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

Question 1

Which of the following is true of a typical firm in a monopolistically competitive industry?

A)Product differentiation allows a successful firm to emerge as a market leader in the industry.
B)All firms have identical cost structures.
C)The more successful firms have an incentive to merge in order to exert greater market power.
D)Each firm acts independently.

Answer 1

D

Question 2

The reason that the "fast-casual" restaurant market is monopolistically competitive rather than perfectly competitive is because

A)barriers to entry are very low.
B)there are many firms in the market.
C)products are differentiated.
D)entry into the market is blocked.

Answer 2

C

Question 3

Which of the following is not an example of a monopolistically competitive market?

A)automobile producers
B)supermarkets
C)gas stations
D)makers of women's clothing

Answer 3

A

Question 4

The key characteristics of a monopolistically competitive market structure include

A)many small (relative to the total market)sellers acting independently.
B)all sellers sell a homogeneous product.
C)barriers to entry are strong.
D)sellers have no incentive to advertise their products.

Question 5

For a monopolistically competitive firm, marginal revenue

A)equals the price.
B)is greater than the price.
C)is less than the price.
D)and price are unrelated.

Question 6

If the demand curve for a firm is downward-sloping, its marginal revenue curve

A)will lie above the demand curve.
B)will lie below the demand curve.
C)is the same as the demand curve.
D)is horizontal.

Question 7

When a monopolistically competitive firm cuts its price to increase its sales, it experiences a loss in revenue due to the

A)substitution effect.
B)income effect.
C)price effect.
D)output effect.

Question 8

All of the following characteristics are common to both monopolistic competition and perfect competition except

A)firms act to maximize profit.
B)entry barriers into the industries are low.
C)the market demand curves are downward-sloping.
D)firms take market prices as given.

Question 9

If a firm faces a downward-sloping demand curve

A)the demand for its product must be inelastic.
B)it can control both price and quantity sold.
C)it must reduce its price to sell more units.
D)it will always make a profit.

Question 10

In monopolistic competition there is/are

A)many sellers who each face a downward-sloping demand curve.
B)a few sellers who each face a downward-sloping demand curve.
C)only one seller who faces a downward-sloping demand curve.
D)many sellers who each face a perfectly elastic demand curve.

Question 11

One reason why the "fast-casual" restaurant market is competitive is that

A)demand for "fast -casual" food is very high.
B)it is trendy and therefore is likely to have a customer following.
C)barriers to entry are low.
D)consumption takes place in public.

Question 12

Table 13-1

Refer to Table 13-1.The Table shows

A)an elastic segment of the demand schedule.
B)an inelastic segment of the demand schedule.
C)a demand schedule with an elastic segment from $7.50 to $6.50 followed by an inelastic segment.
D)a demand schedule with an inelastic segment from $7.50 to $6.50 followed by an elastic segment.

Question 13

Which of the following characteristics is common to monopolistic competition and perfect competition?

A)Firms produce identical products.
B)Entry barriers into the industry are low.
C)Each firm faces a downward-sloping demand curve.
D)Firms take market prices as given.

Question 14

Table 13-1

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

Question 15

A monopolistically competitive firm faces a downward-sloping demand curve because

A)it is able to control price and quantity demanded.
B)there are few substitutes for its product.
C)of product differentiation.
D)its market decisions are affected by the decisions of its rivals.

Question 16

A monopolistically competitive firm will

A)charge the same price as its competitors do.
B)always produce at the minimum efficient scale of production.
C)have some control over its price because its product is differentiated.
D)produce an output level that is productively and allocatively efficient.

Question 17

When a monopolistically competitive firm cuts its price to increase its sales, it experiences a gain in revenue due to the

A)substitution effect.
B)income effect.
C)price effect.
D)output effect.

Question 18

The key characteristics of a monopolistically competitive market structure include

A)few sellers.
B)sellers selling similar but differentiated products.
C)high barriers to entry.
D)sellers acting to maximize revenue.

Question 19

A major difference between monopolistic competition and perfect competition is

A)the number of sellers in the markets.
B)the degree by which the market demand curves slope downwards.
C)that products are not standardized in monopolistic competition unlike in perfect competition.
D)the barriers to entry in the two markets.

Question 20

Which of the following is true for a firm with a downward-sloping demand curve for its product?

A)Price, average revenue, and marginal revenue are all equal.
B)Price, average revenue, and marginal revenue are all different.
C)Price equals average revenue but is greater than marginal revenue.
D)Price equals average revenue but is less than marginal revenue.

Question 21

Table 13-1

Refer to Table 13-1.What portion of the marginal revenue of the 4th unit is due to the output effect and what portion is due to the price effect?

