Deck 16: Monopolistic Competition

Question 1

In monopolistic competition, each firm supplies a small part of the market. This occurs because

A) firms produce differentiated products.
B) there are barriers to entry.
C) there are a large number of buyers.
D) there are a large number of firms.
E) there are no barriers to exit.

Answer 1

there are a large number of firms.

Question 2

A firm in monopolistic competition ________ influence its price and ________ influence the market average price.

A) can; cannot
B) can; only in the short run can
C) can; can
D) cannot; cannot
E) cannot; can

Answer 2

can; cannot

Question 3

If the four-firm concentration ratio equals 0.1 per cent for the Mexican tomato industry, then this industry is best characterised as

A) perfect competition.
B) either a monopoly or monopolistic competition.
C) a monopoly.
D) an oligopoly.
E) monopolistic competition.

Answer 3

perfect competition.

Question 4

If you have found the percentage of the value of total revenue accounted for by the four largest firms in an industry, you have found the

A) elasticity of demand value.
B) monopolistic concentration index.
C) four-firm concentration ratio.
D) Herfindahl-Hirschman Index.
E) elasticity of supply value.

Question 5

Which of the following four-firm concentration ratios would be the best indication of a perfectly competitive industry?

A) 2 per cent
B) 100 per cent
C) 50 per cent
D) 31 per cent
E) 78 per cent

Question 6

What does monopolistic competition have in common with perfect competition?

A) Product differentiation.
B) A large number of firms and freedom of entry and exit.
C) A standardised product.
D) Barriers to exit but no barriers to entry.
E) The ability to make an economic profit in the long run.

Question 7

In monopolistic competition, the presence of a large number of firms making a differentiated product means that

A) each firm must charge the same price.
B) each firm can set the price of its particular product.
C) firms cannot compete with each other on the basis of price.
D) the price is established by collusive behaviour.
E) each firm must produce the same quantity.

Question 8

Which of the following is true about monopolistic competition but false about perfect competition?

A) Firms cannot make an economic profit in the long run.
B) Firms compete on their product's price as well as its quality and marketing.
C) There are a large number of independently acting sellers.
D) Firms can make an economic profit in the short run.
E) There are no barriers to entry.

Question 9

In an industry with a large number of firms,

A) competition is eliminated.
B) one firm will dominate the market.
C) collusion is impossible.
D) barriers to exit must exist.
E) each firm will produce a large quantity, relative to market demand.

Question 10

Which of the following is NOT a characteristic of monopolistic competition?

A) No barriers to entry or exit
B) Small market share
C) Few firms compete
D) Easy entry and exit
E) Differentiated product

Question 11

What does monopolistic competition have in common with monopoly?

A) A downward-sloping demand curve.
B) Mutual interdependence.
C) Barriers to entry.
D) A large number of firms.
E) The ability to collude with respect to price.

Question 12

Which of the following is the best example of a monopolistically competitive industry?

A) Land-based long distance telephone service
B) Wheat farming
C) Cable television
D) The manufacturing of shirts
E) Your electricity producer

Question 13

A differentiated product has

A) many different complements.
B) no close substitutes.
C) no substitutes of any kind.
D) many perfect substitutes.
E) close but not perfect substitutes.

Question 14

Product differentiation involves making a product that is

A) completely different from the products of competing firms.
B) slightly different from the products of competing firms.
C) cheaper than the products of competing firms.
D) very different from the products of competing firms.
E) no different to the products of competing firms.

Question 15

Concentration ratios

A) have high values for perfect competition.
B) measure the concentration of a large number of firms in a certain area.
C) measure whether the market is dominated by a small number of firms.
D) refer to the concentration of customers in a certain area.
E) measure how concentrated a firm's sales are among certain types of goods.

Question 16

Which of the following is the best example of a differentiated product?

A) Carrots
B) Airlines
C) Diamonds
D) Running shoes
E) Electricity

Question 17

Firms in monopolistic competition have demand curves that are

A) vertical.
B) U-shaped.
C) downward sloping.
D) horizontal.
E) upward sloping.

Question 18

The United Company competes with many other firms each producing slightly different products. Firms freely enter and exit this industry. The type of industry United Company operates in is

A) oligopolistic monopoly.
B) perfect competition.
C) oligopoly.
D) monopolistic competition.
E) a monopoly.

