Monopolistic Competition Part 2 (43-100)

43. In the long run, a firm in a perfectly competitive market operates at a. efficient scale and a monopolistically competitive firm operates at efficient scale. b. efficient scale and a monopolistically competitive firm operates with excess capacity. c. excess capacity and a monopolistically competitive firm operates with excess capacity. d. excess capacity and a monopolistically competitive firm operates at efficient scale. ANSWER: b. efficient scale and a monopolistically competitive firm operates with excess capacity. 44. In the long run, a profit-maximizing firm in a monopolistically competitive market operates at a. efficient scale. b. a level of output at which average total cost is rising. c. a level of output at which average total cost is falling. d. the level of output at which total revenue is maximized. ANSWER: c. a level of output at which average total cost is falling. 45. Product differentiation in monopolistically competitive markets ensures that, for profit-maximizing firms, a. marginal revenue will equal average total cost. b. price will exceed marginal cost. c. marginal cost will exceed average revenue. d. average variable cost will be declining. ANSWER: b. price will exceed marginal cost. 46. A firm in a monopolistically competitive market operates a. where marginal revenue is zero. b. where marginal revenue is negative. c. on the rising portion of its average-total-cost curve. d. on the declining portion of its average-total-cost curve. ANSWER: d. on the declining portion of its average-total-cost curve. 47. Hotels in New York City frequently experience an average vacancy rate of about 20 percent (i.e., on an average night, 80 percent of their rooms are full). This kind of excess capacity is indicative of what kind of market? a. monopoly b. perfect competition c. monopolistic competition d. oligopoly ANSWER: c. monopolistic competition 48. For profit-maximizing firms in a monopolistically competitive market, another customer means a. no change in profit. b. more profit. c. potential economic losses. d. marginal cost could potentially exceed price. ANSWER: b. more profit. 49. A profit-maximizing firm in a monopolistically competitive market is eager for another customer because a. it wants to maintain the equality between price and marginal cost. b. price exceeds marginal cost. c. a markup over marginal cost is difficult to maintain. d. it earns zero economic profits in the long run. ANSWER: b. price exceeds marginal cost. 50. A monopolistically competitive market could be considered inefficient because a. marginal revenue exceeds average revenue. b. price exceeds marginal cost. c. efficient scale is realized in the long run, but not in the short run. d. markup pricing does not occur in any other market structure. ANSWER: b. price exceeds marginal cost. 51. When a profit-maximizing firm in a monopolistically competitive market charges a price higher than marginal cost, a. it is violating the antitrust laws. b. it must be losing money. c. there is a deadweight loss, but it is exactly offset by the benefit of excess capacity. d. None of the above are correct. ANSWER: d. None of the above are correct. 52. The deadweight loss that is associated with a monopolistically competitive market is a result of a. price falling short of marginal cost in order to increase market share. b. price exceeding marginal cost. c. operating in a regulated industry. d. excessive advertising costs. ANSWER: b. price exceeding marginal cost. 53. Regulation of a firm in a monopolistically competitive market a. usually implies a very small administrative burden. b. will lower the firm’s costs. c. is commonly used to enhance market efficiency. d. is unlikely to improve market efficiency. ANSWER: d. is unlikely to improve market efficiency. 54. The administrative burden of regulating price in a monopolistically competitive market is a. small due to economies of scale. b. large because price is usually below marginal cost. c. large because of the large number of firms that produce differentiated products. d. small because firms produce with excess capacity. ANSWER: c. large because of the large number of firms that produce differentiated products. 55. If regulators required firms in monopolistically competitive markets to set price equal to marginal cost, a. firms would most likely experience economic losses. b. firms would also operate at maximum efficient scale. c. new firms would be likely to enter the market. d. the most efficient firms are not likely to be affected. ANSWER: a. firms would most likely experience economic losses. 56. If regulators required firms in monopolistically competitive markets to set price equal to marginal cost, a. firms would respond by lowering their costs. b. firms would require a subsidy to stay in business c. new firms that enter the market would operate at efficient scale. d. the most efficient firms would not be affected. ANSWER: b. firms would require a subsidy to stay in business 57. Inefficiency in monopolistically competitive markets can be identified with a. inferior products produced by most firms. b. government programs that effectively regulate price. c. their similarities to perfectly competitive markets. d. not having the "ideal" number of firms in the industry. ANSWER: d. not having the "ideal" number of firms in the industry. 