A)output effect = $24.00; price effect = $19.50
B)output effect = $6.50; price effect = $2.00
C)output effect = -$0.50; price effect = $5.00
D)output effect = $6.00; price effect = -$1.50

Question 22

The Jeans Store sells 7 pairs of jeans per day when it charges $100 per pair.It sells 8 pairs of jeans per day at a price of $90 per pair.The marginal revenue of the eighth pair of jeans is

A)$20.
B)$90.
C)$100.
D)$700.

Question 23

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

A)There are many buyers and sellers.
B)There are low barriers to entry.
C)Average revenue is equal to price.
D)The products sold by all firms are identical.

Question 24

In San Francisco there are many restaurants that specialize in a wide variety of cuisines.Patronage at these restaurants is influenced by factors such as tastes, price, and location.This market is

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

Question 25

Table 13-1

Refer to Figure 13-2.The marginal revenue from selling the additional unit Qb instead of Qₐ equals

A)the area (G + H).
B)the area (H - E).
C)the area (E + F)- (G + H).
D)the area G.
E).

Question 26

Because the monopolistically competitive firm faces a ________ demand curve for its product, it ________ the price of its output.

A)downward-sloping; cannot influence
B)horizontal; can influence
C)horizontal; cannot influence
D)downward-sloping; can influence

Question 27

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

A)Firms are price takers.
B)There are many buyers and sellers.
C)Barriers to entry are low.
D)Firms sell similar, but not identical, products.

Question 28

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

A)All "fast-casual" restaurants face horizontal demand curves.
B)"Fast-casual" restaurants sell identical products.
C)Barriers to entry are low.
D)There are a small number of firms.

Question 29

Table 13-1

Refer to Table 13-1.What portion of the marginal revenue of the 5th unit is due to the output effect and what portion is due to the price effect?

A)output effect = $3.00; price effect = $0.50
B)output effect = $1.50; price effect = $2.00
C)output effect = $5.50; price effect = -$2.00
D)output effect = $4.00; price effect = -$0.50

Question 30

Figure 13-3

Refer to Figure 13-3.What is the marginal revenue of the sixth unit of output?

A)$4
B)$5
C)$9
D)$54

Question 31

When a monopolistically competitive firm lowers it price one bad thing happens to the firm.What is this "one bad thing" called?

A)the output effect
B)the income effect
C)the substitution effect
D)the price effect

Question 32

Figure 13-3

Refer to Figure 13-3.The marginal revenue from one additional unit sold is the sum of the gain in revenue from selling the additional unit and the loss in revenue from having to charge a lower price to sell the additional unit.Based on the diagram in the figure,

A)X represents the gain (price effect)and Y the loss (output effect).
B)X + Z represents the loss (output effect)and Y the gain (price effect).
C)Y represents the gain (output effect)and X the loss (price effect).
D)X represents the loss (price effect)and Y + Z the gain (output effect).

Question 33

A monopolistically competitive market is described as one in which there are

A)a few firms producing an identical product.
B)a large number of firms selling similar, but not identical, products.
C)a few firms producing differentiated products.
D)one large firm and many small firms producing identical products.

Question 34

Which of the following statements is true about marginal revenue?

A)If marginal revenue is zero, it means that quantity demanded falls to zero when a firm changes its price.
B)If marginal revenue is negative, the additional revenue received from selling 1 more unit of the good is smaller than the revenue lost from receiving a lower price on all the units that could have been sold at the original price.
C)If marginal revenue is positive, the additional revenue received from selling 1 more unit of the good is smaller than the revenue lost from receiving a lower price on all the units that could have been sold at the original price.
D)Marginal revenue increases as price falls and quantity sold increases.

Question 35

When a monopolistically competitive firm lowers its price, one good thing happens to the firm.What is this "one good thing" called?

A)the output effect
B)the price effect
C)the income effect
D)the substitution effect

Question 36

In the United States, the average person mostly patronizes firms that operate in

A)perfectly competitive markets.
B)monopolistically competitive markets.
C)oligopoly markets.
D)monopoly markets.

Question 37

Monopolistic competition is a market structure in which

A)firms produce and sell products for which there are no close substitutes.
B)the demand curve for a typical firm is horizontal.
C)firms cannot influence the market price.
D)barriers to entry are low.

Question 38

For the monopolistically competitive firm

A)Price (P)= Marginal Revenue (MR)= Average Revenue (AR).
B)P = MR > AR.
C)P = AR > MR.
D)P > MR = AR.

Question 39

Table 13-1

Refer to Figure 13-1.The marginal revenue from the increase in price from P₀ to P₁ equals

A)the area A.
B)the area (B + D - A).
C)the area (A - D).
D)the area (C - B).

Question 40

Which of the following is the best example of a firm that competes in a monopolistically competitive market?

