Question 1

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-maximizing 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 refers to the gap between the output level that a firm could produce at the minimum point on its average total cost curve and the level at which it currently produces. In other words, a firm produces less than what would be considered the most efficient level of output. This is a characteristic of monopolistically competitive firms because they have some degree of market power, but not enough to fully control prices and output levels. As a result, they choose to produce at a level that is less than the most efficient point on their cost curve.

Question 2

One way by which firms differentiate their products is to find a market niche.

Accepted Answer

This is true. Firms can differentiate their products by finding a market niche, which means identifying and focusing on a specific segment of the market with different needs and preferences than the overall market. By catering to the specific needs of this niche, firms can create a competitive advantage and differentiate themselves from their competitors.

Question 3

Monopolistically competitive firms achieve allocative efficiency but not productive efficiency.

Accepted Answer

Monopolistically competitive firms do not achieve productive efficiency because they produce at a quantity where marginal cost is not equal to marginal revenue, leading to excess capacity. However, they do achieve allocative efficiency because they produce at a point where price equals marginal cost, resulting in a socially optimal level of output.

Question 4

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 maximize their profits by settling price equal to marginal cost.
D) Unlike perfectly competitive firms, monopolistically competitive 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.

Question 5

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 long-run equilibrium, monopolistically competitive firms will produce at a lower level of output compared to perfectly competitive firms due to their inefficiencies. Additionally, they will charge a higher price because they have some degree of market power and can differentiate their products from their competitors. Therefore, option C, lower output and higher price, is the correct answer.

Question 6

In contrast with perfect competition, excess capacity characterizes 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

Excess capacity in monopolistic competition occurs because in the long run, firms produce where their demand curves are tangent to their long-run average total cost curves. This means that they produce at a quantity that is less than their optimal capacity, resulting in excess capacity. The other answer choices do not explain the phenomenon of excess capacity in monopolistic competition.

Question 7

In the long-run equilibrium, a monopolistically competitive firm earning normal profit produces the allocatively efficient output level.

Accepted Answer

In the long-run equilibrium in monopolistic competition, firms are still making excess profits, but these are being eroded by entry and competition. As a result, firms will produce at a quantity where marginal revenue equals marginal cost, which is less than the socially optimal level of output where marginal cost equals marginal benefit. Therefore, monopolistically competitive firms do not produce the allocatively efficient output level in the long-run equilibrium.

Question 8

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 9

Consumers in monopolistically competitive markets face a tradeoff between paying prices greater than marginal costs and purchasing products that are more closely suited to their tastes.

Accepted Answer

In monopolistically competitive markets, firms have some degree of market power to set prices above marginal costs. However, consumers also benefit from a wider variety of products and better differentiation to match their personal preferences and needs. Therefore, they have to decide between paying a higher price or enjoying a better fit with their preferences.

Question 10

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

Monopolistically competitive markets are less efficient than perfectly competitive markets because neither allocative efficiency (where price equals marginal cost) nor productive efficiency (where firms produce at the lowest point on the average total cost curve) are achieved. This is because firms in monopolistically competitive markets have some market power and can charge a price above marginal cost, leading to a deadweight loss to society.

Question 11

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 the long-run equilibrium of monopolistic competition, the firm's price is greater than its marginal cost due to the presence of product differentiation. Therefore, choice D is not a characteristic of a monopolistically competitive firm in long-run equilibrium. Choices A, B, and C are all typical characteristics of monopolistic competition in long-run equilibrium.

Question 12

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 have excess capacity in the long run because they produce at a quantity lower than the one that would minimize their average total cost. This is due to the downward-sloping demand curve, which makes them have a markup over their marginal cost, similar to a monopoly. However, unlike a monopoly, monopolistically competitive firms face competition from other firms producing close substitutes, which erodes their ability to earn economic profits in the long run. As a result, they operate with excess capacity in the long run, which implies that they could produce more and increase their profits, but they don't because they face insufficient demand for their products at higher prices.

Question 13

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 experiences 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 less than the output level that minimizes average total cost, which means they operate on the downward-sloping portion of the ATC curve.

Question 14

Productive efficiency does not hold for a profit-maximizing, monopolistically competitive firm in the long-run equilibrium because the firm operates along the diseconomies-of-scale region of its average total cost curve.

Accepted Answer

The answer of Productive efficiency does not hold for a...

Question 15

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

Monopolistically competitive firms produce products that are similar but not identical to each other, which means that there are some substitutes available. However, the products are not perfectly substitutable, so the demand curve facing a monopolistically competitive firm is less elastic than that facing a perfectly competitive firm.

Question 16

If a significant number of smokers switch from smoking tobacco cigarettes to e-cigarettes, a company like NJOY will likely find its demand curve shifting to the ________ and its marginal revenue curve shifting to the ________ as more competitors enter the market.
A) right; right
B) right; left
C) left; right
D) left; left

Accepted Answer

The answer of If a significant number of smokers switch...

Question 17

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

Some economists believe that monopolistically competitive markets benefit consumers despite any loss of well-being because consumers benefit from being able to buy a differentiated product that more closely suits their tastes. This allows them to derive more utility from the product and can outweigh the negative effects of higher prices and less efficient production.

Question 18

What is the trade-off that consumers face when buying the product of a monopolistically competitive firm?
A) Consumers pay higher prices but receive better quality goods compared to the output of perfectly competitive firms.
B) Consumers pay a price greater than marginal cost, but have the luxury of choices more suited to their tastes.
C) Consumers pay higher prices but the products are produced by highly efficient firms.
D) Consumers pay lower prices but have fewer choices.

Accepted Answer

Monopolistically competitive firms have some market power, allowing them to charge prices greater than marginal cost. However, they also differentiate their products to cater to the preferences of consumers, giving consumers a greater variety of options. This is the trade-off that consumers face when buying from a monopolistically competitive firm. They pay higher prices but have the luxury of choices more suited to their tastes.

Question 19

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 perfect competition, firms produce at the lowest possible cost (productive efficiency) and sell at a price equal to marginal cost, resulting in allocative efficiency. In monopolistic competition, firms have some market power and differentiate their products, which results in excess capacity and higher prices, leading to neither productive nor allocative efficiency.

Question 20

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

The answer of Only one of the following statements is...

Quiz 13: Monopolistic Competition: the Competitive Model in a More Realistic Setting

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

One way by which firms differentiate their products is to find a market niche.

Monopolistically competitive firms achieve allocative efficiency but not productive efficiency.

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

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

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

In the long-run equilibrium, a monopolistically competitive firm earning normal profit produces the allocatively efficient output level.

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

Consumers in monopolistically competitive markets face a tradeoff between paying prices greater than marginal costs and purchasing products that are more closely suited to their tastes.

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

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,

If a monopolistically competitive firm has excess capacity,

Productive efficiency does not hold for a profit-maximizing, monopolistically competitive firm in the long-run equilibrium because the firm operates along the diseconomies-of-scale region of its average total cost curve.

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

If a significant number of smokers switch from smoking tobacco cigarettes to e-cigarettes, a company like NJOY will likely find its demand curve shifting to the and its marginal revenue curve shifting to the as more competitors enter the market.

What is the trade-off that consumers face when buying the product of a monopolistically competitive firm?

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

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