Deck 15: Monopolistic Competition

Question 1

A monopolistically competitive firm influences market price by virtue of its size.

Answer 1

False

Question 2

The feature that distinguishes monopolistic competition from perfect competition is that monopolistically competitive firms are

A) large relative to the market.
B) price takers.
C) able to block the entry of other firms.
D) able to differentiate their products.

Answer 2

D

Question 3

Monopolistically competitive firms are unable to affect the market price of their output, but are able to control the price of their own output.

Answer 3

True

Question 4

In San Francisco there are many retail clothing stores. Each store is slightly different from every other store. Retail clothing stores are an example of what market structure?

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

Question 5

Monopolistic competition is a common form of market structure in the United States.

Question 6

Monopolistic competition differs from perfect competition primarily because in

A) monopolistic competition, firms can differentiate their products.
B) perfect competition, firms can differentiate their products.
C) monopolistic competition, entry into the industry is blocked.
D) monopolistic competition, there are relatively few barriers to entry.

Question 7

Which of the following features distinguishes monopolistically competitive firms from monopolies and oligopolies?

A) Monopolistically competitive firms cannot influence market price by virtue of their size alone while monopolies and oligopolies can.
B) Monopolistically competitive firms are not constrained by market demand while monopolies and oligopolies are.
C) Monopolistically competitive firms are price takers while monopolies and oligopolies are not.
D) Monopolistically competitive firms sell a homogeneous product while monopolies and oligopolies sell a differentiated product.

Question 8

Firms in a monopolistically competitive industry are small relative to the total market.

Question 9

The case for advertising includes the fact that

A) it wastes society's scarce resources.
B) firms spend large sums of money to create meaningless differences among products.
C) it provides consumers with valuable information about product availability, quality, and price.
D) it creates wants that otherwise would not have existed.

Question 10

Monopolistically competitive firms use a(n) ________ strategy to achieve market power.

A) product differentiation
B) dominant
C) maximin
D) opportunistic behavior

Question 11

In monopolistic competition, firms can have some market power

A) by virtue of size alone.
B) by producing differentiated products.
C) because of barriers to entry into the industry.
D) because of barriers to exit from the industry.

Question 12

A(n) ________ industry does NOT have price as a decision variable.

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

Question 13

Monopolistically competitive firms engage in both price and quality competition.

Question 14

A monopolistically competitive industry has all of the following characteristics EXCEPT:

A) there are no barriers to entry.
B) strategic behavior.
C) product differentiation.
D) a large number of firms.

Question 15

In a monopolistically competitive industry,

A) firms are large relative to the total market.
B) firms are small relative to the total market.
C) firms can be either large or small relative to the total market.
D) there is only one firm.

Question 16

The automobile industry is a good example of a monopolistically competitive industry.

Question 17

Firms gain control over price in monopolistic competition by

A) blocking entry of other firms into the industry.
B) producing a product for which there are no close substitutes.
C) differentiating their products.
D) colluding with other firms to set prices.

Question 18

The restaurant industry is an example of a(n) ________ industry.

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

Question 19

Monopolistically competitive firms, like perfectly competitive firms, sell a differentiated product.

Question 20

There is easy entry into the ________ and ________ industries.

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

Question 21

Related to the Economics in Practice on page 318: A company selling iced tea discovers that as sugar is added to tea, customers' opinions of the taste of the tea rises for the first few grams of sugar and then drops. Even so, the company chooses not to add the amount sugar that would result in the best-tasting tea. Which of the following would explain why adding less sugar could be a wise decision?

A) The price of sugar added to tea is much less significant than the price of other ingredients, such as tea leaves.
B) Manufacturers of tea are required to clearly indicate the amount of sugar in their products.
C) Teas with less sugar are more likely to appeal to health-conscious consumers.
D) Many products in the cold drink market are sold with substitutes for sugar, such as high fructose corn syrup.

Question 22

The Internet has had a significant influence on advertising in all of the following ways EXCEPT:

A) the Internet allows firms to actively interact with customers.
B) the Internet has improved firms' ability to target specific markets.
C) the Internet has reduced the level and transparency of informational advertising.
D) the Internet has reduced spending on advertising.

Question 23

The case for product differentiation does NOT include the fact that

A) products that satisfy a real demand survive.
B) standards of living rise with product innovation.
C) new products satisfy people with different preferences.
D) it wastes society's scarce resources.

Question 24

Referring to the Economics in Practice on page 320: If restaurants are required to include calorie and fat-content labels on menus, the demand curve for high-fat, high-calorie menu items will most likely shift to the _____, resulting in ________ in the equilibrium price of these items.

A) right; an increase
B) right; a decrease
C) left; an increase
D) left; a decrease

Question 25

In well-functioning markets, all of the following reflect the degree of product variety EXCEPT:

A) differences in consumers' tastes.
B) cost economies from standardization.
C) gains from network externalities.
D) gains from coordination.

