Deck 14: Monopolistic Competition

Question 1

A monopolistically competitive firm is able to influence the price of what it sells because of

A)barriers to entry.
B)economies of scale.
C)product differentiation.
D)the fact there are many buyers.
E)inelastic demand.

Answer 1

C

Question 2

Toronto has a large number of retail stores that sell clothes.Each store has its own characteristics which differ from the other stores.The clothing business in Toronto is an example of

A)a duopoly.
B)an oligopoly.
C)a perfectly competitive market.
D)a monopoly.
E)a monopolistically competitive market.

Answer 2

E

Question 3

Dole Co.operates in a monopolistically competitive market.Which of the following does not characterize Dole Co.'s market?

A)Dole Co. supplies a small portion of the market's output.
B)Dole Co.'s product is slightly different from its competitors.
C)Dole Co. faced no barrier to entry when it decided to enter its market.
D)Dole Co. is unable to collude with other firms in the market.
E)Dole Co. must pay close attention to the decisions of each of its competitors.

Answer 3

E

Question 4

Which of the following goods is best described as being sold in a monopolistically competitive market?

A)batteries
B)wheat
C)fast food
D)postage stamps
E)the local newspaper

Question 5

When comparing perfect competition and monopolistic competition, we find that

A)firms in monopolistic competition produce identical products just as do firms in perfect competition.
B)firms in monopolistic competition face barriers to entry, unlike firms in perfect competition.
C)advertising plays a large role in monopolistic competition, unlike in perfect competition.
D)firms in monopolistic competition are price takers just as is the case for firms in perfect competition.
E)firms in monopolistic competition each have a large market share.

Question 6

ACME, Inc.operates in a market structure in which there are many other firms that find it easy to enter or exit.ACME is operating in ________ market.

A)definitely a perfectly competitive
B)a perfectly competitive or a monopolistically competitive
C)definitely a monopolistically competitive
D)neither a perfectly competitive nor a monopolistically competitive
E)a monopolistic

Question 7

The key feature of monopolistic competition that distinguishes it from perfect competition is

A)many sellers.
B)barriers to entry.
C)perfectly elastic demand.
D)product differentiation.
E)perfectly inelastic demand.

Question 8

Which of the following best explains why firms in monopolistic competition face a downward-sloping demand curve while perfectly competitive firms do not?

A)Monopolistically competitive industries have only a few firms.
B)Monopolistically competitive firms face barriers to entry.
C)Only industries with free entry and exit have firms that face horizontal demand curves.
D)Firms in monopolistic competition are price takers.
E)Firms in monopolistic competition sell a differentiated good.

Question 9

If some firms in the industry make an economic profit, then

A)the industry cannot be perfectly competitive.
B)the industry must be monopolistically competitive.
C)rival firms will enter if there are no barriers to entry.
D)the firms must practice product differentiation.
E)the industry must be an oligopoly.

Question 10

In monopolistic competition, firms compete on the basis of

A)price only.
B)price, quality, and marketing.
C)marketing only.
D)quality and marketing, but not price.
E)quality only.

Question 11

Product differentiation exists within an industry when

A)there are no substitutes for the product.
B)the firm can sell all it wants at the given price.
C)the market is a monopoly.
D)the market is perfectly competitive.
E)there are close but not perfect substitutes for the product.

Question 12

In monopolistic competition

A)firms practice product differentiation.
B)the goods produced by each firm are identical.
C)firms do not have any control over the price of their products.
D)there are barriers to entry.
E)a small number of firms compete.

Question 13

One factor that distinguishes a monopoly from monopolistic competition is that

A)firms in monopolistic competition practice collusion.
B)no barriers to entry exist in a monopoly.
C)barriers to exit exist in monopolistic competition.
D)close substitutes are available in monopolistic competition.
E)firms are price-takers in monopolistic competition.

Question 14

In monopolistic competition, each firm supplies a ________ part of the total industry output and its actions ________ the actions of the other firms.

A)small; do not directly affect
B)small; directly affect
C)large; do not directly affect
D)large; directly affect
E)large; may or may not directly affect

Question 15

A firm in a monopolistically competitive market

A)faces an upward-sloping demand curve.
B)faces a downward-sloping demand curve.
C)does not practice product differentiation.
D)faces a horizontal demand curve.
E)has few competitors.