Question 19

It would be impossible for members of the fast-food industry to collude to fix prices because

A) there are not enough fast-food firms in the market.
B) there are too many fast-food firms in the market.
C) fast food is not durable.
D) demanders would not buy from firms that collude.
E) the price of fast food is too low.

Question 20

Which market structure is characterised by the following characteristics? i. A large number of firms compete.
Ii) Each firm produces a differentiated product.
Iii) Firms are free to enter and exit.

A) Monopolistic competition
B) Monopoly
C) Duopoly
D) Oligopoly
E) Perfect competition

Question 21

One problem with measures of market concentrations is that they do not

A) accurately measure concentrations in markets with fewer than 4 firms.
B) allow for all market types.
C) account for the difficulty in collecting total revenue data.
D) account for barriers to entry.
E) create meaningful comparisons across industries.

Question 22

Firms in monopolistic competition compete on i. quality.
Ii) price.
Iii) marketing.

A) i and ii
B) ii only
C) i and iii
D) i, ii and iii
E) ii and iii

Question 23

If the HHI for the widget industry is 1,200, then the market structure is

A) monopolistic competition.
B) an oligopoly.
C) perfect competition.
D) a monopoly.
E) impossible to determine.

Question 24

If the four-firm concentration ratio for the market for pizza is 28 per cent, then this industry is best characterised as

A) an oligopoly.
B) perfect competition.
C) monopolistic competition.
D) a monopoly.
E) oligopolistic competition.

Question 25

The marginal revenue curve facing a monopolistically competitive firm

A) is equal to its price curve.
B) lies on its demand curve.
C) lies below its demand curve.
D) lies above its demand curve.
E) is parallel to its demand curve.

Question 26

The absence of barriers to entry in monopolistic competition means that in the long run firms

A) make zero economic profit.
B) make an economic profit.
C) incur an economic loss.
D) make either an economic profit or zero economic profit.
E) make either zero economic profit or incur an economic loss.

Question 27

If the Herfindahl-Hirschman Index in the market for single-use cameras equals 10,000, then the single-use camera industry is best characterised as

A) perfect competition.
B) monopolistic competition.
C) a monopoly.
D) an oligopoly.
E) either a monopoly or monopolistic competition.

Question 28

Each of the four firms in an industry has a market share of 25 per cent. The Herfindahl-Hirschman Index equals

A) 3,600.
B) 100.
C) 2,500.
D) 25.
E) 625.

Question 29

Suppose there are 7 firms in the confectionary industry with the market shares shown above. What is the HHI for the industry?

A) 6,400
B) 1,850
C) 20
D) 2,000
E) 100

Question 30

When a firm maximises its profit, which of the following is correct for firms in monopolistic competition and perfect competition?

A) P = ATC always for firms in both perfect competition and monopolistic competition.
B) P = MC for both types of firms.
C) P = MR = MC for firms in perfect competition, and P > MR = MC for firms in monopolistic competition.
D) P > MR = MC for firms in both perfect competition and monopolistic competition.
E) MR = MC for firms in perfect competition and MR > MC for firms in monopolistic competition.

Question 31

If the four-firm concentration ratio for the market for disposable nappies is 73 per cent, then this industry is best characterised as

A) a monopoly.
B) monopolistic competition.
C) perfect competition.
D) an oligopoly.
E) either a monopoly or monopolistic competition.

Question 32

The table above shows the revenue figures for the top four firms along with a total for the remaining firms in the fast-food industry. What is the four-firm concentration ratio for the industry?

A) 80 per cent
B) 200 per cent
C) 20 per cent
D) 100 per cent
E) 25 per cent

Question 33

If there are four firms in an industry with market shares of 50 per cent, 40 per cent, 5 per cent, and 5 per cent, the Herfindahl-Hirschman Index is

A) 25.
B) 100.
C) 3,450.
D) 4,150.
E) undefined because there are not 50 firms in the industry.

Question 34

A firm in monopolistic competition has a ________ market share and ________ influence the price of its good or service.

A) small; can
B) large; might be able to
C) large; can
D) large; cannot
E) small; cannot

Question 35

Girlfriend's Salon is the only hair salon in Sunnyvale, a small town. Which of the following statements correctly describes a concentration measure for salons in Sunnyvale?

