Deck 14: Monopolistic Competition and Product Differentiation

Question 1

Monopolistic competition is more similar to monopoly than any other industry model.

Answer 1

False

Question 2

A monopolistic competitor's demand curve tends to be more inelastic than a monopolist's demand curve.

Answer 2

False

Question 3

Monopolistic competition is characterized by:

A) a small number of firms selling differentiated products.
B) a large number of firms selling identical products.
C) high barriers to entry.
D) a large number of firms selling differentiated products.

Answer 3

a large number of firms selling differentiated products.

Question 4

Monopolistic competition,like perfect competition,is a market structure in which firms can easily enter and leave the industry.

Question 5

In long-run equilibrium,a monopolistically competitive firm's demand curve will be tangent to its average cost curve.

Question 6

Monopolistic competitors in long-run equilibrium will generally find that they are earning economic profits.

Question 7

By differentiating their products and promoting brand name loyalty,monopolistically competitive firms can raise prices without losing all their customers.

Question 8

Monopolistic competition is a market structure characterized by many small firms selling a homogeneous product.

Question 9

Although there are certain inefficiencies associated with monopolistic competition,society receives a benefit from monopolistic competition in the form of product variety.

Question 10

In the long run,monopolistically competitive firms typically produce with allocative efficiency.

Question 11

Extensive advertising will always lead to an increase in average total cost for the firm.

Question 12

Monopolistically competitive sellers are price takers.

Question 13

A monopolistic competitor's demand curve tends to be more elastic than a monopolist's demand curve.

Question 14

Monopolistically competitive industries have significant barriers to entry and exit.

Question 15

Unlike purely competitive firms,firms in monopolistic competition will operate with excess capacity even in long-run equilibrium.

Question 16

In the monopolistic competition model,firms earn zero economic profits in long-run equilibrium.

Question 17

A monopolistic competitor's demand curve becomes less elastic as new entry occurs.

Question 18

Which of the following is a correct listing of industry models ordered from most competitive to least competitive?

A) perfect competition - monopolistic competition - monopoly
B) perfect competition - monopoly - monopolistic competition
C) monopolistic competition - perfect competition - monopoly
D) monopolistic competition - monopoly - perfect competition

Question 19

Monopolistic competition differs from perfect competition only with regard to the number of firms participating in the market.

Question 20

Monopolistically competitive sellers have some ability to influence the price of their products.

Question 21

A monopolistically competitive firm derives its ability to influence price from:

A) the perfectly elastic demand curve it faces.
B) barriers to entry.
C) its product, which is differentiated in some way from competing products.
D) its position as the sole supplier in the market.

Question 22

If toothpaste manufacturers compete in a monopolistically competitive market,then:

A) firms are price takers.
B) firms try to differentiate their products from those of competitors.
C) firms maximize profits by choosing output where price equals marginal cost.
D) there are significant barriers to entering the toothpaste industry.

Question 23

If the ice cream industry is monopolistically competitive,then:

A) the price of ice cream equals marginal cost in equilibrium.
B) the price of ice cream equals average cost in long-run equilibrium.
C) the price of ice cream is less than marginal cost in equilibrium.
D) there are significant barriers to entering the ice cream business.

Question 24

Monopolistic competition is characterized by:

A) homogeneous products.
B) barriers to entry
C) firms earning economic profits in the long run.
D) differentiated products.

Question 25

Monopolistic competition is common in:

A) retail selling.
B) farming.
C) basic manufacturing.
D) electric power generation.

Question 26

Which of the following observations is true?

A) Monopolistically competitive sellers are price takers.
B) Monopolistically competitive sellers treat price in the same manner as in perfect competition.
C) Monopolistically competitive sellers regard price as a given by market conditions.
D) Monopolistically competitive sellers are price makers.

Question 27

Monopolistic competitors and perfect competitors are alike in:

A) facing horizontal demand curves.
B) earning zero economic profit in the short run.
C) earning zero economic profit in the long run.
D) relying on advertising to attract buyers to their products.

