Deck 15: Monopolistic Competition

Question 1

A monopolistically competitive industry has all of the following characteristics except

A) there are no barriers to entry.
B) strategic behavior.
C) product differentiation.
D) a large number of firms.

Answer 1

strategic behavior.

Question 2

Which of the following features distinguishes monopolistically competitive firms from monopolies and oligopolies?

A) Monopolistically competitive firms cannot influence market price by virtue of their size alone while monopolies and oligopolies can.
B) Monopolistically competitive firms are not constrained by market demand while monopolies and oligopolies are.
C) Monopolistically competitive firms are price takers while monopolies and oligopolies are not.
D) Monopolistically competitive firms sell a homogeneous product while monopolies and oligopolies sell a differentiated product.

Answer 2

Monopolistically competitive firms cannot influence market price by virtue of their size alone while monopolies and oligopolies can.

Question 3

In a monopolistically competitive industry,

A) firms are large relative to the total market.
B) firms are small relative to the total market.
C) firms can be either large or small relative to the total market.
D) there is only one firm.

Answer 3

firms are small relative to the total market.

Question 4

In monopolistic competition, firms can have some market power

A) by virtue of size alone.
B) by producing differentiated products.
C) because of barriers to entry into the industry.
D) because of barriers to exit from the industry.

Question 5

In Chicago there are many restaurants. Each restaurant is slightly different from every other restaurant. Restaurants are an example of which market structure?

A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly

Question 6

There is easy entry into the ________ and ________ industries.

A) perfectly competitive; monopolistically competitive
B) monopolistically competitive; oligopolistic
C) oligopolistic; monopolistic
D) monopolistic; perfectly competitive

Question 7

Price is a limited decision variable in which of the following market organizations?

A) perfect competition
B) monopoly
C) monopolistic competition
D) oligopoly

Question 8

The feature that distinguishes monopolistic competition from monopolies and oligopolies is that monopolistically competitive firms

A) cannot influence market price by virtue of their size alone.
B) benefit from barriers to entry.
C) are price takers.
D) do not have price as a decision variable.

Question 9

Which of the following is a characteristic of monopolistically competitive industries?

A) significant barriers to entry
B) strategic behavior
C) product differentiation
D) a small number of firms

Question 10

A(n) ________ industry does not have price as a decision variable.

A) perfectly competitively
B) monopolistic
C) monopolistically competitive
D) oligopolistic

Question 11

The restaurant industry is an example of a(n) ________ industry.

A) perfectly competitive
B) monopolistic
C) monopolistically competitive
D) oligopolistic

Question 12

In San Francisco there are many retail clothing stores. Each store is slightly different from every other store. Retail clothing stores are an example of what market structure?

A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly

Question 13

Perfect competition differs from monopolistic competition primarily because

A) in perfect competition, firms have homogeneous products.
B) in perfect competition, price is a decision variable.
C) in monopolistic competition, entry into the industry is limited.
D) in monopolistic competition, there are many firms in the industry.

Question 14

Monopolistic competition differs from perfect competition primarily because in

A) monopolistic competition, firms can differentiate their products.
B) perfect competition, firms can differentiate their products.
C) monopolistic competition, entry into the industry is blocked.
D) monopolistic competition, there are relatively few barriers to entry.

Question 15

Firms gain control over price in monopolistic competition by

A) blocking entry of other firms into the industry.
B) producing a product for which there are no close substitutes.
C) differentiating their products.
D) colluding with other firms to set prices.

Question 16

Easy entry of new firms is not a characteristic for ________ industries.

A) perfectly competitive and monopolistically competitive
B) monopolistically competitive and oligopolistic
C) oligopolistic and monopolistic
D) monopolistic and perfectly competitive

Question 17

The feature that distinguishes monopolistic competition from perfect competition is that monopolistically competitive firms are

A) large relative to the market.
B) price takers.
C) able to block the entry of other firms.
D) able to differentiate their products.

Question 18

Monopolistically competitive firms have ________ market power due to producing differentiated products.

A) unlimited
B) some
C) no
D) complete

Question 19

Monopolistically competitive firms use a(n) ________ strategy to achieve market power.

A) product differentiation
B) dominant
C) maximin
D) opportunistic behavior

Question 20

The hand soap industry is an example of a(n) ________ industry.

A) perfectly competitive
B) monopolistic
C) monopolistically competitive
D) oligopolistic

Question 21

Firms in a monopolistically competitive industry are distinguished by strategic behavior.

Question 22

A monopolistically competitive firm influences market price by virtue of its size.

Question 23

A monopolistically competitive industry is characterized by having no barriers to entry.

Question 24

Firms ________ in monopolistic competition due to product differentiation.

A) have no control over price
B) have blocked entry
C) gain control over price
D) are limited in number

Question 25

In a(n) ________ industry, firms are small relative to the total market.

A) monopolistic
B) monopolistically competitive
C) oligopolistic
D) Both B and C are correct.

Question 26

Firms in a monopolistically competitive industry are small relative to the total market.

Question 27

A monopolistically competitive firm influences market price because of product differentiation.

