Monopolistic Competition Part 3 (101-155)

101. An important difference between the situation faced by a profit-maximizing monopolistically competitive firm in the short run and the situation faced by that same firm in the long run is that in the short run, a. price may exceed marginal revenue; in the long run, price equals marginal revenue. b. price may exceed marginal cost; in the long run, price equals marginal cost. c. price may exceed average total cost; in the long run, price equals average total cost. d. there are many firms in the market; in the long run, there are only a few firms in the market. ANSWER: c. price may exceed average total cost; in the long run, price equals average total cost. 102. Suppose that monopolistically competitive firms in a certain market are earning positive profits. In the transition from this initial situation to a long-run equilibrium, a. the number of firms in the market decreases. b. each incumbent firm experiences a decrease in demand for its product. c. each incumbent firm experiences a rightward shift of its marginal revenue curve. d. All of the above are correct. ANSWER: b. each incumbent firm experiences a decrease in demand for its product. 103. Suppose that monopolistically competitive firms in a certain market are experiencing losses. In the transition from this initial situation to a long-run equilibrium, a. the number of firms in the market decreases. b. each incumbent firm experiences a decrease in demand for its product. c. each firm experiences upward shifts of its marginal-cost and average-total-cost curves. d. All of the above are correct. ANSWER: a. the number of firms in the market decreases. 104. When a monopolistically competitive firm is in long-run equilibrium, a. marginal revenue is equal to marginal cost. b. marginal revenue is equal to average total cost. c. marginal revenue is equal to price. d. price is equal to marginal cost. ANSWER: a. marginal revenue is equal to marginal cost. 105. When a monopolistically competitive firm is in long-run equilibrium, a. price is equal to average total cost. b. price exceeds marginal cost. c. price exceeds marginal revenue. d. All of the above are correct. ANSWER: d. All of the above are correct. 106. Which of these types of firms can earn a positive economic profit in the long run? a. monopolies, but not competitive firms or monopolistically competitive firms b. monopolies and monopolistically competitive firms, but not competitive firms c. monopolies, monopolistically competitive firms, and monopolies d. None of the above are correct. ANSWER: a. monopolies, but not competitive firms or monopolistically competitive firms 107. “In a long-run equilibrium, price is equal to average total cost.” This statement applies to a. competitive markets, but not to monopolistically competitive markets or monopolies. b. competitive and monopolistically competitive markets, but not to monopolies. c. competitive and monopolistically competitive markets and to monopolies. d. None of the above are correct. ANSWER: b. competitive and monopolistically competitive markets, but not to monopolies. 108. For a profit-maximizing monopolistically competitive firm, price exceeds marginal cost a. in the short run but not in the long run. b. in the long run but not in the short run. c. in both the short run and the long run. d. in neither the short run nor the long run. ANSWER: c. in both the short run and the long run. 109. Entry and exit drive each firm in a monopolistically competitive market to a point of tangency between its a. marginal revenue curve and its total-cost curve b. marginal revenue curve and its average-total-cost curve. c. demand curve and its total-cost curve. d. demand curve and its average-total-cost curve. ANSWER: d. demand curve and its average-total-cost curve. 110. The point of tangency which characterizes long-run equilibrium for a monopolistically competitive firm always occurs at a certain level of output; call that level of output Q1. Then Q1 a. exceeds the level of output at which marginal revenue equals marginal cost. b. exceeds the level of output at which marginal cost equals average total cost. c. falls short of the level of output at which marginal revenue equals zero. d. All of the above are correct. ANSWER: c. falls short of the level of output at which marginal revenue equals zero. 111. For any firm, average total cost is minimized at a certain level of output; call that level of output Q1. For a monopolistically competitive firm in long-run equilibrium, Q1 a. is also the level of output at which marginal cost equals average total cost. b. exceeds the level of output at which there is a point of tangency between the demand curve and the average-total-cost curve. c. exceeds the level of output at which marginal revenue equals marginal cost. d. All of the above are correct. ANSWER: d. All of the above are correct. 112. In a situation of long-run equilibrium, a. a perfectly competitive firm operates at its efficient scale. b. a monopolistically competitive firm operates at its efficient scale. c. neither a competitive firm nor a monopolistically competitive firm charges a markup over marginal cost. d. All of the above are correct. ANSWER: a. a perfectly competitive firm operates at its efficient scale. 113. In a situation of long-run equilibrium, the term a. “excess capacity” applies to monopolistically competitive firms, but not to competitive firms. b. “zero economic profit” applies to competitive firms, but not to monopolistically competitive firms. c. “markup over marginal cost” applies to both monopolistically competitive and competitive firms. d. All of the above are correct. ANSWER: a. “excess capacity” applies to monopolistically competitive firms, but not to competitive firms. 