Deck 10: Monopolistic Competition and Oligopoly

Question 1

Monopolistically competitive firms use product differentiation to increase the price elasticity of demand.

Answer 1

False

Question 2

Firms may easily enter a monopolistically competitive market.

Answer 2

True

Question 3

If a monopolistically competitive firm raises its price, it

A) loses all of its customers (sales drop to zero)
B) loses some, but not all, of its customers
C) loses very few customers
D) loses no customers at all
E) gains customers (sales increase)

Answer 3

B

Question 4

A firm could differentiate its product by all of the following means except one. Which is the exception?

A) making the product available at a number of different locations
B) increasing the number of services that accompany the product
C) making the product physically different from other products
D) using packaging or advertising to create a special subjective image of the product in the consumer's mind
E) emphasizing that the product provides the same benefits to consumers as the others on the market, even when it is really physically different

Question 5

Monopolistically competitive firms ignore the effect of their decisions upon other firms in the industry because

A) each firm is large relative to the market
B) each firm is small relative to the market
C) there are few sellers in the market
D) there is only one seller in the market
E) all firms follow the same known pricing rules

Question 6

Economic analysis of product differentiation leads to all of the following conclusions except one. Which is the exception?

A) Product differentiation makes it harder for firms to collude.
B) Product differentiation makes price leadership harder to maintain.
C) Product differentiation sometimes contributes to wasteful allocation of resources.
D) Product differentiation must be based on real, substantive differences among products.
E) There is a tradeoff between using resources efficiently and providing consumers with wide choices.

Question 7

If Family Travel Agency, a monopolistic competitor, offers services that are differentiated from the services of other producers in the industry, it

A) faces a perfectly elastic demand curve
B) is a price taker
C) has some power to control the price it charges
D) faces a perfectly inelastic demand curve
E) produces a product with no close substitutes

Question 8

Monopolistic competitors are protected by barriers to entry.

Question 9

Monopolistically competitive industries consist of

A) one firm selling several products
B) one firm selling one product
C) many firms, all selling identical products
D) many firms, each selling a slightly different product
E) many firms, each selling a completely different product

Question 10

All of the following are examples of product differentiation except one. Which is the exception?

A) developing a new video game or a computer program called "How to Teach Your New Dog Old Tricks"
B) manufacturing a car that minimizes outside noise relative to other cars
C) lowering the price of a good in a special sale
D) providing movies and special meals on airline flights
E) making sodium-free, caffeine-free colas

Question 11

Product differentiation helps determine the slope of the demand curve facing a firm in monopolistic competition.

Question 12

Which of the following is most likely produced in a monopolistically competitive market?

A) soybeans
B) autos
C) fast food
D) oil
E) local phone service

Question 13

Monopolistic competition is different from perfect competition because monopolistic competitors produce

A) a homogeneous product
B) a homogeneous but unique product
C) identical products
D) differentiated products
E) products similar to those produced by a monopoly

Question 14

The forces that determine the cost of production are largely independent of the forces that shape demand.

Question 15

Monopolistic competition is best described as

A) many firms with some control over price, and some product differentiation
B) many firms with no control over price, producing identical products
C) a few firms with some control over price, producing highly differentiated products
D) a few firms with no control over price, producing similar products
E) a single firm producing all of the output for the industry, with strong control over price

Question 16

The term monopolistic competition

A) is an alternate expression for monopoly
B) is used to describe perfect competition with strong entry barriers
C) denotes an industry with one seller of many differentiated products
D) denotes an industry with many sellers of homogeneous products
E) denotes an industry with many sellers of differentiated products

Question 17

Which of the following is most likely produced in a monopolistically competitive market?

A) restaurant meals
B) computer chips
C) firewood
D) motorcycles
E) soft drink

Question 18

A monopolistically competitive firm can raise price somewhat due to

A) product differentiation
B) barriers to entry
C) product similarity
D) its homogeneous product
E) high tariffs

Question 19

Collusion among firms to raise price is rare in monopolistically competitive markets because

A) there are too many firms
B) there are too few firms
C) there is only one firm
D) products are homogeneous
E) price leadership is used instead

Question 20

The demand curve facing Imelda's Shoe Boutique, a monopolistically competitive firm,