Question 28

In a monopolistically competitive industry, good product substitutes are available whereas in a monopoly they are not available.

Question 29

Monopolistically competitive firms, like perfectly competitive firms, sell a differentiated product.

Question 30

The airline industry is a good example of a monopolistically competitive industry.

Question 31

The automobile industry is a good example of a monopolistically competitive industry.

Question 32

The case for advertising includes the fact that

A) it wastes society's scarce resources.
B) firms spend large sums of money to create meaningless differences among products.
C) it provides consumers with valuable information about product availability, quality, and price.
D) it creates wants that otherwise would not have existed.

Question 33

Monopolistic competition is a common form of market structure in the United States.

Question 34

Monopolistically competitive firms are like perfectly competitive firms in that they both sell homogeneous products.

Question 35

In order to achieve market power, monopolistically competitive firms use

A) their size.
B) product differentiation.
C) strategic behavior.
D) predatory pricing.

Question 36

In monopolistically competitive industries, the market sets the price.

Question 37

Monopolistically competitive firms engage in both price and quality competition.

Question 38

________ firms use a product differentiation strategy to achieve market power.

A) Monopolistically competitive
B) Monopolistic
C) Oligopolistic
D) Perfectly competitive

Question 39

The feature that distinguishes perfect competition from monopolistic competition is that perfectly competitive firms are

A) large relative to the market.
B) price takers.
C) able to block the entry of other firms.
D) unable to differentiate their products.

Question 40

Monopolistically competitive firms are unable to affect the market price of their output, but are able to control the price of their own output.

Question 41

Related to the Economics in Practice on page 316: According to the Economics in Practice, which of the following statements is true?

A) Because tastes tend to differ across areas, we would expect to see a wider variety of products available from an online retailer than from an individual brick-and-mortar retailer.
B) Even though tastes tend to differ across areas, we tend to see a smaller variety of products available from an online retailer than from an individual brick-and-mortar retailer.
C) Because tastes tend to be roughly the same across areas, we would expect to see a about the same variety of products available from an online retailer as from an individual brick-and-mortar retailer.
D) Because tastes tend to differ across areas, we would expect to see a smaller variety of products available from an online retailer than from an individual brick-and-mortar retailer.

Question 42

An action that an individual takes in one period to try to control her behavior in a future period is called

A) behavioral conditioning.
B) Pavlovian behavior.
C) a maximin strategy.
D) a commitment device.

Question 43

Monopolistically competitive firms use product differentiation to

A) ensure long-run profits.
B) achieve market power.
C) block other firms from entering the industry.
D) limit the number of firms in the industry.

Question 44

Related to the Economics in Practice on page 318: Producers of Honest Tea stop adding sugar to their tea when the marginal utility to consumers of doing so is

A) positive.
B) negative.
C) zero.
D) Indeterminate from the given information.

Question 45

Monopolistically competitive firms can use product differentiation to do which of the following?

A) guarantee long-run profitability
B) block entry of all other firms
C) provide consumers with commitment devices
D) gain complete control over the price of their product

Question 46

The Internet has had a significant influence on advertising in all of the following ways except

A) the Internet allows firms to actively interact with customers.
B) the Internet has improved firms' ability to target specific markets.
C) the Internet has reduced the level and transparency of informational advertising.
D) the Internet has reduced spending on advertising.

Question 47

The case for advertising includes the idea that

A) it adds to society's scarce resources.
B) firms spend large sums of money to create meaningless differences among products.
C) it can promote competition.
D) it creates wants that otherwise would not have existed.

Question 48

The case against advertising includes the fact that

A) firms spend large sums of money to create artificial differences among products.
B) it provides consumers with valuable information about product availability, quality, and price.
C) it increases competition by decreasing barriers to entry of new firms into an industry.
D) it ensures high quality and efficient production.

Question 49

In well-functioning markets, all of the following reflect the degree of product variety except

A) differences in consumers' tastes.
B) cost economies from standardization.
C) gains from network externalities.
D) gains from coordination.

Question 50

Product differentiation that makes the product better for some consumers and worse for others is

A) always welfare decreasing.
B) vertical differentiation.
C) horizontal differentiation.
D) never undertaken by firms.

Question 51

Product differentiation that makes the product ________ is known as vertical differentiation.

A) more similar to the rival's product
B) better for some consumers and worse for others
C) better than a rival's product from everyone's perspective
D) less expensive to produce

Question 52

In well functioning markets, the degree of product variety reflects which of the following?

A) similar preferences in consumers' tastes
B) cost diseconomies from standardization
C) gains from network externalities
D) gains from coordination

Question 53

Referring to the Economics in Practice on page 320: A successful celebrity endorsement of a product will likely shift the demand curve for the product to the ________, resulting in ________ in the equilibrium price of the item.

A) right; an increase
B) right; a decrease
C) left; an increase
D) left; a decrease

Question 54

The right answer to the debate regarding the welfare effects of advertising is that

A) advertising always leads to concentration in an industry.
B) advertising always leads to positive economic profits in an industry.
C) advertising always improves the functioning of the market.
D) there is no right answer.

