Question 1

Which of the following statements is true about monopolistically competitive firms?
A)Unlike perfectly competitive firms, monopolistically competitive firms are able to raise their prices without losing all of their customers.
B)Like perfectly competitive firms, monopolistically competitive firms are not able to raise prices without losing all of their customers because they face competition from firms selling similar products.
C)Like perfectly competitive firms, monopolistically competitive firms maximise their profits by settling price equal to marginal cost.
D)Unlike perfectly competitive firms, monopolistically competitive firms face perfectly inelastic demand curves.

Accepted Answer

Monopolistically competitive firms have some degree of market power due to product differentiation, allowing them to raise prices without losing all customers, unlike perfectly competitive firms which are price takers and would lose customers if they tried to raise prices above the market level.

Question 2

Economists have long debated whether there is a significant loss of well-being to society in markets that are monopolistically competitive rather than perfectly competitive.Which of the following offers the best reason why some economists believe that monopolistically competitive markets benefit consumers despite any loss of well-being?
A)Although consumers may pay a price greater than marginal cost for a product, the product is produced at the minimum average total cost.
B)Although consumers may pay a price greater than marginal cost and the product is not produced at minimum average total cost, they benefit from being able to buy a differentiated product more closely suited to their tastes.
C)Consumers pay a price equal to the marginal cost of producing a product, even though it is not produced at the minimum average total cost.
D)Consumers are better off choosing from a variety of differentiated products, even though product differentiation causes barriers that restrict entry into monopolistically competitive markets.

Accepted Answer

Monopolistically competitive markets allow for product differentiation, which means that firms can create products that are more closely suited to consumers' tastes. Even though consumers may pay a price greater than marginal cost and the product may not be produced at the minimum average total cost, they benefit from having access to these differentiated products. This can lead to increased consumer surplus, as they are able to find products that better fit their preferences.

Question 3

Figure 10.17 -Refer to Figure 10.17.Suppose the firm is currently producing Q_f units.What happens if it increases its output to Q_gunits? A)Its average cost of production will fall and its profit will rise. B)It will be taking advantage of economies of scale and will be able to lower the price of its product. C)It will move from a zero profit situation to a profit situation D)It will move from a zero profit situation to a loss situation

Accepted Answer

Without seeing Figure 10.17, we can infer from the question that increasing output leads to a situation where the firm moves from a zero profit situation to a loss situation. This implies that the additional units produced increase costs more than revenues, leading to losses.

Question 4

Economists have long debated whether there is a significant loss of well-being to society in markets that are monopolistically competitive rather than perfectly competitive.Which of the following offers the best reason why some economists believe that monopolistically competitive markets are less efficient than perfectly competitive markets?
A)In contrast to perfectly competitive markets, neither allocative efficiency nor productive efficiency are achieved in monopolistically competitive markets.
B)In contrast to perfectly competitive markets, firms in monopolistically competitive markets earn economic profits in long-run equilibrium.
C)In contrast to perfectly competitive markets, firms in monopolistically competitive markets do not produce where price equals average total cost in long-run equilibrium.
D)In contrast to perfectly competitive markets, firms in monopolistically competitive markets can charge a price greater than average total cost in the short run.

Accepted Answer

Allocative efficiency and productive efficiency are not achieved in monopolistically competitive markets, meaning that resources are not being efficiently allocated to produce goods and services that society values most, and firms are not producing at the lowest cost possible. In contrast, perfectly competitive markets achieve both allocative and productive efficiency.

Question 5

In what way does long-run equilibrium under monopolistic competition differ from long-run equilibrium under perfect competition?
A)Firms in perfect competition achieve productive and allocative efficiency while firms in monopolistic competition achieve neither allocative nor productive efficiency.
B)The only difference is that in a monopolistically competitive market there are many brands to choose from while in a perfectly competitive market there is one standard product.
C)Firms in perfect competition achieve productive efficiency while firms in monopolistic competition achieve allocative efficiency.
D)Firms in perfect competition achieve allocative efficiency while firms in monopolistic competition achieve brand efficiency.

