Deck 15: Market Structures Ii: Monopolistic Competition

Question 1

The typical firm in the South African economy

A) has some degree of market power.
B) sells its product for a price that is equal to the marginal cost of producing the last unit.
C) is perfectly competitive.
D) is a monopoly.

Answer 1

has some degree of market power.

Question 2

Similar to a monopolist, a monopolistically competitive firm faces a downward sloping demand curve for its product.

Answer 2

True

Question 3

When a monopolistically competitive firm raises its price,

A) quantity demanded falls to zero.
B) quantity demanded declines, but not to zero.
C) the market supply curve shifts outward.
D) quantity demanded remains constant.

Answer 3

quantity demanded declines, but not to zero.

Question 4

A market structure in which there are many firms selling products that are similar but not identical is known as

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

Question 5

Economists generally agree that monopolistically competitive firms should be regulated in order to increase economic efficiency.

Question 6

Critics of advertising argue that advertising decreases competition, while defenders of advertising argue that advertising increases competition and reduces prices to consumers.

Question 7

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

A) A large number of sellers.
B) Firms are price takers.
C) Free entry into the market.
D) A differentiated product.

Question 8

Which of the following products is least likely to be sold in a monopolistically competitive market?

A) Breakfast cereal.
B) Cotton.
C) Video games.
D) Beer.

Question 9

If existing fast food firms realise sizable economic profits in the short run, the demand curves of existing firms will

A) decrease and become more price elastic as new firms enter the market.
B) decrease and become less price elastic as new firms enter the market.
C) increase and become more price elastic as new firms enter the market.
D) increase and become less price elastic as new firms enter the market.

Question 10

Which of the following is true regarding the similarities and differences in monopolistic competition and monopoly?

A) The monopolist faces a downward sloping demand curve, while the monopolistic competitor faces an elastic demand curve.
B) The monopolist charges a price above marginal cost, while the monopolistic competitor charges a price equal to marginal cost.
C) The monopolist makes economic profits in the long run, while the monopolistic competitor makes zero economic profits in the long run.
D) Both the monopolist and the monopolistic competitor operate at the efficient scale.

Question 11

In the short run, if the price is above average total cost in a monopolistically competitive market, the firm makes

A) losses, and firms exit the market.
B) profits, and firms exit the market.
C) losses, and firms enter the market.
D) profits, and firms enter the market.

Question 12

Similar to firms in perfectly competitive markets, firms in monopolistically competitive markets can enter and exit the market without restriction, so profits are driven to zero in the long run.

Question 13

Which of the following is not a characteristic of a monopolistically competitive market?

A) Free entry and exit.
B) Long run economic profits.
C) Many sellers.
D) Differentiated products.

Question 14

Even advertising that appears to contain little information about the product may be useful because it provides a signal about the quality of the product.

Question 15

Both monopolists and monopolistically competitive firms produce the quantity at which marginal revenue equals marginal cost, and then use the demand curve facing the firm to determine the price consistent with that quantity.

Question 16

Monopolistic competition is a market structure in which few firms sell similar products.

Question 17

Firms that sell highly differentiated consumer products are more likely to spend a large percentage of their revenue on advertising.

Question 18

Advertising must be socially wasteful, because advertising simply adds to the cost of producing a product.

Question 19

In the long run, firms in monopolistically competitive markets produce at the minimum of their average total cost curves.

Question 20

Because monopolistically competitive firms produce differentiated products, each firm

A) faces a demand curve that is horizontal.
B) faces a demand curve that is vertical.
C) has no control over product price.
D) has some control over product price.

Question 21

The traditional view of monopolistic competition holds that this type of industrial structure is inefficient because

A) there are too few firms to reach an efficient level of production.
B) firms do not operate at the output that minimises average costs.
C) advertising is not used extensively enough to yield an efficient differentiation of the products.
D) consumers do not have enough choice among the product varieties available.

Question 22

Monopolistic competition differs from perfect competition because in monopolistically competitive markets

A) there are barriers to entry.
B) all firms can eventually earn economic profits.
C) each of the sellers offers a somewhat different product.
D) strategic interactions between firms are important.

Question 23

The use of the word "monopoly" in the name of the market structure called "monopolistic competition" refers to the fact that

A) monopolistically competitive firms charge prices equal to their marginal costs, just like monopolists.
B) a monopolistically competitive firm faces a downward sloping demand curve for its differentiated product, and so does a monopolist.
C) monopolistically competitive markets have free entry and exit, just like a monopolistic market.
D) monopolistically competitive firms produce beyond their efficient scale, and so do monopolists.

