Question 1

If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios best reflects the change a representative firm experiences as the market adjusts to its long-run equilibrium?

Accepted Answer

A)  Demand decreases and becomes less elastic. 
B)  Demand decreases and becomes more elastic. 
C)  Demand increases and becomes less elastic. 
D)  Demand increases and becomes more elastic.

Question 2

A successful trademark is one that becomes a generic name for a product, for example, 'Kleenex' has become a generic term for tissues.

Accepted Answer

A) True 
 B)False

Question 3

The entry and exit of firms in a monopolistically competitive market guarantee that

Accepted Answer

A)  marginal revenue equals marginal cost, and average total cost is minimised. 
B)  firms can earn economic profits in the long run. 
C)  price equals average total cost in the long run. 
D)  firms can earn economic profits in the short run.

Question 4

-Refer to Figure 10-5. The chocolate store represented in the diagram is currently selling Qa units of candy at a price of Pa. Is this candy store maximising its profit and if it is not, what would you recommend to the firm?

Accepted Answer

A)  Yes, it is maximising its profit by charging the highest price possible. 
B)  No, it is not; since its marginal cost is constant, it should produce and sell as much chocolate as it can. It should sell Qd units at a price of Pd. 
C)  No, it is not; it should lower its price to Pc and sell Qc units. 
D)  No, it is not; it should lower its price to Pb and sell Qb units.

Question 5

Why are demand and marginal revenue represented by the same curve for a firm in a perfectly competitive market, but by separate curves for a firm in a monopolistically competitive market?

Accepted Answer

The answer of Why are demand and marginal revenue represented...

Question 6

-Refer to Figure 10-15. It is possible to lower the average cost of production by expanding output beyond Q0 to Q1. Why wouldn't a firm expand its output to Q1?

Accepted Answer

A)  The firm wants to maximise accounting profit rather than economic profit. 
B)  The firm would suffer an economic loss at Q1 while it would break even at Q0. 
C)  The firm's marginal revenue would be negative at Q1. 
D)  Demand is not sufficient for consumers to buy Q1.

Question 7

Both the perfectly competitive firm and the monopolistically competitive firm produce at the output where marginal revenue equals marginal cost (MR = MC) but only the perfectly competitive firm achieves allocative efficiency. Explain why this is the case.

Accepted Answer

The answer of Both the perfectly competitive firm and the...

Question 8

Assume price exceeds average variable cost over the relevant range of demand. If a monopolistically competitive firm is producing at an output where marginal revenue is $23 and marginal cost is $19, then to maximise profits the firm should

Accepted Answer

A)  continue to produce the same quantity. 
B)  increase output. 
C)  decrease output. 
D)  shut down.

Question 9

Which of the following is not an example of a monopolistically competitive market?

Accepted Answer

A)  automobile producers 
B)  supermarkets 
C)  video stores 
D)  makers of women's clothing

Question 10

Does the fact that monopolistically competitive firms do not achieve productive efficiency or allocative efficiency mean that there is a significant loss in consumer welfare?

Accepted Answer

The answer of Does the fact that monopolistically competitive firms...

Question 11

-Refer to Figure 10-4. Should the firm represented in the diagram continue to stay in business despite its losses?

Accepted Answer

A)  No, it should shut down. 
B)  Yes, its total revenue covers its variable cost. 
C)  No, it is not able to cover its fixed cost. 
D)  Yes, it should increase its revenue by raising its price.

Question 12

A profit-maximising monopolistically competitive firm produces and sells an allocatively efficient quantity of output.

Accepted Answer

A) True 
 B)False

Question 13

Assume that price exceeds average variable cost over the relevant range of demand. If a monopolistically competitive firm is producing at an output where marginal revenue is $111.11 and marginal cost is $118, then to maximise profits the firm should increase its output.

Accepted Answer

A) True 
 B)False

Question 14

-Refer to Table 10-4. Victoria's profit-maximising output is where

Accepted Answer

A)  total profit equals $3. 
B)  marginal revenue and marginal cost both equal $4. 
C)  marginal revenue and marginal cost both equal $3. 
D)  marginal cost is at its minimum value.

Question 15

Which of the following would not occur as a result of a monopolistically competitive firm suffering a short-run economic loss?