58. Before a new firm enters a monopolistically competitive market with a new product, it considers a. the profit opportunities. b. the business-stealing externality. c. the product-variety externality. d. All of the above are correct. ANSWER: a. the profit opportunities. 59. The product-variety externality is associated with a. the producer surplus that accrues to incumbent firms in a monopolistically competitive industry. b. loss of consumer surplus from exposure to additional advertising. c. the consumer surplus that is generated from the introduction of a new product. d. the opportunity cost of firms exiting a monopolistically competitive industry. ANSWER: c. the consumer surplus that is generated from the introduction of a new product. 60. When consumers are exposed to additional choices that result from the introduction of a new product, a. their satisfaction is likely to be lowered as a result of their having to make additional choices. b. a product-variety externality is said to occur. c. an advertising externality is said to occur. d. consumers are likely to experience negative consumption externalities. ANSWER: b. a product-variety externality is said to occur. 61. A business-stealing externality a. is likely to be punished under antitrust laws. b. occurs when one firm attempts to duplicate exactly the product of a different firm. c. is considered to be an explicit cost of business in monopolistically competitive markets. d. is the negative externality associated with entry of new firms in a monopolistically competitive market. ANSWER: d. is the negative externality associated with entry of new firms in a monopolistically competitive market. 62. When incumbent firms lose customers and profits due to entry of a new competitor, a a. predatory pricing externality occurs. b. consumption externality occurs. c. business-stealing externality occurs. d. product-variety externality occurs. ANSWER: c. business-stealing externality occurs. 63. When the loss from a business-stealing externality exceeds the gain from a product-variety externality, a. firms are more likely to operate at efficient scale. b. there are likely to be too many firms in a monopolistically competitive market. c. market efficiency is likely to be enhanced by the entry of new firms. d. the market structure is likely to be in transition. ANSWER: b. there are likely to be too many firms in a monopolistically competitive market. 64. The entry of new firms into a monopolistically competitive market is accompanied by a. both positive and negative externalities. b. only positive externalities. c. only negative externalities. d. only private profit opportunities (no externalities). ANSWER: a. both positive and negative externalities. 65. The product-variety externality associated with monopolistic competition arises because in monopolistically competitive markets, a. firms produce with excess capacity. b. firms try to differentiate their products. c. firms would like to produce homogeneous products, but the large number of firms prohibits it. d. entry and exit is not restricted. ANSWER: b. firms try to differentiate their products. Use the following information for questions 66 and 67. Vacation Inns of America (VIA) has recently announced intentions of building a new hotel/resort complex in Myrtle Beach, South Carolina. Assume that the hotel/resort market in Myrtle Beach is characterized by monopolistic competition. 66. As a result of the new VIA hotel/resort, tourists who stay in Myrtle Beach are likely to experience a a. product-variety externality, which harms consumers. b. product-variety externality, which benefits consumers. c. business-stealing externality, which harms consumers. d. business-stealing externality, which benefits consumers. ANSWER: b. product-variety externality, which benefits consumers. 67. Existing hotels, motels, and lodging facilities in Myrtle Beach are likely to experience what kind of externality as a result of the new VIA hotel/resort? a. product-variety b. business-stealing c. competitive d. advertising ANSWER: b. business-stealing 68. In a monopolistically competitive industry, firms’ demand curves also represent a. marginal revenue. b. marginal cost. c. average revenue. d. profit. ANSWER: c. average revenue. 69. When a new firm enters a monopolistically competitive market, the individual demand curves faced by all existing firms in that market will a. shift to the left. b. shift to the right. c. shift in a direction that is unpredictable without further information. d. remain unchanged; only the supply curve will shift. ANSWER: a. shift to the left. 70. When a firm exits a monopolistically competitive market, the individual demand curves faced by all existing firms in that market will a. shift in a direction that is unpredictable without further information. b. shift to the right. c. shift to the left. d. remain unchanged; only the supply curve will shift. ANSWER: b. shift to the right. 71. Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to a a. change in the technology that the firm utilizes. b. shift of its demand curve. c. shift of its supply curve. d. None of the above are correct. ANSWER: b. shift of its demand curve. 72. In the long run, a monopolistically competitive firm produces a quantity that is a. equal to the efficient scale. b. less than the efficient scale. c. greater than the efficient scale. d. consistent with diseconomies of scale. ANSWER: b. less than the efficient scale. 73. Because a monopolistically competitive firm has some market power, in the long-run the price of its good exceeds its a. average revenue. b. average total cost. c. marginal cost. d. profit per unit. ANSWER: c. marginal cost. 74. Which of the following markets impose deadweight losses on society? (i) perfect competition (ii) monopolistic competition (iii) monopoly a. (i) and (ii) b. (ii) and (iii) c. (i) and (iii) d. (i) only ANSWER: b. (ii) and (iii) 75. Which of the following goods are sold in a monopolistically competitive market? a. compact discs b. wheat c. corn d. postage stamps ANSWER: a. compact discs 76. Which of the following goods are not sold in monopolistically competitive markets? a. CDs b. books c. cookies d. wheat ANSWER: d. wheat 77. Monopolistically competitive markets differ from perfectly competitive markets because of (i) the number of sellers. (ii) barriers to entry. (iii) product differentiation among the sellers. a. (ii) only b. (iii) only c. (i) and (iii) d. (ii) and (iii) ANSWER: b. (iii) only 78. A firm in a monopolistically competitive market is similar to a monopoly in the sense that (i) they both face downward-sloping demand curves. (ii) they both charge a price that exceeds marginal cost. (iii) both markets are characterized by free entry and exit. a. (i) only b. (ii) only c. (i) and (ii) d. (i) and (iii) ANSWER: c. (i) and (ii) 79. A monopolistically competitive firm’s choice of output level is virtually identical to the choice made by a(n) a. perfectly competitive firm. b. duopolist. c. monopolist. d. oligopolist. ANSWER: c. monopolist. 80. New firms will necessarily enter a monopolistically competitive market when price exceeds a. marginal revenue. b. average revenue. c. marginal cost. d. average total cost. ANSWER: d. average total cost. 81. Which two curves are tangent to one another in a monopolistically competitive market with zero economic profit? a. demand and average variable cost b. demand and average total cost c. marginal revenue and average variable cost d. marginal revenue and average total cost ANSWER: b. demand and average total cost 82. A downward-sloping demand curve a. is a feature of all monopolistically competitive firms. b. means that the firm in question will never experience a zero profit. c. causes marginal revenue to exceed price. d. All of the above are correct. ANSWER: a. is a feature of all monopolistically competitive firms. 83. Excess capacity a. tells economists little about the desirability of a market outcome. b. is the primary source of market inefficiency in monopolistically competitive markets. c. is a characteristic of rising average-total-cost curves. d. is solely a characteristic of markup pricing. ANSWER: a. tells economists little about the desirability of a market outcome. 84. In a monopolistically competitive market, a. there are only a few sellers. b. each firm takes the price of its product as given. c. firms can enter or exit the market without restriction. d. each firm produces a product that is essentially identical to the products of other firms in the market. ANSWER: c. firms can enter or exit the market without restriction. 85. A monopolistically competitive market a. has some features of monopoly and some features of competition. b. has one large, dominant firm and many other smaller firms. c. is very difficult to enter. d. All of the above are correct. ANSWER: a. has some features of monopoly and some features of competition. 86. In both perfect competition and monopolistic competition, a. each firm is, in many ways, like a monopoly. b. each firm sells a product that is at least slightly different from those of other firms. c. each firm faces a downward-sloping demand curve. d. there are many sellers. ANSWER: d. there are many sellers. 87. Examples of monopolistically competitive markets include the markets for a. restaurants and furniture. b. books and movies. c. cookies and restaurants. d. All of the above are correct. ANSWER: d. All of the above are correct. 88. Examples of monopolistically competitive markets do not include the market for a. piano lessons. b. soybeans. c. cookies. d. voice lessons. ANSWER: b. soybeans. 