A)the U.S. Postal Service
B)Microsoft
C)a movie theater
D)an automobile manufacturer

Question 41

What are the most important differences between perfectly competitive markets and monopolistically competitive markets?

Question 42

The demand curve of a monopolistically competitive firm

A)is horizontal because the firm must cut its price to sell more.
B)is perfectly elastic.
C)is downward-sloping because it sells an identical product.
D)is downward-sloping because it must cut its price to sell more.

Question 43

When a monopolistically competitive firm cuts its price to increase its sales, it experiences a loss in revenue due to the income effect and a gain in revenue due to the substitution effect.

Question 44

Which of the following statements is true?

A)The marginal revenue of a monopolistically competitive firm will be positive at high prices and negative at low prices.
B)Because the demand curve for a monopolistically competitive firm is downward-sloping its marginal revenue will be negative.
C)The marginal revenue of a monopolistically competitive firm will be always be positive.
D)The marginal revenue of a monopolistically competitive firm will be positive at low prices and negative at high prices.

Question 45

The marginal revenue of a monopolistically competitive firm

A)cannot be negative because the price the firm charges will always be greater than zero.
B)can be negative if the firm charges a high price.
C)can be negative if the firm charges a low price.
D)will equal average revenue.

Question 46

If a monopolistically competitive firm lowers its price and, as a result, its total revenue decreases then

A)the output effect of the price change was less than the price effect.
B)the output effect of the price change was greater than the price effect.
C)the firm's demand curve must have decreased.
D)the substitution effect of the price change was greater than the income effect.

Question 47

Every firm that has the ability to affect the price of the good or service it sells will

A)have a perfectly elastic demand curve.
B)have a marginal revenue curve that lies below its demand curve.
C)earn a short-run profit but break even in the long run.
D)shut down in the short run.

Question 48

New firms are able to enter monopolistically competitive markets because there are low barriers to entry.

Question 49

Firms in monopolistic competition compete by selling similar, but not identical products.

Question 50

Monopolistically competitive firms face a perfectly elastic demand curve.

Question 51

There are many cattle ranchers in the world, and there are also many McDonald's restaurants in the world.Why, then, does a McDonald's restaurant face a downward-sloping demand curve while a cattle rancher faces a horizontal demand curve?

Question 52

If marginal revenue is negative then the revenue lost from receiving a lower price on all the units that could have been sold at the original price is smaller than the additional revenue from selling one more unit of the good.

Question 53

One of the assumptions of monopolistic competition is that firms produce differentiated products.What does this assumption imply about the demand curve facing a representative firm?

Question 54

Explain the differences between total revenue, average revenue, and marginal revenue.

Question 55

Why are demand and marginal revenue represented by the same curve for a firm in a perfectly competitive market, but by separate curves for a firm in a monopolistically competitive market?

Question 56

Suppose a monopolistically competitive firm sells 25 units at a price of $10.Calculate its marginal revenue per unit of output if it sells 5 more units of output when it reduced its price to $9.

A)$270
B)$20
C)$4
D)$2.50

Question 57

In monopolistic competition, if a firm produces a highly desirable product relative to its competitors, the firm will be able to raise its price without losing any customers.

Question 58

When a firm faces a downward-sloping demand curve, marginal revenue

A)must exceed price because the price effect outweighs the output effect.
B)is less than price because a firm must lower its price to sell more.
C)equals price because the firm sells a standardized product.
D)must exceed price because the output effect outweighs the price effect.

Question 59

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.

Question 60

For a downward-sloping demand curve, marginal revenue decreases as quantity sold increases.

Question 61

Suppose Jason owns a small pastry shop.Jason wants to maximize his profit, and thinking back to the microeconomics class he took in college, he decides he needs to produce a quantity of pastries which will minimize his average total cost.Will Jason's strategy necessarily maximize profits for his pastry shop?

A)Yes; Since Jason's pastry shop is in a perfectly competitive market, the only way to maximize profit is to produce the quantity where average total cost is minimized.
B)Not necessarily; This strategy will only maximize Jason's profit in the long run, but not in the short run.
C)No; In order to maximize profit, Jason would never want to produce the quantity where average total cost is minimized.
D)Not necessarily; Depending on demand, Jason may maximize profit by producing a quantity other than that where average total cost is at a minimum.

Question 62

Table 13-2

Eco Energy is a monopolistically competitive producer of a sports beverage called Power On.Table 13-2 shows the firm's demand and cost schedules.
Refer to Table 13-2.What is the marginal profit from producing and selling the 5th case?

A)$275
B)$145
C)$35
D)$20

Question 63

Figure 13-4

Figure 13-4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
Refer to Figure 13-4.If the firm represented in the diagram is currently producing and selling Qₐ units, what is the price charged?