A) The measure would incorrectly show an uncompetitive market structure because many firms could open in Sunnyvale without any restrictions.
B) The measure would incorrectly show an uncompetitive market because the measure does not reflect the low prices charged at Girlfriend's Salon.
C) The measure would correctly show a monopoly exists because Girlfriend's revenues are low.
D) The measure would incorrectly show a perfectly competitive market exists because new salons can open and compete with Girlfriend's.
E) The measure would correctly show a monopoly exists in town because there are so few residents.

Question 36

The square of the percentage market share of each firm summed over the 50 largest firms in a market is the

A) fifty-firm concentration ratio.
B) elasticity of supply value.
C) elasticity of demand value.
D) Herfindahl-Hirschman Index.
E) four-firm concentration ratio.

Question 37

If a monopolistically competitive seller's marginal cost is $3.56, the firm will increase its output if

A) its marginal revenue is less than $3.56.
B) its marginal revenue is equal to $3.56.
C) its marginal revenue is more than $3.56.
D) its average total cost is less than $3.56.
E) Both answers A and D are correct.

Question 38

A market in which the Herfindahl-Hirschman Index exceeds 1,800 is considered to be

A) not competitive.
B) competitive.
C) moderately competitive.
D) purely competitive.
E) either a monopoly or monopolistic competition.

Question 39

In monopolistic competition, profit is maximised by producing so that marginal revenue

A) is negative.
B) equals marginal cost and which are less than price.
C) equals marginal cost and equals price.
D) equals average total cost but not marginal cost.
E) equals price.

Question 40

A market has 4 firms in it. The market shares are in the table above. The table represents a(n) ________ market because its ________.

A) competitive; Herfindahl-Hirschman Index (HHI) equals 1,425
B) uncompetitive; Herfindahl-Hirschman Index (HHI) equals 65 per cent
C) uncompetitive; four-firm concentration ratio exceeds 60 per cent
D) competitive; four-firm concentration ratio equals 65 per cent
E) perfectly competitive; Herfindahl-Hirschman Index (HHI) is less than 1,500

Question 41

The above figure shows a motel engaged in monopolistic competition with other motels. The figure above shows the ________ equilibrium in which the motel is ________.

A) short-run; making an economic profit
B) long-run; making zero economic profit
C) short-run; incurring an economic loss
D) long-run; making an economic profit
E) short-run; making zero economic profit

Question 42

The figure above shows Firm X. The ________ firm charges a markup of ________.

A) perfectly competitive; $10 per unit because price equals average total cost
B) perfectly competitive; $20 per unit because price exceeds average total cost
C) monopolistically competitive; $10 per unit because price exceeds marginal cost
D) monopolistically competitive; $20 per unit because prices exceeds average total cost
E) monopolistically competitive; $10 per unit because the demand curve lies above the marginal revenue curve

Question 43

Which of the following is TRUE about a firm in monopolistic competition in the long run?

A) P = ATC
B) ATC = MC
C) P = MR
D) MC = ATC
E) P = MC

Question 44

In the long run, a firm in monopolistic competition will produce

A) zero output.
B) where average total cost is minimised.
C) where price equals marginal cost.
D) any possible amount of output.
E) where price equals average total cost, but average total cost is not at its minimum.

Question 45

When firms in monopolistic competition incur an economic loss, some firms will

A) enter the industry, and demand will become more elastic for the original firms.
B) enter the industry and produce more products.
C) exit the industry, and demand will increase for the firms that remain.
D) exit the industry and other firms will enter.
E) exit the industry, and demand will decrease for the firms that remain.

Question 46

If a monopolistically competitive seller's marginal cost is $3.56, the firm will not change its output if

A) its marginal revenue is less than $3.56.
B) its marginal revenue is equal to $3.56.
C) its marginal revenue is more than $3.56.
D) its average total cost is equal to $3.56.
E) Both answers B and D are correct.

Question 47

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

A) P > ATC and P > MR
B) P = ATC and MR = MC
C) P = MR and P = MC
D) P > ATC and MR = MC
E) P = ATC and P = MC

Question 48

Kevin owns a personal training gymnasium in Adelaide. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. Kevin will train how many clients per day?

A) 10
B) 6
C) 4
D) Between 2 and 4
E) None of the above answers is correct.

Question 49

Which of the following is NOT a characteristic of long-run equilibrium in monopolistic competition?

