Deck 15: Monopolistic Competition and Product Differentiation

Question 1

Monopolistic competition is characterized by:

A)free entry and exit in the long run.
B)each firm producing a standardized product.
C)few producers.
D)barriers to entry.

Answer 1

free entry and exit in the long run.

Question 2

The downward-sloping demand curve for a monopolistically competitive firm:

A)reflects product differentiation.
B)eventually will become perfectly elastic as more firms enter.
C)indicates collusion among firms in the industry.
D)ensures that the firm will produce at minimum average cost in the long run.

Answer 2

reflects product differentiation.

Question 3

Monopolistic competition is similar to perfect competition because firms in both market structures:

A)are price takers.
B)produce goods that are perfect substitutes.
C)find it beneficial to advertise.
D)do not face any barriers to entry to the industry in the long run.

Answer 3

do not face any barriers to entry to the industry in the long run.

Question 4

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

A)a monopoly.
B)a duopoly.
C)an oligopoly.
D)monopolistically competitive.

Question 5

The wedding dress industry is monopolistically competitive.As a result:

A)thousands of dress suppliers all sell identical products.
B)dresses tend to be differentiated among the many sellers serving this market.
C)it has freedom of entry but not exit.
D)prices tend to be lower than if the dress industry approximated perfect competition.

Question 6

In monopolistic competition:

A)firms earn zero economic profits in the long run.
B)each firm produces a product identical to that of every other firm in the industry.
C)firms are aware of their strategic interdependence.
D)firms earn large economic profits in the long run.

Question 7

Monopolistic competition is an industry structure characterized by:

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

Question 8

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

A)fact that firms in monopolistically competitive industries 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 9

In monopolistic competition,each firm:

A)is a price taker.
B)has some ability to set the price of its differentiated good.
C)will set price equal to marginal cost.
D)has marginal revenue that is greater than price.

Question 10

Because most communities have a large number of similar but not identical substitutes,the market for chiropractors is BEST considered to be:

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

Question 11

Which industry is MOST likely to be monopolistically competitive?

A)automobile production
B)fresh bagel shops
C)corn farming
D)electric utility production

Question 12

An example of monopolistic competition is the _____ industry.

A)restaurant
B)soft-drink
C)automobile
D)airline

Question 13

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

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

Question 14

A(n)_____ market has a single firm and _____,whereas a(n)_____ market has _____ firm(s)and _____.

A)oligopolistic;no barriers to entry;monopolistic;many;easy entry and exit
B)monopolistic;barriers to entry;monopolistically competitive;many;easy entry and exit
C)monopolistic;barriers to entry;oligopolistic;few;no barriers to entry
D)monopolistically competitive;barriers to entry;monopolistic;one;barriers to entry

Question 15

An industry characterized by many competitors,each producing identical products,with free entry and exit,is described as:

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

Question 16

In large shopping malls,the retail clothing market is MOST illustrative of:

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

Question 17

A monopolistically competitive industry,such as corn snack chips,and a perfectly competitive industry,like wheat farming,are alike in that:

A)firms in both types of industries produce identical products.
B)firms in both types of industries produce similar but not identical products.
C)barriers to entry in both industries are large.
D)there are many firms in each industry.

Question 18

For the monopolistically competitive wild-caught seafood market,the demand curve for any individual firm is _____,and there are _____ producers of seafood.

A)downward sloping;few
B)upward sloping;many
C)vertical;few
D)downward sloping;many

Question 19

A monopolistically competitive industry is characterized by a _____ number of firms producing _____ products with _____ entry.

A)small;identical;barriers to
B)small;similar;relatively easy
C)large;similar;relatively easy
D)large;identical;relatively easy

Question 20

Because most communities have a large number of similar but not identical substitutes,the market for financial planners is BEST considered to be:

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

Question 21

An industry with a large number of relatively small firms producing _____ products in a market with easy entry and exit is a(n)_____.

A)similar;monopoly
B)identical;monopolistic competition
C)differentiated;oligopoly
D)differentiated;monopolistic competition

Question 22

Monopolistic competition describes an industry characterized by a _____ number of firms producing _____ products with _____ entry.

A)small;identical;barriers to
B)small;similar;relatively easy
C)large;similar;relatively easy
D)large;identical;relatively easy

Question 23

Because most communities have a large number of similar but not identical substitutes,the market for florists is BEST considered to be:

A)a monopoly.
B)an oligopoly.
C)monopolistically competitive.
D)perfectly competitive.

Question 24

If the toothpaste market is monopolistically competitive,product differentiation would NOT take the form of:

A)production of many varieties of toothpaste,including those with whitening agents.
B)differentiation in the locations where certain toothpastes are available.
C)quality differences among the various brands.
D)setting the price of the product well below the price charged by the rivals.

Question 25

A common example of monopolistic competition is the market for:

A)mandarin oranges.
B)cable TV service.
C)automobiles.
D)gasoline for cars.