Question 26

Behavioral economics

A) blends insights from sociology and economics.
B) suggests that too much variety may be welfare enhancing.
C) has contributed to microeconomics but not to macroeconomics.
D) suggests that consumers purchase health club memberships instead of paying per visit in an attempt to commit themselves to an exercise regime.

Question 27

The more significant are economies of scale in an industry, the more product variety will be observed.

Question 28

Product differentiation that makes the product better than a rival's product from everyone's perspective

A) always increases welfare.
B) is known as vertical differentiation.
C) is known as horizontal differentiation.
D) makes the rival's product obsolete.

Question 29

Advertising serves no productive purpose and is thus welfare decreasing.

Question 30

The basic function of advertising, according to its proponents, is to assist consumers in making informed, rational choices.

Question 31

Related to the Economics in Practice on page 318: Producers of Honest Tea stop adding sugar to their tea when the marginal utility to consumers of doing so is

A) positive.
B) negative.
C) zero.
D) Indeterminate from the given information.

Question 32

Product differentiation that makes the product better for some consumers and worse for others is

A) always welfare decreasing.
B) vertical differentiation.
C) horizontal differentiation.
D) never undertaken by firms.

Question 33

Vertical differentiation makes products better for some consumers and worse for others.

Question 34

The more homogeneous are consumers' preferences, the less product variety will be observed.

Question 35

Product differentiation can be used by firms to do all of the following EXCEPT:

A) gain market share.
B) erect barriers to entry for potential firms.
C) provide consumers with commitment devices.
D) gain complete control over the price of their product.

Question 36

In order to achieve market power, monopolistically competitive firms use ________.

A) their size
B) product differentiation
C) strategic behavior
D) predatory pricing

Question 37

The right answer to the debate regarding the welfare effects of advertising is that

A) advertising always leads to concentration in an industry.
B) advertising always leads to positive economic profits in an industry.
C) advertising always improves the functioning of the market.
D) there is no right answer.

Question 38

The case AGAINST advertising includes the fact that

A) firms spend large sums of money to create artificial differences among products.
B) it provides consumers with valuable information about product availability, quality, and price.
C) it increases competition by decreasing barriers to entry of new firms into an industry.
D) it ensures high quality and efficient production.

Question 39

Behavioral economics uses insights from both psychology and economics.

Question 40

One reason for selecting a section of microeconomics for which attendance is part of the grade (as opposed to one where it is not) is that it serves as a commitment device that will get you to attend class.

Question 41

The demand facing a monopolistically competitive firm is ________ a monopolistic firm and ________ a perfectly competitive firm.

A) as elastic as; less elastic than
B) less elastic than; more elastic than
C) more elastic than; less elastic than
D) more elastic than; as elastic as

Question 42

A monopolistically competitive firm produces where

A) marginal revenue equals price.
B) its marginal revenue curve lies above its demand curve.
C) its marginal revenue curve intersects the quantity axis.
D) marginal revenue equals marginal cost.

Question 43

A monopolistically competitive firm that is incurring a loss will shut down if

A) marginal revenue is less than marginal cost.
B) revenues are less than variable costs.
C) price is less than average total cost.
D) price is less than marginal cost.

Question 44

The Specialty Cake Store, a monopolistically competitive firm, is producing 200 decorated cakes per day and selling each cake for $12. At that production level ATC is $20, AVC is $15, AFC is $5, and both MR and MC are $8. This firm should

A) continue to produce 200 cakes, as price is greater than AFC.
B) increase output to the point where price equals marginal cost.
C) decrease output to the point where marginal cost equals average cost.
D) produce zero cakes and just pay fixed costs.

Question 45

A monopolistically competitive firm that is incurring a loss will produce in the short run as long as the revenue the firm receives is sufficient to cover

A) fixed costs.
B) marginal costs.
C) advertising costs.
D) variable costs.

Question 46

If P > ATC, then a profit maximizing, monopolistically competitive firm earns ________ economic profits.

A) positive
B) negative
C) zero
D) either positive or negative

Question 47

The Do It Yourself Hardware Store is a monopolistically competitive firm. Its marginal revenue curve

A) is identical to its demand curve.
B) lies below its demand curve intersecting the quantity axis at the same point at which the demand curve intersects it.
C) lies below its demand curve intersecting the quantity axis midway between the origin and the point at which the demand curve intersects it.
D) is below its demand curve if demand is elastic and above the demand curve if demand is inelastic.

Question 48

A profit‐maximizing firm in a monopolistically competitive market structure behaves much like a ________ in the short run.

