Deck 11: The World of Imperfect Competition

Question 1

An industry with a large number of relatively small firms producing differentiated products in a market with easy entry and exit firms is:

A) monopoly.
B) duopoly.
C) oligopoly.
D) monopolistic competition.

Answer 1

monopolistic competition.

Question 2

An example of monopolistic competition is the _______ market.

A) restaurant
B) soft drink
C) automobile
D) breakfast cereal

Answer 2

restaurant

Question 3

An industry with more than one firm and in which at least one firm is a price setter is:

A) perfect competition.
B) imperfect competition.
C) monopoly.
D) perfect monopolistic.

Answer 3

imperfect competition.

Question 4

A(n) _______ is a single firm with _______ , whereas _______ implies an industry with ________ firm(s) who have (has) _______ .

A) oligopoly; no barriers to entry; monopoly; many; easy entry and exit
B) monopoly; barriers to entry; monopolistic competition; many; easy entry and exit
C) monopoly; barriers to entry; oligopoly; few; no barriers to entry
D) monopolistic competitor; barriers to entry; monopoly; one; barriers to entry

Question 5

An industry characterized by many firms, producing similar but differentiated products, in a market with easy entry and exit is called:

A) perfect competition.
B) monopoly.
C) monopolistic competition.
D) oligopoly.

Question 6

Imperfectly competitive markets include:

A) a category where many firms sell identical products.
B) an industry with a few firms, producing a similar product, and in some cases an identical product.
C) a category where P = MR = MC is the profit maximizing condition.
D) monopolies.

Question 7

In large shopping areas, the retail market is most illustrative of:

A) monopolistic competition.
B) monopoly.
C) perfect competition.
D) perfect oligopoly.

Question 8

Imperfect competition is:

A) a market structure with no more than one firm in the industry.
B) an industry in which all firms are price takers.
C) a market structure where firms have a degree of monopoly power.
D) described by all of the above.

Question 9

Due to the existence of a large number of similar, but not identical, substitutes in most communities, the market for chiropractors is best considered:

A) an oligopoly.
B) perfect competition.
C) monopolistic competition.
D) a monopoly.

Question 10

On the spectrum of market structures, monopolistic competition lies:

A) at the same location as monopoly.
B) at the same location as perfect competition.
C) between perfect competition and monopoly.
D) to the left of both perfect competition and monopoly.

Question 11

Due to the existence of a large number of similar, but not identical, substitutes in most communities, the market for financial planners is best considered:

A) a monopoly.
B) an oligopoly.
C) perfect competition.
D) monopolistic competition.

Question 12

Monopolistic competition is an industry characterized by a:

A) small number of firms producing identical products, with barriers to entry for firms.
B) small number of firms producing similar products, with relatively easy entry for firms.
C) large number of firms producing similar products, with relatively easy entry for firms.
D) large number of firms producing identical products, with relatively easy entry for firms.

Question 13

The demand curve for a firm under monopolistic competition is:

A) U-shaped.
B) upward sloping.
C) downward sloping.
D) vertical.

Question 14

Monopolistic competition is an industry characterized by:

A) a product with no close substitutes.
B) a horizontal demand curve.
C) a large number of firms.
D) significant barriers to entry and exit.

Question 15

Imperfect competition includes:

A) monopolistic competition and oligopoly.
B) monopolistic competition and monopoly.
C) perfect competition and monopoly.
D) monopoly and oligopoly.

Question 16

The world of imperfect competition:

A) lies between the extremes of perfect competition and monopoly.
B) is a world where firms battle over market shares.
C) is a world where economic profits may or may not persist in the long run.
D) is described by all of the above.

Question 17

Monopolistic competition is an industry characterized by:

A) a product with no close substitutes.
B) a horizontal demand curve.
C) a small number of firms.
D) relatively easy entry and exit.

