Question 1

Figure 13-11
 
-Refer to Figure 13-11.The diagram depicts a firm
A)in a constant-cost industry.
B)in an increasing-cost industry.
C)in long-run equilibrium.
D)that is incurring short-run losses.

Accepted Answer

The diagram depicts a firm in long-run equilibrium because it is earning zero economic profits, producing at the efficient scale, and is charging a price equal to its average total cost. There is no indication that it is incurring short-run losses or operating in either a constant-cost or increasing-cost industry.

Question 2

Figure 13-11
 
-Refer to Figure 13-11.What is the monopolistic competitor's profit-maximizing output?
A)Q₁ units
B)Q₂ units
C)Q₃ units
D)Q₄ units

Accepted Answer

The monopolistic competitor's profit-maximizing output is where marginal revenue (MR) equals marginal cost (MC). In this case, Q₂ units is where MR=MC. At any output level below Q₂, the firm can increase profits by increasing production since MR>MC. At any output level above Q₂, the firm can increase profits by producing less since MR<MC. Therefore, Q₂ is the profit-maximizing output level.

Question 3

Why do most firms in monopolistic competition typically make zero profit in the long run?
A)because firms produce differentiated products
B)because the lack of entry barriers would compete away profits
C)because firms do not produce at their minimum efficient scale
D)because the total market is not large enough to accommodate so many firms

Accepted Answer

In monopolistic competition, there are low barriers to entry, so new firms can easily enter the market and produce similar products. This competition limits the ability of existing firms to earn profits in the long run, as they will have to lower their prices to compete with new entrants, thereby reducing their profit margin. As a result, most firms in monopolistic competition will make zero profit in the long run.

Question 4

Figure 13-12
  
Figure 13-12 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
-Refer to Figure 13-12.If the diagram represents a typical firm in the designer watch 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)The firms that are making losses will be purchased by their more successful rivals.
C)Inefficient firms will exit the market and new cost-efficient firms will enter the market.
D)Firms will have to raise their prices to cover costs of production.

Accepted Answer

The answer of Figure 13-12
  
Figure 13-12 shows short-run...

Question 5

If Panera Bread's "clean food" strategy succeeds and customers are willing to pay higher prices for their menu items, the company will
A)no longer be monopolistically competitive.
B)continue to earn substantial economic profits in the long run.
C)eventually suffer economic losses, as do all fast-casual restaurants.
D)likely attract competitors that offer the same kind of food, and all else equal, eventually economic profits will be competed away.

Accepted Answer

If Panera's "clean food" strategy succeeds, it is likely to attract competitors who offer similar types of food, leading to increased competition and a reduction in economic profits over time. While the company may earn higher profits in the short run, in the long run, competition is likely to reduce those profits to a more normal level. Therefore, option D is the best choice.

Question 6

Figure 13-11
 
-Refer to Figure 13-11.What is the amount of excess capacity?
A)Q₄ - Q₃ units
B)Q₄ - Q₂ units
C)Q₃ - Q₂ units
D)Q₃ - Q₁ units

Accepted Answer

The answer of Figure 13-11
 
-Refer to Figure 13-11.What is...

Question 7

Figure 13-11
 
-Refer to Figure 13-11.What is the productively efficient output for the firm represented in the diagram?
A)Q₁ units
B)Q₂ units
C)Q₃ units
D)Q₄ units

Accepted Answer

The answer of Figure 13-11
 
-Refer to Figure 13-11.What is...

Question 8

If a monopolistically competitive firm breaks even, the firm
A)is earning an accounting profit and will have to pay taxes on that profit.
B)is earning zero accounting and zero economic profit.
C)should advertise its product to stimulate demand.
D)should expand production.

Accepted Answer

The answer of If a monopolistically competitive firm breaks even,...

Question 9

In 2011, Red Robin announced that it would open 12 fast-casual restaurants, and in 2016 the company decided to abandon the fast-casual restaurant business.Which of the following reasons relating to the characteristics of monopolistic competition did the company give for getting out of the fast-casual restaurant business?
A)Barriers to entry were too high.
B)The restaurants were not differentiated enough from their full-service restaurants.
C)There were very few buyers and sellers in the market.
D)Standardized pricing in the industry gave them no potential to earn a profit.

