Deck 17: Monopolistic Competition and Advertising

Question 1

As more firms enter a monopolistically competitive market, the individual firm's demand curve:

A) increases, shifts to the right.
B) stays the same.
C) decreases, shifts to the left.
D) It will vary greatly depending on the industry.

Answer 1

C

Question 2

Use the following to answer questions: Figure: Monopolistic Competition
(Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistic competitive market. In this market, in the long run you would expect:

A) both demand and price to stay the same.
B) both demand and price to increase as unprofitable firms leave the industry.
C) demand to decrease and price to fall to the point that P = AC.
D) demand to shift left and decrease price to the point that P = MC.

Answer 2

C

Question 3

In a monopolistically competitive market, new firms will enter the market as long as:

A) P > AC.
B) P = AC.
C) P < AC.
D) P = MC.

Answer 3

A

Question 4

Which of the following is NOT an example of product differentiation?

A) Shell versus Chevron
B) Coca-Cola versus Pepsi
C) Levi's versus American Eagle
D) a small oil well

Question 5

As more firms enter a monopolistically competitive market, the market demand curve:

A) increases, shifts to the right.
B) stays the same.
C) decreases, shifts to the left.
D) It will vary greatly depending on the industry.

Question 6

Which of the following is/are TRUE regarding monopolistic competition?
I. few sellers
II. free entry
III. product differentiation

A) III only
B) I and III only
C) II and III only
D) I, II, and III

Question 7

Firms in monopolistic competitive industries:
I. sell their products at a higher price than if their industry were strictly competitive.
II. sell their products at the same price as if they were in a monopoly market.
III. have a high incentive to innovate with new products and better quality.

A) I and II only
B) II and III only
C) I and III only
D) I, II, and III

Question 8

Monopolistic competitive products are usually _____ advertised.

A) never
B) rarely
C) occasionally
D) highly

Question 9

Monopolistic competition is a market that has:

A) many sellers, free entry, and product differentiation.
B) few sellers, free entry, and product differentiation.
C) many sellers, high barriers to entry, and product differentiation.
D) many sellers, free entry, and identical products.

Question 10

Monopolistic competition combines features of:

A) oligopolies and monopolies.
B) perfect competition and monopolies.
C) elastic and inelastic goods.
D) shortages and surpluses.

Question 11

An example of a monopolistic competitive industry is:

A) produce.
B) white T-shirts.
C) sodas.
D) sugar.

Question 12

Monopolistic competition features _____ products.

A) identical
B) only food, such as McDonald's and Burger King
C) differentiated
D) only electronic, such as Apple and Motorola

Question 13

How do monopolistically competitive firms inform consumers about their products?

A) They rely on word-of-mouth.
B) They inform consumers through advertising.
C) There is no need to do such.
D) Their products are well-known enough to stand on their own.

Question 14

Which of the following is the best example of a monopolistic competitive market?

A) diamonds
B) produce
C) restaurants
D) milk

Question 15

What is the main difference between a perfectly competitive industry and a monopolistically competitive firm?

A) the number of firms in the market
B) product differentiation
C) zero economic profit
D) no barriers to entry

Question 16

A market with many firms, a differentiated product, and little to no barriers to entry is a _____ market.

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

Question 17

Which of the following is NOT an example of product differentiation?

A) Shell versus Chevron
B) Coca-Cola versus Pepsi
C) Levi's versus American Eagle
D) They are all examples of product differentiation.

Question 18

Use the following to answer questions: Figure: Monopolistic Competition
(Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistic competitive market. In the long run you would expect prices in this market to:

A) stay the same.
B) increase as unprofitable firms leave the industry.
C) decrease to the point that P = AC.
D) decrease to the point that P = MC.

Question 19

Use the following to answer questions: Figure: Monopolistic Competition
(Figure: Monopolistic Competition) Refer to the figure. Suppose the figure represents a firm that operates in a monopolistically competitive market. In the long run you would expect:

A) prices to increase.
B) demand to become more inelastic.
C) less quality and innovation.
D) more firms to enter the market.