A) is horizontal because Imelda's is small relative to the market as a whole
B) is horizontal because Imelda's is large relative to the market as a whole
C) slopes downward because Imelda's is small relative to the market as a whole
D) slopes downward because Imelda's sells a differentiated product
E) slopes downward because Imelda's firm is the entire industry

Question 21

NARRBEGIN: Exhibit 10-3
Exhibit 10-3

The profit-maximizing output for the firm in Exhibit 10-3 is

A) 0 units
B) 1 unit
C) 3 units
D) 5 units
E) impossible to determine because MC and MR are not known

Question 22

NARRBEGIN: Exhibit 10-2
Exhibit 10-2

Consider Exhibit 10-2. If the firm is charging price P* for output q*, then in order to minimize loss in the short run, the firm should

A) shut down because price is greater than average variable cost
B) shut down because price is greater than marginal cost
C) shut down because price is less than average variable cost
D) continue to produce because price is greater than average variable cost
E) continue to produce because price is greater than marginal cost

Question 23

Monopolistic competitors are

A) price takers
B) price searchers
C) price maximizers
D) price ignorers
E) collusive price fixers

Question 24

NARRBEGIN: Exhibit 10-3
Exhibit 10-3

The profit-maximizing price for the firm in Exhibit 10-3 is

A) $0
B) $27
C) $21
D) $15
E) impossible to determine because MR and MC are not known

Question 25

NARRBEGIN: Exhibit 10-1
Exhibit 10-1

In Exhibit 10-1, the price that the monopolistic competitor will charge at the profit-maximizing level of output is

A) $2
B) $4
C) $8
D) $9
E) $10

Question 26

Compared to regular grocery stores, convenience stores have

A) higher prices and a more limited selection of goods
B) higher prices and a greater selection of goods
C) lower prices and a more limited selection of goods
D) lower prices and a greater selection of goods
E) equal prices and an equal selection of goods

Question 27

When firms differentiate their products, they

A) provide information to consumers with no additional use of productive resources
B) always increase their profits
C) always create real differences among products
D) frequently create artificial or superficial differences among products, thus raising production costs
E) usually strain the physical capacity of their plants

Question 28

A monopolistically competitive firm produces where demand is inelastic.

Question 29

NARRBEGIN: Exhibit 10-3
Exhibit 10-3

At the profit-maximizing output, the monopolistically competitive firm in Exhibit 10-3 is in

A) long-run equilibrium because price equals average total cost
B) long-run equilibrium because price is less than average total cost
C) short-run equilibrium because price is greater than average total cost
D) short-run equilibrium because there is an economic loss
E) short-run equilibrium because there is zero economic profit

Question 30

The demand curve facing a firm will be more elastic,

A) the fewer the number of competing firms
B) the more differentiated the product
C) the more substitutes there are for its product
D) the greater the firm's ability to control price
E) the larger the profit the firm can make

Question 31

NARRBEGIN: Exhibit 10-1
Exhibit 10-1

In Exhibit 10-1, the monopolistic competitor's profit-maximizing level of output is

A) 75 units
B) 100 units
C) 125 units
D) 150 units
E) 137.5 units

Question 32

NARRBEGIN: Exhibit 10-1
Exhibit 10-1

The monopolistic competitor in Exhibit 10-1 is in

A) long-run equilibrium because price equals average total cost
B) long-run equilibrium because marginal cost equals marginal revenue
C) long-run equilibrium because price exceeds marginal cost
D) short-run equilibrium because it is earning a positive economic profit
E) short-run equilibrium because price equals average total cost

Question 33

What do monopolistic competition, pure monopoly, and perfect competition have in common?

A) free entry
B) long-run economic profits
C) differentiated product
D) price taking
E) the rule of profit maximization

Question 34

A monopolistic competitor's demand curve is

A) perfectly elastic
B) less elastic than a monopolist's or oligopolist's but more elastic than a perfect competitor's
C) as elastic as an oligopolist's
D) more elastic than a monopolist's or oligopolist's but less elastic than a perfect competitor's
E) perfectly inelastic

Question 35

In the short run, a monopolistically competitive firm is

A) guaranteed to earn zero economic profit
B) guaranteed to earn economic profit
C) guaranteed to earn an economic loss
D) guaranteed to earn either zero or positive economic profit
E) not guaranteed any level of economic profit

Question 36

NARRBEGIN: Exhibit 10-1
Exhibit 10-1

In Exhibit 10-1, the monopolistic competitor's total economic profit at the profit-maximizing level of output is