Question 18

Monopolistic competition is an industry characterized by:

A) a product with many close substitutes.
B) a horizontal demand curve.
C) a small number of firms.
D) barriers to entry and exit.

Question 19

Monopolistic competition is an industry characterized by:

A) a product with no close substitutes.
B) many firms facing their own downward-sloping demand curve.
C) a small number of firms.
D) barriers to entry and exit.

Question 20

A feature of monopolistic competition that makes it different from monopoly is the:

A) fact that firms in the model of monopolistic competition follow the marginal decision rule while monopolies do not.
B) downward-sloping demand curve.
C) downward-sloping marginal revenue curve.
D) number of firms in the industry.

Question 21

The profit-maximizing rule MC = MR is followed by firms under:

A) monopolistic competition, but not perfect competition.
B) perfect competition, but not monopolistic competition.
C) either monopolistic competition or perfect competition, depending on the costs of production.
D) both monopolistic competition and perfect competition.

Question 22

Use the following for questions 22-31.
Exhibit: Profit Maximization in Monopolistic Competition

(Exhibit: Profit Maximization in Monopolistic Competition) In Panel (a), the profit-maximizing price and quantity are _______ and _______ .

A) S; M
B) P; M
C) P; Q
D) T; Q

Question 23

The profit-maximizing rule MC = P is followed by firms under:

A) monopolistic competition, but not perfect competition.
B) perfect competition, but not monopolistic competition.
C) both monopolistic competition and perfect competition.
D) either monopolistic competition or perfect competition, depending on the costs of production.

Question 24

If a firm under monopolistic competition is producing a quantity that generates MC < MR, then the marginal decision rule tells us that profit:

A) can be increased by increasing production.
B) can be increased by decreasing production.
C) can be increased by increasing the price.
D) is maximized only if MC = P.

Question 25

The demand curve for a firm under monopolistic competition is:

A) downward sloping, unlike the horizontal demand curve facing a perfectly competitive firm.
B) horizontal, unlike the downward-sloping demand curve facing a perfectly competitive firm.
C) horizontal, the same as that facing a perfectly competitive firm.
D) downward sloping, the same as that facing a perfectly competitive firm.

Question 26

Use the following for questions 22-31.
Exhibit: Profit Maximization in Monopolistic Competition

(Exhibit: Profit Maximization in Monopolistic Competition) A firm in monopolistic competition will maximize profits by producing the level of output where:

A) P = MC
B) MR = MC
C) P = MR
D) price minus ATC (i.e., economic profit per unit) is the largest.

Question 27

Use the following for questions 22-31.
Exhibit: Profit Maximization in Monopolistic Competition

(Exhibit: Profit Maximization in Monopolistic Competition) In Panel (b), the long-run equilibrium will result in:

A) economic profits = 0.
B) accounting profits = 0.
C) a tangency of the ATC curve with the MR curve.
D) A and C.

Question 28

If a firm under monopolistic competition is producing a quantity that generates MC > MR, then the marginal decision rule tells us that profit:

A) can be increased by increasing production.
B) can be increased by decreasing production.
C) can be increased by decreasing the price.
D) is maximized only if MC = P.

Question 29

A firm in monopolistic competition maximizes its profit by producing at the level at which:

A) MC = ATC.
B) MC = AR.
C) MC = MR.
D) MC = P.

Question 30

If a firm under monopolistic competition is producing a quantity that generates MC = MR, then the marginal decision rule tells us that profit:

A) is maximized.
B) can be increased by decreasing production.
C) can be increased by decreasing the price.
D) is maximized only if MC = P.

Question 31

Use the following for questions 22-31.
Exhibit: Profit Maximization in Monopolistic Competition

(Exhibit: Profit Maximization in Monopolistic Competition) In monopolistic competition, long-run equilibrium is characterized by:

A) P > MR.
B) P < MR.
C) P = MR.
D) profit maximization, which occurs where P = MR = MC.

