Chapter 17 Monopolistic Competition

Test B
1

Monopolistic competition is characterized by a. few sellers and free entry. b. few sellers and restricted entry. c. many sellers and free entry. d. many sellers and restricted entry. ANSWER: c. many sellers and free entry. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
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Which of the followin+ prod,cts is li-ely to be sold in a monopolistically competiti.e mar-et/ a. cr,de oil b. electricity c. wheat d. f,rnit,re ANSWER: d. f,rnit,re T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
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The demand c,r.e of a monopolistically competiti.e firm is a. downward slopin+1 as it also is for a monopolist. b. downward slopin+1 as it also is for monopolists and perfectly competiti.e firms. c. horizontal1 as it also is for a perfectly competiti.e firm. d. horizontal1 as it also is for monopolists and perfectly competiti.e firms. ANSWER: a. downward slopin+1 as it also is for a monopolist. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
2

A monopolistically competiti.e firm ma3imizes profits by settin+ 4,antity and5or price accordin+ to the same r,le as a. a perfectly competiti.e firm. b. a monopolist. c. an oli+opolist. d. None of the abo.e is correct. ANSWER: b. a monopolist. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
6

A monopolistically competiti.e firm ma3imizes profits at the 4,antity where a. a.era+e total cost 7 mar+inal cost. b. a.era+e total cost 7 a.era+e re.en,e. c. mar+inal re.en,e 7 a.era+e re.en,e. d. mar+inal re.en,e 7 mar+inal cost. ANSWER: d. mar+inal re.en,e 7 mar+inal cost. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:

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1;2 $hapter 1<5Monopolistic $ompetition

What is the profit>ma3imizin+ o,tp,t of the monopolistically competiti.e firm shown in the dia+ram/

a. 6 b. = c. < d. ? ANSWER: a. 6 T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:

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A monopolistically competiti.e firm ma3imizes its profits and has profits +reater than zero if a. a.era+e total cost e4,als a.era+e re.en,e and a.era+e total cost is +reater than price. b. a.era+e total cost e4,als a.era+e re.en,e and a.era+e total cost is less than price. c. mar+inal re.en,e e4,als mar+inal cost and a.era+e total cost is +reater than price. d. mar+inal re.en,e e4,als mar+inal cost and a.era+e total cost is less than price. ANSWER: d. mar+inal re.en,e e4,als mar+inal cost and a.era+e total cost is less than price. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
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When price is abo.e a.era+e total cost in a monopolistically competiti.e mar-et a. new firms enter the mar-et: and the demand c,r.es of e3istin+ firms shift left. b. new firms enter the mar-et and the demand c,r.es of e3istin+ firms shifts ri+ht. c. some firms e3it the mar-et and the demand c,r.es of e3istin+ firms shifts left. d. some firms e3it the mar-et and the demand c,r.e of e3istin+ firms shifts ri+ht. ANSWER: a. new firms enter the mar-et: and the demand c,r.es of e3istin+ firms shift left. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
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When a monopolistically competiti.e firm is in lon+>r,n e4,ilibri,m a. economic profits will be zero. b. mar+inal cost e3ceeds price. c. mar+inal re.en,e e3ceeds mar+inal cost. d. All of the abo.e are correct. ANSWER: a. economic profits will be zero. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
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Which of the followin+ is correct/ a. Monopolistically competiti.e firms are price ta-ers. b. Aor monopolistically competiti.e firms the mar+inal re.en,e c,r.e lies abo.e the demand c,r.e. c. Bnder monopolistic competition: if price e3ceeds a.era+e total cost: firms will enter the mar-et. d. Aor monopolistically competiti.e firms: price e4,als mar+inal cost in the lon+ r,n. ANSWER: c. Bnder monopolistic competition: if price e3ceeds a.era+e total cost: firms will enter the mar-et. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:

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$hapter 1<5Monopolistic $ompetition 1;6