Question 28

Under monopolistic competition:

A) there are significant barriers to entry.
B) there are few barriers to entry.
C) firms sell identical products.
D) firms face perfectly elastic demand curves.

Question 29

In most areas,there are a large number of qualified primary care physicians whose services are highly personalized.In addition to price,factors such as age,sex,location,and personality influence the choice of physician.The primary care physician market is probably:

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

Question 30

In a monopolistically competitive market:

A) there are significant barriers to the entry of new sellers.
B) firms sell differentiated products.
C) firms face horizontal demand curves.
D) there are a few producers selling standardized products.

Question 31

Characteristics of a monopolistically competitive market include all of the following except:

A) some influence over price.
B) a large number of sellers.
C) barriers to entry.
D) differentiated products.

Question 32

Which of the following is not common to perfect competition and monopolistic competition?

A) Free entry
B) Many sellers
C) Elimination of long run economic profits
D) Product differentiation

Question 33

If the eyeglass industry is monopolistically competitive,then in the long-run:

A) the price of eyeglasses will equal marginal revenue.
B) the price of eyeglasses will exceed marginal cost.
C) firms can earn economic profits.
D) firms are price takers.

Question 34

Firms in monopolistically competitive markets can differentiate their products on the basis of:

A) brand identity.
B) quality.
C) convenience.
D) all of the above.

Question 35

Which of the following conditions distinguishes perfect competition from monopolistic competition?

A) the number of sellers
B) freedom of entry and exit
C) homogeneity of the product
D) none of the above

Question 36

Which of the following industries would most likely represent monopolistic competition?

A) clothing
B) wheat
C) water utilities
D) soft drinks

Question 37

A monopolistically competitive firm:

A) tries to differentiate its product from the products of competitors.
B) faces a perfectly elastic demand curve for its product.
C) unlike a perfectly competitive firm, is able to earn positive economic profits in the long run.
D) is always a retail establishment.

Question 38

Monopolistic competition is characterized by:

A) one firm selling several products.
B) many firms selling the same product.
C) many firms selling slightly different products.
D) one firm selling one product.

Question 39

Monopolistic competition is characterized by which of the following attributes:
i.Many sellers
ii.Product differentiation
iii.Significant barriers to entry

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

Question 40

Firms in monopolistically competitive markets can differentiate their products on the basis of:

A) geographical location.
B) service.
C) credit terms.
D) all of the above.

Question 41

Product differentiation in monopolistically competitive markets implies that:

A) firms make economic profits in the long run.
B) firms will produce at the minimum of the average total cost curve in the long run.
C) individual firms face downward-sloping demand curves.
D) firms are certain to earn economic profits in the short run.

Question 42

Exhibit 14-1 Refer to Exhibit 14-1.Based on the graph,what would total cost be at the profit maximizing level of output?

A) $560
B) $665
C) $875
D) $900

Question 43

Characteristics shared by monopolistically competitive markets and perfectly competitive markets include:

A) differentiated products.
B) advertising.
C) many sellers.
D) brand identity.

Question 44

A monopolistically competitive firm differs from a perfectly competitive firm in that a monopolistically competitive firm:

A) faces a downward-sloping demand curve for its product.
B) faces a horizontal demand curve at the market-clearing price.
C) is able to earn profits in the long run.
D) faces virtually no barriers to entry.

Question 45

The force that leads to zero economic profits for monopolistically competitive firms in the long run is:

A) excess capacity.
B) price wars among firms.
C) new entry.
D) excessive advertising.

Question 46

Exhibit 14-1 Refer to Exhibit 14-1.Based on the graph,what would total revenue equal at the profit maximizing level of output?

A) $245
B) $350
C) $875
D) $1,050

Question 47

Monopolistic competition is similar to monopoly in that:

A) firms face perfectly elastic demand curves.
B) firms sell products for which there are no close substitutes.
C) there is relatively free entry and exit.
D) firms have some influence over the product price.

