Deck 16: Monopolistic Competition

Question 1

When a firm in a monopolistically competitive market earns zero economic profit, its product price must equal marginal cost.

Answer 1

False

Question 2

Advertising during the Rugby World Cup is an example of providing information in the advertisement's content.

Answer 2

False

Question 3

Brand names can improve product quality because firms will want to avoid the financial loss that would follow a fall in reputation. Firms will thus work harder to maintain high quality.

Answer 3

True

Question 4

Excess capacity occurs whenever a firm is operating at an output level below where average total cost is minimised.

Question 5

The Pizza Hut in Agra, India has a very similar menu design, layout and content as the Pizza Hut in Bondi Junction, Sydney. This is an example of a brand name enhancing market efficiency for Australian tourists visiting India.

Question 6

If the long-run price is equal to marginal cost, then the firm must be operating at efficient scale.

Question 7

Whenever a monopolistically competitive firm marks price above marginal cost, the firm will make a profit.

Question 8

A price mark-up over marginal cost is inconsistent with market attributes of free entry and zero profit.

Question 9

For a profit-maximising firm in a monopolistically competitive market, when price is equal to average total cost, price must lie above marginal cost.

Question 10

Advertising only benefits suppliers of a good and has little value to consumers.

Question 11

In the long-run equilibrium in a monopolistic market, a profit-maximising firm will see the price lower than average total cost.

Question 12

Economists who argue that advertising enhances market efficiency suggest that celebrity advertising signals product quality.

Question 13

If firms in a monopolistically competitive market are earning positive profits, firms will enter until price equals the minimum of average total cost.

Question 14

When McDonald's opens a store in Dhaka, Bangladesh, it will have an incentive to set product quality and customer service consistent with local standards.

Question 15

If brand names are efficient market mechanisms, banning them will lead to less competition and higher prices in the markets brand names from which they are absent.

Question 16

The business stealing externality arises because firms post a price above marginal cost and are therefore always eager to sell additional units.

Question 17

Advertising may impede competition by fostering brand loyalty and allowing firms to increase their mark-up.

Question 18

Like a competitive firm, a monopolistically competitive firm maximises profit by setting P=MC.

Question 19

Firms in a monopolistically competitive market are operating at their efficient scale.

Question 20

From a total welfare perspective, it is possible that too many firms can enter into a monopolistically competitive market.

Question 21

Suppose that in the short run, a monopolistically competitive firm sells its product for $20 per unit. Its average total cost at the optimal level of output is $30. This means that:

A) the firm makes a loss in the short run and the long run
B) the firm makes a profit in the short run and the long run
C) the firm's demand curve will shift to the left as new firms enter the market
D) the firm's demand curve will shift to the right as firms leave the market

Question 22

In a monopolistically competitive industry, price is:

A) above marginal cost since each firm is a price setter
B) equal to marginal cost since each firm is a price taker
C) below marginal cost since each firm is a price setter
D) equal to marginal cost since each firm is a price setter

Question 23

Critics of advertisements that depict 'beautiful' human bodies as the primary focus of the message are likely to claim that the purpose of the advertisement is to create desires that do not already exist.

Question 24

When poor-quality products are advertised using cheap advertising, consumers learn to ignore such cheap advertising.

Question 25

The 'monopoly' in monopolistically competitive markets is the result of a firm having a monopoly on a product for which there are no substitutes.

Question 26

Given that firms in monopolistically competitive markets share the attribute of many sellers with firms in perfect competition, it follows that firms in both markets face horizontal demand curves.

Question 27

The profit-maximising rule for a firm in a monopolistically competitive market is to select the quantity at which marginal revenue is equal to long-run average total cost.

Question 28

If advertising decreases the elasticity of demand for specific brand names of beer, we would expect firms to be more able to exercise market power.

Question 29

In the short run, a firm in a monopolistically competitive market operates much like a monopolist.

Question 30

Advertising can be used as a signal of product quality, even if the advertisement contains little information about the product.

Question 31

Monopolistically competitive markets have all the desirable welfare properties of perfectly competitive markets.

