Question 1

In a monopolistically competitive market,

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The answer of In a monopolistically competitive market,
...

Question 2

When the loss from a business-stealing externality exceeds the gain from a product-variety externality,

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In a monopolistically competitive market, firms have some market power to set prices above marginal cost, leading to an inefficiently low output level. If the loss from a business-stealing externality (where competing firms poach each other's customers) is higher than the gain from a product-variety externality (where consumers benefit from having a greater variety of products to choose from), then there are likely to be too many firms in the market, exacerbating the market power problem and leading to even greater inefficiency. Therefore, choice B is the best answer.

Question 3

Which of the following correctly lists the products in order from most advertised to least advertised?

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Question 4

Scenario 16-2
McDonald's restaurants has recently announced intentions to open a new restaurant in Smalltown,Indiana.Assume that the fast-food restaurant market in Smalltown is characterized by monopolistic competition.
-Refer to Scenario 16-2.As a result of the new McDonald's,existing fast food restaurants in Smalltown are likely to

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The answer of Scenario 16-2
McDonald's restaurants has recently announced intentions...

Question 5

Scenario 16-2
McDonald's restaurants has recently announced intentions to open a new restaurant in Smalltown,Indiana.Assume that the fast-food restaurant market in Smalltown is characterized by monopolistic competition.
-Refer to Scenario 16-2.As a result of the new McDonald's,residents of Smalltown are likely to benefit from

Accepted Answer

The opening of a new McDonald's restaurant in Smalltown is likely to create a product-variety externality, as it increases the variety of fast-food options available to consumers in the area. This can be seen as a positive benefit for residents, who now have more choices when it comes to fast food. Business-stealing externality and the efficient scale are less likely to have a direct impact on the benefits for residents in this scenario.

Question 6

Firms that spend the greatest percentage of their revenue on advertising tend to be firms that sell

Accepted Answer

Firms that spend a high percentage of their revenue on advertising are typically those that sell highly-differentiated consumer goods. This is because advertising is a tool for creating brand awareness and differentiation, and is most effective for products where there are clear differences between brands or where emotional appeals can be used to create a connection with consumers. Examples of such products include luxury goods or personal care and beauty products.

Question 7

When consumers are exposed to additional choices that result from the introduction of a new product,

Accepted Answer

When a new product is introduced, it increases the product variety available to consumers. This product-variety externality leads to consumers having more options to choose from, which can increase their welfare by allowing them to find a product that better meets their preferences. However, it can also lead to decision overload and confusion, which can potentially lower consumers' satisfaction.

Question 8

Which of the following is unique to a monopolistically competitive firm when compared to an oligopoly?

Accepted Answer

Monopolistic competition is characterized by the presence of many sellers in the market, each offering a differentiated product, unlike an oligopoly, which typically has only a few dominant firms.

Question 9

Some firms have an incentive to advertise because they sell a

Accepted Answer

Firms that sell a differentiated product and charge a price above marginal cost have an incentive to advertise because they can create brand loyalty, differentiate their product from their competitors' products, and increase their market power, allowing them to charge higher prices. Advertising can also inform consumers about new products or features, attract new customers, and increase overall demand for the product.

Question 10

The relationship between advertising and product differentiation is

Accepted Answer

A more differentiated product may require more advertising to effectively communicate its unique features and benefits to consumers. Additionally, advertising may help to create and maintain a strong brand identity for the differentiated product.

Question 11

Firms that sell highly differentiated consumer goods,such as soft drinks,breakfast cereals,and dog food,typically spend what percent of their revenues on advertising?

Accepted Answer

Firms that sell highly differentiated consumer goods spend a significant portion of their revenues on advertising in order to differentiate their products from competitors and build brand awareness. A range of 10-20% of revenues is common for advertising spending in these industries.

Question 12

Which of the following is a characteristic of oligopoly or monopolistic competition,but not perfect competition?

Accepted Answer

Advertising and sales promotion are common characteristics of oligopoly or monopolistic competition because firms have market power and need to differentiate their products from competitors. In perfect competition, firms sell homogeneous products and have no control over the market price, so advertising is not necessary. Choices B, C, and D are characteristics of all three types of market structures.

Question 13

The product-variety externality arises in monopolistically competitive markets because

Accepted Answer

In monopolistically competitive markets, firms try to differentiate their products to make them appear unique and desirable to consumers. This leads to a product-variety externality, where the introduction of a new product by one firm can increase the overall variety of products available to consumers, thereby benefiting all firms in the market.

Question 14

Entry by new firms into a monopolistically competitive market

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Question 15

When existing firms lose customers and profits due to entry of a new competitor,a

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When existing firms lose customers and profits due to the entry of a new competitor, it is referred to as a business-stealing externality. The new competitor is stealing business away from the existing firms. Predatory pricing occurs when a firm intentionally sets low prices to drive out competitors, while consumption externality occurs when an individual’s consumption affects the well-being of others. Product-variety externality refers to the added value that new products bring to an existing market.

Question 16

The entry of new firms into a monopolistically competitive market is accompanied by

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Question 17

Scenario 16-1
Vacation Inns of America (VIA)has recently announced intentions to build a new hotel/resort complex in Myrtle Beach,South Carolina.Assume that the hotel/resort market in Myrtle Beach is characterized by monopolistic competition.
-Refer to Scenario 16-1.As a result of the new VIA hotel/resort,existing hotels,motels,and lodging facilities in Myrtle Beach are likely to experience a

Accepted Answer

The new VIA hotel/resort is likely to create a business-stealing externality, which harms existing producers in the market of Myrtle Beach. This is because the market structure is characterized by monopolistic competition, where firms have some market power but face competition from other similar firms. The entry of a new firm, such as VIA, can increase competition and draw customers away from existing hotels, motels, and lodging facilities, leading to a loss of market share and profits for these firms. Therefore, the existing producers are likely to experience a business-stealing externality.

Question 18

For the economy as a whole,spending on advertising comprises about what percent of total firm revenue?

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Question 19

A business-stealing externality is

Accepted Answer

A business-stealing externality is the negative externality associated with entry of new firms in a monopolistically competitive market. This happens because the new firm's entry reduces the market share and profits of existing firms.

Question 20

Scenario 16-1
Vacation Inns of America (VIA)has recently announced intentions to build a new hotel/resort complex in Myrtle Beach,South Carolina.Assume that the hotel/resort market in Myrtle Beach is characterized by monopolistic competition.
-Refer to Scenario 16-1.As a result of the new VIA hotel/resort,tourists who stay in Myrtle Beach are likely to experience a

Accepted Answer

Monopolistic competition is characterized by firms selling differentiated products, leading to a product-variety externality. With the entry of VIA, there will be an increase in the variety of hotels and resorts in Myrtle Beach, which benefits consumers as they will have more options to choose from. Therefore, the correct choice is B.

Quiz 16: Monopolistic Competition