Question 48

If firms in a monopolistically competitive industry are making economic profits:

A) firms will likely be subject to regulation.
B) barriers to entry will be strengthened.
C) new firms will enter the market.
D) some firms must exit the market.

Question 49

The demand curve for a monopolistic competitor slopes downward because:

A) quantity demanded drops to zero after a slight price increase.
B) there are close, but not perfect, substitutes for the product.
C) customers have no loyalty to the product.
D) the product is not differentiated in any way from those offered by other sellers.

Question 50

When new firms choose to enter monopolistically competitive markets:

A) there must be little diversity of products in the market.
B) they are guaranteed economic profits upon entry.
C) some firms in the market must be making economic profits.
D) the demand curve faced by an established firm will shift to the right as a result.

Question 51

Excess capacity occurs in long-run equilibrium under monopolistic competition so that:

A) price is less than marginal cost.
B) price exceeds minimum average cost.
C) marginal revenue exceeds price.
D) all of the above occur.

Question 52

When free entry is one of the attributes of a market structure,economic profits are:

A) generally driven to zero in long-run equilibrium.
B) generally negative for all firms.
C) generally zero in the short run.
D) always positive.

Question 53

In monopolistically competitive market structure,because each good sold in the market is ____,each firm is considered a ____.

A) slightly different; price maker
B) slightly different; price taker
C) the same; price maker
D) the same; price taker

Question 54

Long-run equilibrium under monopolistic competition is similar to long-run equilibrium under perfect competition in that:

A) price equals the minimum average total cost.
B) firms face perfectly elastic demand curves.
C) price equals average cost.
D) marginal revenue equals average cost.

Question 55

Exhibit 14-1 Refer to Exhibit 14-1.Based on the graph,what is the maximum amount of profit this firm could earn?

A) $150
B) $210
C) $245
D) $315

Question 56

When many sellers are involved in selling their products in a market,the market structure may be which of the following?
i.perfect competition
ii.monopolistic competition
iii.monopoly

A) (i) only
B) either (i) or (ii)
C) (ii) only
D) (i), (ii), or (iii)

Question 57

The restaurant market in San Francisco is probably best categorized as:

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

Question 58

Characteristics shared by monopolistically competitive markets and monopoly markets include:

A) strategic interactions among sellers.
B) many sellers.
C) firms facing a downward-sloping demand curve.
D) insignificant barriers to entry.

Question 59

Which of the following is not a source of product differentiation?

A) physical differences in products
B) differences in service provided by firms
C) differences in the location of sales outlets
D) All of the above are sources of product differentiation.

Question 60

To maximize its profit,a monopolistically competitive firm produces the output level at which ____.

A) its price elasticity of demand equals one
B) MR = MC
C) ATC is minimized
D) MR = AVC

Question 61

As new firms enter a monopolistically competitive market,profits of existing firms ____ and product diversity in the market ____.

A) decline; decreases
B) rise; decreases
C) rise; increases
D) decline; increases

Question 62

Exhibit 14-2 The following diagram depicts monopolistically competitive firms. Refer to Exhibit 14-2.The firm illustrated in Graph A above maximizes profits (minimizes losses)by producing at level of output ____ and charging price ____.

A) q₁; P₁
B) q₂; P₁
C) q₁; P₂
D) q₂; P₂

Question 63

Since a monopolistically competitive firm faces a ____ demand curve,it will always operate ____ in long-run equilibrium.

A) perfectly elastic; with excess capacity
B) downward-sloping; with excess capacity
C) downward-sloping; at an economically efficient scale
D) perfectly inelastic; at an economically efficient scale

Question 64

When a firm's demand curve is tangent to its average total cost curve:

A) the firm must be operating in a monopolistically competitive market.
B) economic profits are zero.
C) the firm must be earning economic profits.
D) the firm must be incurring economic losses.

Question 65

In equilibrium under monopolistic competition:

A) marginal revenue exceeds average revenue.
B) marginal revenue exceeds marginal cost.
C) marginal revenue is equal to marginal cost.
D) marginal revenue is less than marginal cost.