Question 16

In monopolistic competition

A)there are two firms in the market.
B)the size of one firm is small relative to the size of the industry.
C)the size of one firm is large relative to the size of the industry.
D)each firm is a price-taker.
E)there is only one firm in the market.

Question 17

The existence of a large number of firms in monopolistic competition

A)means that each firm has a small market share.
B)makes it possible for each firm's price to deviate by a large amount from the average price of the other firms.
C)means that a firm must pay attention to the behaviour of all of its competitors.
D)makes collusion highly likely.
E)means that each firm is a price taker.

Question 18

Within a monopolistically competitive industry,

A)firms can freely enter and exit, and economic profit is zero in the long run.
B)firms can freely enter and exit, and economic profit is greater than zero in the long run.
C)there are some barriers to entry and exit, and economic profit is zero in the long run.
D)there are some barriers to entry and exit, and economic profit is greater than zero in the long run.
E)firms can freely enter and exit, and economic profit is zero in the short run.

Question 19

In monopolistic competition

A)firms can collude.
B)each firm has a small market share.
C)each firm pays attention to every other firm.
D)firms make a profit in the long run.
E)no firms advertise.

Question 20

Monopolistic competition differs from monopoly because in monopolistic competition

A)firms maximize profits.
B)firms set marginal revenue equal to marginal cost to maximize profit.
C)firms are free to enter and exit.
D)All of the above are differences between monopoly and monopolistically competitive firms.
E)None of the above are differences between monopoly and monopolistically competitive firms.

Question 21

Use the figure below to answer the following questions.

Figure 14.2.3
Refer to Figure 14.2.3.Assume this firm faces demand curve D₁.At the profit-maximizing output level, the firm

A)incurs an economic loss.
B)makes zero economic profit.
C)makes an economic profit.
D)makes less economic profit than that earned by firms in perfect competition.
E)makes an unknown economic profit that is impossible to determine without information concerning the price charged by the rival firms.

Question 22

Use the figure below to answer the following questions.

Figure 14.2.2
Refer to Figure 14.2.2.This firm

A)is incurring an economic loss.
B)is in long-run equilibrium.
C)is making an economic profit.
D)must raise its price to maximize economic profit.
E)will make more economic profit in the long run.

Question 23

Use the figure below to answer the following questions.

Figure 14.2.2
Refer to Figure 14.2.2.To maximize economic profit, this firm in monopolistic competition will charge a price of

A)$15 a unit.
B)$25 a unit.
C)$20 a unit.
D)$32 a unit.
E)$35 a unit.

Question 24

Use the figure below to answer the following questions.

Figure 14.2.2
Refer to Figure 14.2.2.To maximize economic profit, this firm in monopolistic competition produces an output

A)of 40 units.
B)of 70 units.
C)of 60 units.
D)of less than 40 units.
E)that cannot be determined without information concerning rival firms.

Question 25

Firefox, Internet Explorer, and Google Chrome browsers are an example of

A)goods produced in perfectly competitive markets.
B)goods produced by monopolies.
C)product differentiation.
D)goods that are identical.
E)product similarity.

Question 26

Use the figure below to answer the following questions.

Figure 14.2.3
Refer to Figure 14.2.3.Assume this firm faces demand curve D₁.If this firm in monopolistic competition is maximizing profit,

A)there will be entry of rival firms into the industry.
B)rival firms will exit the industry.
C)the market is efficient.
D)this firm will exit the industry in the long run.
E)its profit will rise over time.

Question 27

Use the figure below to answer the following questions.

Figure 14.2.1
Refer to Figure 14.2.1.If this firm is in monopolistic competition, then it will charge a price

A)of $20 a unit.
B)of $50 a unit.
C)of $40 a unit.
D)of $30 a unit.
E)that is impossible to determine without information concerning the behaviour of the rival firms.

Question 28

Use the figure below to answer the following questions.

Figure 14.2.1
Refer to Figure 14.2.1.This firm in monopolistic competition will

A)make an economic profit in the short run.
B)make zero economic profit in the short run.
C)incur an economic loss.
D)make an economic profit in the long run.
E)incur an economic loss in the long run.

Question 29

Use the figure below to answer the following questions.

