Question 1

What is the difference between zero accounting profit and zero economic profit?

Accepted Answer

Economic profits take into account opportunity costs. Accounting profits do not. So, economic profits will typically be smaller than accounting profits. If a firm has zero accounting profits, it will be making an economic loss, while a firm with zero economic profits will have positive accounting profits.

Question 2

Table 13-5
   Table 13-5 shows the demand and cost data facing a monopolistically competitive producer of canvas bags.
-Refer to Table 13-5. What are the firm's profit-maximizing or loss-minimizing price and quantity?

Accepted Answer

A)  price = $10; quantity = 5. 
B)  price = $12; quantity = 4. 
C)  The firm should shut down temporarily. 
D)  This cannot be determined from the information given. 
A)  price = $10; quantity = 5. 
B)  price = $12; quantity = 4. 
C)  The firm should shut down temporarily. 
D)  This cannot be determined from the information given. B

Question 3

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

Accepted Answer

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. 
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. B

Question 4

Which of the following statements is true?

Accepted Answer

A)  The marginal revenue of a monopolistically competitive firm will be positive at high prices and negative at low prices. 
B)  Because the demand curve for a monopolistically competitive firm is downward-sloping its marginal revenue will be negative. 
C)  The marginal revenue of a monopolistically competitive firm will be always be positive. 
D)  The marginal revenue of a monopolistically competitive firm will be positive at low prices and negative at high prices. 
A)  The marginal revenue of a monopolistically competitive firm will be positive at high prices and negative at low prices. 
B)  Because the demand curve for a monopolistically competitive firm is downward-sloping its marginal revenue will be negative. 
C)  The marginal revenue of a monopolistically competitive firm will be always be positive. 
D)  The marginal revenue of a monopolistically competitive firm will be positive at low prices and negative at high prices.

Question 5

A firm cannot control all of the factors that allow it to make economic profits. Which of the following is an example of an uncontrollable factor?

Accepted Answer

A)  product differentiation 
B)  input prices 
C)  producing at a lower average total cost than competing firms 
D)  hiring competent managers 
A)  product differentiation 
B)  input prices 
C)  producing at a lower average total cost than competing firms 
D)  hiring competent managers

Question 6

The table below shows the demand and cost data facing "Velvet Touches," a monopolistically competitive producer of velvet throw pillows.
   Use the data to answer the following questions.
a. Complete the Total Revenue (TR), Marginal Revenue (MR), and Marginal Cost (MC) columns above.
b. What are the profit-maximizing price and quantity for Velvet Touches?
c. Is the firm making a profit or a loss? How much is the profit or loss? Show your work.
d. Is this firm operating in the long run or in the short run? Explain your answer.
e. If the firm's profit or loss is typical of all firms in the market for throw pillows, what is likely to happen in the future? Will there be more firms or will some existing firms leave the industry? Explain your answer.
f. What will happen to the typical firm's profit or loss after all entry/exit adjustments?

Accepted Answer

a.
 @#IMG-DLM& b. Q = 5; P = $22
c. Profit = $(110

Question 7

A profit-maximizing monopolistically competitive firm produces and sells an allocatively efficient quantity of output.

Accepted Answer

A) True 
 B)False

Question 8

Figure 13-5  
-Refer to Figure 13-5. The candy store represented in the diagram is currently selling Qa units of candy at a price of Pa. Is this candy store maximizing its profit and if it is not, what would you recommend to the firm?

Accepted Answer

A)  Yes, it is maximizing its profit by charging the highest price possible. 
B)  No, it is not; since its marginal cost is constant, it should produce and sell as much candy as it can. It should sell Qd units at a price of Pd. 
C)  No, it is not; it should lower its price to Pc and sell Qc units. 
D)  No, it is not; it should lower its price to Pb and sell Qb units. 
A)  Yes, it is maximizing its profit by charging the highest price possible. 
B)  No, it is not; since its marginal cost is constant, it should produce and sell as much candy as it can. It should sell Qd units at a price of Pd. 
C)  No, it is not; it should lower its price to Pc and sell Qc units. 
D)  No, it is not; it should lower its price to Pb and sell Qb units.