Question 26

An industry with a few interdependent firms is BEST described as being:

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

Question 27

The market for grade A large eggs in California is BEST considered to be an example of:

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

Question 28

Many customers will walk right past a diner that serves coffee and go to Starbucks,where they pay more for a cup of java.For these customers,coffee is differentiated by:

A)style.
B)location.
C)quality.
D)type.

Question 29

An industry with easy entry and exit of a large number of small firms producing a standardized product is:

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

Question 30

Because of the lack of substitutes,the market for a newly developed and freshly patented prescription drug is BEST considered to be:

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

Question 31

The sources of product differentiation do NOT include:

A)differences in location.
B)differences in quality.
C)the perception by consumers that products are different,even if they are physically identical.
D)consumers' dislike of having options.

Question 32

The market for dentists in most communities can be considered _____ because the market has a large number of similar but not identical dental services.

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

Question 33

Monopolistic competition describes 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 34

In many cities you,can stay at a Holiday Inn in the downtown area,in a suburban community,or near the airport.These Holiday Inn establishments are examples of product differentiation by:

A)type.
B)location.
C)quality.
D)style.

Question 35

Monopolistic competition is different from monopoly because firms:

A)have some power to set prices.
B)have a downward-sloping demand curve.
C)face some competition.
D)have a downward-sloping marginal revenue curve.

Question 36

The market for soft drinks,which is dominated by Coca Cola and Pepsi,is BEST considered to be an example of:

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

Question 37

Which characteristic is NOT indicative of monopolistic competition?

A)product differentiation
B)a lack of barriers to entry and exit in the long run
C)many competing producers
D)tacit collusion

Question 38

Which feature is shared by monopolistic competition and perfect competition?

A)few firms in the industry
B)no barriers to entry or exit in the long run
C)absolute market power
D)standardized products

Question 39

An industry with a single firm producing a product for which there are no close substitutes and that is protected by barriers to entry is an example of:

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

Question 40

Monopolistic competition describes an industry characterized by:

A)a product with no close substitutes.
B)many firms,each with some market power.
C)a small number of firms.
D)barriers to entry and exit.

Question 41

In a monopolistically competitive industry:

A)a firm maximizes profits when 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)to maximize profits,firms set MR = MC,and people would be better off if output were reduced.

Question 42

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

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 43

Suppose a monopolistically competitive firm is making a profit,but it can increase its profits by increasing output.At the current level of output:

A)marginal revenue is greater than marginal cost.
B)price is less than marginal cost.
C)price is less than average total cost.
D)marginal revenue is less than marginal cost.

Question 44

Suppose Susan owns a business that operates in a market characterized by monopolistic competition.Susan's profit-maximizing price is $12,her profit-maximizing output is 900 units per week,and her profits are $1,800 per week.Susan decides that she needs more profits and therefore raises her price to $15.At the new price of $15:

A)profits will increase.
B)profits will remain at $1,800.
C)marginal revenue will be greater than marginal cost.
D)marginal revenue will be less than marginal cost.

Question 45

If a monopolistically competitive firm is producing the profit-maximizing level of output and is earning an economic profit in the short run:

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

Question 46

Suppose a monopolistically competitive firm can increase its profits by decreasing its output.At the current output:

A)marginal revenue is less than zero.
B)price is less than marginal revenue.
C)marginal revenue is less than marginal cost.
D)price is less than average total cost.

Question 47

Since a monopolistically competitive firm faces a downward-sloping demand curve,its price will be _____ revenue.

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

Question 48

The demand curve for a firm operating in a monopolistically competitive industry is:

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

Question 49

(Figure: Monopolistic Competition)Use Figure: Monopolistic Competition.The firm in the figure is producing at the output level that maximizes profits (minimizes losses).The shaded rectangle depicts the level of: Figure: Monopolistic Competition

A)profit.
B)loss.
C)fixed cost.
D)variable cost.

Question 50

The _____ demand curve for a firm operating in a monopolistically competitive market _____ facing a perfectly competitive firm.

A)downward-sloping;is the same as the demand curve
B)downward-sloping;differs from the horizontal demand curve
C)horizontal;differs from the downward-sloping demand curve
D)horizontal;is the same as the demand curve

Question 51

Which factor is NOT a source of product differentiation?

A)price
B)location
C)style
D)quality

Question 52

Product differentiation under monopolistic competition means that each firm:

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

Question 53

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)always receives economic profits.

Question 54

The demand curve for a firm in monopolistic competition is _____ facing a perfectly competitive firm.

A)downward sloping,unlike the horizontal demand curve
B)horizontal,unlike the downward-sloping demand curve
C)horizontal,the same as that
D)downward sloping,the same as that

Question 55

To maximize profit,a monopolistically competitive firm should produce the level of output at which:

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

Question 56

Firms in monopolistic competition can acquire some market power by:

A)product differentiation.
B)engaging in tacit collusion.
C)producing where MR > MC.
D)increasing their output to the perfectly competitive level.