Question 32

Use the following for questions 40-42.
Exhibit: Profit Maximization for a Firm in Monopolistic Competition

(Exhibit: Profit Maximization for a Firm in Monopolistic Competition) Suppose that an innovation reduces a firm's fixed costs and reduces cost from ATC to ATC' Before the innovation reduced the cost, the firm's maximum economic profit was:

A) $0.
B) $30.
C) $750.
D) $4,500.

Question 33

Use the following for questions 22-31.
Exhibit: Profit Maximization in Monopolistic Competition

(Exhibit: Profit Maximization in Monopolistic Competition) If other firms see economic profits in the industry, they will enter it, and the demand curve for firms already in the industry will shift to the ________ ; in the long run, this will result in economic profit _______ and price _______ .

A) right; = 0; = ATC; = minimum ATC
B) right; > 0; > ATC
C) left; < 0; < ATC
D) left; = 0; = ATC; > minimum ATC

Question 34

Use the following for questions 22-31.
Exhibit: Profit Maximization in Monopolistic Competition

(Exhibit: Profit Maximization in Monopolistic Competition) In Panel (b), the profit-maximizing price is P₂ and the ATC curve is tangent to the new demand curve.The portion of the ATC that lies to the right of the tangency and continues down to the intersection of MC with ATC indicates _______ , because in the long run in _______ the price would be equal to _______.

A) unused capacity; oligopoly; MC = minimum ATC
B) excess capacity; perfect competition; MC = minimum ATC
C) under-utilization; monopoly; MR = MC
D) excess capacity; perfect competition; MC > minimum ATC

Question 35

Use the following for questions 22-31.
Exhibit: Profit Maximization in Monopolistic Competition

(Exhibit: Profit Maximization in Monopolistic Competition) In the short run, a firm in monopolistic competition may experience economic profits as shown in Panel (a) as the distance:

A) PS.
B) PS times the quantity 0M.
C) PS times the quantity Q.
D) PT times the quantity Q.

Question 36

Use the following for questions 22-31.
Exhibit: Profit Maximization in Monopolistic Competition

(Exhibit: Profit Maximization in Monopolistic Competition).When the demand curve for a firm in monopolistic competition shifts, the marginal revenue curve:

A) must shift too.
B) shifts in the opposite direction.
C) will stay the same.
D) will shift, but the profit-maximizing quantity will not change.

Question 37

Use the following for questions 22-31.
Exhibit: Profit Maximization in Monopolistic Competition

(Exhibit: Profit Maximization in Monopolistic Competition) In determining the price in monopolistic competition:

A) the price to the firm is given by supply and demand for the industry.
B) the firm is a price taker.
C) the firm applies the marginal decision rule.
D) A and B are true.

Question 38

A restaurant:

A) is a price taker.
B) can set its own price.
C) will lose all of its customers if it raises its prices.
D) is described by both B and C.

Question 39

Use the following for questions 22-31.
Exhibit: Profit Maximization in Monopolistic Competition

(Exhibit: Profit Maximization in Monopolistic Competition) In Panel (a), if the firm raises its price above P, it will:

A) lose all its customers.
B) still have some customers.
C) not lose any customers.
D) have none of the above occur.

Question 40

Price for a firm under monopolistic competition is:

A) equal to marginal revenue.
B) greater than marginal revenue.
C) less than marginal revenue.
D) greater than total revenue.

Question 41

Use the following for questions 40-42.
Exhibit: Profit Maximization for a Firm in Monopolistic Competition

(Exhibit: Profit Maximization for a Firm in Monopolistic Competition.) Suppose that an innovation reduces a firm's fixed costs and reduces cost from ATC to ATC'.After the innovation reduced the cost, the firm's maximum economic profit is:

A) $0.
B) $30.
C) $1,500.
D) $3,000.

Question 42

Use the following for questions 43-51.
Exhibit: Firms in Monopolistic Competition

(Exhibit: Firms in Monopolistic Competition) Long-run equilibrium is illustrated at the profit-maximizing price _______ in Panel _______ .