Question 20

Monopolistic competition is a:

A) group of suppliers that try to act as if they were a monopoly.
B) market that is dominated by a small number of firms.
C) market with a large number of firms selling similar but not identical products.
D) group of suppliers that try to act as if they were a perfectly competitive market.

Question 21

Figure: Monopolistic Competition II The monopolistically competitive firm in this diagram is in ______ equilibrium and charging a price of ______.

A) long-run; $14
B) short-run; $8
C) short-run; $11
D) long-run; $8

Question 22

Which of the following statement(s) is/are TRUE?
I. Because monopolistically competitive firms sell differentiated products, their demand curves are downward sloping.
II. Monopolistically competitive firms earn above-normal profits because of high entry barriers.
III. As firms enter a monopolistically competitive industry, the demand curves of the existing firms shift down and to the left.

A) I and III only
B) I and II only
C) II only
D) III only

Question 23

Why might the benefits of monopolistic competition outweigh the inefficiencies?

A) Monopolistic competition has higher deadweight loss than monopoly.
B) In monopolistic competition, firms do not produce at their minimum average cost.
C) In monopolistic competition, firms do not price at marginal cost.
D) If we had perfect competition instead of monopolistic competition, we would not have all the variety and innovation that we have today.

Question 24

A monopolistically competitive firm operates where:

A) MR < MC.
B) MR = MC.
C) MR > MC.
D) MR + MC = 0.

Question 25

Under steady state monopolistic competition firms face ______ demand and earn ______ economic profits on average.

A) downward-sloping; zero
B) downward-sloping; positive
C) perfectly-elastic; zero
D) perfectly-elastic; positive

Question 26

A monopolistic competitive firm is able to charge P > MC because:

A) they clearly have a superior product than their competitors.
B) of product differentiation, some people will prefer their product.
C) of high barriers to entry into the industry.
D) monopolistic competitive firms must not set prices above P = MC.

Question 27

If a firm has an average product that is not much better than what other firms produce they may wish to focus their advertising on:

A) quality.
B) price.
C) deceiving customers.
D) product information.

Question 28

Which of the following is/are TRUE of monopolistic competition?
I. Monopolistic competitive firms do not produce at the minimum of their average cost curves.
II. Monopolistic competitive firms produce at the minimum of their average cost curves.
III. Monopolistic competitive firms earn higher profits than monopolies.

A) I only
B) II only
C) I and III only
D) II and III only

Question 29

Which of the following is/are TRUE?
I. Advertising embodies both information and persuasion.
II. Perfectly competitive firms and monopolistically competitive firms both advertise.
III. Monopolies and monopolistically competitive firms both advertise.

A) I only
B) I and II only
C) I and III only
D) I II and III

Question 30

If a monopolistically competitive firm raises prices, it will:

A) sell no output.
B) continue to sell the same amount of output.
C) go out of business.
D) sell less output.

Question 31

Monopolistically competitive firms create:

A) zero deadweight loss.
B) a small deadweight loss.
C) a large deadweight loss.
D) negative deadweight loss.

Question 32

Monopolistic competition in a market is characterized by:

A) many firms, downward-sloping demand curves, and zero economic profit in the long run.
B) several dominant firms, perfectly elastic demand curves, and above-normal profits.
C) many firms, perfectly elastic demand curves, and zero economic profit in the long run.
D) several firms, inelastic demand curves, and long-run monopoly profit.

Question 33

Monopolistically competitive firms are able to charge:

A) P > MC, eliminating any lost gains from trade.
B) P > MC, so output is produced at minimum per unit cost.
C) P > MC, causing an inefficiently lower level of output.
D) P = MC, maximizing social surplus.

Question 34

Monopolistically competitive firms earn zero profits on average because:

A) they price above marginal cost.
B) new firms cannot enter the market.
C) positive profits cause competitors to enter the market, decreasing demand for each individual firm.
D) they price at marginal cost.