Question 24

Product differentiation allows the firm to

A) raise price and lower quantity demanded.
B) raise price without suffering a substantial loss of sales.
C) shift the market demand curve to the left.
D) decrease barriers to entry.

Question 25

Carmen's Café is a monopolistic competitor. If Carmen is currently producing at the output level where her average total cost is minimised and the café is earning economic profits, then in the long run output will

A) decrease and average total cost will increase.
B) decrease and average total cost will decrease.
C) remain unchanged as Carmen's Café is doing the best it can.
D) increase and average total costs will decrease.

Question 26

One source of inefficiency in monopolistic competition is that

A) since price is above marginal cost, surplus is redistributed from buyers to sellers.
B) monopolistically competitive firms earn economic profits in the long run.
C) monopolistically competitive firms produce beyond their efficient scale.
D) since price is above marginal cost, some units are not produced that buyer's value in excess of the cost of production and this causes a deadweight loss.

Question 27

There are several reasons why demand curves may become more price elastic. Among them are

A) the market becomes more monopolistic and cross elasticities approach zero.
B) the goods become less differentiated and more firms enter the industry.
C) consumers have fewer substitutes and firms drop out of the industry.
D) industry demand increases and consumers increase spending.

Question 28

Which of the following is true with regard to monopolistically competitive firms' scale of production and pricing decisions? Monopolistically competitive firms produce

A) at the efficient scale and charge a price equal to marginal cost.
B) at the efficient scale and charge a price above marginal cost.
C) with excess capacity and charge a price above marginal cost.
D) with excess capacity and charge a price equal to marginal cost.

Question 29

Which of the following is not put forth as a criticism of advertising and brand names?

A) Advertising manipulates people's tastes to create a desire that otherwise would not exist.
B) Advertising increases competition, which causes unnecessary bankruptcies and layoffs.
C) Advertising increases brand loyalty, causes demand to be more inelastic and, thus, increases mark-up over marginal cost.
D) Brand names cause consumers to perceive differences between goods that do not exist.
E) Brand names are only relevant to high priced products and so exclude other types of products.

Question 30

If the monopolistic competitor firm described by the graph above is producing at the profit-maximising (loss-minimising) level of output, it

A) is generating zero profits.
B) is generating profits.
C) could be generating either profits or losses depending on what quantity it chooses to produce.
D) is generating losses.

Question 31

Which of the following firms is most likely to spend a large percentage of their revenue on advertising?

A) The producer of a highly differentiated consumer product.
B) The manufacturer of an undifferentiated commodity.
C) A perfect competitor.
D) The manufacturer of an industrial product.
E) The producer of a low quality product that costs the same to produce as a similar high quality product.

Question 32

Perhaps it's not a problem at all, but if "too much choice" were a problem for consumers, it would occur in which market structure(s)?

A) Perfect competition.
B) Monopoly.
C) Monopolistic competition.
D) Perfect competition and monopolistic competition.

Question 33

Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilibrium?

A) P = AR
B) MR = MC
C) P > MC
D) All of the above are correct.

Question 34

The graph below depicts a monopolistically competitor firm, which is

A) generating normal profits.
B) generating profits in the short run.
C) generating zero profits in the long run.
D) generating losses in the short run.

Question 35

In the long run, under monopolistic competition, when firms advertise,

A) they will still earn zero economic profit.
B) they can earn positive economic profit by increasing market share.
C) the market price must fall.
D) the market price must rise.

Question 36

To maximise its profit, a monopolistically competitive firm chooses its level of output by looking for the level of output at which

A) price equals marginal cost.
B) marginal revenue equals marginal cost.
C) average total cost is minimised.
D) all of the above are correct.

Question 37

The use of the word "competition" in the name of the market structure called "monopolistic competition" refers to the fact that

A) there are many sellers in a monopolistically competitive market, and there is free entry and exit in the market just like a competitive market.
B) monopolistically competitive firms face a downward sloping demand curve, just like competitive firms.
C) monopolistically competitive firms charge prices equal to the minimum of their average total cost, just like competitive firms.
D) the products are differentiated in a monopolistically competitive market, just like in a competitive market.

Question 38

The monopolistically competitive firm shown in the graph above will, in the long run,

A) attract new producers into the market, which will shift the demand faced by incumbent firms to the left.
B) attract new producers into the market, which will shift the demand faced by incumbent firms to the right.
C) cause producers to exit the market, which will shift the demand faced by incumbent firms to the left.
D) cause producers to exit the market, which will shift the demand faced by incumbent firms to the right.