A)P₀
B)P₁
C)P₂
D)P₃

Question 64

Table 13-2

Eco Energy is a monopolistically competitive producer of a sports beverage called Power On.Table 13-2 shows the firm's demand and cost schedules.
Refer to Table 13-2.What is Eco Energy's profit?

A)$125
B)$140
C)$145
D)$150

Question 65

If price exceeds average variable cost but is less than average total cost, a firm

A)should further differentiate its product.
B)should stay in business for a while longer until its fixed costs expire.
C)is making some profit but less than maximum profit.
D)should shut down.

Question 66

Table 13-3

Table 13-3 shows the demand and cost schedules for a monopolistically competitive firm.
Refer to Table 13-3.What is the amount of the firm's loss at its optimal output level?

A)$0
B)$41
C)$45
D)$50

Question 67

Unlike a perfectly competitive firm, for a monopolistically competitive firm

A)price ≠ marginal cost for all output levels.
B)price ≠ marginal revenue for all output levels.
C)price ≠ average revenue for all output levels.
D)marginal revenue = marginal cost at the profit-maximizing output.

Question 68

Figure 13-4

Figure 13-4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
Refer to Figure 13-4.What is the area that represents the total variable cost of production?

A)0P₀aQₐ
B)0P₁bQₐ
C)P₀abP₁
D)P₁bdP₃

Question 69

A monopolistically competitive firm maximizes profit where

A)price = marginal revenue.
B)price > marginal cost.
C)marginal revenue > average revenue.
D)total revenue > marginal cost.

Question 70

Table 13-2

Eco Energy is a monopolistically competitive producer of a sports beverage called Power On.Table 13-2 shows the firm's demand and cost schedules.
Refer to Table 13-2.What is the output (Q)that maximizes profit and what is the price (P)charged?

A)P = $55; Q = 5 cases
B)P = $50; Q = 6 cases
C)P = $45; Q = 7 cases
D)P = $40; Q = 8 cases

Question 71

Figure 13-4

Figure 13-4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
Refer to Figure 13-4.What is the area that represents the loss made by the firm?

A)the area P₀adP₃
B)the area P₁bcP₂
C)the area P₀acP₂
D)the area P₂cdP₃

Question 72

What is the profit-maximizing rule for a monopolistically competitive firm?

A)to produce a quantity that maximizes market share
B)to produce a quantity that maximizes total revenue
C)to produce a quantity such that marginal revenue equals marginal cost
D)to produce a quantity such that price equals marginal cost

Question 73

In the short run, a profit-maximizing firm's decision to produce should be guided by whether

A)it makes a profit.
B)its marginal profit is maximized.
C)its total revenue exceeds its fixed cost.
D)its total revenue covers its variable cost.

Question 74

Figure 13-4

Figure 13-4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
Refer to Figure 13-4.What is the area that represents the total revenue made by the firm?

A)0P₀aQₐ
B)0P₁bQₐ
C)0P₂cQₐ
D)0P₃dQₐ

Question 75

Complete the following table.

Question 76

Figure 13-4

Figure 13-4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
Refer to Figure 13-4.What is the area that represents the total fixed cost of production?

A)0P₁aQₐ
B)P₀adP₃
C)P₁bdP₃
D)That information cannot be determined from the graph.

Question 77

Table 13-2

Eco Energy is a monopolistically competitive producer of a sports beverage called Power On.Table 13-2 shows the firm's demand and cost schedules.
Refer to Table 13-2.What is likely to happen to the product's price in the long run?

A)It will fall.
B)It will increase.
C)It will remain constant.
D)This cannot be determined without information on its long-run demand curve.

Question 78

Suppose that if a local McDonald's restaurant reduces the price of a Big Mac from $4.00 to $3.25, the number of Big Macs it sells per day will increase from 4 to 5.Explain the output effect and the price effect resulting from this change.Using a graph, illustrate both the loss in revenue from selling each of the first 4 Big Macs for $0.75 less and the additional revenue from selling 1 more Big Mac.What is the total change in revenue received which results from this price decrease?

Question 79

Table 13-3

Table 13-3 shows the demand and cost schedules for a monopolistically competitive firm.
Refer to Table 13-3.What are the profit-maximizing/loss-minimizing output level and price?

A)Q = 0 (firm should not produce)
B)Q = 3; P = $18
C)Q = 4; P = $17
D)Q = 5; P = $16

Question 80

Figure 13-4

Figure 13-4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches.
Refer to Figure 13-4.Should the firm represented in the diagram continue to stay in business despite its losses?

A)No, it should shut down.
B)Yes, its total revenue covers its variable cost.
C)No, it is not able to cover its fixed cost.
D)Yes, it should increase its revenue by raising its price.