Question 57

A monopolistically competitive firm has a downward-sloping demand curve for its product,primarily because:

A)there are no barriers to entry or exit in the long run.
B)there are many sellers in the industry.
C)its product is differentiated.
D)the price is greater than the marginal revenue.

Question 58

The price for a firm under monopolistic competition is _____ revenue.

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

Question 59

The demand curve for a firm operating in a monopolistically competitive market is BEST described as:

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

Question 60

When a monopolistically competitive industry earns economic profit,the result of competition among sellers is usually that:

A)the price of the product increases to monopoly level.
B)the price of the product quickly reaches the perfectly competitive level.
C)firms in the industry gain market share.
D)firms in the industry lose market share.

Question 61

In the short run,a monopolistically competitive firm produces at the optimal level of output and is earning positive economic profits.Which expression must be TRUE for this firm?

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

Question 62

If a firm operating in 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 63

A firm in monopolistic competition maximizes its profit by producing at a quantity where:

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

Question 64

To maximize profits,a firm in monopolistic competition should produce such that marginal cost:

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

Question 65

Use the following to answer question:
Figure: Profit Maximization for a Firm in Monopolistic Competition

-(Figure: Profit Maximization for a Firm in Monopolistic Competition)Use Figure: Profit Maximization for a Firm in Monopolistic Competition.Suppose that an innovation reduces a firm's costs from ATC to ATC'.After the innovation reduces the cost,the firm's economic profit at the new profit-maximizing quantity is:

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

Question 66

If a monopolistically competitive firm is in long-run equilibrium,price:

A)equals average total cost.
B)equals marginal cost.
C)equals marginal revenue.
D)is greater than average total cost.

Question 67

If a firm operating in monopolistic competition is producing a quantity at which MC < MR,then profit can be _____ by _____.

A)increased;decreasing production
B)increased;increasing production
C)increased;increasing the price
D)maximized;decreasing production

Question 68

A monopolistically competitive firm is operating in the short run at the optimal level of output and is earning negative economic profits.Which expression must be TRUE for this firm?

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

Question 69

A gas station operates in a monopolistically competitive market and is in short-run equilibrium.Suppose that a fixed cost for this firm decreases.As a result,the firm's price will _____,the firm's output will _____,and the firm's economic profit will _____.

A)increase;increase;increase
B)increase;increase;decrease
C)stay the same;stay the same;increase
D)decrease;stay the same;increase

Question 70

A firm operating in a monopolistically competitive market is producing a quantity at which MC = MR.Profit:

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

Question 71

Suppose the dry-cleaning market is monopolistically competitive and economically profitable this year.In the long run,the demand for any one firm's dry-cleaning services will _____ as more firms enter the industry,causing economic profits to _____.

A)decrease;become economic losses
B)decrease;fall to zero
C)not change;fall
D)increase;increase

Question 72

Toby operates a small deli downtown.The deli industry is monopolistically competitive.In the long run,Toby will produce where:

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

Question 73

Monopolistically competitive firms have zero economic profits in the long run because of:

A)excess capacity.
B)price wars among firms.
C)easy entry and exit.
D)excessive advertising.

Question 74

When a monopolistically competitive firm is making zero economic profits,it is producing so that the average total cost curve is tangent to the demand curve.At this output:

A)the firm is maximizing profits,and marginal cost must equal marginal revenue.
B)the firm is not maximizing profits,and a slight increase or decrease in output will lead to positive profits.
C)since economic profits are zero,the condition that marginal revenue equals marginal cost is irrelevant.
D)the condition that marginal revenue equals marginal cost continues to be relevant,but the marginal revenue and marginal cost curves need not intersect directly below the point of tangency between the average total cost curve and the demand curve.

Question 75

If a firm operating in 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 76

If a firm operating in 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 77

If monopolistically competitive firms are earning positive economic profits in the short run,then in the long run:

A)firms will leave the industry.
B)the demand curves faced by existing firms will move to the right.
C)economic profits will increase.
D)economic profits will be reduced to zero.

Question 78

Use the following to answer question:
Figure: Profit Maximization for a Firm in Monopolistic Competition

-(Figure: Profit Maximization for a Firm in Monopolistic Competition)Use Figure: Profit Maximization for a Firm in Monopolistic Competition.Suppose that an innovation reduces a firm's costs from ATC to ATC'.Before the innovation reduced the cost,the firm's economic profit at the profit-maximizing quantity was:

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

Question 79

If a firm operating in monopolistic competition is producing a quantity at which _____,then the marginal decision rule tells us that profit _____.

A)MC > MR;can be increased by increasing production
B)MC < MR;can be increased by decreasing production
C)MC < MR;can be increased by increasing production
D)MC > MR;is maximized

Question 80

In the long run,monopolistically competitive firms:

A)produce at the level that minimizes average total cost.
B)set marginal revenue equal to price.
C)cannot earn an economic profit.
D)produce such that marginal cost equals price.