Question 39

Which of the following is true regarding the production and pricing decisions of monopolistically competitive firms? Monopolistically competitive firms choose the quantity at which marginal cost equals

A) marginal revenue and then use the demand curve to determine the price consistent with this quantity.
B) average total cost and then use the supply curve to determine the price consistent with this quantity.
C) marginal revenue and then use the supply curve to determine the price consistent with this quantity.
D) average total cost and then use the demand curve to determine the price consistent with this quantity.

Question 40

When firms enter a monopolistically competitive market and the business-stealing externality is larger than the product variety externality, then

A) there are too few firms in the market, and market efficiency could be increased with additional entry.
B) the only way to improve efficiency in this market is for the government to regulate it like a natural monopoly.
C) there are too many firms in the market, and market efficiency could be increased if firms exited the market.
D) the number of firms in the market is optimal, and the market is efficient.

Question 41

Why does a typical monopolistically competitive firm face a downward sloping demand curve?

Question 42

Evaluate the following statement: "Advertisements that use celebrity endorsements are devoid of any value and do not enhance the efficient functioning of markets."

Question 43

If some coffee drinkers continue to buy Ricoffy even when Nescafé coffee is on sale and cheaper, it may be a result of

A) irrational consumer behaviour.
B) a high cross elasticity between the two goods.
C) brand loyalty.
D) Ricoffy being a monopoly.

Question 44

In markets where the government imposes an excise tax on unit sales, it also has a tendency to dabble with restrictions on advertising (for example, cigarettes and hard liquor). Do potential (or actual) restrictions on advertising in these markets serve the interest of a government that is interested in maximising its tax revenue from the sale of these products? Explain your answer.

Question 45

Assume the role of a defender of advertising. Describe the characteristics of advertising that enhance the effectiveness of markets and increase the social welfare of society.

Question 46

Defenders of the use of brand names argue that brand names

A) All of these answers.
B) are useful, even in socialist economies such as the former Soviet Union.
C) provide information about the quality of the product.
D) give firms incentive to maintain high quality.

Question 47

Advertising

A) provides information about products, including prices and seller locations.
B) has been shown to increase competition and reduce prices compared to markets without advertising.
C) signals quality to consumers, since firms spend so much money on advertisements.
D) All of the above are correct.

Question 48

Many airlines promise "frequent flyer" miles to passengers who travel on their flights regularly. This is an example of a firm attempting to create

A) exclusivity on its flights.
B) a predatory pricing scheme.
C) discounting below marginal costs.
D) brand loyalty.

Question 49

Critics of advertising argue that advertising

A) wastes resources, because it creates an image without necessarily improving product quality.
B) lowers barriers to entry into an industry, because new firms can more easily establish themselves as competitors.
C) advertising increases competition by providing information about prices.
D) advertising encourages monopolisation of markets by raising entry barriers too high.

Question 50

Which of the following firms has the least incentive to advertise?

A) A manufacturer of breakfast cereal.
B) A wholesaler of crude oil.
C) A restaurant.
D) A manufacturer of home heating and air conditioning.

Question 51

What is meant by the term "excess capacity" as it relates to monopolistically competitive firms?

Question 52

In a small university town, four take away restaurants have opened in the last two years. Demonstrate the effect of the new market entrants on the demand for the existing take away restaurants that already serve this market. Assume that the local town council has now placed a ban on any new take away restaurants in the town. How will this affect the long run profitability of incumbent firms?

Question 53

List five goods that are likely sold in a monopolistically competitive market.

Question 54

One of the reasons that supermarkets advertise so much is that

A) each hopes to create a natural monopoly.
B) they are in a perfectly competitive industry, where advertising is the difference between economic and normal profits.
C) they want to develop brand loyalty.
D) they want to increase price elasticity of demand.

Question 55

Which of the following is not an argument put forth by economists in support of the use of advertising? Advertising

A) increases competition.
B) provides information to customers about prices, new products, and location of retail outlets.
C) provides a creative outlet for artists and writers.
D) provides new firms with the means to attract customers from existing firms.

Question 56

Use a graph to demonstrate why a profit-maximising monopolistically competitive firm must operate at excess capacity. Explain why a perfectly competitive firm is not subject to the same constraint.

Question 57

Expensive television commercials that appear to provide no specific information about the product being advertised

A) may be useful because they provide a signal to the consumer about the quality of the product.
B) should be banned by regulators because they add to the cost of the product without providing the consumer with any useful information about the product.
C) only affect the buying habits of irrational consumers.
D) are most likely used by firms that are perfect competitors.

Question 58

Assume the role of a critic of advertising. Describe the characteristics of advertising that reduce the effectiveness of markets and decrease the social welfare of society.