A) Price exceeds marginal revenue.
B) The firm makes zero economic profit.
C) Production occurs at minimum average total cost.
D) Price is equal to average total cost.
E) Marginal revenue is equal to marginal cost.

Question 50

In monopolistic competition, the entry of new firms

A) only results in a movement along the existing firms' demand curves.
B) has no effect on the existing firms' demand curves.
C) shifts existing firms' demand curves rightward.
D) shifts existing firms' demand curves leftward.
E) shifts existing firms' supply curves rightward.

Question 51

Assume that Nike is a firm in monopolistic competition. If Nike is making an economic profit from its new cross-training shoe, over time the demand for these shoes

A) decreases as new firms enter the market.
B) does not change as new firms enter the market.
C) increases as new firms enter the market.
D) decreases as firms exit the market.
E) increases as firms exit the market.

Question 52

Kevin owns a personal training gymnasium in Adelaide. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. What price will Kevin charge per session?

A) $40
B) $100
C) $60
D) $80
E) $20

Question 53

In monopolistic competition there are ________ barriers to entry, so therefore in the long run, economic profit ________.

A) no; equals zero
B) many; is substantial
C) many; equals zero
D) no; is substantial
E) many; might be earned depending on the degree of product differentiation

Question 54

The above figure shows a motel engaged in monopolistic competition with other motels. The equilibrium price at this motel is ________ per room.

A) $10
B) $40
C) $20
D) $30
E) $50

Question 55

In the long run, firms in monopolistic competition make zero economic profit because

A) their products are similar but slightly different.
B) their demand curves are horizontal.
C) of over-reliance on product marketing.
D) of collusion among the various sellers.
E) firms are free to enter and exit.

Question 56

If firms in monopolistic competition are making economic profits, eventually

A) they shut down.
B) new firms enter the industry.
C) they exit the industry.
D) the firms in the market increase their production so that the economic profit disappears.
E) the market turns into a monopoly.

Question 57

If firms in monopolistic competition are making economic profits, then

A) new rivals enter the industry and the demand for any seller's good increases.
B) the market demand becomes more inelastic.
C) new rivals enter the industry and the demand for any seller's good decreases.
D) the industry is in long-run equilibrium.
E) they can expect to earn the profits indefinitely.

Question 58

In the long run in monopolistic competition, firms

A) make zero economic profit.
B) shut down if they are making zero economic profit.
C) incur an economic loss.
D) make either an economic profit or zero economic profit.
E) can make an economic profit.

Question 59

A firm in monopolistic competition is similar to a firm in perfect competition because they both

A) can make only zero economic profit in the short run.
B) maximise their profits by producing where P = MR = MC.
C) can make only zero economic profit in the long run.
D) Both answers A and C are correct.
E) Both answers B and C are correct.

Question 60

The above figure shows a motel engaged in monopolistic competition with other motels. The equilibrium quantity at this motel is ________ rooms per day.

A) 300
B) 200
C) 400
D) 500
E) 100

Question 61

The decision to innovate

A) depends on whether the firm wants to benefit its customers.
B) depends on the marketing department's needs.
C) is unnecessary in a monopolistically competitive market.
D) is based on the marginal cost and the marginal revenue of innovation.
E) None of the above answers is correct.

Question 62

Monopolistic competition is judged to be economically inefficient because

A) firms make an economic profit in the long run.
B) firms have deficient capacity in the long run.
C) marginal revenue equals marginal cost.
D) firms make zero economic profit in the long run.
E) the price is greater than marginal cost.

Question 63

A firm is spending the profit-maximising amount on product development when

A) the advertising costs are covered.
B) people perceive the firm's product to be better than those of its competitors.
C) the price of the good is higher than its marginal cost.
D) the firm's total revenue exceeds its total costs.
E) the marginal cost of product development is equal to the marginal revenue from product development.

Question 64

In the long run, firms in monopolistic competition produce at a level that is ________ the efficient scale of output.

A) not comparable to
B) less than
C) equal to
D) more than
E) All of the above are possible depending on market conditions.

Question 65

In the long run, advertising by all firms in a monopolistically competitive industry

A) increases all firms' demand.
B) might increase or decrease the firms' prices.
C) decreases all firms' demand.
D) lowers all firms' prices.
E) lowers all firms' costs.

Question 66

Which of the following statements about a firm in long-run equilibrium is true?