A) F; (a)
B) G; (a)
C) H; (b)
D) I; (c)

Question 43

Use the following for questions 43-51.
Exhibit: Firms in Monopolistic Competition

(Exhibit: Firms in Monopolistic Competition) In Panel (a), the profit-maximizing quantity of output is generated by the intersection at point:

A) K.
B) M.
C) N.
D) O.

Question 44

Use the following for questions 43-51.
Exhibit: Firms in Monopolistic Competition

(Exhibit: Firms in Monopolistic Competition) In Panel (c), the profit-maximizing quantity of output is generated by the intersection at point:

A) U.
B) V.
C) W.
D) X.

Question 45

Use the following for questions 43-51.
Exhibit: Firms in Monopolistic Competition

(Exhibit: Firms in Monopolistic Competition) Economic profit is earned if the profit-maximizing price is price _______ in Panel _______ .

A) F; (a)
B) G; (a)
C) H; (b)
D) I; (c)

Question 46

Use the following to answer question(s): The Restaurant Model

(Exhibit: The Restaurant Market) The exhibit shows curves facing a typical restaurant in a community.Assume that the market is characterized by many firms, differentiated products, easy entry and easy exit.If the restaurant shown here were to raise its price above the profit-maximizing price, it would experience:

A) a reduction in total revenue.
B) an increase in total revenue.
C) no change in total revenue.
D) There is not enough information given to answer the question.

Question 47

Use the following for questions 40-42.
Exhibit: Profit Maximization for a Firm in Monopolistic Competition

(Exhibit: Profit Maximization for a Firm in Monopolistic Competition) Suppose that an innovation reduces a firm's fixed costs and reduces cost from ATC to ATC´.Suppose further that after the innovation reduced the cost to ATC´, it costs a total of $18 per unit to produce 170 units per day.If the firm charges a price equal to marginal cost, total net profit will be:

A) $1,190.
B) $1,700.
C) $3,060.
D) $3,400.

Question 48

Use the following to answer question(s): The Restaurant Model

(Exhibit: The Restaurant Market) The exhibit shows curves facing a typical restaurant in a community.Assume that the market is characterized by many firms, differentiated products, easy entry and easy exit.If the restaurant shown here is typical of others in the community, then in the long run, we would expect to observe:

A) restaurants leaving the market.
B) new restaurants entering the market.
C) neither entry nor exit.
D) There is not enough information given to answer the question.

Question 49

Use the following to answer question(s): The Restaurant Model

(Exhibit: The Restaurant Market) The exhibit shows curves facing a typical restaurant in a community.Assume that the market is characterized by many firms, differentiated products, easy entry and easy exit.For the restaurant shown here the profit-maximizing price is:

A) P₁.
B) P₂.
C) P₃.
D) There is not enough information given to answer the question.

Question 50

Use the following to answer question(s): The Restaurant Model

(Exhibit: The Restaurant Market) The exhibit shows curves facing a typical restaurant in a community.Assume that the market is characterized by many firms, differentiated products, easy entry and easy exit.In long-run equilibrium, the economic profit earned by the typical restaurant in the community will be:

A) negative.
B) zero.
C) equal to the level shown in the exhibit.
D) There is not enough information given to answer the question.

Question 51

Use the following for questions 43-51.
Exhibit: Firms in Monopolistic Competition

(Exhibit: Firms in Monopolistic Competition) Zero economic profit is earned if the profit-maximizing price is price _______ in Panel _______ .

A) F; (a)
B) G; (a)
C) H; (b)
D) I; (c)

Question 52

Use the following to answer question(s): The Restaurant Model

(Exhibit: The Restaurant Market) The exhibit shows curves facing a typical restaurant in a community.Assume that the market is characterized by many firms, differentiated products, easy entry and easy exit.If the restaurant shown here is typical of others in the community, then in the long-run, prices charged by firms in the market are likely to:

A) fall.
B) rise.
C) remain unchanged.
D) There is not enough information given to answer the question.

