Question 1

Suppose the firms in a monopolistically competitive market are incurring economic losses. What will happen to move the market to its long-run equilibrium?

Accepted Answer

In the short run, firms in a monopolistically competitive market can operate with economic losses. However, if economic losses persist in the long run, firms will exit the market. As firms exit, the market supply decreases, causing prices to rise until economic profits are zero. Therefore, option C is correct as firms will continue to exit the market until economic losses are equal to zero. Options A, B, and D are incorrect as they do not accurately describe the process of firms exiting the market and the adjustment back to long-run equilibrium.

Question 2

Barriers to entry serve to limit the number of firms that operate in a particular market and, as such, reduce the amount of total profit earned in the market.

Accepted Answer

Barriers to entry serve to limit competition by preventing new firms from entering the market, which can actually allow existing firms to maintain higher profits due to reduced competition.

Question 3

Patents and copyrights create incentives for individuals to create information that might not be produced otherwise.

Accepted Answer

Patents and copyrights provide legal protection for the creations of individuals, encouraging them to invest time, effort, and money into developing new ideas, inventions, and creative works. Without this protection, there would be little incentive for individuals to create and innovate, as others could easily copy and profit from their work without compensation.

Question 4

The fact that a firm is a price-setter does not ensure it will make a positive economic profit in the short run and over time.

Accepted Answer

Being a price-setter means the firm has some control over the price of its product, but other factors such as costs, competition, and consumer demand also play a role in determining profit. Therefore, there is no guarantee that the firm will always make a positive economic profit.

Question 5

Barriers to entry reduce the likelihood that price-setter firms will see their positive economic profits competed away over time.

Accepted Answer

Barriers to entry prevent other firms from entering the market and competing away positive economic profits, meaning that the price-setter firm can continue to enjoy those profits for a longer period of time.

Question 6

A price-setting firm prefers to operate in the inelastic portion of its demand curve because total revenue increases when price is increased.

Accepted Answer

A price-setting firm prefers to operate in the elastic portion of its demand curve because in the inelastic portion, increasing price would lead to a proportionally larger decrease in quantity demanded, potentially reducing total revenue.

Question 7

The term "price setter" refers to a firm that faces a downward-sloping demand curve and must therefore set the combination of output and price that will maximize the firm's profits.

Accepted Answer

A price setter has some degree of market power and can influence the price at which it sells its products, unlike a price taker which must accept the market price. The firm must consider both the demand curve and its production costs in order to determine the optimal price and output level to maximize profits.

Question 8

Because barriers to entry limit the amount of competition in various markets, government policy should be designed to reduce or eliminate such barriers wherever possible.

Accepted Answer

While reducing or eliminating barriers to entry can promote competition, it's not always desirable or beneficial to do so in every market. Some barriers are necessary for protecting public safety, ensuring quality, and encouraging investment in research and development. Government policy needs to balance the benefits of competition with the need for regulation, consumer protection, and incentives for innovation.

Question 9

Price will always exceed marginal cost for the profit-maximizing monopolist, or any price-setter firm for that matter.

Accepted Answer

This is because the profit-maximizing monopolist will choose to produce a quantity where marginal revenue equals marginal cost, and then charge the highest price that consumers are willing to pay for that quantity. Thus, the price charged will always exceed the marginal cost.

Question 10

So long as a monopolist finds itself in the situation where price is greater than average fixed cost at the profit-maximizing loss-minimizing) level of output, the firm should continue to operate to minimize its losses.

Accepted Answer

The answer of So long as a monopolist finds itself...

Question 11

Because a price setter has control over both the level of output it produces and the price it charges, it can select from a number of different combinations of output and price levels that will maximize its profits.

Accepted Answer

The answer of Because a price setter has control over...

Question 12

Any firm that operates in an imperfectly competitive market faces a downward-sloping demand curve for its product.

Accepted Answer

In an imperfectly competitive market, a firm's demand curve is not perfectly elastic (horizontal) but has a downward slope, indicating that the quantity demanded decreases as the price increases. Examples of imperfectly competitive markets include monopolistic competition, oligopoly, and monopoly.

Question 13

Although monopoly and perfect competition result in different market outcomes, the fact that firms in both market structures work to maximize their profits ensures that resources are allocated efficiently in both situations.

Accepted Answer

In a monopoly, a single firm controls the market, leading to higher prices and lower output compared to perfect competition, where many firms ensure prices are close to marginal costs, promoting efficient resource allocation. Monopolies can result in allocative and productive inefficiencies, unlike perfect competition, which is characterized by optimal resource allocation.

Question 14

For a monopolist to earn a positive economic profit, price has to exceed average total cost at the level of output at which marginal revenue equals marginal cost.

Accepted Answer

This is because a monopolist has market power and can set a price above its marginal cost, allowing it to earn economic profit at the output level where marginal revenue equals marginal cost. However, if price is lower than average total cost, the firm will experience losses.

Question 15

Price will be higher and output will be lower under monopoly than under perfect competition with the same demand and cost conditions.

Accepted Answer

Monopolies have the ability to control the price and output of a good or service, leading to the potential for higher prices and lower output compared to a perfectly competitive market where no single seller has control over the market.

Question 16

Even if production of a good is characterized by economies of scale, consumers of the good would be best served by having a large number of small firms produce the good because of the effects of increased competition.

Accepted Answer

Economies of scale mean that as a firm increases its production, the average cost of producing each unit decreases. Therefore, consumers are often better served by fewer, larger firms that can produce goods more efficiently and potentially at a lower cost, rather than a large number of small firms that may have higher average costs.

Question 17

Suppose the firms in a monopolistically competitive market are earning positive economic profits. What will happen to move the market to its long-run equilibrium?

Accepted Answer

In a monopolistically competitive market, positive economic profits attract new firms to enter the market. These new firms offer close substitutes, increasing the competition and leading to a decrease in demand for the existing firms. This process continues until economic profits are zero, achieving long-run equilibrium.

Question 18

Consumers lose when a market is served by a monopolist to the extent that units of output for which the price consumers are willing to pay exceeds the marginal costs of production are not produced.

Accepted Answer

When a market is dominated by a monopolist, they have the power to restrict output and charge higher prices than under competitive conditions. This means that consumers may not be able to purchase as much of the product as they would like, or may have to pay a higher price for it. The monopolist also has less incentive to invest in innovation or efficiency to lower costs, since they do not face competition. As a result, units of output that consumers are willing to buy at a higher price than the cost of production (i.e. where there is consumer surplus) are not produced, and consumers lose out.

Question 19

Economies of scale can benefit consumers to the extent that the costs of production incurred by the firms in the industry are lower than they would otherwise be. At the same time, the price-setting power of those firms is increased, which could hurt consumers.

Accepted Answer

Economies of scale can lead to lower production costs for firms, which can potentially result in lower prices for consumers. However, if firms with economies of scale gain increased market power, they may use this to set prices higher than they otherwise would, hurting consumers.

Question 20

Licensing requirements for doctors, which are intended primarily to maintain the quality of persons who work in the profession, have no the effect on the profits of those individuals because the number of competitors is so large.

Accepted Answer

Licensing requirements for doctors can actually decrease the number of competitors in the profession, thereby potentially increasing profits for licensed doctors who face less competition. Additionally, obtaining a license often requires significant time and financial investment, which can also impact profits.

Quiz 8: Market Structure: Monopoly and Monopolistic Competition