A) $0
B) $4
C) $600
D) $6
E) $750

Question 37

NARRBEGIN: Exhibit 10-3
Exhibit 10-3

At the profit-maximizing output, the firm in Exhibit 10-3 is earning

A) an economic profit of $38
B) an economic profit, but the amount cannot be determined
C) zero economic profit
D) an economic profit of $32
E) an economic loss

Question 38

When firms in an industry produce differentiated products,

A) long-run economic profit will always be zero
B) short-run economic profit will always be positive
C) the demand curves facing firms will always be perfectly elastic
D) the demand curves facing firms will always be downward-sloping
E) new firms will always have an incentive to enter the industry in the long run

Question 39

In economics, products are considered "differentiated" only if

A) they are physically or chemically different
B) sellers decide that they are different
C) buyers think that they are different
D) the government determines that they are different
E) they are produced by different firms

Question 40

Firms in monopoly or monopolistically competitive market structures do not have traditional supply curves as firms in perfect competition do.

Question 41

NARRBEGIN: Exhibit 10-5
Exhibit 10-5

In the long run, the firm in Exhibit 10-5 can expect

A) to shut down
B) entry into the industry which will reduce the demand for their product and lower their profit
C) exit from the industry which will increase demand for their product and increase their profitability
D) competitors to differentiate their products which will reduce the demand for their product and lower their profit
E) no change in the industry

Question 42

NARRBEGIN: Exhibit 10-4
Exhibit 10-4

For the situation depicted in Exhibit 10-4, what will happen in the long-run?

A) New technology will lower average total costs and increase profits for the firm.
B) Firms will exit this market causing economic profit to increase.
C) Product differentiation will lead to an increase in profitablility.
D) New firms will enter the market driving economic profit to zero.
E) Nothing, the situation will remain the same.

Question 43

NARRBEGIN: Exhibit 10-7
Exhibit 10-7

At the profit-maximizing output level, total cost for the firm in Exhibit 10-7 is approximately

A) $5,700
B) $5,320
C) $4,750
D) $4,940
E) $8,100

Question 44

NARRBEGIN: Exhibit 10-9
Exhibit 10-9

If the firm in Exhibit 10-9 produces 100 units of output, it will have

A) both d and e
B) variable cost of slightly less than $800
C) fixed cost of slightly more than $700
D) total cost of $1,500
E) total revenue of $800

Question 45

NARRBEGIN: Exhibit 10-6
Exhibit 10-6

In Exhibit 10-6, what is the profit-maximizing price for this monopolistic competitor in the short run?

A) $7
B) $6
C) $5
D) $4
E) $3

Question 46

A rise in demand for restaurant meals is likely to cause which of the following in the short run?

A) economic losses for each restaurant
B) a lower price for each restaurant meal
C) fewer restaurants in the industry
D) more restaurants in the industry
E) economic profit for restaurants

Question 47

If a monopolistically competitive firm can earn a profit, it will adjust production until

A) MR > AVC
B) MR = ATC
C) MC > MR
D) MR = AR
E) MR = MC

Question 48

NARRBEGIN: Exhibit 10-8
Exhibit 10-8

Assume the firm in Exhibit 10-8 is currently charging price P and producing output level Q. In order to maximize profit (or minimize loss), the firm should

A) charge more and sell less
B) charge less and sell more
C) charge less and sell less
D) charge more and sell more
E) continue to charge P and sell Q

Question 49

Assume a monopolistically competitive firm is earning an economic profit. The marginal revenue from selling an additional unit is $30 and the marginal cost of producing that additional unit is $23. The firm should

A) change neither its price nor its output level
B) reduce its price and increase its output level
C) increase its price and reduce its output level
D) reduce both its price and its output level
E) increase both its price and its output level

Question 50

NARRBEGIN: Exhibit 10-7
Exhibit 10-7

In the long run, the firm in Exhibit 10-7 can expect

A) to earn an economic profit of $760
B) earn an economic profit of $950
C) earn zero economic profit
D) earn an economic profit of $990
E) suffer a loss of $1,000

Question 51

NARRBEGIN: Exhibit 10-4
Exhibit 10-4

In the short run, which of the following should the firm in Exhibit 10-4 do?

