Monopolistic Competition Part 1 (1-42)

Monopolistic Competition MULTIPLE CHOICE 1. Monopolistic competition is characterized by which of the following attributes? (i) free entry (ii) product differentiation (iii) many sellers a. (i) and (iii) only b. (i) and (ii) only c. (ii) and (iii) only d. (i), (ii), and (iii) ANSWER: d. (i), (ii), and (iii) 2. The phenomenon of product differentiation contrasts sharply with the phenomenon of a. homogeneous products. b. industrial products. c. monopolistic competition. d. product integration. ANSWER: a. homogeneous products. 3. In a monopolistically competitive industry, price is a. equal to marginal cost since each firm is a price taker. b. below marginal cost since each firm is a price taker. c. above marginal cost since each firm is a price setter. d. always a fraction of marginal cost since each firm is a price setter. ANSWER: c. above marginal cost since each firm is a price setter. 4. In which of the following market structures is the number of sellers less than “many?” (i) monopolistic competition (ii) monopoly (iii) oligopoly a. (i) and (ii) only b. (ii) and (iii) only c. (ii) only d. All of the above are correct. ANSWER: b. (ii) and (iii) only 5. Which of the following market structures features free entry and exit? (i) perfect competition (ii) monopolistic competition (iii) monopoly a. (i) only b. (i) and (ii) only c. (ii) and (iii) only d. All of the above are correct. ANSWER: b. (i) and (ii) only 6. Monopolistic competition differs from perfect competition because in monopolistically competitive markets a. there are barriers to entry. b. all firms can eventually earn economic profits. c. each of the sellers offers a somewhat different product. d. strategic interactions between firms is vitally important. ANSWER: c. each of the sellers offers a somewhat different product. 7. One way in which monopolistic competition differs from oligopoly is a. there are no barriers to entry in oligopolies. b. in oligopoly markets there are only a few sellers. c. all oligopoly firms eventually earn zero economic profits. d. strategic interactions between firms are rarely evident in oligopolies. ANSWER: b. in oligopoly markets there are only a few sellers. 8. A similarity between monopoly and monopolistic competition is that, in both market structures, a. strategic interactions among sellers are important. b. there are fewer than “many” sellers. c. sellers are price makers rather than price takers. d. product differentiation is important. ANSWER: c. sellers are price makers rather than price takers. 9. A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly competitive market because the firm in the monopolistically competitive market a. is characterized by market share maximization. b. has no barriers to entry. c. faces a downward-sloping demand curve for its product. d. faces a horizontal demand curve at the market clearing price. ANSWER: c. faces a downward-sloping demand curve for its product. 10. The profit-maximizing rule for a firm in a monopolistically competitive market is to select the quantity at which a. marginal revenue is equal to marginal cost. b. average total cost is equal to marginal revenue. c. average total cost is at its minimum value. d. average revenue exceeds average total cost. ANSWER: a. marginal revenue is equal to marginal cost. 11. A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following? a. Average revenue exceeds marginal revenue. b. Marginal revenue exceeds average revenue. c. Average revenue is equal to marginal revenue. d. Revenue is always maximized along with profit. ANSWER: a. Average revenue exceeds marginal revenue. Use the figures below to answer questions 12 through 14. 12. Which of the graphs would most likely represent a profit-maximizing firm in a monopolistically competitive market? a. panel a b. panel b c. panel c d. panel d ANSWER: a. panel a 13. If a firm in a monopolistically competitive market was producing the level of output depicted as Qd in panel d, it would a. not be maximizing its profit. b. be minimizing its losses. c. be losing market share to other firms in the market. d. be operating at excess capacity. ANSWER: a. not be maximizing its profit. 14. The firm depicted in panel b faces a horizontal demand curve. If panel b depicts a profit-maximizing firm, a. it could be operating in either a perfectly competitive market or in a monopolistically competitive market. b. it would not have excess capacity in its production as long as it is earning zero economic profit. c. it is able to choose the price at which it sells its product. d. All of the above are correct. ANSWER: b. it would not have excess capacity in its production as long as it is earning zero economic profit. 15. Product differentiation causes the seller of a good to face what type of demand curve? a. downward sloping b. upward sloping c. horizontal d. vertical ANSWER: a. downward sloping Use the figure below to answer questions 16 through 18. 16. Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is earning a positive profit? a. panel a b. panel b c. panel c d. panel d ANSWER: c. panel c 17. Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is doing its best but still losing money? a. panel a b. panel b c. panel c d. panel d ANSWER: b. panel b 18. Which of the graphs depicts a monopolistically competitive firm in long-run equilibrium? a. panel a b. panel b c. panel c d. None of the above are correct. ANSWER: d. None of the above are correct. 19. In the short run, a firm in a monopolistically competitive market operates much like a(n) a. perfectly competitive firm. b. oligopoly firm. c. monopoly. d. All of the above are correct. ANSWER: c. monopoly. 20. A monopolistically competitive firm chooses a. the quantity of output to produce, but the market determines price. b. the price, but competition in the market determines the quantity. c. price, but output is determined by a cartel production quota. d. the quantity of output to produce and the price at which it will sell its output. ANSWER: d. the quantity of output to produce and the price at which it will sell its output. 21. If firms in a monopolistically competitive market are earning positive profits, a. firms will likely be subject to regulation. b. barriers to entry will be strengthened. c. some firms must exit the market. d. new firms will enter the market. ANSWER: d. new firms will enter the market. 