Deck 13: Monopolistic Competition: The Competitive Model in a More Realistic Setting

Question 1

-Refer to Table 13-1. What is the marginal revenue of the 3rd unit?

A) $6.50
B) $5.50
C) $1.83
D) $0.50

Answer 1

$5.50

Question 2

Which of the following characterizes the market that Intelligentsia competes in?

A) All coffeehouses face horizontal demand curves.
B) Coffeehouses sell identical products.
C) Barriers to entry are low.
D) There are a small number of firms.

Answer 2

Barriers to entry are low.

Question 3

Which of the following describes a difference between the marginal revenue and demand curves of a perfectly competitive firm and a monopolistically competitive firm?

A) The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies above its demand curve.
B) The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies below its demand curve.
C) The monopolistically competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a perfectly competitive firm lies below its demand curve.
D) The marginal revenue curve of a monopolistically competitive firm lies below its demand curve; the marginal revenue curve of a perfectly competitive firm lies above its demand curve.

Answer 3

The perfectly competitive firm's marginal revenue and demand curves are the same; the marginal revenue curve of a monopolistically competitive firm lies below its demand curve.

Question 4

Complete the following table.

Question 5

-Refer to Figure 13-9. Which of the graphs in the figure depicts a monopolistically competitive firm that is earning economic profits?

A) Panel A
B) Panel B
C) Panel C
D) Panel A and Panel B

Question 6

Central Grocery in New Orleans is famous for its muffaletta, a large round sandwich filled with deli meats and topped with a tangy olive salad. Suppose the following table represents cost and revenue data for Central Grocery.



Illustrate this data by graphing the demand, MR, MC, and ATC curves. Identify the profit-maximizing price and quantity, and show the area representing the total profit received by Central Grocery.

Question 7

Central Grocery in New Orleans is famous for its muffaletta, a large round sandwich filled with deli meats and topped with a tangy olive salad. Suppose the following table represents cost and revenue data for Central Grocery. Fill in the columns for TR, MR, MC, ATC, and profit. If Central Grocery wants to maximize profits, what price should it charge for a muffaletta, what quantity should it sell, and what will be the amount of its total profit?

Question 8

If the strategy of selling artisanal coffee succeeds and customers are willing to pay higher prices for this higher-end coffee, third wave coffeehouses will

A) no longer be monopolistically competitive.
B) continue to earn substantial economic profits in the long run.
C) eventually suffer economic losses, as do all coffeehouses.
D) likely attract competitors that offer the same kind of coffee, and all else equal, eventually economic profits will be competed away.

Question 9

If Amazon is successful with its Amazon Go convenience store concept, these Amazon Go convenience stores

A) will likely earn an economic profit in both the short-run and the long-run.
B) may very well earn an economic profit in the short-run, but the profit will likely be competed away in the long-run as other firms enter the industry.
C) will definitely earn an economic profit in the short-run, but will most likely suffer economic losses in the long-run.
D) will likely suffer economic losses in the short-run, but will eventually earn an economic profit in the long-run.

Question 10

-Refer to Figure 13-13. What is the area that represents the firm's total cost?

A) P1aQ10
B) P1cQ30
C) P4eQ40
D) P2dQ40

Question 11

The table below shows the demand and cost data facing "Velvet Touches,"
a monopolistically competitive producer of velvet throw pillows.



Use the data to answer the following questions.
a. Complete the Total Revenue (TR), Marginal Revenue (MR), and Marginal Cost (MC) columns above.
b. What are the profit-maximizing price and quantity for Velvet Touches?
c. Is the firm making a profit or a loss? How much is the profit or loss? Show your work.
d. Is this firm operating in the long run or in the short run? Explain your answer.
e. If the firm's profit or loss is typical of all firms in the market for throw pillows, what is likely to happen in the future? Will there be more firms or will some existing firms leave the industry? Explain your answer.
f. What will happen to the typical firm's profit or loss after all entry/exit adjustments?

Question 12

How does the long-run equilibrium of a monopolistically competitive industry differ from that of a perfectly competitive industry?

A) A firm in monopolistic competition will earn economic profits but a firm in perfect competition earns zero profit.
B) A firm in monopolistic competition will charge a price higher than the average cost of production but a firm in perfect competition charges a price equal to the average cost of production.
C) A firm in monopolistic competition does not take full advantage of its economies of scale but a firm in perfect competition produces at the lowest average cost possible.
D) A firm in monopolistic competition produces an allocatively efficient output level while a firm in perfect competition produces a productively efficient output level.

Question 13

UK-based cosmetics retailer Lush has begun opening stores which they are calling "Naked", where customers can purchase their products free of any plastic packaging. The company, which is already 100% vegetarian and against animal testing, is trying out this concept as a way to allow customers to buy its products without harming the environment. According to Emily Salter, an analyst at Global Data Retail, Lush has recognized that there is demand for packaging-free products and is the first mass market retailer to try this approach. The company also hopes that other retailers will follow their lead in an effort to eliminate plastic from the retail industry. Salter believes that the way that retailers will become plastic-free is through pressure from both consumers and competitors.
Source: Anna Schaverien, "Lush Creates Packaging-Free Shops. But Will Other Retailers Follow Suit?," Forbes, March 12, 2019.

-Refer to the Article Summary. By marketing to environmentally conscious customers, Lush is trying to set its business apart from competing cosmetic retailers. This is an example of

A) defending a brand name.
B) blocking entry into the market.
C) legally enforcing a trademark.
D) product differentiation.

Question 14

UK-based cosmetics retailer Lush has begun opening stores which they are calling "Naked", where customers can purchase their products free of any plastic packaging. The company, which is already 100% vegetarian and against animal testing, is trying out this concept as a way to allow customers to buy its products without harming the environment. According to Emily Salter, an analyst at Global Data Retail, Lush has recognized that there is demand for packaging-free products and is the first mass market retailer to try this approach. The company also hopes that other retailers will follow their lead in an effort to eliminate plastic from the retail industry. Salter believes that the way that retailers will become plastic-free is through pressure from both consumers and competitors.
Source: Anna Schaverien, "Lush Creates Packaging-Free Shops. But Will Other Retailers Follow Suit?," Forbes, March 12, 2019.

-Refer to the Article Summary. By marketing to environmentally conscious customers, Lush is trying to set its business apart from competing cosmetic retailers. All else equal, if the company's concept remains successful, in the long run we would expect Lush to experience

A) increased competition and lower economic profits.
B) increased competition and higher economic profits.
C) government regulation and no additional competition.
D) rising average costs and long-run economic profits.