Question 53

The market for plumbing services in a city can be characterized by the model of monopolistic competition.Suppose that the market is in long-run equilibrium.For a typical plumbing firm, price:

A) equals average total cost.
B) exceeds average total cost.
C) is less than average total cost.
D) is greater than the average for all other firms in the market.

Question 54

The market for plumbing services in a city can be characterized by the model of monopolistic competition.Suppose that the market is initially in long-run equilibrium, and then there is an increase in demand for plumbing services.We expect that in the short run the price:

A) and output of plumbing services will fall.
B) and output of plumbing services will remain unchanged.
C) and output of plumbing services will rise.
D) of plumbing services will rise and the output will fall.

Question 55

Use the following for questions 43-51.
Exhibit: Firms in Monopolistic Competition

(Exhibit: Firms in Monopolistic Competition) Negative economic profit or economic loss is incurred if the profit-maximizing price is price _______ in Panel _______ .

A) G; (a)
B) H; (b)
C) I; (c)
D) J; (c)

Question 56

Use the following for questions 43-51.
Exhibit: Firms in Monopolistic Competition

(Exhibit: Firms in Monopolistic Competition) In Panel (c), economic loss per unit is amount:

A) XT.
B) UW.
C) VW.
D) VT.

Question 57

Use the following to answer question(s): The Restaurant Model

(Exhibit: The Restaurant Market) The exhibit shows curves facing a typical restaurant in a community.Assume that the market is characterized by many firms, differentiated products, easy entry and easy exit.The restaurant shown here will maximize profits at a quantity of:

A) Q₁.
B) Q₂.
C) Q₃.
D) There is not enough information given to answer the question.

Question 58

Use the following for questions 43-51.
Exhibit: Firms in Monopolistic Competition

(Exhibit: Firms in Monopolistic Competition) In Panel (b), the profit-maximizing quantity of output is generated by the intersection at point:

A) Q.
B) R.
C) S.
D) T.

Question 59

Use the following for questions 43-51.
Exhibit: Firms in Monopolistic Competition

(Exhibit: Firms in Monopolistic Competition) In Panel (a), economic profit per unit is amount:

A) KL.
B) LM.
C) MN.
D) NO.

Question 60

Use the following to answer question(s): The Restaurant Model

(Exhibit: The Restaurant Market) The exhibit shows curves facing a typical restaurant in a community.Assume that the market is characterized by many firms, differentiated products, easy entry and easy exit.For the restaurant shown here, its profit per unit is:

A) ae.
B) fd.
C) bf.
D) bd.

Question 61

The market for plumbing services in a city can be characterized by the model of monopolistic competition.Suppose that the market is initially in long-run equilibrium, and then there is an increase in demand for plumbing services.We expect that in the long run:

A) firms will leave the plumbing market.
B) there will be a short-run increase in the number of firms, but then the number will return to the original level.
C) new firms will enter the plumbing market.
D) firms will shut down, but they will not leave the industry.

Question 62

Product differentiation under monopolistic competition means that each firm:

A) charges slightly different prices.
B) has a pure monopoly.
C) maximizes profit where MC = P.
D) faces a horizontal demand curve.

Question 63

In monopolistic competition:

A) to maximize profits MR = MC, yet P > MC.
B) people would be better off if output were reduced.
C) output could be increased without an increase in total cost.
D) A and B are true.

Question 64

Economic profits in the long run are guaranteed for firms under:

A) monopolistic competition, but not perfect competition.
B) perfect competition, but not monopolistic competition.
C) both monopolistic competition and perfect competition.
D) neither monopolistic competition nor perfect competition.

Question 65

The Case in Point on Craft Brewers suggested that this industry is an example of:

A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.

