Question 1

In the long run, a firm in a perfectly competitive market operates

Accepted Answer

In the long run, a firm in a perfectly competitive market operates at its efficient scale, where it produces at the minimum average total cost. On the other hand, a monopolistically competitive firm operates with excess capacity, where it produces at a quantity lower than the one that minimizes its average total cost. This is because a monopolistically competitive firm faces downward-sloping demand for its differentiated product, and it must reduce its output to maintain a price that is above its marginal cost. Therefore, choice B is the correct answer.

Question 2

Joe's Juice Shop operates in a monopolistically competitive market. Joe's is currently producing where its average total cost is minimized. In the long run we would expect Joe's output to

Accepted Answer

In a monopolistically competitive market, firms tend to produce less than the output that minimizes average total cost in the long run due to the presence of excess capacity. Therefore, Joe's output would decrease and average total cost would increase as the market adjusts.

Question 3

Excess capacity is

Accepted Answer

Excess capacity is a characteristic of monopolistically competitive markets where firms have the ability to produce more than the current level of output but choose not to, leading to inefficiencies. It is not a short-run problem but a long-run problem as firms continue to produce below their optimal capacity and cannot achieve economies of scale, leading to higher prices and lower output.

Question 4

Since a firm in a monopolistically competitive market faces a

Accepted Answer

In monopolistically competitive markets, firms face a downward-sloping but relatively elastic demand curve because they produce differentiated products. This means that they cannot charge a price too much higher than their competitors without losing customers, which results in excess capacity. Firms will not operate at their efficient scale because they do not have the economies of scale enjoyed by monopolies or oligopolies.

Question 5

In comparison to perfect competition, monopolistic competition is characterized by

Accepted Answer

Monopolistic competition is characterized by excess capacity, which means that firms are not producing at their efficient scale, leading to higher average costs than necessary. This is because each firm in monopolistic competition produces a differentiated product, which gives them some market power to set prices above marginal cost. Therefore, pricing at marginal cost is not typical in monopolistic competition.

Question 6

Hotels in New York City frequently experience an average vacancy rate of about 20 percent (i.e., on an average night, 80 percent of the hotel rooms are full). This kind of excess capacity is indicative of what kind of market?

Accepted Answer

A high vacancy rate (i.e., excess capacity) suggests that there is a lot of competition among hotels, as they are unable to fully exploit their capacity due to the availability of alternatives. This is a characteristic of a monopolistically competitive market. Monopoly, perfect competition, and oligopoly markets are all unlikely to have high vacancy rates.

Question 7

Which of the following statements regarding monopolistic competition is not correct?

Accepted Answer

In monopolistic competition, firms produce at a quantity less than their efficient scale in the long run due to excess capacity.

Question 8

When a firm operates with excess capacity,

Accepted Answer

When a firm operates with excess capacity, it means that it is not producing at its maximum potential. Therefore, additional production can be achieved without incurring higher fixed costs. This will lead to a decrease in the average total cost as the fixed cost is spread over a larger output, resulting in economies of scale.

Question 9

Consider monopoly, monopolistic competition, and perfect competition. In which of these three market structures does a profit-maximizing firm charge a price that exceeds marginal cost?

Accepted Answer

In both monopoly and monopolistic competition, firms have some market power, allowing them to set prices above marginal cost. In perfect competition, firms are price takers and cannot charge above marginal cost.

Question 10

Consider a monopolistically competitive firm in a market in long-run equilibrium. This firm is likely earning

Accepted Answer

In long-run equilibrium of a monopolistically competitive market, firms are earning only normal profit, which means they are covering all their costs including opportunity cost of resources. This implies that firms are charging a price equal to their average total cost, which makes the answer D the correct one.

Question 11

In the long run, a monopolistically competitive firm produces a quantity that is

Accepted Answer

A monopolistically competitive firm does not achieve productive efficiency, meaning it produces at a quantity that is less than the efficient scale. This is because they have some degree of market power, which allows them to charge a price higher than marginal cost. As a result, they do not produce at the minimum average total cost, which is achieved at the efficient scale.

Question 12

Under which of the following market structures would consumers likely receive the most product variety?

Accepted Answer

In monopolistic competition, there are many firms competing with each other, offering slightly differentiated products. This competition drives firms to provide more product variety to attract consumers. In perfect competition, all firms offer the exact same product, so there is no room for product variety. In oligopoly and monopoly, there are few or only one dominant firm(s), respectively, which may limit the amount of product variety available to consumers.

Question 13

A monopolistically competitive firm

Accepted Answer

In monopolistic competition, firms have some market power leading to deadweight loss (A), they earn zero economic profit in the long run due to free entry and exit (B), and they operate with excess capacity as they do not produce at the minimum of their average total cost (C).

Question 14

In which of the following market structures can firms earn economic profits in the long run?

Accepted Answer

In a monopoly market structure, there is a single firm that dominates the market and has significant market power. This allows the firm to restrict output and increase prices, leading to economic profits in the long run. In perfect competition, firms are price takers and have no market power, resulting in zero economic profits. In monopolistic competition, firms have some degree of control over prices due to product differentiation, but entry of new firms in the long run drives profits to zero.

Question 15

Under which of the following market structures would consumers likely pay the highest price for a product?

Accepted Answer

In a monopoly market, there is only one supplier for a particular product or service. This gives the supplier complete control over the price and limits consumer choice. As a result, consumers are likely to pay the highest price in a monopoly market.

Question 16

Under which of the following market structures would the highest output of a particular good be produced?

Accepted Answer

In perfect competition, there are many firms competing in the market, each producing a small portion of the total output. As a result, firms in a perfectly competitive market are price takers and do not have market power. In this market structure, the output is determined by the intersection of the market demand and supply curve, resulting in the highest possible output for a particular good. In contrast, monopolistic competition, oligopoly, and monopoly have varying degrees of market power, which can limit output and result in higher prices.

Question 17

In a monopolistically competitive market, social welfare would be enhanced if

Accepted Answer

In a monopolistically competitive market, firms typically set prices above marginal cost, leading to inefficiencies. If price equaled marginal cost, it would result in an allocatively efficient outcome, enhancing social welfare.

Question 18

Consider monopoly, monopolistic competition, and perfect competition. In which of these three market structures does a profit-maximizing firm experience zero economic profit?

Accepted Answer

The answer of Consider monopoly, monopolistic competition, and perfect competition....

Question 19

Which of the following statements is correct?

Accepted Answer

Excess capacity refers to a situation in which a firm produces below its efficient scale. In the long run, perfectly competitive firms operate at their efficient scale, while monopolistically competitive firms operate with excess capacity. Therefore, option A is incorrect. Option C is also incorrect because the efficient scale is the level of output at which the average total cost curve intersects the marginal cost curve, not the demand curve. Only option B correctly defines excess capacity, making it the correct answer.

Question 20

In the long run, a profit-maximizing firm in a monopolistically competitive market operates at

Accepted Answer

In a monopolistically competitive market, firms have some market power and can set their prices above marginal cost. However, there are still many competitors offering differentiated products, so the demand for any one firm's product is somewhat elastic. This means that a profit-maximizing firm will produce at the level of output where marginal revenue equals marginal cost, which will typically be a lower output level than the efficient scale. At this level of output, average total cost is falling, which means the firm is experiencing economies of scale. Therefore, the best choice is C, a level of output at which average total cost is falling.

Quiz 16: Monopolistic Competition