Accepted Answer

Red Robin stated that the fast-casual restaurants were not differentiated enough from their full-service restaurants. This suggests that in the monopolistic competition market structure, Red Robin faced difficulty in creating unique restaurant offerings that were different enough to attract customers from other fast-casual restaurants. Therefore, option B is the correct answer. Options A and D relate more to the barrier and industry structures of a monopoly, while option C implies a lack of competition, which is not a characteristic of monopolistic competition.

Question 10

In the long run, what happens to the demand curve facing a monopolistically competitive firm that is earning short-run profits?
A)The demand curve will shift to the left and became more elastic.
B)The demand curve will shift to the left and became less elastic.
C)The demand curve will shift to the right and became more elastic.
D)The demand curve will shift to the right and became less elastic.

Accepted Answer

In the long run, new firms will enter the market, increasing competition and shifting the demand curve to the left. As the market becomes more competitive, consumers have more alternatives to choose from, making demand more elastic.

Question 11

Figure 13-11
 
-Refer to Figure 13-11.The firm represented in the diagram
A)makes zero economic profit.
B)makes zero accounting profit.
C)should exit the industry.
D)should expand its output to take advantage of economies of scale.

Accepted Answer

The firm represented in the diagram is producing where marginal revenue equals marginal cost, which means it is earning normal profit (equal to its opportunity cost of capital). Therefore, it is not making any economic profit, but it is making enough to cover its explicit (accounting) costs. There is no need for the firm to exit the industry or expand output because it is already at its optimal level of production.

Question 12

You have just opened a new Italian restaurant in your hometown where there are three other Italian restaurants.Your restaurant is doing a brisk business and you attribute your success to your distinctive northern Italian cuisine using locally grown organic produce.What is likely to happen to your business in the long run?
A)Your competitors are likely to change their menus to make their products more similar to yours.
B)Your success will invite others to open competing restaurants and ultimately your profits will be driven to zero.
C)If your success continues, you will be likely to establish a franchise and expand your market size.
D)If you continue to maintain consistent quality, you will be able to earn profits indefinitely.

Accepted Answer

In the long run, the success of a business in a competitive market often attracts new entrants, increasing competition and driving profits down to a normal level.

Question 13

A monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing and becoming more elastic in the long run as new firms move into the industry until
A)the original firm is driven into bankruptcy.
B)the firm's demand curve is perfectly elastic.
C)the firm's demand curve is tangent to its average total cost curve.
D)the firm exits the market.

Accepted Answer

As new firms enter the industry, the demand faced by each individual firm will decrease, making it more elastic. However, in the long-run equilibrium of a monopolistically competitive market, the demand curve for each firm will be tangent to its average total cost curve at the profit-maximizing level of output. This occurs because new firms will continue to enter the industry until firms are earning zero economic profits.

Question 14

You are planning to open a new Italian restaurant in your hometown where there are three other Italian restaurants.You plan to distinguish your restaurant from your competitors by offering northern Italian cuisine and using locally grown organic produce.What is likely to happen in the restaurant market in your hometown after you open?
A)Your competitors are likely to change their menus to make their products more similar to yours.
B)The demand curve facing each restaurant owner shifts to the right.
C)The demand curve facing each restaurant owner becomes more elastic.
D)While the demand curves facing your competitors becomes more elastic, your demand curve will be inelastic.

Accepted Answer

The introduction of a new restaurant offering a differentiated product makes the market more competitive, leading to more elastic demand curves for each restaurant as consumers have more options to choose from.

Question 15

Assuming that the total market size remains constant, a monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing in the long run because
A)new entrants into the market are more likely to have cutting edge products.
B)as the firm raises its price in the long run, it will lose some customers to new entrants in the market.
C)some of its customers have switched to purchasing the products of new entrants in the market.
D)its costs of production rises.