Question 35

In the 1990s, fast food restaurants refused to make special orders-there was no way to "hold the tomatoes." When Burger King branded itself as the place where you could "have it your way" and allowed special orders, it enjoyed an advantage over other fast food restaurants. Until other firms copied it, what was Burger King's position?

A) monopolistic competitive
B) cartelized
C) perfectly competitive
D) monopoly

Question 36

Which of the following is/are TRUE?
I. A monopolistic competitive firm sets price > MC.
II. A monopolistic competitive firm sets price = MC.
III. A monopolistic competitive firm operates at MC = MR.

A) I only
B) II only
C) I and III only
D) II and III only

Question 37

If consumers observe a lot of advertising for a product, they can infer that the producer:

A) expects the product to be successful.
B) thinks the product is of poor quality.
C) does not want his brand name associated with that product.
D) needs to rely on misinformation to get people to try the product.

Question 38

Monopolistically competitive firms set price:

A) less than marginal cost.
B) equal to marginal cost.
C) greater than marginal cost.
D) sometimes greater than, sometimes less than, and sometimes equal to marginal cost.

Question 39

In a stable, monopolistically competitive market for restaurants there are:

A) zero profits on average, and consumers are indifferent about where they eat.
B) zero profits on average, and consumers have strong preferences about where they eat.
C) positive profits on average, and consumers are indifferent about where they eat.
D) positive profits on average, and consumers have strong preferences about where they eat.

Question 40

Bottled water is produced in a ______ manner.

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

Question 41

In 2010, which was the location of more advertisement for the iPad?

A) Charlottesville, Virginia
B) Berlin, Germany
C) Silicon Valley, California
D) These markets were equally saturated with iPad ads.

Question 42

Consumers benefit from advertising:

A) only when they gain information.
B) if the advertising is not persuasive.
C) because it leads to lower prices for some products.
D) only when the advertising is being used as a signal.

Question 43

Advertising designed to link fond lifetime memories with the use of a product is a form of:

A) informative advertising that is designed to reduce market power.
B) informative advertising that is designed to increase market power.
C) differentiated advertising that tries to reduce consumer surplus.
D) persuasive advertising that may actually increase consumer well-being.

Question 44

Firms that expect their products to be successful:

A) have more of an incentive to advertise.
B) have less of an incentive to advertise.
C) will only participate in price advertising.
D) can better signal the quality of their product if they do NOT advertise.

Question 45

Firms that expect their products to be successful:

A) have more of an incentive to advertise.
B) have less of an incentive to advertise.
C) will only participate in price advertising.
D) can better signal the quality of their product if they do not advertise.

Question 46

Persuasive advertising:

A) is informative.
B) is wasteful.
C) can create market power for firms through brand differentiation.
D) has been shown to do little to increase sales.

Question 47

Sometimes advertising is simply about trying to change our minds. An example of this with respect to Coca-Cola include the following previous slogans:
I. The pause that refreshes.
II. Coca-Cola hits the spot, for only a nickel you get a lot.
III. Things go better with Coca-Cola.

A) I and II only
B) I and III only
C) II and III only
D) I, II, and III

Question 48

Persuasive ads:

A) make people feel good about a product, and this is potentially valuable.
B) lower the enjoyment people have for products.
C) make people unambiguously worse off.
D) generally do not succeed in persuading people.

Question 49

Which of the following is NOT subsidized through advertising?

A) Google searches
B) cable TV
C) Apple iPhones
D) The Wall Street Journal

Question 50

Persuasive advertising:

A) is informative.
B) is wasteful.
C) can create market power for firms by brand differentiation.
D) has been shown to do little to increase sales.

Question 51

Informative advertising:

A) degrades the competitive process by increasing the costs of firms.
B) degrades the competitive process by confusing the consumer with information about prices and new products.
C) improves the competitive process by educating the consumer about prices and new products.
D) improves the competitive process by making all products appear to be the same.