Question 32

The 'competition' in monopolistically competitive markets is most likely a result of:

A) free entry and free exit
B) product differentiation
C) strategic interactions among sellers
D) product homogeneity

Question 33

The product-variety externality associated with monopolistic competition arises because in monopolistically competitive markets firms try to mimic the success of other brands and products.

Question 34

When free entry is one of the attributes of a market structure, economic profits are:

A) eventually driven to zero
B) negative for all firms
C) never above or below zero
D) positive for all firms

Question 35

Suppose that in the short run, a monopolistically competitive firm sells its product for $35 per unit. Its average total cost at this level of output is $39. This means that:

A) the firm makes a short-run profit of $4 per unit
B) the firm makes a short-run loss of $4 per unit
C) the firm makes a short-run and long-run profit of $4 per unit
D) the firm makes a short-run and long-run loss of $4 per unit

Question 36

In a monopolistically competitive industry, the profit-maximising firm will produce where marginal costs are equal to average total cost.

Question 37

The reason that monopoly remains a root-word for monopolistically competitive market is because of:

A) strategic interactions among sellers
B) there being many sellers
C) sellers being price makers rather than price takers
D) the homogeneous products that are produced

Question 38

The use of celebrity endorsements in advertising has enabled firms to differentiate their products.

Question 39

In a monopolistically competitive market structure, each firm sells a good that is:

A) slightly different from goods sold by other firms
B) produced at minimum average cost
C) identical to other goods sold in the market
D) produced at minimum marginal cost

Question 40

Counterfeiting of goods is a rational market outcome of the success of a brand.

Question 41

Graph 17-1

Refer to Graph 17-1. If a firm in a monopolistically competitive market was producing the level of output depicted as Q_d in panel d, it would:

A) be minimising its losses
B) be losing market share to other firms in the market
C) be operating at excess capacity
D) not be maximising its profit

Question 42

Economic losses are in a monopolistically competitive markets:

A) a signal to some incumbent firms to exit the market
B) are never possible in the short run
C) a signal for new firms to enter the market
D) only possible if collusion between the firms cannot be maintained

Question 43

Graph 17-3
Lines in these figures reflect the potential effect of entry and exit in a monopolistically competitive market on the demand and/or marginal cost curves of incumbent firms.
Refer to Graph 17-3. Panel d in the set of figures shown depicts the effect on incumbent firms of:

A) existing firms exiting the market
B) long-run economic losses
C) a decrease in the diversity of products offered in the market
D) new entrants in the market

Question 44

As new firms enter a monopolistically competitive market, profits of existing firms:

A) decline and product diversity in the market decreases
B) rise and product diversity in the market decreases
C) rise and product diversity in the market increases
D) decline and product diversity in the market increases

Question 45

Graph 17-2

Refer to graph 17-2. Which of the graphs shown would be consistent with the firm making short-run profit in a competitive market?

A) panel a
B) panel b
C) panel c
D) panel d

Question 46

In the long-run equilibrium, a monopolistically competitive firm makes zero profit because:

A) marginal revenue will equal marginal cost
B) price will equal marginal cost
C) marginal cost intersects the minimum of average total cost
D) price will equal average total cost

Question 47

Graph 17-2

Refer to Graph 17-2. Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is making economic profits?

A) panel a
B) panel b
C) panel c
D) panel d

Question 48

As some incumbent firms exit a monopolistically competitive market, profits of existing firms:

A) decline and product diversity in the market decreases
B) rise and product diversity in the market increases
C) rise and product diversity in the market decreases
D) decline and product diversity in the market increases

Question 49

A monopolistically competitive firm chooses:

A) price, but output is determined by cartel production quota
B) the quantity of output to produce and the price at which it will sell its output
C) the quantity of output to produce, but the market determines price
D) price, but competition in the market determines the quantity

Question 50

Graph 17-3
Lines in these figures reflect the potential effect of entry and exit in a monopolistically competitive market on the demand and/or marginal cost curves of incumbent firms.
Refer to the graphs in 17-3. Which panel is consistent with a celebrity announcing her endorsement of a specific brand's product?

