Question 1

A firm in a monopolistically competitive market operates on the:

Accepted Answer

In a monopolistically competitive market, firms have some control over the price of their product, but face competition from many other firms. This means that they cannot charge a price significantly above their average total cost without losing customers to their competitors. Therefore, firms in this market tend to operate on the declining portion of their average total cost curve, where they can produce at a lower cost and still charge a price that is competitive with other firms. Operating on the rising portion of the average total cost curve would result in higher costs and lower profits, making it an unattractive strategy.

Question 2

A monopolistically competitive market can have too many firms enter, that is, the number of firms in a market can be greater than the socially optimal number.For there to be too much entry, which of the following needs to occur?

Accepted Answer

In a monopolistically competitive market, firms produce differentiated products, which creates product-variety externality. However, when a new firm enters the market, it results in business-stealing externality for the existing firms. If the business-stealing externality is greater than the product-variety externality, then there will be too many firms in the market. Thus, choice B is correct. Option A talks about the product-variety externality being greater than the business-stealing externality, which would result in too few firms in the market. Options C and D are not relevant in determining whether there is too much entry in a monopolistically competitive market.

Question 3

The main reason that a monopolistically competitive market is considered inefficient is because:

Accepted Answer

In a monopolistically competitive market, firms have some degree of market power to set prices above their marginal costs. This leads to a situation where the price exceeds the marginal cost, resulting in a deadweight loss and inefficiency in the market. This is because some consumers who value the good more than the cost of producing it are not able to purchase it at the higher price, leading to a loss in social welfare.

Question 4

In the short run, a firm in a perfectly competitive market operates at:

Accepted Answer

The answer of In the short run, a firm in...

Question 5

In the long-run equilibrium, a difference between monopolistically competitive firms and perfectly competitive firms is:

Accepted Answer

In the long-run equilibrium, monopolistically competitive firms produce on the downward sloping section of their ATC curves, while perfectly competitive firms produce at the minimum of ATC. This is because monopolistically competitive firms have some degree of market power, which allows them to charge a price above their marginal cost. However, because there are close substitutes available, they cannot charge a price that is too high or they will lose customers to their competitors. As a result, they produce at a level where their price is equal to their average total cost, but their average total cost is not at its minimum point. In contrast, perfectly competitive firms do not have any market power and must sell their product at the market price. Because the market price is determined by the intersection of the supply and demand curves, which are assumed to be perfectly elastic in the long run, each firm in a perfectly competitive industry produces at the minimum of its average total cost curve.

Question 6

Graph 17-4 
-Refer to graph 17-4.Which of the markets depicted in each panel is likely to see a firm enter in the long run?

Accepted Answer

In both panels C and D, the market price is above the average total cost curve (ATC), indicating that firms are earning positive economic profit. This creates an incentive for new firms to enter the market in the long run, leading to an increase in market supply and eventually driving down the market price to the minimum of the ATC curve. In panels A and B, the market price is below the ATC curve, indicating that firms are incurring losses and there is no incentive for new firms to enter the market.

Question 7

Graph 17-4 
-Refer to graph 17-4.Which of the markets depicted in each panel is likely to see firms exit in the long run?

Accepted Answer

In panel B, if firms are experiencing losses, they are likely to exit the market in the long run.

Question 8

If a firm is making zero profits, then which of the following must be true?

Accepted Answer

When a firm is making zero profits, it means that its total revenue is exactly equal to its total costs. Since average total cost (ATC) is total cost divided by the quantity of output, if price (which equals average revenue in perfect competition) equals ATC, the firm is covering all its costs, including normal profit, but not making any economic profit.

Question 9

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

Accepted Answer

The answer of In the long run, a profit-maximising firm...

Question 10

A profit-maximising firm in a monopolistically competitive market is eager for another customer because:

Accepted Answer

In a monopolistically competitive market, firms have some degree of market power, allowing them to set prices above marginal cost. Thus, acquiring another customer is profitable because the price received from the sale exceeds the marginal cost of producing one more unit.

Question 11

Graph 17-4 
-Refer to Graph 17-4.Which of the panels shown depicts a firm in a monopolistically competitive market earning economic profits in the short run?

Accepted Answer

Panel c depicts a firm in a monopolistically competitive market earning economic profits in the short run, as it shows the price being above the average total cost curve at the profit-maximizing quantity.

Question 12

The efficient scale occurs when the firm's:

Accepted Answer

The efficient scale occurs when a firm produces at the minimum point of its average total cost curve (ATC). At this point, the firm is able to produce at the lowest cost possible, making it efficient. If the firm produces beyond the efficient scale, the ATC will start to increase, resulting in inefficiency. Therefore, at the efficient scale, the average revenue (AR) must be equal to the minimum point of the ATC. This is because if the AR is less than the minimum point of the ATC, the firm will be making a loss; and if the AR is greater than the minimum point of the ATC, the firm is not producing at the lowest cost possible, making it inefficient.

