25-1. Which of the following characterizes monopolistic competition?
Many interdependent firms sell a homogeneous product.
A few firms produce a particular type of product.
→ Many firms produce a particular type of product, but each maintains some independent control over its own price.
A few firms produce all of the market supply of a good. / 25-2. Which of the following is not characteristic of monopolistic competition?
Many firms in an industry
Low concentration ratios
Some market power
→ Price takers
25-3. The combined market share of the top four firms in a monopolistically competitive industry will typically be in the range of:
Zero to 2 percent.
Zero to 5 percent.
→ 20 to 40 percent.
70 to 100 percent. / 25-4. A monopolistically competitive industry is characterized by ______concentration ratios and ______entry barriers.
High; high
High; low
Low; high
→ Low; low
25-5. Each producer in monopolistic competition has:
Complete market power.
Substantial market power.
→ Some market power.
No market power. / 25-6. One of the main differences between an oligopoly and a monopolistically competitive firm is that a monopolistically competitive firm:
Faces a horizontal demand curve; an oligopoly does not.
→ Is relatively independent; an oligopoly is interdependent.
Has no market power; an oligopoly has some market power.
Has high barriers to entry; an oligopoly does not.
25-7. The kinked oligopoly demand curve does not describe the demand curve for monopolistic competition, because in monopolistically competitive markets:
→ Firms are not as interdependent as oligopolistic firms.
Firms have no market power.
There is not as much product differentiation as in oligopoly.
There is no nonprice competition. / 25-8. Large cities typically have many drug stores, which offer different levels of service and product selection. The drug store market in big cities can best be classified as:
A competitive market.
→ Monopolistic competition.
Oligopoly.
Monopoly.
25-9. Brand loyalty usually makes the demand curve for a product:
More price elastic.
→ Less price elastic.
Unitary elastic.
More income elastic. / 25-10. A monopolistically competitive firm maximizes profits or minimizes losses in the short run by:
Using marginal cost pricing.
Producing output at the level where ATC is minimized.
Producing output at the level where price equals ATC.
→ Producing output at the level where MC = MR.
25-2. Monopolistic competition is a market in which many firms produce similar but somewhat differentiated goods or services and therefore each maintains some independent control of its own price. Monopolistic competitive markets have low barriers to entry and low or modest concentration ratios. / 25-1. Monopolistic competition is a market in which many firms produce similar but somewhat differentiated goods or services and therefore each maintains some independent control of its own price.
25-4. Monopolistic competitive markets have low barriers to entry and low or modest concentration ratios. / 25-3. Concentration ratios between 70 to 100 percent are common in oligopolies. Although a few firms may stand above the rest in a monopolistic competitive market, the combined market share of the top four firms will typically be in the range of 20 to 40 percent.
25-6. An oligopoly is characterized by high concentration ratios, market power and interdependence where as monopolistic competition is characterized by a high degree of brand loyalty, low concentration ratios, some market power and independent product decisions. / 25-5. Monopolistic competition is a market in which many firms produce similar but somewhat differentiated goods or services and therefore each maintains some independent control of its own price.
25-8. Product differentiation, a characteristic of monopolistic competition, is when one product is different (actually or perceived) from competing products in the same market by consumers. / 25-7. A monopolistically competitive firm confronts a downward-sloping demand curve for its output because of brand loyalty, product differentiation and independence where as an oligopolistic firm faces a kinked demand curve because of the interdependence of the market structure.
25-10. Profit maximizing (or loss minimizing) firms, regardless of the market structure, will choose to produce at the output level where MR = MC as long as P>AVC. / 25-9. The more brand loyalty a firm can establish, the less likely consumers are to switch brands when price is increased. In other words, brand loyalty makes the demand curve facing the firm less price-elastic.
25-11. If a monopolistically competitor is maximizing profit, he is producing at a point where marginal cost:
→ Is less than price.
Equals price.
Is greater than price.
Equals average total cost.
25-12. Refer to Table 25.1. In order to maximize profit, Will's Beach Ball Co. should produce ______and charge a price of ______each.
6 beach balls, $11
→ 7 beach balls, $10
8 beach balls, $9
9 beach balls, $8 / 25-13. Refer to Table 25.1. At the profit-maximizing output and price, Will's Beach Ball Co. will earn a profit equal to:
→ $18.
$70.
$72.
-$12.
25-14. Entry into a market characterized by monopolistic competition:
Is rare because firms have market power.
→ Is frequent because barriers to entry are low.
Occurs when a firm's demand is everywhere below its long-run average cost curve.
Results from economies of scale. / 25-15. In monopolistic competition, a firm's demand curve is tangent to the ATC curve in the long run because:
Barriers to entry are very high.
→ Entry eliminates economic profit, and exit eliminates losses.
Advertising is ineffective in differentiating the product.
Producers are price takers.
25-16. In a monopolistically competitive market with negative economic profits:
Firms will enter until accounting profits are zero.
Firms will enter until economic profits are zero.
→ Firms will exit until economic profits are zero.
No entry or exit will occur. / 25-17. In monopolistic competition, the entry of new firms will cause all of the following to happen except:
Long-run economic profits to be zero.
→ The industry cost curves to shift to the left.
The firm's demand curve to shift to the left.
The market supply curve to shift to the right.
25-11. Profit maximizing (or loss minimizing) firms, regardless of the market structure, will choose to produce at the output level where MR = MC as long as P>AVC. Because the monopolistically competitor faces a downward sloping demand curve, price is greater than MR.