A) panel a
B) panel b
C) panel c
D) panel d

Question 51

Graph 17-1

Refer to Graph 17-1, panel A. Assume the market is monopolistically competitive and in long-run equilibrium. If drawn in, the average total cost curve would be:

A) tangent to the demand curve at the market price, P^a
B) tangent to the demand curve where marginal cost intersects demand
C) tangent to the marginal revenue curve at the market price, P^a
D) tangent to the marginal revenue curve at the point where marginal cost intersects marginal revenue

Question 52

Graph 17-1

Refer to Graph 17-1. Which of the following graphs would most likely represent a profit-maximising firm in a monopolistically competitive market?

A) panel a
B) panel b
C) panel c
D) panel d

Question 53

Graph 17-3
Lines in these figures reflect the potential effect of entry and exit in a monopolistically competitive market on the demand and/or marginal cost curves of incumbent firms.
Refer to Graph 17-3. Panel c in the set of graphs shown depicts the effect on incumbent firms of:

A) a few existing firms exiting the market
B) new entrants in the market
C) long-run economic losses
D) an increase in the diversity of products offered in the market

Question 54

Graph 17-2

Refer to Graph 17-2. Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is minimising its losses?

A) panel a
B) panel b
C) panel c
D) panel d

Question 55

If firms in a monopolistically competitive industry are making losses:

A) they will likely be subject to regulation
B) they ought to form a cartel
C) new firms will enter the market
D) some firms must exit the market

Question 56

The profit-maximising rule for a firm in a monopolistically competitive market is to select the quantity at which:

A) average revenue exceeds average total cost
B) marginal revenue is equal to marginal cost
C) average total cost is minimum
D) demand is equal to supply

Question 57

When firms are encouraged to enter monopolistically competitive markets:

A) the diversity of products in the market must be small
B) they are guaranteed economic profits upon entry
C) some firms in the market must be making economic profits
D) no firms can experience economic losses

Question 58

If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios would best reflect the change facing incumbent firms as the market adjusts to its new equilibrium?

A) a downward shift in their marginal cost curve
B) an upward shift in their marginal cost curve
C) an increase in demand
D) a decrease in demand

Question 59

A profit-maximising firm in a monopolistically competitive market is characterised by which of the following?

A) revenue is always maximised along with profit
B) average revenue exceeds marginal revenue
C) marginal revenue exceeds average revenue
D) average revenue is equal to marginal revenue

Question 60

If firms in a monopolistically competitive market are incurring economic losses, which of the following scenarios would best reflect the change facing incumbent firms (who are able to stay in the market) as the market adjusts to its new equilibrium?

A) a downward shift in their marginal cost curve
B) an upward shift in their marginal cost curve
C) an increase in demand
D) a decrease in demand

Question 61

Hotels in Sydney observe that on most nights, about 80 per cent of their rooms are occupied, with the remainder being empty. This kind of excess capacity is indicative of what kind of market?

A) tourist markets
B) competitive
C) oligopoly
D) monopolistically competitive

Question 62

In the long-run equilibrium, a difference between monopolistically competitive firms and perfectly competitive firms is:

A) monopolistically competitive firms produce on the downward sloping section of their ATC curves, while perfectly competitive firms produce at the minimum of ATC
B) monopolistically competitive firms set P=MC, while competitive firms set P=MR
C) individual firm demand slopes down for monopolistically competitive firms, while market demand is horizontal for perfectly competitive markets
D) average total cost is U-shaped for monopolistically competitive firms, while it is downward sloping for perfectly competitive firms

Question 63

Graph 17-4

Refer to Graph 17-4. Which of the panels shown depicts a firm in a monopolistically competitive market earning economic profits in the short run?