Question 55

Product differentiation can be used by firms to do all of the following except

A) gain market share.
B) erect barriers to entry for potential firms.
C) provide consumers with commitment devices.
D) gain complete control over the price of their product.

Question 56

Behavioral economics

A) blends insights from sociology and economics.
B) suggests that too much variety may be welfare enhancing.
C) has contributed to microeconomics but not to macroeconomics.
D) suggests that consumers purchase health club memberships instead of paying per visit in an attempt to commit themselves to an exercise regime.

Question 57

Product differentiation that makes the product ________ is horizontal differentiation.

A) more similar to the rival's product
B) better than a rival's product from everyone's perspective
C) better for some consumers and worse for others
D) less expensive to produce than the rival's product

Question 58

Related to the Economics in Practice on page 318: A company selling iced tea discovers that as sugar is added to tea, customers' opinions of the taste of the tea rises for the first few grams of sugar and then drops. Even so, the company chooses not to add the amount sugar that would result in the best-tasting tea. Which of the following would explain why adding less sugar could be a wise decision?

A) The price of sugar added to tea is much less significant than the price of other ingredients, such as tea leaves.
B) Manufacturers of tea are required to clearly indicate the amount of sugar in their products.
C) Teas with less sugar are more likely to appeal to health-conscious consumers.
D) Many products in the cold drink market are sold with substitutes for sugar, such as high fructose corn syrup.

Question 59

The case for product differentiation does not include the fact that

A) products that satisfy a real demand survive.
B) standards of living rise with product innovation.
C) new products satisfy people with different preferences.
D) it wastes society's scarce resources.

Question 60

Product differentiation that makes the product better than a rival's product from everyone's perspective

A) always increases welfare.
B) is known as vertical differentiation.
C) is known as horizontal differentiation.
D) makes the rival's product obsolete.

Question 61

Vertical differentiation makes products better for some consumers and worse for others.

Question 62

Related to the Economics in Practice on page 316: From a consumer welfare standpoint, as the variety of available choices of a particular type of product increases, consumer welfare

A) increases at a proportional rate.
B) decreases at a proportional rate.
C) increases to a point, but eventually may lose value with too much variety.
D) tends to remain very constant.

Question 63

In well-working markets, any gains from coordination are reflected in the level of product variety.

Question 64

The case for product differentiation includes the assertion that

A) even products that do not satisfy a real demand survive.
B) standards of living rarely improve with product innovation.
C) new products satisfy people with different preferences.
D) it wastes society's scarce resources.

Question 65

Horizontal differentiation makes products better for some consumers and worse for others.

Question 66

The case against advertising includes the assertion that advertising

A) keeps firms from spending huge sums of money to create artificial differences among goods.
B) provides consumers with valuable information about product availability, quality, and price.
C) decreases competition by increasing barriers to entry of new firms into an industry.
D) ensures high quality and efficient production.

Question 67

A chewing gum manufacturer adds a jalapeño-flavored bubble gum to its product mix. This is an example of horizontal differentiation.

Question 68

Referring to the Economics in Practice on page 320: A successful celebrity endorsement of a product will most likely ________ for the product, resulting in a higher equilibrium price and a larger equilibrium quantity.

A) increase the demand
B) increase the supply
C) decrease the demand
D) decrease the supply

Question 69

In a well-working market, the underlying heterogeneity of consumers' tastes in that market are reflected in the level of product variety.

Question 70

In which of the following ways has the Internet has had a significant influence on advertising?

A) The Internet limits firms from actively interacting with customers.
B) The Internet has improved firms' ability to target specific markets.
C) The Internet has reduced the level and transparency of informational advertising.
D) The Internet has increased spending on advertising.

Question 71

One reason for selecting a section of microeconomics for which attendance is part of the grade (as opposed to one where it is not) is that it serves as a commitment device that will get you to attend class.

Question 72

Apple improves the resolution of its iPhone camera by doubling the number of megapixels. This is an example of vertical differentiation.

Question 73

Behavioral economics uses insights from both psychology and economics.

Question 74

In well-working markets, cost economies from standardization are reflected in the level of product variety.

Question 75

The more homogeneous are consumers' preferences, the less product variety will be observed.

Question 76

The basic function of advertising, according to its proponents, is to assist consumers in making informed, rational choices.

Question 77

Advertising serves no productive purpose and is thus welfare decreasing.

Question 78

Related to the Economics in Practice on p. 318. Producers of Honest Tea add less sugar to their tea than the amount that would maximize consumer's total utility from sugar because

A) the financial cost of the additional sugar is less than the additional revenue that the firm would earn.
B) producers are attempting to differentiate their product from the very sweet Snapple.
C) the marginal utility to the consumer from adding more sugar is very low (near zero) while the marginal health cost (added calories) is quite high.
D) producers are attempting to market their product to diabetics.

Question 79

The more significant are economies of scale in an industry, the more product variety will be observed.

Question 80

Advertising provides consumers with product information and can promote competition. Thus, it is always welfare enhancing.