Question 1

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

Accepted Answer

The efficient scale of production is the output level at which the firm's average total cost is at a minimum. This occurs because at this level of production, the firm is able to spread its fixed costs over a larger output, resulting in a lower average total cost.

Question 2

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 3

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

Accepted Answer

The firm's profit-maximizing amount of product development occurs where the marginal cost of product development is equal to the marginal revenue from product development. This is because at this point, the firm is adding to its profits at the same rate that it is incurring costs from developing the product. Choices A, C, D, and E may be factors that contribute to or affect the firm's profitability, but they do not necessarily determine the profit-maximizing amount of product development.

Question 4

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

In monopolistic competition, firms have some market power, meaning they can set a markup of price over marginal cost to increase their profits. In contrast, in perfect competition, firms have no market power and must sell at the market price, which equals marginal cost. Therefore, they do not have a markup of price over marginal cost.

Question 5

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

Accepted Answer

A firm in monopolistic competition has excess capacity because it produces a quantity of output that falls short of the minimum efficient scale of production, in order to differentiate its product and capture a greater market share. In contrast, a firm in perfect competition produces at the minimum efficient scale of production, which does not result in excess capacity. Therefore, only option B correctly identifies the difference between the two market structures.

Question 6

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 7

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

Accepted Answer

Product differentiation in monopolistic competition leads to firms having some market power and the ability to set prices higher than marginal cost. This creates inefficiency as output is not being produced at the lowest possible cost, leading to deadweight loss. The other choices (A, C, D, and E) do not necessarily contribute to this inefficiency in monopolistic competition.

Question 8

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 9

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

Accepted Answer

Even though monopolistic competition results in inefficiency, it does benefit society through product variety. This benefit arises because each firm produces a slightly differentiated product, which gives consumers more choices.

Question 10

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 11

A firm in monopolistic competition definitely incurs an economic loss if

Accepted Answer

If the price is less than average total cost, the firm is not earning enough revenue to cover its production costs and is incurring an economic loss.

Question 12

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

Accepted Answer

Firms in monopolistic competition must continually engage in product development and marketing in order to stand out from their competitors and maintain their economic profits. If they do not continue to differentiate or improve their product, they may lose customers to their rivals. Lowering prices may result in short-term gains but can lead to decreased profits in the long run. Raising prices may also result in decreased demand for their product. Realizing short-run losses is not a sustainable strategy for maintaining economic profits. Making the demand for their product more elastic may result in increased sales but may also lead to increased competition and lower profits.

Question 13

One of the major benefits to society of monopolistic competition is

Accepted Answer

The major benefit of monopolistic competition is product differentiation. This allows firms to offer unique products or services to consumers, which can lead to increased competition and innovation. It also allows firms to charge higher prices for their differentiated products, which may help them earn higher profits. However, this competition may also result in excess capacity, as firms try to differentiate their products and compete for market share.

Question 14

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

Accepted Answer

Monopolistic competition allows for product differentiation and variety, giving consumers more options and potentially creating more innovation in the market.

Question 15

Monopolistic competition is judged to be economically inefficient because

Accepted Answer

Monopolistic competition is judged to be economically inefficient because firms in monopolistically competitive markets charge prices that are greater than marginal cost, which results in a deadweight loss to society. This is because firms in monopolistic competition have some market power and can manipulate prices to increase their profits. As a result, they charge prices that are above the socially optimal level, leading to inefficiency. Choices B, C, D, and E are incorrect as they do not reflect the characteristic that makes monopolistic competition economically inefficient.

Question 16

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 17

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

Accepted Answer

Firms need to balance the cost and benefit of product development and marketing to ensure they are maximizing their profits while also reaching their desired target market. Simply spending the same amount as previous years or the historical average may not align with current market demands or cost-benefit analysis. Determining spend based on excess capacity or marginal cost may also not necessarily result in the best allocation of resources.

Question 18

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 19

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

Accepted Answer

In monopolistic competition, each firm produces a differentiated product, which creates a certain degree of market power. However, in the long run, profits will be driven down to zero due to the entry of new firms that will produce similar products. Therefore, in order to make a short-run economic profit, firms need to constantly innovate and develop their products to maintain their market power and differentiate themselves from competitors.

Question 20

A monopolistically competitive firm is inefficient because the firm

Accepted Answer

In monopolistic competition, firms differentiate their products from their competitors, which allows them to have some market power and charge a higher price than marginal cost. However, because there are many firms in the market, this market power is limited and firms cannot charge a price higher than the average total cost in the long run. Therefore, firms in monopolistic competition will produce at an output level where average total cost is not at its minimum, which is inefficient.

Quiz 17: Monopolistic Competition