Accepted Answer

In long-run equilibrium under perfect competition, firms achieve both productive and allocative efficiency through price competition and the absence of market power. In contrast, under monopolistic competition, firms have some market power due to brand differentiation, which allows them to charge higher prices and therefore achieve higher profits. However, this comes at the expense of allocative and productive efficiency because prices are not equal to marginal cost and resources are not allocated to their most efficient use. Therefore, option A is the best choice. Option B is incorrect because the number of brands is not the only difference between the two markets. Option C is incorrect because monopolistically competitive firms do not achieve allocative efficiency. Option D is incorrect because "brand efficiency" is not a well-defined economic concept.

Question 6

Compared to a perfectly competitive firm, the demand curve facing a monopolistically competitive firm is
A)more elastic because there are many close substitutes for the product of a monopolistically competitive firm.
B)less elastic because monopolistically competitive firms produce similar, but not identical, products.
C)just as elastic because there are many sellers in both markets.
D)more elastic because in the long run, the demand curve is tangent to the firm's average total cost curve.

Accepted Answer

The answer of Compared to a perfectly competitive firm, the...

Question 7

Figure 10.17 -Refer to Figure 10.17.The amount of excess capacity is A)Q_h - Q_f units B)Q_j - Q_f units C)Q_j - Q_h units D)Q_h - Q_g units

Accepted Answer

Excess capacity is the difference between the quantity produced at the minimum point of the average total cost curve and the quantity produced at the profit-maximizing output level. This is represented by the distance between points j and f on the quantity axis in the given figure.

Question 8

Which of the following is not a characteristic of a monopolistically competitive firm in long-run equilibrium?
A)Marginal revenue is equal to marginal cost.
B)Price is equal to average revenue.
C)The firm has excess capacity.
D)Price is equal to marginal cost.

Accepted Answer

In long-run equilibrium, a monopolistically competitive firm will produce where marginal revenue equals marginal cost (A), charge a price equal to its average revenue (B), and have excess capacity (C). However, it will not necessarily have a price equal to its marginal cost (D).

Question 9

In the long run, firms in both monopolistically competitive markets and perfectly competitive markets earn zero economic profits, but unlike perfectly competitive firms in the long run, monopolistically competitive firms
A)charge a price that is greater than average revenue.
B)charge a price that is equal to marginal cost.
C)do not produce at minimum average total cost.
D)charge a price that is equal to average total cost.

Accepted Answer

Monopolistically competitive firms do not produce at minimum average total cost in the long run because each firm has some degree of market power and is able to charge a price greater than marginal cost. This results in firms operating at a level of output where their average total cost is higher than the minimum efficient scale, unlike perfectly competitive firms that operate at the minimum efficient scale and produce at minimum average total cost in the long run. While both types of firms earn zero economic profits in the long run, monopolistically competitive firms have higher costs and a higher price than perfectly competitive firms.

Question 10

Figure 10.18 -Refer to Figure 10.18.Which of the following statements is true? A)D_arepresents the long-run demand curve facing a monopolistic competitor in a constant-cost industry while D_bdepicts the demand curve in the short run. B)D_arepresents the long-run demand curve facing a monopolistic competitor in a constant-cost industry while D_bdepicts the long-run demand curve in an increasing-cost industry. C)D_arepresents the long-run demand curve facing a perfect competitor while D_bdepicts the long-run demand curve facing a monopolistic competitor. D)D_arepresents the long-run supply curve in a perfectly competitive, constant-cost industry while D_bdepicts the long-run demand curve facing a monopolistic competitor in a decreasing-cost industry.

Accepted Answer

The answer of Figure 10.18 
-Refer to Figure 10.18.Which of...

Question 11

Figure 10.17 -Refer to Figure 10.17.In the long run, why will the firm produce Q_f units and not Q_gunits, which has a lower average cost of production? A)Although its average cost of production is lower when the firm produces Q_gunits, to be able to sell its output the firm will have to charge a price below average cost, resulting in a loss. B)At Q_g, average cost exceeds marginal cost so the firm will actually incur a loss. C)At Q_g, marginal revenue is less than average revenue, which will result in a loss for the firm. D)The firm's goal is to charge a high price and make a small profit rather than charge a low price and make no profit.