114. Firm A is a perfectly competitive firm. Firm B is a monopolistically competitive firm. Both firms are currently maximizing their respective profits. Which of the following statements is correct? a. Both Firm A and Firm B would be eager to make an additional sale. b. Firm A would be eager to make an additional sale, but Firm B would not care whether it made an additional sale or not. c. Firm B would be eager to make an additional sale, but Firm A would not care whether it made an additional sale or not. d. Neither Firm A nor Firm B would care whether they made an additional sale or not. ANSWER: c. Firm B would be eager to make an additional sale, but Firm A would not care whether it made an additional sale or not. 115. In a monopolistically competitive market, a. the entry of new firms creates externalities. b. the absence of restrictions on entry by new firms ensures that there will be no deadweight loss. c. there are always too many firms in the market relative to the socially-optimal number of firms. d. None of the above are correct. ANSWER: a. the entry of new firms creates externalities. 116. Entry by new firms into a monopolistically competitive market a. creates new consumer surplus. b. imposes a positive externality on existing firms. c. leads to the same externalities that are observed when new firms enter a perfectly competitive market. d. All of the above are correct. ANSWER: a. creates new consumer surplus. 117. A monopolistically competitive firm faces the following demand curve for its product: Price ($) Quantity 10 2 9 4 8 6 7 9 6 10 5 12 4 14 3 16 2 18 The firm has total fixed costs of $20 and a constant marginal cost of $2 per unit. The firm will a. produce nine units; firms will enter the market in the long run. b. produce 10 units; firms will enter the market in the long run. c. produce 12 units; firms will enter the market in the long run. d. produce 10 units; firms will exit the market in the long run. ANSWER: a. produce nine units; firms will enter the market in the long run. 1 20 118. A monopolistically competitive firm faces the following demand curve for its product: Price ($) Quantity 10 2 9 4 8 6 7 8 6 10 5 12 4 14 3 16 2 18 1 20 The firm has total fixed costs of $20 and a constant marginal cost of $5 per unit. The firm will a. produce two units; firms will exit the market in the long run. b. produce four units; firms will exit the market in the long run. c. produce six units; firms will exit the market in the long run. d. produce eight units; firms will enter the market in the long run. ANSWER: c. produce 6 units; firms will exit the market in the long run. 119. A monopolistically competitive firm faces the following demand curve for its product: Price ($) Quantity 10 2 9 4 8 6 7 8 6 10 5 12 4 14 3 16 2 18 1 20 The firm has total fixed costs of $40 and a constant marginal cost of $2 per unit. We can conclude that a. firms will exit this market. b. firms will enter this market. c. this market is in long-run equilibrium. d. this firm is operating at efficient scale. ANSWER: c. this market is in long-run equilibrium. 120. A firm has the following cost structure: Output Total Cost($) 1 30 2 32 3 36 4 42 5 50 6 63 7 77 If this firm is in a typical monopolistically competitive market, it will likely produce a. four or fewer units of output. b. five units of output. c. more than five units of output. d. None of the above are correct; there is not enough information to tell. ANSWER: a. 4 or fewer units of output. 121. A firm has the following cost structure: Output Total Cost($) 1 30 2 32 3 36 4 42 5 50 6 63 7 77 If this firm is in a typical perfectly competitive market, in the long run it will likely produce a. 4 or fewer units of output. b. 5 units of output. c. more than 5 units of output. d. there is not enough information to tell. ANSWER: b. 5 units of output. 122. A monopolistically competitive firm has the following cost structure: Output Total Cost($) 1 30 2 32 3 36 4 42 5 50 6 63 7 77 15 3 12 4 9 5 7 6 4 7 The firm faces the following demand curve: Price ($) Quantity 20 1 18 2 To maximize profit (or minimize losses), the firm will produce a. 2 units. b. 3 units. c. 4 units. d. 5 units. ANSWER: b. 3 units. 123. A monopolistically competitive firm has the following cost structure: Output Total Cost($) 1 30 2 32 3 36 4 42 5 50 6 63 7 77 15 3 12 4 9 5 7 6 4 7 The firm faces the following demand curve: Price ($) Quantity 20 1 18 2 If the government forces this firm to produce at its efficient scale, it will a. produce 3 units and make $9. b. produce 4 units and make $6 c. produce 5 units and lose $5. d. produce 7 units and lose $49. ANSWER: c. produce 5 units and lose $5. 124. A monopolistically competitive firm is currently making a profit. If other firms enter the market, we would expect that the added competition will cause this firm to adjust its a. output so that it will operate closer to its efficient scale. b. output so that it will operate further from its efficient scale. c. output so that it will no longer be at its efficient scale. d. output, but it might move either closer to or further from its efficient scale. ANSWER: b. output so that it will operate further from its efficient scale. 125. Senator Hubris wants to pass a law that would require all monopolistically competitive firms to operate at their efficient scale. If this law were to pass and be enforced, we would expect that monopolistically competitive firms would a. see their profits increase. b. break even. c. lose money. d. not really be affected by the law. ANSWER: c. lose money. 126. When firms sell highly differentiated consumer goods it is likely that one significant cost to all firms is a. advertising. b. fixed costs. c. intermediate materials. d. taxes and regulation. ANSWER: a. advertising. 