Question 13

Graph 17-4 
-Refer to Graph 17-4.Panel b in the set of figures shown is consistent with a firm in a monopolistically competitive market that is:

Accepted Answer

In panel b, the firm is producing at a quantity where marginal revenue equals marginal cost (Q1) and charging a price of P1. However, in the long run, new firms will enter the market due to economic profits, shifting the demand curve faced by the firm to the left, and causing it to produce at a lower quantity (Q2) and charge a lower price (P2). Therefore, the firm is in a short-run equilibrium but not in a long-run equilibrium.

Question 14

Graph 17-4 
-Refer to Graph 17-4.Which of the panels shown could not characterise a short-run equilibrium for a firm in a monopolistically competitive market?

Accepted Answer

In a monopolistically competitive market, firms can have short-run profits or losses. Panel d, which likely shows a situation where price equals average total cost, represents a long-run equilibrium, not a short-run one.

Question 15

In the market for hotel rooms in large metropolitan markets, the cost of a single night's stay can be several times higher than that of a similar room in a suburban market.If the market for hotel rooms is characterised by monopolistic competition, this difference in price can be partially explained by:

Accepted Answer

In monopolistic competition, firms have some degree of pricing power due to product differentiation. In the case of hotel rooms, the differentiation may come from location, amenities, or other factors. The mark-up of price over marginal cost in large metropolitan markets can partially explain the higher prices for hotel rooms in these areas.

Question 16

For profit-maximising firms in a monopolistically competitive market, another customer means:

Accepted Answer

In a monopolistically competitive market, firms have some market power to set their prices higher than their marginal cost. As such, adding another customer will likely result in more profit for the firm, as long as the cost of serving that customer does not exceed the price they are willing to pay. Therefore, more customers generally mean more profit for firms in a monopolistically competitive market.

Question 17

Hotels in Sydney observe that on most nights, about 80 per cent of their rooms are occupied, with the remainder being empty.This kind of excess capacity is indicative of what kind of market?

Accepted Answer

The excess capacity and competition among hotels in Sydney suggest a monopolistically competitive market, where multiple firms offer differentiated products (different types of rooms, amenities, etc.) but face some level of competition. The fact that 80% of rooms are occupied on most nights suggests that demand is relatively stable, but there is still some excess capacity that is not being utilized. This is common in monopolistically competitive markets where firms must offer a variety of options to attract customers, but cannot fully utilize their capacity due to competition.

Question 18

In equilibrium, product differentiation in monopolistically competitive markets ensures that:

Accepted Answer

In monopolistically competitive markets, firms have some degree of market power due to product differentiation. This means that they can charge a price above their marginal cost in order to maximize profits. If price were equal to marginal cost, the firm would not be earning any profits. Therefore, in equilibrium, price will exceed marginal cost in monopolistically competitive markets.

Question 19

When a profit-maximising firm in a monopolistically competitive market is producing the short-run equilibrium quantity:

Accepted Answer

The answer of When a profit-maximising firm in a monopolistically...

Question 20

Graph 17-4 
-Refer to Graph 17-4.Which of the panels shown reflects a long-run equilibrium for a firm in a monopolistically competitive market?

Accepted Answer

The answer of Graph 17-4 
-Refer to Graph 17-4.Which of...

Quiz 16: Monopolistic Competition

A firm in a monopolistically competitive market operates on the:

A monopolistically competitive market can have too many firms enter, that is, the number of firms in a market can be greater than the socially optimal number.For there to be too much entry, which of the following needs to occur?

The main reason that a monopolistically competitive market is considered inefficient is because:

In the short run, a firm in a perfectly competitive market operates at:

In the long-run equilibrium, a difference between monopolistically competitive firms and perfectly competitive firms is:

Graph 17-4 -Refer to graph 17-4.Which of the markets depicted in each panel is likely to see a firm enter in the long run?

Graph 17-4 -Refer to graph 17-4.Which of the markets depicted in each panel is likely to see firms exit in the long run?

If a firm is making zero profits, then which of the following must be true?

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

A profit-maximising firm in a monopolistically competitive market is eager for another customer because:

Graph 17-4 -Refer to Graph 17-4.Which of the panels shown depicts a firm in a monopolistically competitive market earning economic profits in the short run?

The efficient scale occurs when the firm's:

Graph 17-4 -Refer to Graph 17-4.Panel b in the set of figures shown is consistent with a firm in a monopolistically competitive market that is:

Graph 17-4 -Refer to Graph 17-4.Which of the panels shown could not characterise a short-run equilibrium for a firm in a monopolistically competitive market?

For profit-maximising firms in a monopolistically competitive market, another customer means:

Hotels in Sydney observe that on most nights, about 80 per cent of their rooms are occupied, with the remainder being empty.This kind of excess capacity is indicative of what kind of market?

In equilibrium, product differentiation in monopolistically competitive markets ensures that:

When a profit-maximising firm in a monopolistically competitive market is producing the short-run equilibrium quantity:

Graph 17-4 -Refer to Graph 17-4.Which of the panels shown reflects a long-run equilibrium for a firm in a monopolistically competitive market?