Ch16 Monopolistic Competition Test Bank Docx - Principles of Microeconomics ANZ Edition Test Bank by Joshua Gans. DOCX document preview.
CHAPTER 16 – Monopolistic competition
TRUE/FALSE
1. For a profit-maximising firm in a monopolistically competitive market, when price is equal to average total cost, price must lie above marginal cost.
DIF: Easy TOP: The monopolistically competitive firm in the short run
2. Like a competitive firm, a monopolistically competitive firm maximises profit by setting P=MC.
DIF: Easy TOP: The monopolistically competitive firm in the short-run
3. Whenever a monopolistically competitive firm marks price above marginal cost, the firm will make a profit.
DIF: Easy TOP: Monopolistic versus perfect competition
4. Firms in a monopolistically competitive market are operating at their efficient scale.
DIF: Easy TOP: Excess capacity
5. If firms in a monopolistically competitive market are earning positive profits, firms will enter until price equals the minimum of average total cost.
DIF: Moderate TOP: the long run equilibrium
6. Excess capacity occurs whenever a firm is operating at an output level below where average total cost is minimised.
DIF: Easy TOP: Excess capacity
7. If the long-run price is equal to marginal cost, then the firm must be operating at efficient scale.
DIF: Easy TOP: Excess capacity
8. A price mark-up over marginal cost is inconsistent with market attributes of free entry and zero profit.
DIF: Easy TOP: Mark-up over marginal cost
9. When a firm in a monopolistically competitive market earns zero economic profit, its product price must equal marginal cost.
DIF: Moderate TOP: Mark-up over marginal cost
10. In the long-run equilibrium in a monopolistic market, a profit-maximising firm will see the price lower than average total cost.
DIF: Moderate TOP: The long-run equilibrium
11. Advertising only benefits suppliers of a good and has little value to consumers.
DIF: Easy TOP: The defence of advertising
12. Advertising may impede competition by fostering brand loyalty and allowing firms to increase their mark-up.
DIF: Easy TOP: Brand names
13. Economists who argue that advertising enhances market efficiency suggest that celebrity advertising signals product quality.
DIF: Moderate TOP: Advertising
14. When McDonald’s opens a store in Dhaka, Bangladesh, it will have an incentive to set product quality and customer service consistent with local standards.
DIF: Easy TOP: Brand names
15. The Pizza Hut in Agra, India has a very similar menu design, layout and content as the Pizza Hut in Bondi Junction, Sydney. This is an example of a brand name enhancing market efficiency for Australian tourists visiting India.
DIF: Easy TOP: Brand names
16. Advertising during the Rugby World Cup is an example of providing information in the advertisement’s content.
DIF: Moderate TOP: The defence of advertising
17. Brand names can improve product quality because firms will want to avoid the financial loss that would follow a fall in reputation. Firms will thus work harder to maintain high quality.
DIF: Easy TOP: Brand names
18. From a total welfare perspective, it is possible that too many firms can enter into a monopolistically competitive market.
DIF: Easy TOP: Monopolistic competition and the welfare of society
19. The business stealing externality arises because firms post a price above marginal cost and are therefore always eager to sell additional units.
DIF: Easy TOP: Monopolistic competition and the welfare of society
20. If brand names are efficient market mechanisms, banning them will lead to less competition and higher prices in the markets brand names from which they are absent.
DIF: Moderate TOP: Brand names
21. Advertising can be used as a signal of product quality, even if the advertisement contains little information about the product.
DIF: Easy TOP: Advertising as a signal of quality
22. Critics of advertisements that depict ‘beautiful’ human bodies as the primary focus of the message are likely to claim that the purpose of the advertisement is to create desires that do not already exist.
DIF: Moderate TOP: FYI: Galbraith versus Hayek
23. If advertising decreases the elasticity of demand for specific brand names of beer, we would expect firms to be more able to exercise market power.
DIF: Moderate TOP: Brand names
24. When poor-quality products are advertised using cheap advertising, consumers learn to ignore such cheap advertising.
DIF: Easy TOP: Advertising as a signal of quality
25. In a monopolistically competitive industry, the profit-maximising firm will produce where marginal costs are equal to average total cost.
DIF: Easy TOP: Mark-up over marginal cost
26. The ‘monopoly’ in monopolistically competitive markets is the result of a firm having a monopoly on a product for which there are no substitutes.
DIF: Easy TOP: Introduction
27. Given that firms in monopolistically competitive markets share the attribute of many sellers with firms in perfect competition, it follows that firms in both markets face horizontal demand curves.
DIF: Moderate TOP: The monopolistically competitive firm in the short run
28. The profit-maximising rule for a firm in a monopolistically competitive market is to select the quantity at which marginal revenue is equal to long-run average total cost.
DIF: Easy TOP: The monopolistically competitive firm in the short run
29. In the short run, a firm in a monopolistically competitive market operates much like a monopolist.
DIF: Moderate TOP: The monopolistically competitive firm in the short run
30. Monopolistically competitive markets have all the desirable welfare properties of perfectly competitive markets.
DIF: Easy TOP: Monopolistic competition and the welfare of society
31. The product-variety externality associated with monopolistic competition arises because in monopolistically competitive markets firms try to mimic the success of other brands and products.