22. If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios would best reflect the change facing incumbent firms as the market adjusts to its new equilibrium? a. an increase in demand b. a decrease in demand c. a downward shift in their marginal cost curve d. an upward shift in their marginal cost curve ANSWER: b. a decrease in demand 23. If firms in a monopolistically competitive market are incurring economic losses, which of the following scenarios would best reflect the change facing incumbent firms (who are able to stay in the market) as the market adjusts to its new equilibrium? a. a downward shift in their marginal cost curve b. an upward shift in their marginal cost curve c. a decrease in demand d. an increase in demand ANSWER: d. an increase in demand Lines in the figures below reflect the potential effect of entry and exit in a monopolistically competitive market on the demand and/or marginal cost curves of incumbent firms. Use these figures to answer questions 24 and 25. 24. Panel d in the set of figures shown depicts the effect on incumbent firms of a. long-run economic losses. b. a decrease in the diversity of products offered in the market. c. new entrants in the market. d. existing firms exiting the market. ANSWER: c. new entrants in the market. 25. Which of the diagrams depicts the effect on incumbent firms of some existing firms leaving the market? a. panel a b. panel b c. panel c d. panel d ANSWER: c. panel c 26. In monopolistically competitive markets, economic profits a. signal some incumbent firms to exit the market. b. signal new firms to enter the market. c. are maintained through government-imposed barriers to entry. d. are never possible. ANSWER: b. signal new firms to enter the market. 27. In monopolistically competitive markets, economic losses a. signal some incumbent firms to exit the market. b. signal new firms to enter the market. c. are maintained through government-imposed barriers to exit. d. are never possible. ANSWER: a. signal some incumbent firms to exit the market. 28. As new firms enter a monopolistically competitive market, profits of existing firms a. rise and product diversity in the market increases. b. rise and product diversity in the market decreases. c. decline and product diversity in the market increases. d. decline and product diversity in the market decreases. ANSWER: c. decline and product diversity in the market increases. 29. As some incumbent firms exit a monopolistically competitive market, profits of existing firms a. decline and product diversity in the market decreases. b. decline and product diversity in the market increases. c. rise and product diversity in the market decreases. d. rise and product diversity in the market increases. ANSWER: c. rise and product diversity in the market decreases. 30. The free entry and exit of firms in a monopolistically competitive market guarantees that a. both economic profits and economic losses can persist into the long run. b. both economic profits and economic losses disappear in the long run. c. economic profits can persist into the long run, but not economic losses. d. economic losses can persist into the long run, but not economic profits. ANSWER: b. both economic profits and economic losses disappear in the long run. 31. In monopolistically competitive markets, the property of free entry and exit suggests that a. the market structure will eventually be characterized by perfect competition in the long run. b. all firms earn zero economic profits in the long run. c. some firms will be able to earn economic profits in the long run. d. some firms will be forced to incur economic losses in the long run. ANSWER: b. all firms earn zero economic profits in the long run. 32. When a profit-maximizing firm in a monopolistically competitive market is producing the long-run equilibrium quantity, a. its average revenue will equal its marginal cost. b. its marginal revenue will exceed its marginal cost. c. it will be earning positive economic profits. d. its demand curve will be tangent to its average-total-cost curve. ANSWER: d. its demand curve will be tangent to its average-total-cost curve. 33. When a firm's demand (average revenue) curve is tangent to its average-total-cost curve, the a. firm’s economic profit is zero. b. firm must be earning economic profits. c. firm must be incurring economic losses. d. firm must be operating in a monopolistically competitive market. ANSWER: a. firm’s economic profit is zero. Use the figures below to answer questions 34 through 37 34. Panel (a) shows a profit-maximizing monopolistically competitive firm that is a. earning a zero profit. b. in long-run equilibrium. c. charging a price that is equal to average total cost. d. All of the above are correct. ANSWER: d. All of the above are correct. 35. Which of the panels shown could characterize short-run equilibrium for a firm in a monopolistically competitive market? a. panel a b. panel b c. panel c d. All of the above are correct. ANSWER: d. All of the above are correct. 36. Panel b in the set of figures shown is consistent with a firm in a monopolistically competitive market that is a. in short-run equilibrium, but not long-run equilibrium. b. in long-run equilibrium, but not short-run equilibrium. c. in both short-run and long-run equilibrium. d. earning a positive profit. ANSWER: a. in short-run equilibrium, but not long-run equilibrium. 37. Which of the panels depicts a firm in a monopolistically competitive market earning economic profits? a. panel c b. panel d c. both panels c and d d. None of the above are correct. ANSWER: a. panel c 38. When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium, a. the demand curve will be perfectly elastic. b. price exceeds marginal cost. c. marginal cost is falling. d. marginal revenue exceeds marginal cost. ANSWER: b. price exceeds marginal cost. A profit-maximizing firm in a monopolistically competitive market always operates at the point of a. minimum average total cost. b. unitary elasticity of demand. c. efficient scale. d. None of the above are correct. ANSWER: d. None of the above are correct. 39. 40. Since a firm in a monopolistically competitive market faces a a. downward-sloping demand curve, it will always operate with excess capacity. b. downward-sloping demand curve, it will always operate at efficient scale. c. perfectly elastic demand curve, it will always operate with excess capacity. d. perfectly inelastic demand curve, it will always operate at efficient scale. ANSWER: a. downward-sloping demand curve, it will always operate with excess capacity. 41. When a firm operates with excess capacity, a. additional production would lower the average total cost. b. additional production would increase average total cost. c. it must be a perfectly competitive firm. d. it must be a monopolistically competitive firm. ANSWER: a. additional production would lower the average total cost. When a firm operates at efficient scale, a. its average revenue must exceed the minimum of average total cost. b. its average revenue must be equal to the minimum of average total cost. c. the average-total-cost curve must be falling. d. the average-total-cost curve must be rising. ANSWER: b. its average revenue must be equal to the minimum of average total cost. 42.