Question 66

Billy is running a fast-food burger stand in his small community.If he is like other monopolistic competitors in short-run equilibrium which of the following would be true?

A) His demand curve would be downward sloping.
B) His marginal revenue curve would lie below his demand curve.
C) He would be maximizing profits where his MC = MR.
D) All of the above would be characteristics of Billy's burger stand.

Question 67

Which of the following characteristics apply to both monopoly and monopolistic competition?

A) Marginal revenue exceeds marginal cost at equilibrium.
B) Average revenue exceeds both marginal cost and marginal revenue at equilibrium.
C) Marginal revenue exceeds average revenue at equilibrium.
D) Marginal revenue and marginal cost are equal and exceed price at equilibrium.

Question 68

Exhibit 14-2 The following diagram depicts monopolistically competitive firms. Refer to Exhibit 14-2.In Graph B above,the firm will maximize profits (minimize losses)by producing at level of output ____ and charging price ____.

A) q₁; P₁
B) q₂; P₁
C) q₁; P₂
D) q₂; P₂

Question 69

In monopolistically competitive markets,economic losses ____,and ____ shifts the demand curve of the remaining firms to the ____.

A) signal some remaining firms to exit; exit; right
B) signal some remaining firms to exit; exit; left
C) signal new firms to enter; entry; left
D) signal new firms to enter; entry; right

Question 70

When a monopolistically competitive firm is in long-run equilibrium:

A) the demand curve will be perfectly elastic.
B) marginal cost must be falling.
C) price exceeds marginal cost.
D) marginal revenue exceeds marginal cost.

Question 71

Exhibit 14-2 The following diagram depicts monopolistically competitive firms. Refer to Exhibit 14-2.In Graph A,a profit-maximizing (loss-minimizing)firm will experience a ____ at output quantity ____.

A) loss; q₁
B) loss; q₂
C) profit; q₁
D) profit; q₂

Question 72

A profit-maximizing,monopolistically competitive firm always operates:

A) at the minimum of average total cost.
B) at the point where demand is unit elastic.
C) with excess capacity.
D) at an economically efficient scale.

Question 73

Due to the entry and exit of firms in a monopolistically competitive market:

A) economic profits and economic losses are dissipated in the long run.
B) economic profits persist 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 exist in the long run.

Question 74

In monopolistically competitive markets,economic profits ____,and ____ shifts the demand curve of the remaining firms to the ____.

A) signal some remaining firms to exit; exit; right
B) signal some remaining firms to exit; exit; left
C) signal new firms to enter; entry; left
D) signal new firms to enter; entry; right

Question 75

Monopolistic and perfect competition are alike in that:

A) a firm's long-run equilibrium output is located where long-run average total cost is increasing.
B) a firm's long-run equilibrium output is located where long-run average total cost is minimized.
C) firms earn a normal rate of return in the long run.
D) firms are price takers.

Question 76

In the monopolistic competition model,the attribute of free entry suggests that:

A) all 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 characterized by perfect competition in the long run.

Question 77

In equilibrium under monopolistic competition:

A) firms always earn profits in the short run.
B) firms always suffer losses in the short run.
C) output is at the socially efficient level in the long run.
D) marginal revenue is less than price.

Question 78

A monopolistic competitor is like a monopolist in that:

A) it sells in the inelastic portion of its demand curve.
B) it earns zero economic profit in the long run.
C) the marginal revenue curve lies above the AR curve.
D) it faces a downward-sloping demand curve.

Question 79

Exhibit 14-2 The following diagram depicts monopolistically competitive firms. Refer to Exhibit 14-2.In Graph B,a profit-maximizing (loss-minimizing)firm will experience a ____ at output quantity ____.

A) loss; q₁
B) loss; q₂
C) profit; q₁
D) profit; q₂

Question 80

As firms exit a monopolistically competitive market,profits of existing firms ____ and product diversity in the market ____.

A) decline; decreases
B) rise; decreases
C) rise; increases
D) decline; increases