DIF: Easy TOP: Monopolistic competition and the welfare of society
32. The use of celebrity endorsements in advertising has enabled firms to differentiate their products.
DIF: Moderate TOP: Brand names
33. Counterfeiting of goods is a rational market outcome of the success of a brand.
DIF: Moderate TOP: Brand names
MULTIPLE CHOICE
1. In a monopolistically competitive market structure, each firm sells a good that is:
A. | slightly different from goods sold by other firms |
B. | produced at minimum average cost |
C. | identical to other goods sold in the market |
D. | produced at minimum marginal cost |
DIF: Easy TOP: Introduction
2. In a monopolistically competitive industry, price is:
A. | above marginal cost since each firm is a price setter |
B. | equal to marginal cost since each firm is a price taker |
C. | below marginal cost since each firm is a price setter |
D. | equal to marginal cost since each firm is a price setter |
DIF: Easy TOP: The monopolistically competitive firm in the short run
3. Suppose that in the short run, a monopolistically competitive firm sells its product for $35 per unit. Its average total cost at this level of output is $39. This means that:
A. | the firm makes a short-run profit of $4 per unit |
B. | the firm makes a short-run loss of $4 per unit |
C. | the firm makes a short-run and long-run profit of $4 per unit |
D. | the firm makes a short-run and long-run loss of $4 per unit |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
4. When free entry is one of the attributes of a market structure, economic profits are:
A. | eventually driven to zero |
B. | negative for all firms |
C. | never above or below zero |
D. | positive for all firms |
DIF: Easy TOP: The long-run equilibrium
5. Suppose that in the short run, a monopolistically competitive firm sells its product for $20 per unit. Its average total cost at the optimal level of output is $30. This means that:
A. | the firm makes a loss in the short run and the long run |
B. | the firm makes a profit in the short run and the long run |
C. | the firm’s demand curve will shift to the left as new firms enter the market |
D. | the firm’s demand curve will shift to the right as firms leave the market |
DIF: Easy TOP: Introduction
6. The ‘competition’ in monopolistically competitive markets is most likely a result of:
A. | free entry and free exit |
B. | product differentiation |
C. | strategic interactions among sellers |
D. | product homogeneity |
DIF: Easy TOP: Introduction
7. The reason that monopoly remains a root-word for monopolistically competitive market is because of:
A. | strategic interactions among sellers |
B. | there being many sellers |
C. | sellers being price makers rather than price takers |
D. | the homogeneous products that are produced |
DIF: Easy TOP: Introduction
8. The profit-maximising rule for a firm in a monopolistically competitive market is to select the quantity at which:
A. | average revenue exceeds average total cost |
B. | marginal revenue is equal to marginal cost |
C. | average total cost is minimum |
D. | demand is equal to supply |
DIF: Easy TOP: The monopolistically competitive firm in the short run
9. A profit-maximising firm in a monopolistically competitive market is characterised by which of the following?
A. | revenue is always maximised along with profit |
B. | average revenue exceeds marginal revenue |
C. | marginal revenue exceeds average revenue |
D. | average revenue is equal to marginal revenue |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
Graph 17-1
10. Refer to Graph 17-1. Which of the following graphs would most likely represent a profit-maximising firm in a monopolistically competitive market?
A. | panel a |
B. | panel b |
C. | panel c |
D. | panel d |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
11. Refer to Graph 17-1. If a firm in a monopolistically competitive market was producing the level of output depicted as Qd in panel d, it would:
A. | be minimising its losses |
B. | be losing market share to other firms in the market |
C. | be operating at excess capacity |
D. | not be maximising its profit |
DIF: Difficult TOP: The monopolistically competitive firm in the short run
12. Refer to Graph 17-1, panel A. Assume the market is monopolistically competitive and in long-run equilibrium. If drawn in, the average total cost curve would be:
A. | tangent to the demand curve at the market price, Pa |
B. | tangent to the demand curve where marginal cost intersects demand |
C. | tangent to the marginal revenue curve at the market price, Pa |
D. | tangent to the marginal revenue curve at the point where marginal cost intersects marginal revenue |
DIF: Easy TOP: The monopolistically competitive firm in the long run
Graph 17-2
13. Refer to Graph 17-2. Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is making economic profits?
A. | panel a |
B. | panel b |
C. | panel c |
D. | panel d |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
14. Refer to Graph 17-2. Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is minimising its losses?
A. | panel a |
B. | panel b |
C. | panel c |
D. | panel d |
DIF: Difficult TOP: The monopolistically competitive firm in the short run
15. Refer to graph 17-2. Which of the graphs shown would be consistent with the firm making short-run profit in a competitive market?
