Question 1

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 _______.

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 2

If a perfectly competitive firm maximises short-run profits,its marginal revenue will be positive and less than its price.

Accepted Answer

In a perfectly competitive market, the firm is a price taker, meaning it cannot influence the market price. Therefore, the marginal revenue of the firm is equal to the market price. In the short run, a firm will only produce if the price it receives is greater than its variable costs. Therefore, if the firm maximizes its profits, it will produce where marginal cost equals marginal revenue (MC=MR) and since marginal revenue is equal to market price, marginal cost must be equal to market price as well. Therefore, the marginal revenue of the firm will be positive and less than its price.

Question 3

Consumers in a monopolistically competitive market do not receive any consumer surplus because the price paid for the product exceeds the marginal cost of production.

Accepted Answer

Consumers in a monopolistically competitive market do receive some consumer surplus, although it is likely to be less than in a perfectly competitive market. The degree of market power and the level of product differentiation will impact the amount of consumer surplus available.

Question 4

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

Accepted Answer

In the long run, other firms will enter the market and offer similar products, causing the demand facing the monopolistically competitive firm to decrease, as consumers have more options. As a result, the demand curve will shift to the left. Additionally, the increase in competition will make the demand curve more elastic, as consumers have even more substitutes to choose from.

Question 5

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?

Accepted Answer

The answer of You are planning to open a new...

Question 6

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 ______.

Accepted Answer

The answer of Assuming that the total market size remains...

Question 7

Figure 9.9 
-Refer to Figure 9.9.The graph in the figure that depicts a monopolistically competitive firm that is minimising its losses is _______.

Accepted Answer

The answer of Figure 9.9 
-Refer to Figure 9.9.The graph...

Question 8

Unlike a perfectly competitive firm,a monopolistic competitor does not have a short-run shut-down point.

Accepted Answer

The answer of Unlike a perfectly competitive firm,a monopolistic competitor...

Question 9

For a monopolistically competitive firm,price equals average revenue.

Accepted Answer

The answer of For a monopolistically competitive firm,price equals average...

Question 10

A monopolistically competitive industry that earns economic profits in the short run will ______.

Accepted Answer

In the long run, due to the existence of economic profits, new firms will enter the market, causing an increase in competition and ultimately reducing profits to zero. Therefore, option B is the best choice. Option A is incorrect since economic profits usually attract new entrants, and there is increased competition. Option C may occur, but it is not necessarily the norm. Option D is incorrect since there is no indication of any change in demand.

Question 11

A profit-maximising monopolistically competitive firm produces and sells an allocatively efficient quantity of output.

Accepted Answer

In monopolistic competition, firms are not allocatively efficient because they produce at a point where price is greater than marginal cost, leading to a deadweight loss. Therefore, a profit-maximizing monopolistically competitive firm will not produce an allocatively efficient quantity of output.

Question 12

Figure 9.9 
-Refer to Figure 9.9.Which of the graphs in the figure depicts a monopolistically competitive firm that is earning economic profits?

Accepted Answer

The answer of Figure 9.9 
-Refer to Figure 9.9.Which of...

Question 13

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?

Accepted Answer

The answer of You have just opened a new Italian...

Question 14

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

Accepted Answer

If price is less than average cost, firms are incurring losses. In the long run, firms have the freedom to exit the market if they are not making any profits. As a result, there is an incentive for firms to exit the market. This will lead to a decrease in the number of firms in the market, reducing supply and increasing prices, eventually leading to an equilibrium where price is equal to the average cost.

Question 15

Figure 9.11 
-Refer to Figure 9.11.Suppose the above graph represents the relationship between the average total cost of producing notebook computers and the quantity of notebook computers produced by Dell.On a graph,illustrate the demand,MR,MC,and ATC curves which would represent Dell maximising profits at a quantity of 100 000 per month and identify the area on the graph which represents the profit.
__________________________________________________________________________________________________________________________________________________________________________________________

Accepted Answer

The answer of Figure 9.11 
-Refer to Figure 9.11.Suppose the...

Question 16

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

Accepted Answer

The answer of A monopolistically competitive firm that is earning...

Question 17

For a profit-maximising monopolistically competitive firm,for the last unit sold,the marginal cost of production is less than the marginal benefit received by a customer from the purchase of that unit.

Accepted Answer

The answer of For a profit-maximising monopolistically competitive firm,for the...

Question 18

Write your answer in the space provided or on a separate sheet of paper.
Figure 9.10  Figure 9.10 shows cost and demand curves for a monopolistically competitive producer of iced tea.
-Refer to Figure 9.10 to answer the following questions.
a.What is the profit-maximising output level?
b.What is the profit-maximising price?
c.At the profit-maximising output level,how much profit will be realised?
d.Does this graph most likely represent the long run or the short run? Why?
__________________________________________________________________________________________________________________________________________________________________________________________

Accepted Answer

The answer of Write your answer in the space provided...

Question 19

Assume that price exceeds average variable cost over the relevant range of demand.If a monopolistically competitive firm is producing at an output where marginal revenue is $111.11 and marginal cost is $118,then to maximise profits the firm should increase its output.

Accepted Answer

If marginal cost is greater than marginal revenue, the firm should decrease its output to increase profits. In this scenario, the marginal cost is $118 and the marginal revenue is $111.11, indicating that the firm is producing beyond the point of profit maximization. Therefore, the firm should decrease its output to maximize profits.

Question 20

A monopolistically competitive firm should lower its price if its marginal revenue exceeds its marginal cost.

Accepted Answer

In monopolistic competition, a firm maximizes its profit by producing at the point where marginal revenue (MR) equals marginal cost (MC). If MR is greater than MC, it means the firm can increase its profit by producing and selling more units. To do so, the firm should lower its price to attract more consumers and increase its sales. Therefore, in monopolistic competition, a firm should lower its price if MR exceeds MC.

Quiz 9: Monopolistic Competition and Oligopoly