Question 9

A monopolistically competitive firm that is earning profits will, in the long run, experience all of the following except

Accepted Answer

A)  new rivals entering the market. 
B)  a decrease in demand for its product. 
C)  demand for the firm's product becomes more elastic. 
D)  a decrease in the number of rival products. 
A)  new rivals entering the market. 
B)  a decrease in demand for its product. 
C)  demand for the firm's product becomes more elastic. 
D)  a decrease in the number of rival products.

Question 10

Figure 13-11  
-Refer to Figure 13-11. What is the allocatively efficient output for the firm represented in the diagram?

Accepted Answer

A)  Q1 units 
B)  Q2 units 
C)  Q3 units 
D)  Q4 units 
A)  Q1 units 
B)  Q2 units 
C)  Q3 units 
D)  Q4 units

Question 11

A monopolistically competitive firm maximizes profit where

Accepted Answer

A)  price = marginal revenue. 
B)  price > marginal cost. 
C)  marginal revenue > average revenue. 
D)  total revenue > marginal cost. 
A)  price = marginal revenue. 
B)  price > marginal cost. 
C)  marginal revenue > average revenue. 
D)  total revenue > marginal cost.

Question 12

If the marginal revenue is negative then the revenue lost from receiving a lower price on all the units that could have been sold at the original price is smaller than the additional revenue from selling one more unit of the good.

Accepted Answer

A) True 
 B)False

Question 13

For productive efficiency to hold

Accepted Answer

A)  price must equal the marginal cost of the last unit produced. 
B)  price must equal marginal revenue of the last unit sold. 
C)  the average variable cost must be minimized in production. 
D)  the average total cost must be minimized in production. 
A)  price must equal the marginal cost of the last unit produced. 
B)  price must equal marginal revenue of the last unit sold. 
C)  the average variable cost must be minimized in production. 
D)  the average total cost must be minimized in production.

Question 14

Figure 13-6  
-Refer to Figure 13-6. Suppose the above graph represents the relationship between the average total cost of producing notebook computers and the quantity of notebook computers produced by Dell. On a graph, illustrate the demand, MR, MC, and ATC curves which would represent Dell maximizing profits at a quantity of 100,000 per month and identify the area on the graph which represents the profit.

Accepted Answer

The answer of Figure 13-6  
-Refer to Figure 13-6....

Question 15

Most economists believe that consumers would be better off if markets were perfectly competitive rather than monopolistically competitive.

Accepted Answer

A) True 
 B)False

Question 16

Monopolistically competitive firms face a perfectly elastic demand curve.

Accepted Answer

A) True 
 B)False

Question 17

Is a monopolistically competitive firm allocatively efficient?

Accepted Answer

A)  No, because it does not produce at minimum average total cost. 
B)  Yes, because it produces where marginal cost equals marginal revenue. 
C)  No, because price is greater than marginal cost. 
D)  Yes, because price equals average total cost. 
A)  No, because it does not produce at minimum average total cost. 
B)  Yes, because it produces where marginal cost equals marginal revenue. 
C)  No, because price is greater than marginal cost. 
D)  Yes, because price equals average total cost.

Question 18

Figure 13-11  
-Refer to Figure 13-11. The diagram depicts a firm

Accepted Answer

A)  in a constant-cost industry. 
B)  in an increasing-cost industry. 
C)  in long-run equilibrium. 
D)  that is making short-run losses. 
A)  in a constant-cost industry. 
B)  in an increasing-cost industry. 
C)  in long-run equilibrium. 
D)  that is making short-run losses.

Question 19

Figure 13-3  
-Refer to Figure 13-3. The marginal revenue from one additional unit sold is the sum of the gain in revenue from selling the additional unit and the loss in revenue from having to charge a lower price to sell the additional unit. Based on the diagram in the figure

Accepted Answer

A)  X represents the gain (price effect) and Y the loss (output effect). 
B)  X + Z represents the loss (output effect) and Y the gain (price effect). 
C)  Y represents the gain (output effect) and X the loss (price effect). 
D)  X represents the loss (price effect) and Y + Z the gain (output effect). 
A)  X represents the gain (price effect) and Y the loss (output effect). 
B)  X + Z represents the loss (output effect) and Y the gain (price effect). 
C)  Y represents the gain (output effect) and X the loss (price effect). 
D)  X represents the loss (price effect) and Y + Z the gain (output effect).