Figure 14.2.2
Refer to Figure 14.2.2.If this firm in monopolistic competition is maximizing economic profit,

A)there will be entry of rival firms into the industry.
B)rival firms will exit the industry.
C)its profit will rise over time.
D)this firm will exit the industry in the long run.
E)it is in long-run equilibrium.

Question 30

Use the figure below to answer the following questions.

Figure 14.2.1
Refer to Figure 14.2.1.If this firm in monopolistic competition is in short-run equilibrium, then

A)rival firms will enter the industry.
B)all firms will exit the industry.
C)economic profit of all firms in the industry is zero.
D)it produces 60 units of output to maximize economic profit.
E)the firm's profits can be expected to rise over time.

Question 31

Use the figure below to answer the following questions.

Figure 14.2.3
Refer to Figure 14.2.3.Assume this firm faces demand curve D₁.If the firm produced the efficient quantity, it would produce

A)100 units.
B)220 units.
C)200 units.
D)250 units.
E)140 units.

Question 32

Use the figure below to answer the following questions.

Figure 14.2.3
Refer to Figure 14.2.3.Assume this firm faces demand curve D₁.To maximize economic profit, this firm in monopolistic competition will charge a price of ________ and produce an output of ________ units.

A)$100; 200
B)$90; 220
C)$80; 200
D)$70; 100
E)$55; 140

Question 33

Use the figure below to answer the following questions.

Figure 14.2.3
Refer to Figure 14.2.3.Assume this firm faces demand curve D₂.At the profit-maximizing output level, the firm

A)incurs an economic loss.
B)makes zero economic profit.
C)makes an economic profit.
D)is not in a long-run equilibrium.
E)is producing at its efficient scale.

Question 34

Use the figure below to answer the following questions.

Figure 14.2.3
Refer to Figure 14.2.3.Which demand curve does this monopolistically competitive firm face in the long run?

A)demand curve D₁
B)demand curve D₂
C)either demand curve D₁ or D₂
D)neither demand curve D₁ nor demand curve D₂
E)Any demand curve is possible, including D₁ or D₂.

Question 35

Use the figure below to answer the following questions.

Figure 14.2.3
Refer to Figure 14.2.3.Assume this firm faces demand curve D₂.If this firm in monopolistic competition is maximizing economic profit,

A)there will be entry of rival firms into the industry.
B)rival firms will exit the industry.
C)it is producing the efficient quantity.
D)the number of firms in the industry will remain constant.
E)economic profit will fall over time.

Question 36

Use the information below to answer the following questions.
Fact 14.1.1
For automobiles the HHI is 2,350, for sporting goods it is 161, for batteries it is 2,883, and for jewellery it is 81.
Refer to Fact 14.1.1.The market for batteries is ________ and the market for jewellery is ________.

A)monopolistic competition; an oligopoly
B)a monopoly; monopolistic competition
C)a monopoly; perfectly competitive
D)an oligopoly; monopolistic competition
E)an oligopoly; an oligopoly

Question 37

Use the figure below to answer the following questions.

Figure 14.2.3
Refer to Figure 14.2.3.Assume this firm faces demand curve D₂.To maximize economic profit, this firm in monopolistic competition will charge a price of ________ and produce an output of ________ units.

A)$40; 100
B)$90; 220
C)$80; 200
D)$55; 140
E)$70; 100

Question 38

Use the information below to answer the following questions.
Fact 14.1.1
For automobiles the HHI is 2,350, for sporting goods it is 161, for batteries it is 2,883, and for jewellery it is 81.
Refer to Fact 14.1.1.The market for automobiles is ________ and the market for sporting goods is ________.

A)monopolistic competition; an oligopoly
B)an oligopoly; perfectly competitive
C)an oligopoly; monopolistic competition
D)an oligopoly; an oligopoly
E)Perfectly competitive; perfectly competitive

Question 39

Use the figure below to answer the following questions.

Figure 14.2.1
Refer to Figure 14.2.1.If this firm is in monopolistic competition, it will produce an output level

A)of 40 units.
B)of 60 units.
C)of 80 units.
D)that is less than 40 units.
E)that is impossible to determine without information concerning the rival firms.