A) Produce 10 units at a price of $36 per unit.
B) Produce 10 units at a price of $24 per unit.
C) Produce 10 units at a price of $40 per unit.
D) Produce 15 units at a price of $32 per unit.
E) We cannot determine what the firm should do without knowing its average variable cost.

Question 52

A monopolistically competitive firm is producing an output level at which marginal revenue is less than marginal cost. This firm should __________ quantity and __________ price to increase profit or reduce losses.

A) increase, increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
E) increase; not change

Question 53

A monopolistically competitive firm is producing an output level at which marginal revenue is greater than marginal cost. This firm should __________ quantity and __________ price to increase profit or reduce losses.

A) increase, increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
E) increase; not change

Question 54

NARRBEGIN: Exhibit 10-6
Exhibit 10-6

In Exhibit 10-6, what is the maximum profit this monopolistic competitor can earn in the short run?

A) $40
B) $4
C) $48
D) $8
E) $0

Question 55

NARRBEGIN: Exhibit 10-7
Exhibit 10-7

Assume that the firm in Exhibit 10-7 is maximizing profit. Its total revenue is

A) $5,320
B) $5,700
C) $4,750
D) $8,120
E) $8,100

Question 56

NARRBEGIN: Exhibit 10-9
Exhibit 10-9

In order to maximize profit or minimize loss, the firm in Exhibit 10-9 should

A) produce 100 units of output and charge $15
B) produce 100 units of output and charge $8
C) produce more than 100 units of output and charge less than $8
D) produce slightly less than 100 units of output and charge more than $8
E) shut down

Question 57

NARRBEGIN: Exhibit 10-5
Exhibit 10-5

In the short run, the firm in Exhibit 10-5 should

A) shut down
B) produce 8 units at a price of $11 per unit
C) produce 8 units at a price of $10 per unit
D) produce 8 units at a price of $9 per unit
E) produce 10 units at a price of $9 per unit

Question 58

A rise in demand for restaurant meals is likely to cause which of the following in the long run?

A) economic losses for each restaurant
B) a lower price for each restaurant meal
C) fewer restaurants in the industry
D) more restaurants in the industry
E) economic profit for restaurants

Question 59

In both monopolistic competition and non-price-discriminating monopoly,

A) the marginal revenue curve lies above the average revenue curve
B) the marginal revenue curve lies above the demand curve
C) the marginal revenue curve lies below the demand curve
D) marginal revenue is equal to average revenue
E) marginal revenue is equal to price

Question 60

NARRBEGIN: Exhibit 10-7
Exhibit 10-7

At the profit-maximizing output level, the firm in Exhibit 10-7 is

A) earning economic profit of $760
B) earning economic profit of $950
C) earning zero economic profit
D) earning economic profit of $990
E) suffering a loss of $1,000

Question 61

A profit-maximizing firm in monopolistic competition should shut down in the short run

A) if marginal revenue is less than price
B) if price is always less than average total cost
C) if price is always less than average fixed cost
D) if price is always less than average variable cost
E) under no circumstances

Question 62

Because of easy entry, monopolistically competitive firms will

A) produce at the lowest average total cost
B) charge a price equal to marginal cost
C) earn no economic profit in the long run
D) take advantage of all economies of scale
E) earn no economic profit in the short run

Question 63

NARRBEGIN: Exhibit 10-11
Exhibit 10-11

At the profit-maximizing output level, total cost for the firm in Exhibit 10-11 is

A) $5,200
B) $4,000
C) $3,600
D) $5,600
E) impossible to determine

Question 64

If a monopolistically competitive firm is in long-run equilibrium and average cost equals $150, then the market price must be $150.

Question 65

NARRBEGIN: Exhibit 10-11
Exhibit 10-11

At the profit-maximizing output level, the firm in Exhibit 10-11 is

A) earning economic profit of $400
B) earning economic profit of $200
C) earning zero economic profit
D) suffering a loss of $200
E) suffering a loss of $400

Question 66

If the firms in a monopolistically competitive industry are suffering short-run losses, which of the following will occur in the long run?

A) Some firms will enter the industry.
B) Customers of firms that leave the industry will switch to remaining firms.
C) Firms that remain in the industry will face reduced demand.
D) Firms will continue to incur losses.
E) There will be no excess capacity.