Question 20

In theory, in the long run, monopolistically competitive firms earns zero profits. However, in reality there are some ways by which a firm can avoid losing profits. Which of the following is one such way?

Accepted Answer

A)  gradually increase the mark-up on the goods produced 
B)  lower the price of its products to expand its market share 
C)  identify new markets and develop products precisely for those markets 
D)  find a market niche and keep it as narrow as possible so as to prevent other producers from entering this market segment 
A)  gradually increase the mark-up on the goods produced 
B)  lower the price of its products to expand its market share 
C)  identify new markets and develop products precisely for those markets 
D)  find a market niche and keep it as narrow as possible so as to prevent other producers from entering this market segment

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

What is the difference between zero accounting profit and zero economic profit?

Table 13-5 Table 13-5 shows the demand and cost data facing a monopolistically competitive producer of canvas bags. -Refer to Table 13-5. What are the firm's profit-maximizing or loss-minimizing price and quantity?

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

Which of the following statements is true?

A firm cannot control all of the factors that allow it to make economic profits. Which of the following is an example of an uncontrollable factor?

A profit-maximizing monopolistically competitive firm produces and sells an allocatively efficient quantity of output.

Figure 13-5 -Refer to Figure 13-5. The candy store represented in the diagram is currently selling Qa units of candy at a price of Pa. Is this candy store maximizing its profit and if it is not, what would you recommend to the firm?

A monopolistically competitive firm that is earning profits will, in the long run, experience all of the following except

Figure 13-11 -Refer to Figure 13-11. What is the allocatively efficient output for the firm represented in the diagram?

A monopolistically competitive firm maximizes profit where

If the marginal revenue is negative then the revenue lost from receiving a lower price on all the units that could have been sold at the original price is smaller than the additional revenue from selling one more unit of the good.

For productive efficiency to hold

Most economists believe that consumers would be better off if markets were perfectly competitive rather than monopolistically competitive.

Monopolistically competitive firms face a perfectly elastic demand curve.

Is a monopolistically competitive firm allocatively efficient?

Figure 13-11 -Refer to Figure 13-11. The diagram depicts a firm

Figure 13-3 -Refer to Figure 13-3. The marginal revenue from one additional unit sold is the sum of the gain in revenue from selling the additional unit and the loss in revenue from having to charge a lower price to sell the additional unit. Based on the diagram in the figure

In theory, in the long run, monopolistically competitive firms earns zero profits. However, in reality there are some ways by which a firm can avoid losing profits. Which of the following is one such way?

Economics: Foundations and Models

Trade-Offs, Comparative Advantage, and the Market System

Where Prices Come From: the Interaction of Demand and Supply

Economic Efficiency, Government Price Setting, and Taxes

Externalities, Environmental Policy, and Public Goods

Elasticity: the Responsiveness of Demand and Supply

The Economics of Health Care

Firms, the Stock Market, and Corporate Governance

Comparative Advantage and the Gains From International Trade

Consumer Choice and Behavioral Economics

Technology, Production, and Costs

Firms in Perfectly Competitive Markets

Oligopoly: Firms in Less Competitive Markets

Monopoly and Antitrust Policy

Pricing Strategy

The Markets for Labor and Other Factors of Production

Public Choice, Taxes, and the Distribution of Income

Gdp: Measuring Total Production and Income

Unemployment and Inflation

Economic Growth, the Financial System, and Business Cycles

Long-Run Economic Growth: Sources and Policies

Aggregate Expenditure and Output in the Short Run

Aggregate Demand and Aggregate Supply Analysis

Money, Banks, and the Federal Reserve System

Monetary Policy

Fiscal Policy

Inflation, Unemployment, and Federal Reserve Policy

Macroeconomics in an Open Economy

The International Financial System

Filters

Figure 13-5 -Refer to Figure 13-5. The candy store represented in the diagram is currently selling Q_a units of candy at a price of P_a. Is this candy store maximizing its profit and if it is not, what would you recommend to the firm?