89. For existing firms in a monopolistically competitive market, a. strategic interactions among the firms are very important. b. the threat of entry by new firms is not an important consideration. c. the attainment of a Nash equilibrium is an important objective. d. None of the above are correct. ANSWER: d. None of the above are correct. 90. Each firm in a monopolistically competitive firm faces a downward-sloping demand curve because a. there are many other sellers in the market. b. there are very few other sellers in the market. c. that firm’s product is different from those offered by other firms in the market. d. that firm faces the threat of entry into the market by new firms. ANSWER: c. that firm’s product is different from those offered by other firms in the market. 91. Both monopolistic competition and oligopoly are market structures a. that lie between the extreme cases of competition and monopoly. b. that feature only a few firms in each market. c. to which the concept of Nash equilibrium is frequently applied by economists. d. All of the above are correct. ANSWER: a. that lie between the extreme cases of competition and monopoly. 92. When a market is monopolistically competitive, the typical firm in the market is likely to experience a a. positive profit in the short run and in the long run. b. positive or negative profit in the short run and a zero profit in the long run. c. zero profit in the short run and a positive or negative profit in the long run. d. zero profit in the short run and in the long run. ANSWER: b. positive or negative profit in the short run and a zero profit in the long run. 93. Among the following situations, the one that is least likely to apply to a monopolistically competitive firm is that in which a. profit is positive in the short run. b. total cost exceeds total revenue in the short run. c. profit is positive in the long run. d. total revenue equals total cost in the long run. ANSWER: c. profit is positive in the long run. 94. To maximize its profit, a monopolistically competitive firm a. takes the price as given and it chooses its quantity, just as a competitive firm does. b. takes the price as given and chooses its quantity, just as a colluding oligopolist does. c. chooses its quantity and price, just as a competitive firm does. d. chooses its quantity and price, just as a monopoly does. ANSWER: d. chooses its quantity and price, just as a monopoly does. 95. To maximize its profit, a monopolistically competitive firm chooses its level of output by looking for the a. intersection of the demand curve and the marginal cost curve. b. intersection of the marginal revenue curve and the marginal cost curve. c. level of output at which marginal revenue equals zero. d. level of output at which average total cost is minimized. ANSWER: b. intersection of the marginal revenue curve and the marginal cost curve. 96. When we compare diagrams for firms in different market structures, we see that a. for competitive firms and monopolistically competitive firms, the revenue curves are similar but the cost curves are quite different. b. for competitive firms and monopolistically competitive firms, the cost curves are similar but the revenue curves are quite different. c. for monopoly firms and monopolistically competitive firms, the revenue curves are similar but the cost curves are quite different. d. for monopoly firms and monopolistically competitive firms, the cost curves are similar but the revenue curves are quite different. ANSWER: b. for competitive firms and monopolistically competitive firms, the cost curves are similar but the revenue curves are quite different. 97. For a monopolistically competitive firm, a. marginal revenue and price are the same quantity. b. average revenue and price are the same quantity. c. at the profit-maximizing quantity of output, price equals marginal cost. d. at the profit-maximizing quantity of output, marginal revenue exceeds price. ANSWER: b. average revenue and price are the same quantity. 98. For a monopolistically competitive firm, at the profit-maximizing quantity of output, a. price exceeds marginal revenue. b. marginal revenue exceeds marginal cost. c. marginal cost exceeds average revenue. d. All of the above are correct. ANSWER: a. price exceeds marginal revenue. 99. Ignoring oligopoly and focusing on the other three types of market structure, in which of those market structures does a profitmaximizing firm charge a price that exceeds marginal cost? a. monopoly only b. monopoly and monopolistic competition only c. monopoly, monopolistic competition, and perfect competition d. It depends on whether we are in the short run or the long run. ANSWER: b. monopoly and monopolistic competition only 100. Ignoring oligopoly and focusing on the other three types of market structure, in which of those market structures does a profitmaximizing firm experience a zero economic profit? a. perfect competition only b. perfect competition and monopolistic competition only c. perfect competition, monopolistic competition, and monopoly d. It depends on whether we are in the short run or the long run. ANSWER: d. It depends on whether we are in the short run or the long run.