.
B)some firms will ultimately exit the industry.
C)they will resort to advertising wars to help sustain these profits.
D)new firms will enter the market.

Question 70

When new firms are encouraged to enter a monopolistically competitive market

A)some existing firms must be earning economic profits.
B)they do so because there is insufficient product differentiation.
C)the demand curve facing an existing firm shifts to the right.
D)the marginal cost curve facing an existing firm shifts downwards.

Question 71

If firms in a monopolistically competitive market are earning economic profits,which of the following scenarios best reflects the change a representative firm experiences as the market adjusts to its long-run equilibrium?

A)Demand decreases and becomes less elastic.
B)Demand decreases and becomes more elastic.
C)Demand increases and becomes less elastic.
D)Demand increases and becomes more elastic.

Question 72

Figure 13-7
Refer to Figure 13-7.Economies of scale are exhausted at which output level?

A)Q₁ units
B)Q₂ units
C)Q₃ units
D)more than Q₁ units

Question 73

Which of the following would not occur as a result of a monopolistically competitive firm suffering a short-run economic loss?

A)The firm could exit the industry in the long run.
B)If the firm does not exit the industry in the long run its demand curve will shift to the left.
C)If the firm does not exit the industry in the long run its demand curve will shift to the right.
D)If the firm remains in the industry in the long run it will break even.

Question 74

Figure 13-7
Refer to Figure 13-7.What is the area that represents the firm's profit?

A)profit = 0
B)P₄edP₂
C)P₄eaP₁
D)P₃baP₂

Question 75

Tony's Italian Ice is a monopolistically competitive firm.If Tony's earns a profit in the short run,which of the following is most likely to occur?

A)New firms that sell Italian ice will enter the market and Tony's cost curves will shift to the left.
B)New firms that sell Italian ice will enter the market and Tony's demand curve will shift to the left.
C)New firms that sell Italian ice will enter the market and Tony's demand curve will shift to the right.
D)New firms that sell Italian ice will enter the market and Tony's demand curve will become more inelastic.

Question 76

Figure 13-7
Refer to Figure 13-7.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.

Question 77

Which of the following describes the relative positions of the demand curve and the average total cost (ATC)curve of a monopolistically competitive firm that earns a profit in the short run?

A)In the short run,the firm's demand curve will lie above its ATC curve.The demand curve will be tangent to the ATC curve in the long run.
B)In the short run,the firm's demand curve will lie below its ATC curve.The demand curve will be tangent to the ATC curve in the long run.
C)In the short run,the firm's demand curve will cross its ATC curve at the ATC curve's lowest point.The demand curve will be above the ATC curve in the long run.
D)In the short run,the firm's ATC curve will cross the demand curve at the profit maximizing level of output.The demand curve will be tangent to the ATC curve in the long run.

Question 78

Figure 13-7
Refer to Figure 13-7.What is the output price?

A)P₄
B)P₃
C)P₂
D)P₁

Question 79

Long-run equilibrium under monopolistic competition and perfect competition is similar in that

A)firms produce at the minimum point of their average cost curves.
B)price equals marginal cost.
C)firms break even.
D)price equals marginal revenue.

Question 80

Figure 13-7
Refer to Figure 13-7.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.