25-13. Profit is maximized at the output level where MR ($4) is equal to MC ($4), at an output level of 7. Profit is equal to total revenue ($66) minus total costs ($48) which is $18. / 25-12. Profit ($18) is maximized at the output level where MR ($4) is equal to MC ($4), at an output level of 7 beach balls.
25-15. Given the ease of entry and exit, as long as firms are making a profit or losing money, firms will enter or exit the market and the disappearance of economic profits (losses) is inevitable. / 25-14. Entry barriers are low in monopolistic competition so new entrants can't be kept out of the market.
25-17. Barriers to entry are low in monopolistic competition. Hence, new firms will enter if economic profits are available, driving the market cost curves (supply) to the right and the average price down the market demand curve. When more firms enter the market, the firm's demand curve shifts to the left and becomes more elastic because more close substitutes (other firms) are available until profit is zero. / 25-16. Given the ease of entry and exit, as long as firms are losing money, firms will exit the market and when all economic losses disappear, firms will stop exiting.
25-18. When new firms enter a monopolistically competitive industry, ceteris paribus, the:
→ Market price decreases.
Market price increases.
Market price remains unchanged.
Change in market price cannot be determined based on the information given. / 25-19. Which of the following is not true about a monopolistic competitor?
It maximizes profit at the point where MC = MR
It produces less output than a perfectly competitive firm, ceteris paribus
It charges a higher price than a perfectly competitive firm, ceteris paribus
→ It can earn economic profits in the long run
25-20. Which of the following characterizes the difference between oligopoly and monopolistic competition?
Oligopolists are independent of each other; monopolistically competitive firms are interdependent.
→ Monopolistically competitive firms experience zero long-run economic profit; oligopolists may experience positive long-run economic profit.
There are many oligopolists but only a few monopolistically competitive firms.
Monopolistically competitive firms face horizontal demand curves; oligopolists face downward-sloping demand curves.
25-21. Refer to Figure 25.1 for a monopolistically competitive firm. The profit-maximizing output and price combination for this firm in the short run is:
Q1, P1.
→ Q2, P4.
Q2, P1.
Q4, P3.
25-22. Refer to Figure 25.1. The output that maximizes production efficiency for this firm is:
Q1.
Q2.
→ Q3.
Q4.
25-19. Given the ease of entry and exit, as long as firms are making a profit or losing money, firms will enter or exit the market and the disappearance of economic profits (losses) is inevitable. / 25-18. Barriers to entry are low in monopolistic competition. Hence, new firms will enter if economic profits are available, driving the market cost curves (supply) to the right and the average market price down the market demand curve.
25-20. Given the ease of entry and exit of perfect and monopolistic competition, as long as firms are making a profit or losing money, firms will enter or exit the market and the disappearance of economic profits (losses) is inevitable. Oligopoly markets have high barriers to entry; therefore it is likely that profits will persist in the long run.
25-21. Profit is maximized at the output level where the MR is equal to MC, at an output level of Q2and a price of P4.
25-22. Production efficiency is at the output level that minimizes ATC, that output in Figure 25.1 is Q3.
25-23. Refer to Figure 25.2 for a monopolistically competitive firm. At the profit-maximizing output and price, this firm is experiencing economic:
Profits and should stay in this market in the long run.
Profits but could make even higher economic profits producing the next best alternative good.
→ Losses but should keep producing in the short run.
Losses and should shutdown in the short run.
25-24. Refer to Figure 25.2 for a monopolistically competitive firm. At the profit-maximizing output and price, this firm is:
Earning an economic profit.
→ Earning an economic loss.
Breaking even.
Earning a monopoly profit.
Refer to Figure 25.4 for a monopolistically competitive firm. In the long run this firm will charge a price of ______and produce an output of ______.
P2; Q1
→ P4; Q3
P1; Q2
P3; Q4
Refer to Figure 25.4 for a monopolistically competitive firm. In the long run this firm is most likely to face:
Demand1 and MR1.
Demand1 and MR2.
→ Demand2 and MR2.
A demand curve between Demand1 and Demand2.
Refer to Figure 25.4 for a monopolistically competitive firm. If the firm currently faces Demand1 and MR1, then it will earn:
A positive economic profit and firms will enter the industry.
A negative economic profit and firms will enter the industry.
→ A negative economic profit and firms will exit the industry.
Zero economic profit and neither entry nor exit will occur.
25-23. Profit is maximized or losses are minimized at the output level where the MR is equal to MC. At that output level, the price is below ATC but above AVC, therefore the firm is incurring economic losses but is losing less than if it shut down.
25-24. Profit is maximized or losses are minimized at the output level where the MR is equal to MC. At that output level, the price is below ATC but above AVC, therefore the firm is incurring economic losses but is losing less than if it shut down.
25-25. In the long run the firm will produce where MR is equal to MC and price is just tangent to ATC.
25-26. In the long run the firm will produce where MR is equal to MC and price is just tangent to ATC.
25-27. If the firm currently faces Demand1and MR1, then its price is less than ATC, profits are negative and firms will exit the market.
25-28. Which firm in Figure 25.5 is earning a profit?
→ Firms A and C
Firms B and D
Firm A only
All of the firms are earning a profit / 25-29. Which firm in Figure 25.5 is most likely a monopolistically competitive firm?
Firm A
Firm B
Firm C
→ Firm D
25-29. Firm D is most likely a monopolistically competitive firm because it has a relatively elastic demand curve and it is earning zero economic profits. / 25-28. Firm A is earning a profit based on the fact that the price level at the point where MR is equal to MC is greater than ATC.