Deck 18: Monopolistic Competition

Question 1

A profit-maximising firm in a monopolistically competitive market always operates on the downward-sloping portion of its marginal cost curve.

Answer 1

False

Question 2

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

Answer 2

False

Question 3

Just like a competitive firm, a monopolistically competitive market has insignificant barriers to entry.

Answer 3

True

Question 4

Firms in monopolistic competition sell products that are identical to those produced by other firms.

Question 5

A profit-maximising firm in a monopolistically competitive market always prices its product at marginal cost.

Question 6

Perfect competition and monopolistic competition share the attributes of having many sellers and free entry.

Question 7

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

Question 8

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 9

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

Question 10

Policymakers do not accept the view that advertising enhances the efficiency of markets.

Question 11

Excess capacity and efficient scale characterise firms in monopolistically competitive markets.

Question 12

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

Question 13

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

Question 14

Advertising can have an important benefit to consumers by providing them with information about new products and prices.

Question 15

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 the India.

Question 16

When McDonald's opens a store in Dhaka, Bangladesh, it has a strong incentive to enforce product quality consistent with that in stores in the US.

Question 17

A firm in a monopolistically competitive market is usually concerned about each additional customer walking through the door, since it will always end up earning additional economic profits.

Question 18

When a firm operates at excess capacity, it must be in a monopolistically competitive market.

Question 19

When a firm operates at efficient scale, it is producing at the maximum point on its average total cost curve.

Question 20

In the long-run equilibrium in a monopolistic market, a profit-maximising firm's output is where marginal cost is less than marginal revenue.

Question 21

Empirical evidence suggests that advertising usually leads to an increase in the price of advertised products.

Question 22

Firms that spend a large amount of money on advertising a particular product are likely to be providing consumers with a signal of product quality.

Question 23

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

Question 24

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 25

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

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

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 28

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

Question 29

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

Question 30

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

Question 31

Brand names have a useful function if the preference for brands has a rational basis.

Question 32

The debate over whether advertising serves a valuable purpose in society is still unconfirmed by economists.

Question 33

The 'monopoly' in monopolistically competitive markets is most likely a result of strategic interactions among sellers.

Question 34

There is general disagreement among economists about the role of advertising, but there is widespread agreement about the effect of brand names on market efficiency.

Question 35

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.

Question 36

In centrally planned economies the usefulness of brand names is demonstrated when brand names allow consumers to identify producers.

Question 37

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

Question 38

The 'competition' in monopolistically competitive markets is most likely a result of having many sellers in the market.

Question 39

If firms in a monopolistically competitive market are not making accounting profits, this will discourage more firms to enter the market.

Question 40

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

Question 41

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) average total cost is equal to marginal revenue

Question 42

The product-variety externality associated with monopolistic competition arises because in monopolistically competitive markets firms try to differentiate their products.

Question 43

Graph 17-1

Refer to Graph 17-1. The firm depicted in panel b faces a horizontal demand curve. If panel b depicts a profit-maximising firm:

A) it would not be operating in a monopolistically competitive market
B) it would not have excess capacity in its production as long as it is earning zero economic profit
C) it is not able to choose the price at which it sells its product
D) all of the above are true

Question 44

Which of the following market structures is consistent with many sellers in the marketplace? (i) perfect competition
(ii) monopolistic competition
(iii) monopoly
(iv) oligopoly

A) (i) only
B) both (i) and (ii)
C) (ii) only
D) (i), (ii), (iii) and (iv)

Question 45

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) always positive

Question 46

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

Question 47

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 48

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) always a fraction of marginal cost since each firm is a price setter

Question 49

One way in which monopolistic competition differs from oligopoly is that:

A) there are no barriers to entry in oligopolies
B) all oligopoly firms eventually earn zero economic profits
C) strategic interactions between firms are rarely evident in oligopolies
D) in oligopoly markets there are only a few sellers

Question 50

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

A) free entry
B) product differentiation
C) strategic interactions among sellers
D) firms facing a downward-sloping demand curve

Question 51

Monopolistic competition is characterised by which of the following attributes? (i) many sellers
(ii) product differentiation
(iii) barriers to entry

A) (i) and (iii) only
B) (i) and (ii) only
C) (ii) and (iii) only
D) (i), (ii) and (iii)

Question 52

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 53

Suppose that in the short run, a monopolistically competitive firm sells its product for $40 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 new firms leave the market

Question 54

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 55

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

Question 56

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 57

Suppose that in the short run, a monopolistically competitive firm sells its product for $25 per unit. Its average total cost at this level of output is $30. This means that:

A) the firm makes a short profit of $5 per unit
B) the firm makes a short-run loss of $5 per unit
C) the firm makes a short-run and long-run profit of $5 per unit
D) the firm makes a short-run and long-run loss of $5 per unit

Question 58

Celebrities who endorse a product quality should ensure that the product meets its specifications, as a risk may exist of a fall in reputation. They should not leave this to the firm

Question 59

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 60

An important distinction between a profit-maximising firm in a monopolistically competitive market differs and a firm in a perfectly competitive market is the firm in the monopolistically competitive market:

A) faces a downward-sloping demand curve for its product
B) faces a horizontal demand curve at the market clearing price
C) is characterised by market share maximisation
D) produces where marginal cost is equal to marginal revenue

Question 61

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 62

The fact that firms in monopolistically competitive markets differentiate their product from other sellers means that the average revenue curve each seller faces is:

A) horizontal
B) vertical
C) downward-sloping
D) equal to the marginal revenue curve

Question 63

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 64

Economic profits are in a monopolistically competitive market:

A) a signal to some incumbent firms to exit the market
B) never possible in the short run
C) a signal to new firms to enter the market
D) only possible if the producer has exclusive rights to a natural resource

Question 65

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 66

In monopolistically competitive markets, economic profits will eventually lead to:

A) rightward shifts of the demand curve of incumbent firms
B) leftward shifts of the demand curve of incumbent firms
C) barriers to entry
D) economic losses

Question 67

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 68

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 69

When a profit-maximising firm in a monopolistically competitive market is producing the long-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 average revenue will equal marginal cost
D) its marginal revenue will exceed marginal cost

Question 70

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 71

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 72

If in the short run, a firm in a monopolistically competitive market is making a loss, then in the long run it will:

A) either have exited the market or make a zero economic profit
B) definitely exit the market
C) make a positive economic profit
D) continue making a loss but stay in the market

Question 73

The property of free entry means that in monopolistically competitive markets:

A) all remaining firms earn zero economic profits in the long run
B) some firms will be able to earn economic profits in the long run
C) some firms will be forced to incur economic losses in the long run
D) the market structure will eventually be characterised by perfect competition in the long run

Question 74

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 75

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 76

Free entry into a market drives economic profit to:

A) the Nash equilibrium
B) zero
C) the monopoly level
D) the accounting equilibrium

Question 77

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 78

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 79

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 80

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