Question 40

The four-firm concentration ratio for men's clothing makers is 27 and for electric lamp makers it is 89.The HHI for men's clothing makers is 362 and for electric lamp makers it is 2,850.The men's clothing market ________ an example of monopolistic competition.The electric lamp market ________ an example of monopolistic competition.

A)is; is
B)is not; is
C)is; is not
D)is not; is not
E)sometimes is and sometimes is not; sometimes is and sometimes is not

Question 41

The real estate industry is monopolistically competitive, so in this industry

A)the market demand curve is a horizontal line.
B)the market demand curve is upward sloping.
C)there are few realtors in the market.
D)excess capacity exists.
E)excess capacity does not exist.

Question 42

Use the figure below to answer the following questions.

Figure 14.2.3
Refer to Figure 14.2.3.Assume this firm faces demand curve D₂.If the firm produces the efficient quantity, it

A)makes an economic profit.
B)makes zero economic profit.
C)incurs an economic loss.
D)is in a long-run equilibrium.
E)will face competition from new firms entering the industry.

Question 43

Mrs.Smith's bakery shop is a firm in monopolistic competition.If in the short run Mrs.Smith incurs an economic loss, she will keep producing as long as

A)price is less than average variable cost.
B)price is equal to marginal cost.
C)price is greater than or equal to average variable cost.
D)marginal revenue is greater than or equal to average variable cost.
E)marginal revenue is less than average variable cost.

Question 44

A firm has excess capacity if

A)it produces above its efficient scale.
B)it produces below its efficient scale.
C)it produces the same level as its efficient scale.
D)it sells some of its factors of production.
E)it improves the quality of its factors of production.

Question 45

A firm's markup is

A)the firm's total profit.
B)the firm's total cost.
C)the amount by which price exceeds marginal cost.
D)the amount by which price exceeds average variable cost.
E)the amount by which price is less than marginal cost.

Question 46

In the short-run, the similarity between a monopolist and a monopolistically competitive firm is that

A)they both make the same decisions about the level of output and output price.
B)they both face an upward-sloping supply curve for their products.
C)they both try to maximize their total revenues.
D)they both try to minimize their average fixed costs.
E)they set the price such that marginal revenue equals average total cost.

Question 47

Consider a monopolistically competitive industry in long-run equilibrium.Suppose there is a large increase in wages that raises the costs for all firms.What happens within each firm in the short run?

A)They will be forced to close down due to the excess costs.
B)They will continue producing as before, cushioned by their previous excess profits.
C)They will expand output and try to make up for lost profits.
D)They will lower prices and try to steal customers away from their rivals.
E)They will decrease production and produce the quantity at which marginal revenue equals the new (higher)marginal cost curve; this means a rise in price.

Question 48

Use the figure below to answer the following questions.

Figure 14.2.4
Refer to Figure 14.2.4.The figure represents a monopolistically competitive firm in short-run equilibrium.What price does the firm charge?

A)P₂
B)P₁
C)P₄
D)P₃
E)P₅

Question 49

Mrs.Smith's bakery shop is a firm in monopolistic competition.She is currently selling a box of bread for $16.The firm's marginal cost is $7 and marginal revenue is $7.To maximize economic profit Mrs.Smith

A)shuts down.
B)decreases output so that marginal revenue exceeds marginal cost.
C)continues to produce the same level of output.
D)increases output so that marginal cost exceeds marginal revenue.
E)decreases output so that marginal cost equals the output price.

Question 50

Use the figure below to answer the following questions.

Figure 14.2.4
Refer to Figure 14.2.4.The figure represents a monopolistically competitive firm in short-run equilibrium.What is the firm's level of output?

A)Q₁
B)Q₂
C)Q₃
D)Q₄
E)zero

Question 51

In the long run, a monopolistically competitive firm produces the output at which price equals

A)marginal cost.
B)marginal revenue.
C)average variable cost.
D)average total cost.
E)average fixed cost.

Question 52

In monopolistically competitive industries,

A)firms compete on quality, price and marketing.
B)the range of choice of products is the same as in perfectly competitive industries.
C)firms are insensitive to changes in consumer demand.
D)all firms produce a quantity at which marginal cost is greater than marginal benefit.
E)all firms make an economic profit.