Accepted Answer

In the long run, new firms enter the market due to the presence of profits, increasing competition and leading some customers to switch to the products of these new entrants, thus decreasing the demand for the original firm's product.

Question 16

A monopolistically competitive firm that is earning profits will, in the long run, experience all of the following except
A)new rivals entering the market.
B)a decrease in demand for its product.
C)demand for the firm's product becomes more elastic.
D)a decrease in the number of rival products.

Accepted Answer

In the long run, new firms enter the market due to the presence of profits, increasing competition and making demand more elastic, but the number of rival products does not decrease.

Question 17

Figure 13-11
 
-Refer to Figure 13-11.What is the monopolistic competitor's profit-maximizing price?
A)P₁
B)P₂
C)P₃
D)P₄

Accepted Answer

The answer of Figure 13-11
 
-Refer to Figure 13-11.What is...

Question 18

In the long run, if price is less than average cost
A)there is an incentive for firms to exit the market.
B)there is profit incentive for firms to enter the market.
C)the market must be in long-run equilibrium.
D)there is no incentive for the number of firms in the market to change.

Accepted Answer

If price is less than average cost, firms will be making losses. In the long run, this will lead to firms exiting the market, as they cannot sustain these losses indefinitely. Therefore, there is an incentive for firms to exit the market when price is less than average cost.

Question 19

Figure 13-11
 
-Refer to Figure 13-11.What is the allocatively efficient output for the firm represented in the diagram?
A)Q₁ units
B)Q₂ units
C)Q₃ units
D)Q₄ units

Accepted Answer

Allocative efficiency occurs when the marginal cost of production equals the marginal benefit to consumers. In the diagram, this occurs at output Q3.

Question 20

If a typical monopolistically competitive firm is incurring short-run losses, then
A)other more competitive firms will enter the market.
B)as some firms leave, the remaining firms will experience an increase in the demand for their products.
C)as some firms leave, the demand for the products of the remaining firms will become more elastic.
D)the industry will eventually cease to exist.

Accepted Answer

In the short run, firms in monopolistic competition may incur losses due to high fixed costs and low demand. As some firms exit the market due to these losses, the remaining firms will experience an increase in the demand for their products, which can lead to an increase in price and profits in the long run. Therefore, choice B is the best answer. Choice A is not applicable as more competitive firms entering the market would make the competition even tougher for existing firms. Choice C is not correct as the demand for products in a monopolistically competitive market is already relatively elastic due to the availability of close substitutes. Choice D is too extreme and not applicable in most cases.

Quiz 13: Monopolistic Competition: the Competitive Model in a

Figure 13-11 -Refer to Figure 13-11.The diagram depicts a firm

Figure 13-11 -Refer to Figure 13-11.What is the monopolistic competitor's profit-maximizing output?

Why do most firms in monopolistic competition typically make zero profit in the long run?

Figure 13-12 Figure 13-12 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches. -Refer to Figure 13-12.If the diagram represents a typical firm in the designer watch market, what is likely to happen in the long run?

If Panera Bread's "clean food" strategy succeeds and customers are willing to pay higher prices for their menu items, the company will

Figure 13-11 -Refer to Figure 13-11.What is the amount of excess capacity?

Figure 13-11 -Refer to Figure 13-11.What is the productively efficient output for the firm represented in the diagram?

If a monopolistically competitive firm breaks even, the firm

In the long run, what happens to the demand curve facing a monopolistically competitive firm that is earning short-run profits?

Figure 13-11 -Refer to Figure 13-11.The firm represented in the diagram

A monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing and becoming more elastic in the long run as new firms move into the industry until

Assuming that the total market size remains constant, a monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing in the long run because

A monopolistically competitive firm that is earning profits will, in the long run, experience all of the following except

Figure 13-11 -Refer to Figure 13-11.What is the monopolistic competitor's profit-maximizing price?

In the long run, if price is less than average cost

Figure 13-11 -Refer to Figure 13-11.What is the allocatively efficient output for the firm represented in the diagram?

If a typical monopolistically competitive firm is incurring short-run losses, then