Question 1

Which of the following is the best example of product differentiation?
A) A cookie manufacturer introduces a new variant of cookies for Halloween.
B) A firm that sells printers starts a new manufacturing unit to manufacture printer cartridges.
C) A firm that produces laptops introduces a new line of tablet personal computers.
D) A leading women's fashion house introduces a line of men's clothing.
E) A supermarket introduces a range of pre-packaged salads.

Accepted Answer

Product differentiation refers to a strategy where a company introduces a product with unique features or attributes to stand out from competitors. The introduction of a new variant of cookies for Halloween by a cookie manufacturer is a classic example of product differentiation, as it offers consumers a unique product different from the standard offerings.

Question 2

Many natural monopolies are regulated. Explain the rationale for such regulation.

Accepted Answer

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Question 3

In the long run, the economic profit earned by a firm under monopolistic competition:
A) is positive because firms produce with excess capacity.
B) is zero because of price wars among a small number of firms.
C) is zero because of free entry and exit possibilities in the market.
D) is positive because of advertising and product differentiation by the firms.
E) is positive because of collusive behavior between firms.

Accepted Answer

In the long run, monopolistically competitive markets have free entry and exit possibilities, which means that new firms can enter the market and earn profits, and existing firms can exit the market if they are earning losses. As a result, in the long run, economic profits will be driven to zero as new firms enter and competition increases. Therefore, option C is the correct answer.

Question 4

How can the quality of a product serve as an entry barrier in a market?

Accepted Answer

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Question 5

In the long run, monopolistically competitive firms:
A) earn zero economic profit.
B) face perfectly elastic demand curves.
C) tend to standardize their products.
D) produce output at minimum marginal cost.
E) merge and form a few dominant firms to maximize profit.

Accepted Answer

In the long run, monopolistically competitive firms tend to earn zero economic profit due to the presence of low barriers to entry and exit, allowing new firms to enter the market and compete with existing firms, leading to a decrease in demand and profits for all firms. This situation leads to firms adjusting their prices and output in order to maintain a level of demand that allows them to break even. Therefore, choice A is the best option.

Question 6

Explain why monopolies are economically inefficient.

Accepted Answer

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Question 7

In comparing monopolistic competition to perfect competition, the major difference lies in:
A) the number of firms in each industry.
B) the typical firm size in each industry.
C) the degree of entry barriers in each industry.
D) the demand curves faced by individual firms in each industry.
E) the long-run profits of firms in each industry.

Accepted Answer

The major difference between monopolistic competition and perfect competition lies in the demand curves faced by the individual firms in each industry. In perfect competition, firms face a perfectly elastic demand curve, meaning they cannot influence the price of the product they sell. In contrast, in monopolistic competition, firms face a downward sloping demand curve, meaning they have some ability to influence the price of their product.

Question 8

Why do monopolistically competitive firms have a tendency to advertise much more than perfectly competitive firms?

Accepted Answer

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Question 9

Which of the following, if true, would be an example of a monopolistically competitive industry?
A) In the utilities industry, average cost declines over all levels of output.
B) In the automobile industry, fixed costs as well as variable costs are high.
C) In the retail trade industry, a large number of firms provide similar products.
D) The market for basic office supplies (pencils, paper, and clips) is served by scores of online suppliers.
E) In the pharmaceuticals industry, the entire market is served by a small number of large firms.

Accepted Answer

Monopolistic competition is characterized by many firms offering similar but not identical products, which is typical in the retail trade industry.

Question 10

The demand curve faced by individual firms under monopolistic competition is:
A) perfectly elastic.
B) perfectly inelastic.
C) downward-sloping.
D) upward-sloping.
E) the same as the market demand curve.

Accepted Answer

The demand curve faced by individual firms under monopolistic competition is downward-sloping. This is because firms in monopolistic competition have some degree of market power and can influence the price of their products through product differentiation. As a result, if a firm raises its price, it will lose some customers to its competitors. Therefore, the demand curve that a firm faces will be downward-sloping, reflecting the fact that as the firm charges a higher price, it will sell fewer units.

Question 11

Why are substantial economies of scale considered a barrier to entry?

Accepted Answer

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Question 12

How useful is the Lerner index as a measure of monopoly power?

Accepted Answer

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Question 13

Carefully define and describe a natural monopoly.

Accepted Answer

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Question 14

Unlike perfectly competitive markets, monopolistically competitive markets:
A) have significant barriers to entry.
B) face declining average costs at all levels of output.
C) have fewer firms.
D) produce differentiated products.
E) Answers face declining average costs at all levels of output and produce differentiated products are both correct.