A) perfectly competitive firm
B) monopolistic firm
C) dominant firm
D) Cournot duopolist

Question 49

A monopolistically competitive firm maximizes profit where

A) MR > MC.
B) MC > MR.
C) MR = MC.
D) P = MC.

Question 50

Unlike a monopolistic firm's product, a monopolistically competitive firm's product

A) is homogeneous.
B) is a unique product.
C) has many close substitutes.
D) has no close substitutes.

Question 51

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Below are cost curves for Dom's Barber Shop, a monopolistically competitive firm. Figure 15.1
Refer to Figure 15.1. The profit-maximizing number of haircuts for Dom's Barber Shop is

A) 20.
B) 23.
C) 25.
D) 30.

Question 52

Advertising provides consumers with product information and can promote competition. Thus, it is always welfare enhancing.

Question 53

A monopolistically competitive firm can minimize its losses by producing where ________ as long as ________.

A) MR = MC; P > AVC
B) P = MC; P > ATC
C) P = ATC; P > MR
D) P = MR; P > AFC

Question 54

Compared to a perfectly competitive firm, the demand schedule of a monopolistically competitive firm faces is

A) more price elastic.
B) less price elastic.
C) perfectly price elastic.
D) perfectly price inelastic.

Question 55

To maximize profit, a monopolistically competitive firm will produce where

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

Question 56

The Specialty Cake Store, a monopolistically competitive firm, is producing 200 decorated cakes per day and selling each cake for $17. At that production level, ATC is $20, AVC is $15, AFC is $5, and both MR and MC are $8. This firm should

A) continue to produce 200 cakes, as price is greater than AVC.
B) increase output to the point where price equals marginal cost.
C) decrease output to the point where price equals average total cost.
D) shutdown and produce zero cakes and just pay fixed costs.

Question 57

If ATC > P, then a profit maximizing, monopolistically competitive firms earns ________ economic profits.

A) positive
B) negative
C) zero
D) either positive or negative

Question 58

The pizza delivery industry is monopolistically competitive. Little Joe's Pizzeria raises its prices by 10%, but all the other pizzerias in town keep their prices the same. Which of the following is most likely to occur?

A) Little Joe's Pizzeria will not be able to sell any pizzas, because it was the only firm to raise its price.
B) Little Joe's Pizzeria will lose some of its customers.
C) Little Joe's Pizzeria's profits will increase.
D) The number of customers served by Little Joe's Pizzeria will increase.

Question 59

A monopolistically competitive firm

A) can sell an infinite amount of output at the market-determined price.
B) must lower price to sell more output.
C) must raise price to sell more output.
D) sells a fixed amount of output regardless of price.

Question 60

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Below are cost curves for Dom's Barber Shop, a monopolistically competitive firm. Figure 15.1
Refer to Figure 15.1. The profit-maximizing price for a haircut is

A) $10.
B) $12.
C) $14.
D) $16.

Question 61

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Below are cost curves for Dom's Barber Shop, a monopolistically competitive firm. Figure 15.1
Refer to Figure 15.1. If Dom's Barber Shop is maximizing profit, its total costs are

A) $200.
B) $240.
C) $350.
D) $360.

Question 62

Mama Lena's, a frozen food producer, is a monopolistically competitive firm. Mama Lena's is currently selling frozen lasagna at a price of $10. Mama Lena's marginal cost is $5 and marginal revenue is $5. This firm should ________ to maximize profits in the short run.

A) increase output to where price just equals marginal cost
B) decrease output to where price just equals marginal cost
C) continue to produce the same output level
D) Indeterminate from the given information.

Question 63

Refer to the information provided in Figure 15.4 below to answer the questions that follow. Figure 15.4
Refer to Figure 15.4. Assume The Hand Made Shirt Shop has fixed costs of $150 and is a monopolistically competitive firm. To maximize profits in the short run, this firm should produce ________ personalized sweatshirts.

A) 0
B) 50
C) 70
D) 75

Question 64

Refer to the information provided in Figure 15.2 below to answer the questions that follow. Figure 15.2
Refer to Figure 15.2. From society's point of view, the efficient level of output is

A) 40 perms.
B) 50 perms.
C) 60 perms.
D) 80 perms.

Question 65

Refer to the information provided in Figure 15.2 below to answer the questions that follow. Figure 15.2
Refer to Figure 15.2. If We Do Hair is maximizing profit as a monopolistically competitive firm, it is earning a profit of

A) $180.
B) $220.
C) $320.
D) $480.

Question 66

Refer to the information provided in Figure 15.4 below to answer the questions that follow. Figure 15.4
Refer to Figure 15.4. Assume The Hand Made Shirt Shop has fixed costs of $150 and is a monopolistically competitive firm. If this firm is producing the profit-maximizing level of output and selling it at the profit-maximizing price, the firm's profit is

A) -$250.
B) -$150.
C) -$100.
D) -$50.