A) both panels c and d
B) panel d
C) panel c
D) none of the above

Question 64

In a monopolistically competitive market, equilibrium is characterised by:

A) the average total cost curve being tangent to the demand curve
B) marginal cost crossing the demand curve
C) price being equal to the minimum of average total cost
D) firms making a positive economic profit

Question 65

When a profit-maximising firm in a monopolistically competitive market is producing the short-run equilibrium quantity:

A) it will be earning economic profits
B) its demand curve will be tangent to its average total cost curve
C) its demand curve can be above, below or be tangent to its average total cost curve
D) its marginal revenue will exceed marginal cost

Question 66

In the market for hotel rooms in large metropolitan markets, the cost of a single night's stay can be several times higher than that of a similar room in a suburban market. If the market for hotel rooms is characterised by monopolistic competition, this difference in price can be partially explained by:

A) a higher cost for accommodations to compensate for the lower cost of airfare into metropolitan markets
B) the mark-up of price over a higher marginal cost in large metropolitan markets
C) the cost of living in a large city
D) transportation access

Question 67

In the short run, a firm in a perfectly competitive market operates at:

A) efficient scale and a monopolistically competitive firm operates at excess capacity
B) efficient scale and a monopolistically competitive firm operates at efficient scale
C) excess capacity and a monopolistically competitive firm operates at excess capacity
D) we cannot say without more information

Question 68

For profit-maximising firms in a monopolistically competitive market, another customer means:

A) potential economic losses
B) marginal cost could potentially exceed price
C) more profit
D) zero economic profit

Question 69

Graph 17-4

Refer to Graph 17-4. Which of the markets depicted in each panel is likely to see firms exit in the long run?

A) panel A
B) panel B
C) panel C
D) panel D

Question 70

A monopolistically competitive market can have too many firms enter, that is, the number of firms in a market can be greater than the socially optimal number. For there to be too much entry, which of the following needs to occur?

A) the product-variety externality is greater than the business-stealing externality
B) the business-stealing externality is greater than the product-variety externality
C) price needs to be below average total cost, leading to negative profits
D) some consumers must value the product at less than the price they paid

Question 71

Graph 17-4

Refer to Graph 17-4. Which of the panels shown could not characterise a short-run equilibrium for a firm in a monopolistically competitive market?

A) panel a
B) panel b
C) panel c
D) panel d

Question 72

If a firm is making zero profits, then which of the following must be true?

A) price equals average total cost
B) price equals marginal cost
C) the firm is operating at its efficient scale
D) the firm is not marking up over marginal cost

Question 73

Graph 17-4

Refer to Graph 17-4. Which of the markets depicted in each panel is likely to see a firm enter in the long run?

A) panels A and B
B) panels B and C
C) panels A and D
D) panels C and D

Question 74

A firm in a monopolistically competitive market operates on the:

A) rising portion of its average total cost curve
B) declining portion of its average total cost curve
C) rising portion of its demand curve
D) rising portion of its supply curve

Question 75

In equilibrium, product differentiation in monopolistically competitive markets ensures that:

A) price will exceed marginal cost
B) price will equal marginal cost
C) average revenue will equal marginal revenue
D) average variable cost will be declining

Question 76

Graph 17-4

Refer to Graph 17-4. Panel b in the set of figures shown is consistent with a firm in a monopolistically competitive market that is:

A) incurring economic gains
B) in a short-run equilibrium, but not a long-run equilibrium
C) in both a short-run and a long-run equilibrium
D) in a long-run equilibrium, but not a short-run equilibrium

Question 77

In the long run, a profit-maximising firm in a monopolistically competitive market operates at:

A) some point above its average total cost curve
B) the minimum point on its average total cost curve
C) some point along the upward-sloping portion of its average total cost curve
D) some point along the downward-sloping portion of its average total cost curve

Question 78

The entry and exit of firms in a monopolistically competitive market guarantees that:

A) economic profits and economic losses disappear in the long run
B) economic profits can survive in the long run, but not economic losses
C) economic losses will exist in the long run, but not economic profits
D) both economic profits and economic losses will exist in the long run

Question 79

Graph 17-4

Refer to Graph 17-4. Which of the panels shown reflects a long-run equilibrium for a firm in a monopolistically competitive market?

A) panel a
B) panel b
C) panel c
D) panel d

Question 80

The efficient scale occurs when the firm's:

A) average total cost curve must be falling
B) average total cost curve must be rising
C) average revenue must be equal to the minimum of average total cost
D) average revenue must exceed the minimum of average total cost