Accepted Answer

Although Q_g has a lower average cost of production, the firm would have to charge a price below average cost, which will result in a loss. Therefore, Q_f is the optimal production level in the long run.

Question 12

Long-run equilibrium in a monopolistically competitive market is similar to long-run equilibrium in a perfectly competitive market in that in both markets, firms
A)produce at the minimum point of their average total cost curves.
B)produce where price equals marginal cost.
C)break even.
D)produce where price equals marginal revenue.

Accepted Answer

The answer of Long-run equilibrium in a monopolistically competitive market...

Question 13

It is true in both monopolistically competitive and perfectly competitive industries that
A)firms produce products for which there are no close substitutes.
B)there are high barriers to entry.
C)there are many buyers and sellers.
D)firms are price takers.

Accepted Answer

In both monopolistically competitive and perfectly competitive markets, one of the key characteristics is the presence of many buyers and sellers, which ensures that no single buyer or seller has the power to influence market prices significantly.

Question 14

Figure 10.18 -Refer to Figure 10.18.The diagram demonstrates that A)in the short run, the monopolistic competitor produces an output Q_b, but in the long run after it adjusts its capacity, it will produce the allocatively efficient output, Q_a. B)it is not possible for a monopolistic competitor to produce the productively efficient output level, Q_a,because of product differentiation. C)it is possible for a monopolistic competitor to produce the productively efficient output level, Q_a,if it is willing to lower its price from P_bto P_a. D)in the long run, the monopolistic competitor produces the minimum-cost output level, Q_a,but in the short run its output of Q_b is not cost minimising.

Accepted Answer

Monopolistic competitors cannot produce at the productively efficient output level due to product differentiation, which leads to excess capacity and prevents them from achieving minimum average total cost.

Question 15

Only one of the following statements is correct.The statements compare perfectly competitive (PC)markets and monopolistically competitive (MC)markets.Which statement is correct?
A)Productive efficiency is achieved in both PC and MC markets.Allocative efficiency is achieved only in MC markets.
B)Allocative efficiency is achieved in both PC and MC markets.Productive efficiency is achieved only in PC markets.
C)Productive efficiency and allocative efficiency are both achieved in PC markets.Neither is achieved in MC markets.
D)Allocative efficiency is achieved only in PC markets.Productive efficiency is achieved only in MC markets.

Accepted Answer

Productive efficiency occurs when goods are produced at the lowest possible cost, which is typical in perfectly competitive markets due to intense competition. Allocative efficiency happens when the mix of goods being produced represents what consumers prefer the most, also a characteristic of perfectly competitive markets. Monopolistically competitive markets, due to product differentiation and lack of price competition, typically do not achieve either productive or allocative efficiency.

Question 16

Monopolistically competitive firms have downward-sloping demand curves.In the long run, monopolistically competitive firms earn zero economic profits.These two characteristics imply that in the long run
A)monopolistically competitive markets achieve productive efficiency.
B)monopolistically competitive markets achieve allocative efficiency.
C)monopolistically competitive firms earn economic profits.
D)monopolistically competitive firms have excess capacity.

Accepted Answer

Monopolistically competitive firms are not efficient in the long run because they have excess capacity, meaning they are not producing at the lowest possible average cost. While they do not earn economic profits in the long run, they still have some market power, so they are not allocatively efficient either. Therefore, the correct answer is D.

Question 17

Excess capacity is a characteristic of monopolistically competitive firms.What does excess capacity mean?
A)It means that firms do not produce the output level that corresponds to the minimum point on their average total cost curves.
B)It means that firms hire more than the minimum number of workers needed to produce the profit-maximising level of output.
C)It means that firms produce with inefficient combinations of resources.
D)It means that firms build plants that are not large enough to achieve minimum efficient scale.