Accepted Answer

Monopolistically competitive markets are characterized by firms producing differentiated products, which distinguishes them from perfectly competitive markets where firms produce identical or homogenous products.

Question 15

A monopolist faces the demand curve P = 100 - 2Q, where P = price and Q is quantity demanded. If the monopolist has a total cost of C = 50 + 20Q, determine its profit-maximizing price and output.

Accepted Answer

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Question 16

The profit margins for fast food firms like Wendy's have fallen because of an increase in competition from similar fast food chains and microwaveable food available in supermarkets. Based on this information, which of the following is true?
A) The elasticity of demand for Wendy's fast food is relatively inelastic.
B) Wendy's operates as a monopoly firm in the fast food market.
C) The fast food market is monopolistically competitive.
D) Wendy's fast food is an inferior good for most consumers.
E) There are strategic entry barriers in the fast-food market.

Accepted Answer

The increase in competition and the availability of similar options suggest that the fast food market is monopolistically competitive, with firms competing on product differentiation and pricing. Additionally, the fact that Wendy's profit margins have fallen implies that demand is relatively elastic, meaning that consumers have a variety of options and are sensitive to price changes. Neither A, B, D, nor E are supported by the information given.

Question 17

Which of the following is true in the long run under monopolistic competition?
A) P = MC.
B) P = AC.
C) P > AC > MC.
D) Price > AC = MC.
E) MR > MC.

Accepted Answer

In the long run under monopolistic competition, firms make zero economic profit, which occurs when price (P) equals average cost (AC). This is because firms can enter and exit the market freely, leading to a situation where price adjusts to cover all costs, including normal profit, but not enough to sustain economic profits.

Question 18

The demand curve for a monopolistically competitive firm slopes downward because:
A) the demand for the product drops to zero after a slight price increase.
B) competing firms produce differentiated products.
C) there is a very little brand loyalty towards a single firm's product.
D) customers are not influenced by advertising.
E) buyers are not sensitive to changes in the price of the product.

Accepted Answer

Monopolistically competitive firms produce differentiated products, which means that they compete on non-price factors such as quality, design, and marketing. As a result, if one firm raises its price, customers may switch to a similar product from another firm. This competition leads to a downward-sloping demand curve.

Question 19

Unlike a pure monopoly firm, a monopolistically competitive firm:
A) makes a positive economic profit in the long-run.
B) faces downward sloping demand curve.
C) have no entry barriers to protect it from new entrants.
D) produces a standardized good or service.
E) produces at the level where marginal revenue equals marginal cost.

Accepted Answer

In monopolistic competition, there are no significant barriers to entry, allowing new firms to enter the market easily, unlike in a pure monopoly.

Question 20

When competing firms or nations collude to form a cartel, the intention is to set one common price. This tendency to avoid competition should bring about stability. Paradoxically, however, cartels are usually unstable. Why?

Accepted Answer

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Quiz 8: Monopoly

Which of the following is the best example of product differentiation?

Many natural monopolies are regulated. Explain the rationale for such regulation.

In the long run, the economic profit earned by a firm under monopolistic competition:

How can the quality of a product serve as an entry barrier in a market?

In the long run, monopolistically competitive firms:

Explain why monopolies are economically inefficient.

In comparing monopolistic competition to perfect competition, the major difference lies in:

Why do monopolistically competitive firms have a tendency to advertise much more than perfectly competitive firms?

Which of the following, if true, would be an example of a monopolistically competitive industry?

The demand curve faced by individual firms under monopolistic competition is:

Why are substantial economies of scale considered a barrier to entry?

How useful is the Lerner index as a measure of monopoly power?

Carefully define and describe a natural monopoly.

Unlike perfectly competitive markets, monopolistically competitive markets:

A monopolist faces the demand curve P = 100 - 2Q, where P = price and Q is quantity demanded. If the monopolist has a total cost of C = 50 + 20Q, determine its profit-maximizing price and output.

The profit margins for fast food firms like Wendy's have fallen because of an increase in competition from similar fast food chains and microwaveable food available in supermarkets. Based on this information, which of the following is true?

Which of the following is true in the long run under monopolistic competition?

The demand curve for a monopolistically competitive firm slopes downward because:

Unlike a pure monopoly firm, a monopolistically competitive firm:

When competing firms or nations collude to form a cartel, the intention is to set one common price. This tendency to avoid competition should bring about stability. Paradoxically, however, cartels are usually unstable. Why?