Question 66

Product differentiation under monopolistic competition means that each firm:

A) charges the same price.
B) maximizes profit where MC = P.
C) faces a downward-sloping demand curve.
D) receives economic profits.

Question 67

A monopolistically competitive industry shares some of the same characteristics as perfect competition, including:

A) many firms making economic profit in the long run.
B) easy entry and exit.
C) identical products.
D) both B and C.

Question 68

Which of the following is (are) true?

A) When choosing the profit-maximizing quantity, the short-run decisionmaking process for a firm in perfect competition and a firm in monopolistic competition is the same, since they produce the quantity where MR = MC.
B) In the long run in perfect competition economic profits = 0, and in monopolistic competition in the long-run economic profits are = 0.
C) In perfect competition P = MC and in monopolistic competition, MR = MC, but P > MC and there is excess capacity.
D) All of the above are true.

Question 69

When the profit-maximizing level of output is less than the output associated with the minimum possible average total cost of production, a firm is said to have:

A) economic profits.
B) excess capacity.
C) advertising.
D) excess production.

Question 70

The excess capacity in monopolistic competition may be viewed as:

A) the cost of product diversity.
B) efficient.
C) the reason P = MR = MC in monopolistic competition.
D) all of the above.

Question 71

In the long run, monopolistically competitive firms tend to experience:

A) high economic profits.
B) zero economic profits.
C) negative economic profits.
D) substantial economic losses.

Question 72

The market for plumbing services in a city can be characterized by the model of monopolistic competition.Suppose that the market is initially in long-run equilibrium, and then there is an increase in demand for plumbing services.We expect that in the long run the economic profits of typical firms in the industry will be:

A) typical of those earned by monopoly firms.
B) negative.
C) zero.
D) positive but less than the level typically earned by monopoly firms.

Question 73

Oligopoly is a market structure that is characterized by a:

A) small number of interdependent firms producing identical or differentiated products.
B) small number of independent firms producing identical or differentiated products.
C) large number of relatively small independent firms producing differentiated products.
D) large number of relatively small independent firms producing identical products.

Question 74

Because monopolistically competitive firms charge a P > MC:

A) monopolistic competition is efficient.
B) monopolistic competition is inefficient.
C) the marginal benefit to society of an additional unit of output is below its cost.
D) B and C are true.

Question 75

Monopolistic competition within an industry results in:

A) overutilization of plants.
B) chronic excess capacity.
C) less advertising than in perfect competition.
D) lower prices than in perfect competition.

Question 76

The main characteristic that distinguishes monopolistic competition from perfect competition is:

A) easy entry and exit.
B) many firms.
C) differentiated products.
D) that in perfect competition to maximize profits, a firm will produce where MR = MC.

Question 77

Which of the following is (are) true?

A) One can criticize monopolistic competition because it falls short of the efficiency standards of perfect competition.
B) Monopolistic competition is inefficient because of product differentiation.
C) According to the text, the inefficiency of monopolistic competition may be a small price to pay for the wide range of product choices it offers.
D) All of the above are true.

Question 78

Assuming identical production functions and cost curves, the long-run equilibrium of a monopolistically competitive firm, as compared with a perfectly competitive firm, is such that, for the former, price is:

A) higher and output is greater.
B) higher and output is smaller.
C) lower and output is greater.
D) lower and output is smaller.

Question 79

An industry dominated by a few firms, where each of those firms recognizes that its own choices will affect the choices of its rivals and that its rivals' choices will affect it, is a(n):

A) monopoly.
B) oligopoly.
C) monopolistic competition.
D) perfect competition.

Question 80

Which of the following is (are) true?

A) According to the text, perfect competition is a goal toward which an economy should strive.
B) Monopolistic competition results in excess capacity, since in the long run MR = MC to the left of the minimum of the ATC curve.
C) One might characterize monopolistic competition as an industry, such as gasoline stations, which in the long run experiences economic profits.
D) All of the above are true.