Question 67

NARRBEGIN: Exhibit 10-11
Exhibit 10-11

Assume that the firm in Exhibit 10-11 maximizes profit. Its total revenue is

A) $5,200
B) $4,000
C) $3,600
D) $5,600
E) $3,200

Question 68

A permanent decrease in demand for convenience store services is likely to cause which of the following in the long run?

A) an economic loss for each firm
B) a higher price for each firm's output
C) fewer firms in the industry
D) more firms in the industry
E) economic profit for each firm

Question 69

If the firms in a monopolistically competitive industry are earning short-run profit, which of the following is not likely to occur in the long run?

A) New firms will enter the industry.
B) New firms in the industry will draw customers away from existing firms.
C) Existing firms in the industry will face a decrease in demand.
D) Firms will continue to earn profit.
E) Firms will produce with some excess capacity.

Question 70

Suppose that a monopolistically competitive firm is in long-run equilibrium. The firm's demand curve is tangent to its average cost curve at Q = 25. Average cost is minimized at Q = 35, where average cost is $50. Which of the following is true?

A) This firm charges $50 for the good.
B) This firm charges more than $50 for the good.
C) This firm charges less than $50 for the good.
D) The firm has excess capacity at all output levels greater than 35 units.
E) Average cost is $50 at the profit-maximizing output level.

Question 71

Monopolistic competition is similar to

A) perfect competition because the firms face downward-sloping demand curves and can earn only a normal profit in the long run
B) pure monopoly because the firms face downward-sloping demand curves and can earn only a normal profit in the long run
C) perfect competition because the firms face downward-sloping demand curves and similar to pure monopoly in that the firms can earn only a normal profit in the long run
D) pure monopoly because the firms face downward-sloping demand curves and similar to perfect competition in that the firms can earn only a normal profit in the long run
E) pure monopoly because the firms face downward-sloping demand curves and can earn an economic profit in the long run

Question 72

A firm will only earn normal profit in the long run

A) if firms can freely enter or leave the market
B) if firms do not try to maximize profit
C) only if the industry is perfectly competitive
D) whenever products are not differentiated
E) if barriers to entry exist

Question 73

NARRBEGIN: Exhibit 10-10
Exhibit 10-10

In Exhibit 10-10, what is the maximum profit this monopolistic competitor can earn in the long run?

A) $40
B) $4
C) $48
D) $8
E) $0

Question 74

Suppose that a monopolistically competitive firm is in long-run equilibrium. The firm's demand curve is tangent to its average cost curve at Q = 25. Average cost is minimized at Q = 35, where average cost is $50. Which of the following is true?

A) This firm maximizes profit at an output level of 25 units.
B) This firm maximizes profit at an output level of 35 units.
C) This firm maximizes profit at an output level less than 25 units.
D) This firm maximizes profit at an output level greater than 35 units.
E) There is not enough information to find the firm's profit-maximizing level of output.

Question 75

In the long run, the economic profit of Hoot's Pump Chicken 'n' Ribs, a monopolistic competitor,

A) is not eliminated because competition is not perfect
B) is not eliminated because the demand curve slopes downward
C) is eliminated because of new firms entering the industry
D) is eliminated because of firms leaving the industry
E) is not eliminated because new firms cannot enter the industry

Question 76

In the long run in monopolistic competition, the demand curve facing the typical firm

A) is perfectly elastic
B) slopes upward
C) is tangent to the firm's average total cost curve
D) lies above the firm's average total cost curve
E) is the same as the portion of the firm's marginal cost curve above average variable cost

Question 77

In the long run, Bubba's Baby Boutique, a monopolistically competitive firm,

A) earns zero normal profit but positive economic profit
B) earns normal profit but zero economic profit
C) earns normal and economic profit
D) earns zero normal and economic profit
E) might earn any level of economic profit; no level is guaranteed

Question 78

Which of the following describes the relationship among market price (P), average revenue (AR), and marginal revenue (MR) for a firm in monopolistic competition.

A) P = AR = MR
B) P > AR = MR
C) P = AR > MR
D) P > AR > MR
E) P = AR < MR

Question 79

In the long run in monopolistic competition, firms earn zero economic profit.

Question 80

In the long run, a monopolistically competitive firm will

A) produce a greater variety of goods than do firms in other market structures
B) produce a greater output level than would a perfectly competitive firm
C) produce where price equals average total cost
D) earn an economic profit
E) suffer a loss because of its advertising budget