Accepted Answer

A)  The firm could exit the industry in the long run. 
B)  If the firm does not exit the industry in the long run, its demand curve will shift to the left. 
C)  If the firm does not exit the industry in the long run, its demand curve will shift to the right. 
D)  If the firm remains in the industry in the long run, it will break even.

Question 16

Sparkle, one of many firms in the market for toothpaste, is in long-run equilibrium. Sparkle has a small market share and has been in business for a long time.
a. Identify the market structure in which Sparkle operates. Explain your answer.
b. What is Sparkle's profit or loss? Explain your answer. If you cannot determine the profit or loss, explain what information is missing.
c. Draw a diagram showing Sparkle's demand curve, marginal revenue curve, average total cost curve and marginal cost curve. Label your diagram.

Accepted Answer

The answer of Sparkle, one of many firms in the...

Question 17

If a firm has excess capacity, it means

Accepted Answer

A)  that the firm expends too much of its resources on advertising its product without seeing an appreciable increase in sales. 
B)  that the firm is not producing its minimum efficient scale of output. 
C)  that the firm's long-run average cost of producing a given quantity exceeds its short-run cost of producing that same quantity. 
D)  that the firm's quantity supplied exceeds its quantity demanded.

Question 18

Assuming that the total market size remains constant, a monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing in the long run because

Accepted Answer

A)  new entrants into the market are more likely to have cutting edge products. 
B)  as the firm raises its price in the long run, it will lose some customers to new entrants in the market. 
C)  some of its customers have switched to purchasing the products of new entrants in the market. 
D)  its costs of production rises.

Question 19

-Refer to Figure 10-16 to answer the following questions.
a. What is the profit-maximising output level?
b. What is the profit-maximising price?
c. What is the average total cost at the profit-maximising output level?
d. What area represents the firm's profit?
e. At which output level are economies of scale exhausted?
f. Does this graph most likely represent the long run or the short run? Why?

Accepted Answer

The answer of 
-Refer to Figure 10-16 to answer the...

Question 20

-Refer to Figure 10-4. What is the area that represents the total fixed cost of production?

Accepted Answer

A)  0P1aQa 
B)  P0adP3 
C)  P1bdP3 
D)  That information cannot be determined from the graph.

Exam 10: Monopolistic Competition : The Competitive Model in More Realistic Setting

If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios best reflects the change a representative firm experiences as the market adjusts to its long-run equilibrium?

A successful trademark is one that becomes a generic name for a product, for example, 'Kleenex' has become a generic term for tissues.

The entry and exit of firms in a monopolistically competitive market guarantee that

-Refer to Figure 10-5. The chocolate store represented in the diagram is currently selling Q_a units of candy at a price of P_a. Is this candy store maximising its profit and if it is not, what would you recommend to the firm?

Why are demand and marginal revenue represented by the same curve for a firm in a perfectly competitive market, but by separate curves for a firm in a monopolistically competitive market?

-Refer to Figure 10-15. It is possible to lower the average cost of production by expanding output beyond Q₀ to Q₁. Why wouldn't a firm expand its output to Q₁?

Both the perfectly competitive firm and the monopolistically competitive firm produce at the output where marginal revenue equals marginal cost (MR = MC) but only the perfectly competitive firm achieves allocative efficiency. Explain why this is the case.

Assume price exceeds average variable cost over the relevant range of demand. If a monopolistically competitive firm is producing at an output where marginal revenue is $23 and marginal cost is $19, then to maximise profits the firm should

Which of the following is not an example of a monopolistically competitive market?

Does the fact that monopolistically competitive firms do not achieve productive efficiency or allocative efficiency mean that there is a significant loss in consumer welfare?

-Refer to Figure 10-4. Should the firm represented in the diagram continue to stay in business despite its losses?

A profit-maximising monopolistically competitive firm produces and sells an allocatively efficient quantity of output.

Assume that price exceeds average variable cost over the relevant range of demand. If a monopolistically competitive firm is producing at an output where marginal revenue is $111.11 and marginal cost is $118, then to maximise profits the firm should increase its output.

-Refer to Table 10-4. Victoria's profit-maximising output is where

Which of the following would not occur as a result of a monopolistically competitive firm suffering a short-run economic loss?

If a firm has excess capacity, it means

Assuming that the total market size remains constant, a monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing in the long run because

-Refer to Figure 10-4. What is the area that represents the total fixed cost of production?