Question 53

Markup

A)does not exist in monopoly.
B)does not exist in monopolistic competition.
C)exists in perfect competition.
D)is the difference between price and average total cost.
E)exists in both monopoly and monopolistic competition.

Question 54

What will happen in the long run if firms in monopolistic competition incur economic loss?

A)Firms will continue producing and endure the losses.
B)Firms will leave the industry until the remaining firms make positive economic profit.
C)Firms will ask the government for financial aid.
D)Firms will leave the industry until the remaining firms make zero economic profit.
E)The level of investment in this industry will increase to boost the economy.

Question 55

In the long run, all firms in an industry that is monopolistically competitive

A)produce at their efficient scale.
B)set price equal to marginal cost.
C)incur an economic profit.
D)make an economic profit.
E)make zero economic profit.

Question 56

Use the figure below to answer the following questions.

Figure 14.2.3
Refer to Figure 14.2.3.Assume this firm faces demand curve D₂.When the firm produces the efficient quantity, it produces

A)100 units.
B)140 units.
C)200 units.
D)220 units.
E)250 units.

Question 57

Mrs.Smith's bakery shop is a firm in monopolistic competition.The firm's marginal revenue curve

A)is upward sloping.
B)is downward sloping and above the demand curve.
C)is a horizontal line.
D)is the same as the demand curve.
E)is downward sloping and lies below the demand curve.

Question 58

Use the figure below to answer the following questions.

Figure 14.2.4
Refer to Figure 14.2.4.The figure represents a monopolistically competitive firm in short-run equilibrium.In the long run,

A)new firms enter, and each existing firm's demand curve shifts leftward.
B)new firms enter, and each existing firm's demand curve shifts rightward.
C)existing firms exit, and each remaining firm's demand curve shifts leftward.
D)existing firms exit, and each remaining firm's demand curve shifts rightward.
E)the equilibrium is the same as in the short run.

Question 59

Excess capacity in monopolistically competitive firms occurs because

A)each firm faces a demand that is perfectly elastic.
B)each firm builds a huge plant.
C)the existence of slightly differentiated products, serving almost the same purpose, causes a waste of precious natural resources.
D)firms produce an output that is less than the output at minimum average total cost.
E)marginal cost is too high.

Question 60

Under monopolistic competition, long-run economic profit is zero because of

A)product differentiation.
B)no barriers to entry.
C)excess capacity.
D)economic inefficiency.
E)the downward-sloping demand curve facing each firm.

Question 61

Use the figure below to answer the following questions.

Figure 14.2.6
Refer to Figure 14.2.6, which shows the demand curve, marginal revenue curve and cost curves faced by Gap.Gap's economic ________ is ________ a day.

A)loss; $8,000
B)loss; $13,000
C)profit; $7,200
D)profit; $13,000
E)loss; $8,960

Question 62

Which of the following is always true regarding a profit-maximizing monopolistically competitive firm in short-run equilibrium?

A)P = ATC
B)P = MR
C)MR = MC
D)MC = ATC
E)P = MC

Question 63

Which one of the following characteristics is not shared by single-price monopoly and monopolistic competition?

A)Firms face a downward-sloping demand curve.
B)Profit-maximizing quantity occurs where MC = MR.
C)Price charged is the highest consumers are willing to pay.
D)Firms make an economic profit in the long run.
E)The marginal revenue curve lies below the demand curve.

Question 64

Use the figure below to answer the following questions.

Figure 14.2.6
Refer to Figure 14.2.6, which shows the demand curve, marginal revenue curve and cost curves faced by Gap.Gap maximizes its profit if it charges ________ per jacket.

A)$100
B)$95
C)$75
D)$120
E)$90

Question 65

Which one of the following characteristics is shared by perfect competition and monopolistic competition?

A)Firms face a downward-sloping demand curve.
B)Profit-maximizing quantity occurs where MC = MR.
C)Long-run equilibrium price equals minimum ATC.
D)Firms make an economic profit in the long run.
E)Demand is perfectly elastic.

Question 66

When firms in monopolistic competition incur an economic loss,

A)firms enter the industry and produce better products.
B)firms exit the industry, and demand increases for the products of the firms that remain.
C)firms exit the industry, and demand decreases for the firms that remain in the industry.
D)firms enter the industry, and demand increases for the firms that were originally in the industry.
E)the industry will eventually disappear.