Question 52

Perfectly competitive firms advertise:

A) somewhat.
B) extensively.
C) not at all.
D) only in their infant stage.

Question 53

Advertising:

A) is about price and quality only.
B) is informative only.
C) infers that the seller expects the product to make a big splash.
D) is only when the seller fears the product will not make a big splash.

Question 54

In No Logo, Naomi Klein criticizes companies that prioritize the brand name over quality of their product. What function of advertising is Klein concerned about?

A) informative
B) signaling
C) persuasion
D) informative, signaling, and part of the product

Question 55

The movie The Invention of Lying takes place in a world where everyone can only tell the absolute truth. An advertisement for Coke admits there is nothing new about the product and that it's basically just brown sugar water. It ends with the tagline: "Coke. It's very famous." How is Coke using advertising in this fictional advertisement?

A) as a signal
B) as conveying new information
C) as part of the product
D) both as a signal and the conveyor of new information

Question 56

When an advertisement serves as a signaling device, it provides potential customers with:

A) the idea that the product is expected to be very popular for a long time.
B) information on price.
C) information on quality.
D) information on availability.

Question 57

Consumers benefit from advertising:
I. by gaining product information.
II. by being persuaded to try a new product they might like.
III. when the ad provides a signal of the product's quality.
IV. if the ad leads to a lower price for the product.

A) IV only
B) II and III only
C) I and II only
D) I, II, III and IV

Question 58

Price advertising typically:

A) raises prices for consumers, as the cost of advertising is simply passed off to consumers.
B) raises prices and lowers output for consumers.
C) is wasteful advertising.
D) lowers prices and increases consumer welfare.

Question 59

States allowing firms in certain industries to advertise prices, a form of ______, has been found to ______.

A) signaling; decrease prices
B) informative advertising; increase prices
C) informative advertising; decrease prices
D) signaling; increase prices

Question 60

Which of the following is NOT true about advertising?

A) Advertising brings businesses and customers together.
B) Advertising helps promote many useful goods and services.
C) Advertising improves the incentive to make low-cost, high-quality items.
D) Advertising lowers the social surplus by costing businesses a lot of money with no corresponding benefit.

Question 61

In the long run, monopolistic competitive firms will end up producing at a price equal to that of competitive markets.

Question 62

A monopolistic competitive firms charges P = MC.

Question 63

As long as profits are possible, more firms will enter the market, reducing the profits to each individual firm in a monopolistic competition.

Question 64

The behavior of firms in monopolistic competition is similar to that in a monopoly, but monopolistic competition allows for entry and exit of competing firms.

Question 65

In the long run, a monopolistically competitive firm will operate where P = AC and will no longer have economic profits.

Question 66

A monopolistically competitive firm operates where MR = MC.

Question 67

Both perfectly competitive markets and monopolistically competitive markets feature product differentiation.

Question 68

A monopolistic competitive firm is able to charge P > MC because its product is slightly different from the product of other firms.

Question 69

Products can be differentiated only by taste and style.

Question 70

Under monopolistic competition, small inefficiencies are the price we pay to get greater variety and innovation.

Question 71

Firms that are monopolistically competitive face a demand curve that is identical to one of a perfectly competitive firm.

Question 72

A monopolistic competitive firm produces a product like oil that has perfect substitutes.

Question 73

Monopolistic competition is similar to that of monopoly, but it allows for free entry and exit of competing firms.

Question 74

In the long run, a monopolistically competitive firm will set P = MC.

Question 75

Products can be differentiated along any dimension that people care about, such as taste, style, features, or location.

Question 76

Owning a small oil well is a good example of a monopolistically competitive market.

Question 77

In the long run, monopolistically competitive firms end up producing at a price equal to that of competitive markets.

Question 78

Monopolistically competitive firms face a downward-sloping demand curve.

Question 79

When P > MC, output is at the socially efficient level in a monopolistically competitive firm.

Question 80

A monopolistically competitive firm continues to make profits so long as P > AC.