127. When advertising is deceptive, critics claim that it a. increases competition in the market. b. makes buyers less sensitive to price differences among similar products. c. lowers the quality of goods in the market. d. alters a firm's supply curve. ANSWER: b. makes buyers less sensitive to price differences among similar products. 128. Critics claim that when advertising decreases the elasticity of demand, firms are able to a. become more competitive. b. increase their advertising budget. c. lower their advertising budget. d. charge a larger mark-up over marginal cost. ANSWER: d. charge a larger mark-up over marginal cost. 129. When advertising is used to strengthen brand loyalty, a. demand for the product becomes less elastic. b. demand for related products is typically unaffected. c. consumers become more sensitive to price differences among similar goods. d. firms should lower price to increase revenue. ANSWER: a. demand for the product becomes less elastic. 130. Advocates for advertising argue that the efficiency of markets is enhanced when advertising a. focuses on issues other than the prices of products. b. is psychological rather than informational. c. decreases the elasticity of demand for a product. d. provides information that is useful to consumers. ANSWER: d. provides information that is useful to consumers. 131. Advertising that conveys information about the existence of new products a. usually confuses consumers about market competition. b. enhances the ability of markets to allocate resources efficiently. c. reveals information that is of little value to consumers. d. increases elasticity of demand. ANSWER: b. enhances the ability of markets to allocate resources efficiently. 132. When advertising enhances the ability of markets to allocate resources, it is most likely to be a. conveying information about price, the existence of new products or locations of retail outlets. b. addressing psychological rather than informational characteristics of the good. c. manipulating people's tastes. d. increasing elasticity of supply. ANSWER: a. conveying information about price, the existence of new products or locations of retail outlets. 133. When advertising encourages customers to become more informed about all firms in the market, a. the demand for each particular brand in the market is likely to become less elastic. b. firms are able to foster stronger brand loyalty. c. each firm is likely to have less control over the price of its product. d. the market power of individual firms is strengthened. ANSWER: c. each firm is likely to have less control over the price of its product. 134. Advertising in markets for professional services (lawyers, doctors, etc.) has a. decreased in recent years and competition in these markets has been enhanced. b. decreased in recent years and competition in these markets has been reduced. c. increased in recent years and competition in these markets has been enhanced. d. increased in recent years and competition in these markets has been reduced. ANSWER: c. increased in recent years and competition in these markets has been enhanced. 135. Professional organizations and producer groups have an incentive to a. restrict advertising in order to enhance competition on the basis of price. b. restrict advertising in order to reduce competition on the basis of price. c. encourage advertising in order to reduce competition on the basis of price. d. encourage advertising in order to enhance competition on the basis of price. ANSWER: b. restrict advertising in order to reduce competition on the basis of price. 136. When firms in a monopolistically competitive market engage in price-related advertising, defenders of advertising argue that a. the quality of products sold in the market always increases. b. customers are less likely to be informed about other characteristics of the product. c. new firms are discouraged from entering the market. d. each firm has less market power. ANSWER: d. each firm has less market power. 137. Critics of advertising argue that in some markets advertising may a. attract products of lower quality into the market. b. attract less informed buyers into the market. c. decrease elasticity of demand. d. enhance competition in markets to an unnecessary degree. ANSWER: c. decrease elasticity of demand. 138. In the study done by Lee Benham on advertising for eyeglasses, a. advertising increased the average price. b. advertising decreased the average price. c. there was no difference in price, but quality was better in the states that didn't allow advertising. d. advertising appeared to have no effect whatsoever in the states that permitted advertising. ANSWER: b. advertising decreased the average price. 139. Results of the study done by Lee Benham on advertising for eyeglasses would suggest that a. brand loyalty and market power in the eyeglass market was likely to be more pervasive in states that allowed advertising. b. eyeglass sales were more profitable in states that allowed advertising. c. optometrists would not be supportive of advertising restrictions. d. optometrists would enthusiastically endorse advertising restrictions. ANSWER: d. optometrists would enthusiastically endorse advertising restrictions. 140. Advertising that uses celebrity endorsements is most likely intended to a. increase elasticity of demand for the advertised product. b. reduce the ability of markets to allocate resources efficiently. c. provide a signal of product quality. d. be useful only for psychological effects. ANSWER: c. provide a signal of product quality. 