Question 67

For a firm in monopolistic competition, the marginal cost curve intersects the average total cost curve

A)at the minimum average total cost.
B)to the left of the minimum average total cost.
C)to the right of the minimum average total cost.
D)at no point.
E)at the same quantity at which the marginal cost curve intersects the marginal revenue curve.

Question 68

When firms in monopolistic competition make an economic profit,

A)firms enter the industry, which increases demand for the product of the firms originally in the market.
B)firms exit the industry, and demand increases for the products of the firms that remain.
C)firms exit the industry, and demand decreases for the firms that remain in the industry.
D)firms enter the industry, and demand decreases for the firms that were originally in the industry.
E)eventually the market will become a monopoly.

Question 69

Firms in monopolistic competition make zero economic profit in the long run because

A)their costs rise over time.
B)the demand they face decreases as rival firms offer slightly differentiated products for sale in the same market.
C)their marginal cost curves slope upward.
D)the market eventually becomes perfectly competitive.
E)both A and B are correct.

Question 70

Use the figure below to answer the following questions.

Figure 14.2.5
Refer to Figure 14.2.5 The figure shows the situation facing Smart Digit, Inc., a firm in monopolistic competition that produces calculators.What is the firm's economic profit per day?

A)zero
B)between $1 and $700
C)between $701 and $900
D)more than $901
E)less than zero

Question 71

Which one of the following is true for perfect competition, monopolistic competition, and single-price monopoly?

A)Each firm produces an identical good.
B)Each firm makes zero long-run economic profit.
C)The profit maximizing quantity occurs at the quantity at which MC = MR.
D)There is easy entry and exit.
E)Demand is perfectly elastic.

Question 72

Choose the correct statement about firms in monopolistic competition.

A)All firms make positive economic profit.
B)The price is set equal to marginal cost to achieve maximum economic profit.
C)Price is lower than in perfect competition.
D)Production always takes place at minimum average total cost.
E)The price is always greater than the marginal cost.

Question 73

Choose the correct statement about firms in monopolistic competition.

A)A firm must lower its price to sell a greater quantity.
B)A firm can never incur an economic loss.
C)Price is never more than marginal cost.
D)Firms offer identical products.
E)The most a firm can make is zero economic profit.

Question 74

In the long run, the firm in monopolistic competition

A)faces a perfectly elastic demand.
B)produces more than the quantity at minimum ATC.
C)produces less than the quantity at minimum ATC.
D)produces the quantity at minimum ATC.
E)makes an economic profit.

Question 75

Use the figure below to answer the following questions.

Figure 14.2.6
Refer to Figure 14.2.6, which shows the demand curve, marginal revenue curve and cost curves faced by Gap.Gap maximizes its profit if it sells ________ jackets per day.

A)200
B)240
C)275
D)140
E)280

Question 76

Use the figure below to answer the following questions.

Figure 14.2.5
Refer to Figure 14.2.5.The figure shows the situation facing Smart Digit, Inc., a firm in monopolistic competition that produces calculators.The firm's markup is ________ per calculator.

A)zero
B)$2
C)$4
D)$6
E)$10

Question 77

For a monopolistically competitive firm to be making an economic profit,

A)the production period must be the short run.
B)the production period must be the long run.
C)rival firms must not exist.
D)its rivals must also be making an economic profit.
E)barriers to entry must exist.

Question 78

In the long run, a monopolistically competitive firm will make the same economic profit as

A)a monopolistically competitive firm in the short run.
B)a single-price monopoly.
C)a price-discriminating monopoly.
D)a perfectly competitive firm in long-run equilibrium.
E)a perfectly competitive firm in short-run equilibrium.

Question 79

Which of the following are true? The similarities between perfect competition and monopolistic competition include: (1) no barriers to entry.
(2) profit-maximizing output occurs where MC = MR.
(3) long-run economic profit equals zero.

A)(1)only
B)(2)only
C)(1)and (2)only
D)(2)and (3)only
E)(1), (2), and (3)

Question 80

Firms in monopolistic competition have rivals that

A)will always match their price increases.
B)will always match their price decreases but not their price increases.
C)all agree on a common price.
D)set their price where the demand curve is tangent to the average cost curve.
E)set their price according to the demand they face.