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$onsider the followin+ two sentences. 'eca,se the demand c,r.e of a monopolistically competiti.e firm is downward slopin+: its mar+inal re.en,e is less than price. 'eca,se there is free entry into monopolistically competiti.e mar-ets: in the lon+>r,n economic profits are dri.en to zero. a. 'oth sentences are correct. b. 'oth sentences are incorrect. c. &nly the first sentence is correct. d. &nly the second sentence is correct. ANSWER: a. 'oth sentences are correct. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
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$onsider the followin+ two sentences. 'oth perfectly competiti.e and monopolistically competiti.e firms prod,ce at the efficient scale. !erfectly competiti.e firms prod,ce where price e4,als mar+inal cost: while monopolistically competiti.e firms prod,ce where price is +reater than mar+inal cost. a. 'oth sentences are correct. b. Neither sentence is correct. c. &nly the first sentence is correct. d. &nly the second sentence is correct. ANSWER: d. &nly the second sentence is correct. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: * RAN#&M:
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A monopolistically competiti.e firm in the lon+ r,n prod,ces a. a 4,antity less than the efficient scale. b. at the efficient scale. c. at a 4,antity abo.e the efficient scale. d. None of the abo.e is necessarily correct: it depends on whether firms are ma-in+ economic profits +reater than zero. ANSWER: a. a 4,antity less than the efficient scale. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: * RAN#&M:
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%n the lon+ r,n profit>ma3imizin+ monopolistically competiti.e firms char+e a price a. abo.e a.era+e total cost: b,t less than mar+inal cost. b. abo.e a.era+e total cost: b,t +reater than mar+inal cost. c. e4,al to a.era+e total cost: b,t less than mar+inal cost. d. e4,al to a.era+e total cost: b,t +reater than mar+inal cost. ANSWER: d. e4,al to a.era+e total cost: b,t +reater than mar+inal cost. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: * RAN#&M:

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Accordin+ to the +raph: the mar-,p of this firm e4,als a. 1@. b. =. c. 0. d. None of the abo.e is correct. ANSWER: b. =. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: * RAN#&M:

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1;= $hapter 1<5Monopolistic $ompetition NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER"
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E3cess capacity arises ,nder conditions of monopolistic competition beca,se: a. there is ,nder,tilization of reso,rces and not eno,+h firms. b. the o,tp,t prod,ced does not minimize a.era+e total cost. c. a monopolistically competiti.e firm prod,ces more o,tp,t than wo,ld be prod,ced by a perfectly competiti.e firm. d. there are too many +oods chasin+ too few reso,rces. ANSWER: b. the o,tp,t prod,ced does not minimize a.era+e total cost. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: * RAN#&M:
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Which of the e3ternalities created by the entry of a new firm e3ists ,nder both perfect competition and monopolistic competition/ a. only the prod,ct>.ariety e3ternality b. only the b,siness>stealin+ e3ternality c. both the prod,ct>.ariety e3ternality and the b,siness>stealin+ e3ternality d. neither the prod,ct>.ariety e3ternality nor the b,siness>stealin+ e3ternality ANSWER: d. neither the prod,ct>.ariety e3ternality nor the b,siness>stealin+ e3ternality T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 0 RAN#&M:
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Re4,irin+ monopolistic competitors to set price e4,al to mar+inal cost wo,ld a. be a b,rden beca,se there are so many prod,cers of differentiated prod,cts. b. ca,se them to ma-e losses. c. 'oth of the abo.e are correct. d. None of the abo.e is correct. ANSWER: c. 'oth of the abo.e are correct. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 0 RAN#&M:
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The n,mber of firms in a monopolistically competiti.e mar-et is li-ely to be too small a. if the prod,ct>.ariety e3ternality is lar+er than the b,siness>stealin+ e3ternality. b. if the b,siness>stealin+ e3ternality is lar+er than the prod,ct>.ariety e3ternality. c. if there are either b,siness>stealin+ e3ternalities or prod,ct>.ariety e3ternalities. d. ,nder no conditions: monopolistically competiti.e mar-ets always ha.e a lar+er n,mber of firms than is socially efficient. ANSWER: a. if the prod,ct>.ariety e3ternality is lar+er than the b,siness>stealin+ e3ternality. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 0 RAN#&M: NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER"
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Monopolistic competition res,lts in inefficiency beca,se a. they can earn an economic profit in the short r,n. b. price is not e4,al to a.era+e total cost in the lon+ r,n. c. firms e3it the ind,stry in response to losses. d. price is +reater than mar+inal cost. ANSWER: d. price is +reater than mar+inal cost. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 0 RAN#&M:

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$hapter 1<5Monopolistic $ompetition 1;<

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%n which of the followin+ mar-ets are ad.ertisin+ e3pendit,res as a percent of re.en,es li-ely to be hi+hest/ a. perfect competition. b. monopoly. c. monopolistic competition. d. None of the abo.e is necessarily li-ely to spend a lar+er share of re.en,es on ad.ertisin+ than the others. ANSWER: c. monopolistic competition. T !E: M "E 1: # SE$T%&N: * &'(E$T%)E: 2 RAN#&M: NOTE: THE FOLLOWING QUESTION IS REPEATED FROM THE ON LINE QUI!!ES" #OUR STUDENTS MA# HA$E ALREAD# SEEN THIS QUESTION AND ITS ANSWER"
**