Question 67

Refer to the information provided in Figure 15.4 below to answer the questions that follow. Figure 15.4
Refer to Figure 15.4. Assume The Hand Made Shirt Shop has fixed costs of $75 and is a monopolistically competitive firm. To maximize profits in the short run, this firm should produce ________ personalized sweatshirts.

A) 0
B) 50
C) 70
D) 75

Question 68

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Below are cost curves for Dom's Barber Shop, a monopolistically competitive firm. Figure 15.1
Refer to Figure 15.1. If Dom's Barber Shop is maximizing profit, its total revenue equals

A) $200.
B) $320.
C) $350.
D) $360.

Question 69

Refer to the information provided in Figure 15.2 below to answer the questions that follow. Figure 15.2
Refer to Figure 15.2. In this monopolistically competitive industry, in the long run,

A) firms will enter until all firms earn a normal profit.
B) firms will continue to earn economic profits.
C) demand for the product will decrease so that profits are decreased.
D) the government will impose price controls to eliminate any economic profits.

Question 70

Refer to the information provided in Figure 15.2 below to answer the questions that follow. Figure 15.2
Refer to Figure 15.2. The profit-maximizing number of perms for We Do Hair, a monopolistically competitive firm, is

A) 60.
B) 50.
C) 46.
D) 40.

Question 71

Refer to the information provided in Figure 15.2 below to answer the questions that follow. Figure 15.2
Refer to Figure 15.2. If We Do Hair is maximizing profit as a monopolistically competitive firm, its total costs are

A) $1,200.
B) $960.
C) $800.
D) $660.

Question 72

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Below are cost curves for Dom's Barber Shop, a monopolistically competitive firm. Figure 15.1
Refer to Figure 15.1. If Dom's Barber Shop is maximizing profit, it is earning a profit of

A) $0.
B) $80.
C) $120.
D) $320.

Question 73

Refer to the information provided in Figure 15.3 below to answer the questions that follow. Figure 15.3
Refer to Figure 15.3. In the long run, this monopolistic competitive firm should expect

A) nothing to change; it will continue to make a profit.
B) firms to exit the industry and profits to increase.
C) firms to enter the industry until all economic profits are eliminated.
D) firms to enter the industry and profits to increase.

Question 74

Refer to the information provided in Figure 15.4 below to answer the questions that follow. Figure 15.4
Refer to Figure 15.4. Assume The Hand Made Shirt Shop has fixed costs of $150 and is a monopolistically competitive firm. To maximize profits in the short run, this firm should set a price of

A) $18.
B) $22.
C) $23.
D) $25.

Question 75

Refer to the information provided in Figure 15.2 below to answer the questions that follow. Figure 15.2
Refer to Figure 15.2. At We Do Hair, a monopolistically competitive firm, the profit-maximizing price for a perm is

A) $32.
B) $28.
C) $24.
D) $20.

Question 76

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Below are cost curves for Dom's Barber Shop, a monopolistically competitive firm. Figure 15.1
Refer to Figure 15.1. In this industry, in the long run,

A) firms will continue to earn economic profits.
B) firms will enter until all firms earn a normal profit.
C) demand for the product will decrease so that profits are decreased.
D) the government will impose price controls to eliminate any economic profits.

Question 77

Refer to the information provided in Figure 15.3 below to answer the questions that follow. Figure 15.3
Refer to Figure 15.3. Gwen's Country Curtains is currently manufacturing 1,000 pairs of curtains per month. This firm

A) should reduce the number of pairs of curtains it manufacturers to maximize profit.
B) should increase the number of pairs of curtains it manufacturers to maximize profit.
C) should continue to produce 1,000 pairs of curtains; it is already maximizing profits.
D) could increase profits by either increasing or decreasing the number of pairs of curtains it manufactures.

Question 78

Refer to the information provided in Figure 15.2 below to answer the questions that follow. Figure 15.2
Refer to Figure 15.2. If We Do Hair is maximizing profit as a monopolistically competitive firm, its total revenue equals

A) $1,280.
B) $1,320.
C) $1,200.
D) $600.

Question 79

Refer to the information provided in Figure 15.4 below to answer the questions that follow. Figure 15.4
Refer to Figure 15.4. Assume The Hand Made Shirt Shop has fixed costs of $75 and is a monopolistically competitive firm. If this firm is attempting to maximize profits, the firm's profit is

A) -$175.
B) -$100.
C) -$75.
D) $0.

Question 80

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Below are cost curves for Dom's Barber Shop, a monopolistically competitive firm. Figure 15.1
Refer to Figure 15.1. From society's point of view, the efficient level of output is

A) 20 haircuts.
B) 23 haircuts.
C) 25 haircuts.
D) 30 haircuts.