141. Firms that spend a large amount of money on advertising a particular product are likely to be providing consumers with a. information about the availability of the product. b. information about product price. c. a signal of product quality. d. a good example of wasted resources. ANSWER: c. a signal of product quality. 142. Defenders of advertising argue that it is not rational for profit-maximizing firms to spend money on advertising for products that have a. superior quality. b. inferior or mediocre quality. c. low prices. d. limited availability. ANSWER: b. inferior or mediocre quality. 143. One theory of advertising suggests that a. information on price is always a necessary ingredient of effective advertising. b. the content of advertising may be irrelevant to product success in the market. c. celebrity advertising is not effective in retail food markets. d. Post and Kellogg should not advertise new cereals. ANSWER: b. the content of advertising may be irrelevant to product success in the market. 144. Advertisements that appear to convey no information at all a. are usually associated with "infomercials." b. are mostly useless to consumers, but valuable to firms. c. are mostly useless to firms, but valuable to consumers for their entertainment quality alone. d. may convey information to consumers by providing them with a signal that firms are willing to spend significant amounts of money to advertise. ANSWER: d. may convey information to consumers by providing them with a signal that firms are willing to spend significant amounts of money to advertise. 145. Critics of markets that are characterized by firms that sell "brand" name products argue that brand names encourage consumers to pay more for branded products that a. have elastic demand curves. b. are very different from generic products. c. are indistinguishable from generic products. d. consumer-advocate groups have found to be inferior. ANSWER: c. are indistinguishable from generic products. 146. Edward Chamberlin argued that brand names a. hampered market efficiency. b. were instrumental in enhancing market efficiency. c. were useful in enhancing market efficiency when the government enforced the use of exclusive trademarks. d. were likely to be more socially efficient when used in conjunction with advertising. ANSWER: a. hampered market efficiency. 147. The debate over the efficiency of markets in which products with brand names are sold a. is framed by the role of regulation in advertising. b. is likely to be resolved by reference to anecdotal evidence. c. hinges on whether consumers are rational in their choices. d. hinges on the effectiveness of advertising which identifies price differences. ANSWER: c. hinges on whether consumers are rational in their choices. 148. A recent outbreak of hepatitis was linked to a national fast-food restaurant chain. This is an example of a case in which a. brand name identity increases the effectiveness of markets. b. brand name identity can be detrimental to the profitability of a firm. c. advertising is ineffective in salvaging perceptions of product quality. d. advertising cannot be used to establish brand loyalty. ANSWER: b. brand name identity can be detrimental to the profitability of a firm. 149. Critics of vacation advertisements that depict "beautiful" human bodies on sun-drenched beaches as the primary focus of the message are likely to claim that the purpose of the advertisement is to a. provide helpful information about a tourist destination. b. manipulate people's tastes through psychological messages. c. inflame carnal desire. d. encourage sun-bathing in general. ANSWER: b. manipulate people's tastes through psychological messages. 150. If advertising reduces a consumer's price sensitivity between identical goods, it is likely to a. increase the elasticity of demand for differentiated products. b. enhance competition, and encourage more product diversity. c. impede competition and reduce social well-being. d. encourage the consumption of all homogenous goods. ANSWER: c. impede competition and reduce social well-being. 151. If a firm in a monopolistically competitive market successfully uses advertising to decrease elasticity of demand for its product, a. the firm will be able to increase its markup over marginal cost. b. the firm will eventually have to lower price to remain competitive. c. it will increase the well-being of society. d. it will reduce average total cost. ANSWER: a. the firm will be able to increase its markup over marginal cost. 152. The primary claim of defenders of advertising is that it a. conveys information about firm profitability. b. is psychological rather than informational. c. enhances the information available to consumers. d. All of the above are correct. ANSWER: c. enhances the information available to consumers. 153. Evidence suggests that, in markets with differentiated products but without a lot of advertising, a. consumers are not confused by conflicting signals. b. in general, firms are less profitable. c. markets are less efficient. d. consumers make better choices. ANSWER: c. markets are less efficient. 154. Evidence suggests that, in markets with differentiated products and with a lot of advertising, (i) consumers make better choices. (ii) markets are less efficient. (iii) in general, firms are less profitable. a. (i) only b. (iii) only c. (ii) and (iii) only d. All of the above are true. ANSWER: a. (i) only 155. In markets where restrictions on advertising have been used to curtail competition, the U.S. courts have generally a. referred the matters of advertising restrictions to executive regulators. b. enforced industry-wide agreements to restrict advertising. c. been silent on the effect of explicit advertising restrictions. d. overturned laws that prohibit advertising. ANSWER: d. overturned laws that prohibit advertising.