$ritics of ad.ertisin+ ar+,e that ad.ertisin+: a. increases the elasticity of demand for the firmCs prod,ct. b. impedes competition. c. decreases demand for the firmCs prod,ct. d. decreases s,pply of the firmCs prod,ct. ANSWER: b. impedes competition. T !E: M "E 1: # SE$T%&N: * &'(E$T%)E: 2 RAN#&M:
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S,ppose that by ad.ertisin+: fast food places are able to increase the perception that their prod,cts are ,ni4,e and so foster brand loyalty. The demand c,r.es for the prod,cts of these firms become a. more elastic: so mar-,p increases. b. more elastic: so mar-,p decreases. c. less elastic: so mar-,p increases. d. less elastic: so mar-,p decreases. ANSWER: c. less elastic: so mar-,p increases. T !E: M "E 1: # SE$T%&N: * &'(E$T%)E: 2 RAN#&M:
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Which of the followin+ is incorrect/ a. $o,rts ha.e recently concl,ded that restrictions on ad.ertisin+ by certain professions ser.ed mostly to c,rtail competition. b. A st,dy showed that the a.era+e price of eye+lasses was hi+her in states that allowed ad.ertisin+ than in states that did not. c. 'y their willin+ness to spend money on ad.ertisin+ alone: firms si+nal that their prod,cts are not of inferior 4,ality. d. Ad.ertisin+ may lead to a more efficient allocation of reso,rces. ANSWER: b. A st,dy showed that the a.era+e price of eye+lasses was hi+her in states that allowed ad.ertisin+ than in states that did not. T !E: M "E 1: # SE$T%&N: * &'(E$T%)E: 2 RAN#&M:
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'rand loyalty may a. pro.ide incenti.e for brand names to offer prod,cts of consistently hi+h 4,ality. b. ma-e demand for the brandCs prod,ct more elastic. c. tend to p,sh a.era+e total cost towards price. d. All of the abo.e are correct. ANSWER: a. pro.ide incenti.e for brand names to offer prod,cts of consistently hi+h 4,ality. T !E: M "E 1: # SE$T%&N: * &'(E$T%)E: 6 RAN#&M:

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ANSWER: c. many sellers and free entry. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
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ANSWER: d. f,rnit,re T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:

0

ANSWER: a. downward slopin+1 as it also is for a monopolist. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
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ANSWER: b. a monopolist. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:

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ANSWER: d. mar+inal re.en,e 7 mar+inal cost. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
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ANSWER: a. 6 T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:

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ANSWER: d. mar+inal re.en,e e4,als mar+inal cost and a.era+e total cost is less than price. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
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ANSWER: a. new firms enter the mar-et: and the demand c,r.es of e3istin+ firms shift left. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
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ANSWER: a. economic profits will be zero. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
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ANSWER: c. Bnder monopolistic competition: if price e3ceeds a.era+e total cost: firms will enter the mar-et. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
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ANSWER: a. 'oth sentences are correct. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 1 RAN#&M:
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ANSWER: d. &nly the second sentence is correct. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: * RAN#&M:
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ANSWER: a. a 4,antity less than the efficient scale. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: * RAN#&M:
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ANSWER: d. e4,al to a.era+e total cost: b,t +reater than mar+inal cost. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: * RAN#&M:

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ANSWER: b. =. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: * RAN#&M:

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ANSWER: b. the o,tp,t prod,ced does not minimize a.era+e total cost. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: * RAN#&M:
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ANSWER: d. neither the prod,ct>.ariety e3ternality nor the b,siness>stealin+ e3ternality T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 0 RAN#&M:
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ANSWER: c. 'oth of the abo.e are correct. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 0 RAN#&M:
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ANSWER: a. if the prod,ct>.ariety e3ternality is lar+er than the b,siness>stealin+ e3ternality. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 0 RAN#&M:
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ANSWER: d. price is +reater than mar+inal cost. T !E: M "E 1: # SE$T%&N: 1 &'(E$T%)E: 0 RAN#&M:
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ANSWER: c. monopolistic competition. T !E: M "E 1: # SE$T%&N: * &'(E$T%)E: 2 RAN#&M:

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ANSWER: b. impedes competition. T !E: M "E 1: # SE$T%&N: * &'(E$T%)E: 2 RAN#&M:

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ANSWER: c. less elastic: so mar-,p increases. T !E: M "E 1: # SE$T%&N: * &'(E$T%)E: 2 RAN#&M:
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ANSWER: b. A st,dy showed that the a.era+e price of eye+lasses was hi+her in states that allowed ad.ertisin+ than in states that did not. T !E: M "E 1: # SE$T%&N: * &'(E$T%)E: 2 RAN#&M:
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ANSWER: a. pro.ide incenti.e for brand names to offer prod,cts of consistently hi+h 4,ality. T !E: M "E 1: # SE$T%&N: * &'(E$T%)E: 6 RAN#&M: