Question 1

A firm in monopolistic competition definitely incurs an economic loss if

Accepted Answer

In monopolistic competition, firms operate in a market with some level of competition but can differentiate their products from their competitors. In the short run, a firm can earn profits or incur losses. However, in the long run, the market adjusts and economic profits are competed away. If the price is less than the average total cost, the firm is not covering all its costs and is incurring a loss. Therefore, option B is the correct answer.

Question 2

Firms decide how much to spend on product development and marketing by

Accepted Answer

Firms need to ensure that their spending on product development and marketing does not exceed the benefits they will receive from increased sales and customer loyalty. They must balance the cost of these activities with the potential revenue generated from product sales. Simply spending the same amount as in previous years or using a historical average does not take into account changes in market conditions or the potential for new products or services. Eliminating excess capacity may be a factor in determining spending levels, but it is not the only consideration. Ensuring the marginal cost of product development and marketing is less than or equal to the marginal cost of producing the good or service is important for profitability, but does not account for the potential benefits of these activities.

Question 3

A firm's efficient scale of production is the output at which its

Accepted Answer

The firm's efficient scale of production is where its average total cost is at a minimum. This is because at this level of output, the firm is able to produce most efficiently, minimizing its average cost per unit produced. This also allows the firm to have a competitive advantage in the market, as it can produce at a lower cost than its competitors.

Question 4

A firm in monopolistic competition is

Accepted Answer

In monopolistic competition, firms are inefficient because the price they charge is higher than the marginal cost of production, indicating that resources are not allocated in the most efficient manner. This is a characteristic of monopolistic competition where firms have some market power to set prices above marginal costs, unlike in perfect competition where price equals marginal cost.

Question 5

In monopolistic competition,there is inefficiency because price is greater than marginal cost.What brings about this inefficiency?

Accepted Answer

In monopolistic competition, firms have the ability to differentiate their products, which creates a degree of market power. This leads to a downward-sloping demand curve, which means that firms can charge a price above their marginal cost. This results in inefficiency because resources are not allocated to their most productive use, and consumer surplus is reduced. Therefore, the presence of product differentiation brings about inefficiency in monopolistic competition.

Question 6

A firm is spending the profit-maximizing amount on product development when

Accepted Answer

The firm is spending the profit-maximizing amount on product development when the marginal cost of product development is equal to the marginal revenue from product development. This is because at this point, the firm is allocating resources efficiently and costs are equal to revenue, maximizing profits. The other options may impact profit, but they do not necessarily determine the profit-maximizing amount spent on product development.

Question 7

Monopolistic competition is efficient when compared to

Accepted Answer

Monopolistic competition allows for some differentiation among products, which can lead to innovation and variety for consumers. In contrast, complete product uniformity (as in perfect competition) eliminates any possibility for product differentiation and can lead to a lack of innovation and consumer choice. Therefore, monopolistic competition is more efficient than complete product uniformity.

Question 8

In the long run,a firm in monopolistic competition

Accepted Answer

In the long run, a firm in monopolistic competition will make zero economic profit due to the entry of new firms into the market, which erodes any initial economic profits to normal profit levels.

Question 9

A monopolistically competitive firm is inefficient because the firm

Accepted Answer

In monopolistic competition, firms differentiate their products, which leads to a downward sloping demand curve, allowing them to have some power over the price they charge. However, they also face competition, which prevents them from charging too high a price. Therefore, firms in monopolistic competition will produce at an output level where average total cost is not at its minimum, which makes them inefficient compared to a perfectly competitive firm that produces at the minimum of its long-run average total cost curve.

Question 10

In the long run,a firm in monopolistic competition ________ excess capacity and a firm in perfect competition ________ excess capacity.

Accepted Answer

Monopolistically competitive firms have excess capacity because they produce at a quantity where their marginal revenue equals their marginal cost, which is below the minimum point of their average total cost curve. Perfectly competitive firms, on the other hand, produce at a quantity where their marginal cost equals their price, which is also the minimum point of their average total cost curve. Therefore, they do not have excess capacity.

Question 11

The shampoo industry is constantly coming out with new products.The reason is that when a firm introduces a new shampoo into the market,the demand for the shampoo becomes ________ temporarily and economic profit ________.

Accepted Answer

When a firm introduces a new shampoo, the demand for it becomes less elastic because consumers are curious about the new product and are more willing to buy it at various prices. This novelty factor can lead to increased economic profit as the firm can capitalize on the unique demand for the product.

Question 12

A firm in monopolistic competition maximizes profit by equating

Accepted Answer

In monopolistic competition, as in all market structures, firms maximize profit by producing at a level where marginal revenue (MR) equals marginal cost (MC). This is the rule for profit maximization in economics, regardless of the market structure.

Question 13

Even though monopolistic competition results in inefficiency,it does have which of the following benefits for society?

Accepted Answer

Monopolistic competition leads to product differentiation which offers a greater variety of products to consumers. This can lead to increased consumer satisfaction and utility. However, this benefit must be weighed against the inefficiencies and higher prices associated with monopolistic competition.

Question 14

For a firm in monopolistic competition,innovation and product development are

Accepted Answer

In monopolistic competition, firms differentiate their products in order to create a unique identity and attract customers. However, this differentiation also creates a form of perceived uniqueness or monopolistic power that allows firms to charge a higher price. Innovation and product development are necessary in order to maintain this perceived uniqueness and continue generating short-run economic profit.

Question 15

In the long run,a firm in monopolistic competition ________ a markup of price over marginal cost and a firm in perfect competition ________ a markup of price over marginal cost.

Accepted Answer

A firm in monopolistic competition typically has some degree of market power, allowing them to charge a markup of price over marginal cost. In contrast, a firm in perfect competition has no market power and therefore cannot charge a markup of price over marginal cost. Therefore, in the long run, a firm in monopolistic competition has a markup of price over marginal cost, while a firm in perfect competition does not.

Question 16

Monopolistic competition is judged to be economically inefficient because

Accepted Answer

Monopolistic competition is economically inefficient because the price charged by firms in the market is greater than their marginal cost, indicating deadweight loss and a misallocation of resources. This is because firms have some market power and can charge a markup over their production costs.

Question 17

Which of the following is an advantage to society of monopolistic competition?

Accepted Answer

Monopolistic competition offers a wider range of products from different firms, which provides consumers with more choices, and therefore, satisfies their preferences better. This is especially true when compared to an industry in which there is only one dominant firm, which results in a limited choice of products.

Question 18

Once a firm in monopolistic competition has determined how much to produce,the firm determines its price by referring to its

Accepted Answer

The firm in monopolistic competition determines its price by referring to its demand curve, as the demand curve reflects the highest price consumers are willing to pay for each quantity of the product. This allows the firm to set a price for the quantity it has decided to produce.

Question 19

To maintain their economic profits,firms in monopolistic competition must continually engage in

Accepted Answer

In monopolistic competition, firms differentiate their product from their competitors to create a unique brand image through product development and marketing. This allows them to maintain their economic profits despite facing competition in the market. By constantly improving their product, firms can attract more customers and charge higher prices, which leads to higher profits.

Question 20

One of the major benefits to society of monopolistic competition is

Accepted Answer

Product differentiation allows for companies to create unique products and compete on non-price factors such as quality, brand image, and customer service. This leads to product diversity and improved consumer options.

Quiz 17: Monopolistic Competition