Accepted Answer

Excess capacity in monopolistically competitive firms refers to their operation at a level of output where they do not achieve the lowest possible average total cost, which is not producing at the minimum point on their average total cost curves.

Question 18

In contrast with perfect competition, excess capacity characterises monopolistic competition.Excess capacity is due to which of the following?
A)Monopolistically competitive firms produce at the minimum point on their average total cost curves.
B)Monopolistically competitive firms face downward-sloping demand curves.In the long run, firms produce where their demand curves are tangent to their long-run average total cost curves.
C)Monopolistically competitive firms produce where marginal revenue is equal to marginal cost.
D)Monopolistically competitive markets have low barriers to entry.

Accepted Answer

In monopolistic competition, firms do not produce at the minimum point on their average total cost curves due to the downward-sloping demand curve they face. Instead, they produce where their demand curve is tangent to their long-run average total cost curve, which typically does not coincide with the minimum point of the average total cost curve, leading to excess capacity.

Question 19

In long-run equilibrium, compared to a perfectly competitive market, a monopolistically competitive industry produces a ________ level of output and charges a ________ price.
A)higher; lower
B)lower; lower
C)lower; higher
D)higher; higher

Accepted Answer

In the long run, monopolistically competitive industries will make zero economic profit, just like perfectly competitive industries. However, since monopolistic competitors have differentiated products, they have some market power and can charge a higher price than perfectly competitive firms. They also produce a lower level of output because they operate at a point where marginal revenue is equal to marginal cost, which is less than the level of output that would prevail in a perfectly competitive market. Therefore, the correct choice is C, where monopolistically competitive industries produce a lower level of output and charge a higher price than perfectly competitive industries.

Question 20

Which of the following is true if a monopolistically competitive firm has excess capacity?
A)it has exhausted all economies of scale.
B)it is producing beyond the minimum efficient scale.
C)it is experiencing diseconomies of scale.
D)it produces an output rate that places it on the negatively sloped portion of its average total cost curve.

Accepted Answer

In monopolistic competition, firms have excess capacity because they produce at a level where average total costs are not minimized, which is on the negatively sloped portion of the ATC curve.

Quiz 10: Monopolistic Competition: The Competitive Model in a More Realistic

Which of the following statements is true about monopolistically competitive firms?

Figure 10.17 -Refer to Figure 10.17.Suppose the firm is currently producing Q_f units.What happens if it increases its output to Q_gunits?

In what way does long-run equilibrium under monopolistic competition differ from long-run equilibrium under perfect competition?

Compared to a perfectly competitive firm, the demand curve facing a monopolistically competitive firm is

Figure 10.17 -Refer to Figure 10.17.The amount of excess capacity is

Which of the following is not a characteristic of a monopolistically competitive firm in long-run equilibrium?

In the long run, firms in both monopolistically competitive markets and perfectly competitive markets earn zero economic profits, but unlike perfectly competitive firms in the long run, monopolistically competitive firms

Figure 10.18 -Refer to Figure 10.18.Which of the following statements is true?

Figure 10.17 -Refer to Figure 10.17.In the long run, why will the firm produce Q_f units and not Q_gunits, which has a lower average cost of production?

Long-run equilibrium in a monopolistically competitive market is similar to long-run equilibrium in a perfectly competitive market in that in both markets, firms

It is true in both monopolistically competitive and perfectly competitive industries that

Figure 10.18 -Refer to Figure 10.18.The diagram demonstrates that

Only one of the following statements is correct.The statements compare perfectly competitive (PC) markets and monopolistically competitive (MC) markets.Which statement is correct?

Monopolistically competitive firms have downward-sloping demand curves.In the long run, monopolistically competitive firms earn zero economic profits.These two characteristics imply that in the long run

Excess capacity is a characteristic of monopolistically competitive firms.What does excess capacity mean?

In contrast with perfect competition, excess capacity characterises monopolistic competition.Excess capacity is due to which of the following?

In long-run equilibrium, compared to a perfectly competitive market, a monopolistically competitive industry produces a level of output and charges a price.

Which of the following is true if a monopolistically competitive firm has excess capacity?