A) P = MC for firms in both monopolistic competition and perfect competition.
B) MR > P for a firm in monopolistic competition, and P = ATC for a firm in perfect competition.
C) P > MC for a firm in monopolistic competition, and P = ATC for a firm in perfect competition.
D) P = MC for a firm in perfect competition, and P < ATC for a firm in monopolistic competition.
E) Both answers A and B are correct.

Question 67

In the example of the Nike running shoe, we see that

A) selling costs account for over half of a shoe's retail price.
B) taxes account for one-quarter of the retail price of the shoes.
C) materials actually account for two-thirds of the retail price of the shoes.
D) raw materials costs are by far the largest component of the total costs of producing the shoes.
E) production costs exceed selling costs by a wide margin.

Question 68

In the long run, a firm in monopolistic competition ________ excess capacity and a firm in perfect competition ________ excess capacity.

A) has; does not have
B) does not have; does not have
C) has; has
D) does not have; has
E) might have; might have

Question 69

Which of the following is an advantage to society of monopolistic competition?

A) Only essential costs are incurred.
B) The firms have excess capacity so they are always willing to increase their production.
C) Long-run profitability.
D) Production at the lowest possible average cost.
E) Product variety.

Question 70

A firm's efficient scale of production is the output at which its

A) marginal revenue is at a maximum.
B) marginal revenue equals marginal cost.
C) profit is maximised.
D) average total cost is at a minimum.
E) marginal cost is at a minimum.

Question 71

To maintain their economic profits, firms in monopolistic competition must continually engage in

A) product development and marketing.
B) making the demand for their product more elastic.
C) realising short-run losses.
D) raising their product's price.
E) lowering their product's price.

Question 72

Even though monopolistic competition results in inefficiency, it does have which of the following benefits for society?

A) Product variety benefits consumers.
B) Firms make zero economic profit in the long run.
C) Firms can make an economic profit in the short run.
D) Marginal cost equals price in the long run.
E) The premise of the question is incorrect because nothing in monopolistic competition justifies any economic inefficiency.

Question 73

A monopolistically competitive firm is inefficient because the firm

A) is producing at an output where marginal cost equals price.
B) is not maximising its profits.
C) produces a product identical to that of its competitors.
D) makes positive economic profit in the long run.
E) produces at an output level where average total cost is not at its minimum.

Question 74

When weighing the efficiency of monopolistic competition, which of the following should be considered? i. The information provided by advertising.
Ii) Product variety.
Iii) The extra cost of excess capacity.

A) i, ii and iii
B) ii only
C) ii and iii
D) i and iii
E) iii only

Question 75

In which of the following ways do advertising and other selling costs affect a firm's cost curves? i. Advertising expenditures increase total fixed costs.
Ii) Selling costs increase total fixed costs.
Iii) Advertising and other selling costs per unit of output decrease as output increases.

A) i and ii
B) iii only
C) i, ii and iii
D) i only
E) i and iii

Question 76

Advertising is a ________ cost that is incurred by ________.

A) fixed; perfectly competitive firms
B) marginal; monopolistically competitive firms
C) fixed; monopolistically competitive firms
D) variable; monopolies
E) variable; perfectly competitive firms

Question 77

In the long run, a firm in monopolistic competition ________ a markup of price over marginal cost, and a firm in perfect competition ________ a markup of price over marginal cost.

A) has; does not have
B) might have; might have
C) does not have; does not have
D) does not have; has
E) has; has

Question 78

Once a firm in monopolistic competition has determined how much to produce, the firm determines its price by referring to its

A) demand curve.
B) marginal revenue curve.
C) average total cost curve.
D) average variable cost curve.
E) marginal cost curve.

Question 79

Which of the following statements about product development in monopolistic competition is correct? i. Firms in monopolistic competition undertake too much product development for efficiency.
Ii) Firms in monopolistic competition undertake too little product development for efficiency.
Iii) Product development might allow the firm to make a temporary economic profit.

A) ii only
B) i and iii
C) ii and iii
D) i only
E) iii only

Question 80

If a firm is maximising its profit and producing less than the output at which its average total cost is minimised, then that firm

A) must be earning an economic profit.
B) has excess capacity.
C) must be earning a normal profit.
D) must be suffering an economic loss.
E) is producing at its capacity output.