A. | panel a |
B. | panel b |
C. | panel c |
D. | panel d |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
16. A monopolistically competitive firm chooses:
A. | price, but output is determined by cartel production quota |
B. | the quantity of output to produce and the price at which it will sell its output |
C. | the quantity of output to produce, but the market determines price |
D. | price, but competition in the market determines the quantity |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
17. If firms in a monopolistically competitive industry are making losses:
A. | they will likely be subject to regulation |
B. | they ought to form a cartel |
C. | new firms will enter the market |
D. | some firms must exit the market |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
18. When firms are encouraged to enter monopolistically competitive markets:
A. | the diversity of products in the market must be small |
B. | they are guaranteed economic profits upon entry |
C. | some firms in the market must be making economic profits |
D. | no firms can experience economic losses |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
19. If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios would best reflect the change facing incumbent firms as the market adjusts to its new equilibrium?
A. | a downward shift in their marginal cost curve |
B. | an upward shift in their marginal cost curve |
C. | an increase in demand |
D. | a decrease in demand |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
20. If firms in a monopolistically competitive market are incurring economic losses, which of the following scenarios would best reflect the change facing incumbent firms (who are able to stay in the market) as the market adjusts to its new equilibrium?
A. | a downward shift in their marginal cost curve |
B. | an upward shift in their marginal cost curve |
C. | an increase in demand |
D. | a decrease in demand |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
Graph 17-3
Lines in these figures reflect the potential effect of entry and exit in a monopolistically competitive market on the demand and/or marginal cost curves of incumbent firms.
21. Refer to Graph 17-3. Panel d in the set of figures shown depicts the effect on incumbent firms of:
A. | existing firms exiting the market |
B. | long-run economic losses |
C. | a decrease in the diversity of products offered in the market |
D. | new entrants in the market |
DIF: Moderate TOP: The long-run equilibrium
22. Refer to Graph 17-3. Panel c in the set of graphs shown depicts the effect on incumbent firms of:
A. | a few existing firms exiting the market |
B. | new entrants in the market |
C. | long-run economic losses |
D. | an increase in the diversity of products offered in the market |
DIF: Moderate TOP: The long-run equilibrium
23. Refer to the graphs in 17-3. Which panel is consistent with a celebrity announcing her endorsement of a specific brand’s product?
A. | panel a |
B. | panel b |
C. | panel c |
D. | panel d |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
24. In the long-run equilibrium, a monopolistically competitive firm makes zero profit because:
A. | marginal revenue will equal marginal cost |
B. | price will equal marginal cost |
C. | marginal cost intersects the minimum of average total cost |
D. | price will equal average total cost |
DIF: Moderate TOP: The long-run equilibrium
25. Economic losses are in a monopolistically competitive markets:
A. | a signal to some incumbent firms to exit the market |
B. | are never possible in the short run |
C. | a signal for new firms to enter the market |
D. | only possible if collusion between the firms cannot be maintained |
DIF: Easy TOP: The monopolistically competitive firm in the short run
26. As new firms enter a monopolistically competitive market, profits of existing firms:
A. | decline and product diversity in the market decreases |
B. | rise and product diversity in the market decreases |
C. | rise and product diversity in the market increases |
D. | decline and product diversity in the market increases |
DIF: Easy TOP: The monopolistically competitive firm in the short run
27. As some incumbent firms exit a monopolistically competitive market, profits of existing firms:
A. | decline and product diversity in the market decreases |
B. | rise and product diversity in the market increases |
C. | rise and product diversity in the market decreases |
D. | decline and product diversity in the market increases |
DIF: Easy TOP: The long-run equilibrium
28. The entry and exit of firms in a monopolistically competitive market guarantees that:
A. | economic profits and economic losses disappear in the long run |
B. | economic profits can survive in the long run, but not economic losses |
C. | economic losses will exist in the long run, but not economic profits |
D. | both economic profits and economic losses will exist in the long run |
DIF: Easy TOP: The long-run equilibrium
29. In a monopolistically competitive market, equilibrium is characterised by:
A. | the average total cost curve being tangent to the demand curve |
B. | marginal cost crossing the demand curve |
C. | price being equal to the minimum of average total cost |
D. | firms making a positive economic profit |
DIF: Easy TOP: The long-run equilibrium
30. When a profit-maximising firm in a monopolistically competitive market is producing the short-run equilibrium quantity:
A. | it will be earning economic profits |
B. | its demand curve will be tangent to its average total cost curve |
C. | its demand curve can be above, below or be tangent to its average total cost curve |
D. | its marginal revenue will exceed marginal cost |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
Graph 17-4
31. Refer to Graph 17-4. Which of the panels shown reflects a long-run equilibrium for a firm in a monopolistically competitive market?
A. | panel a |
B. | panel b |
C. | panel c |
D. | panel d |
DIF: Difficult TOP: The long-run equilibrium
32. Refer to Graph 17-4. Which of the panels shown could not characterise a short-run equilibrium for a firm in a monopolistically competitive market?
A. | panel a |
B. | panel b |
C. | panel c |
D. | panel d |
DIF: Difficult TOP: The monopolistically competitive firm in the short run
33. Refer to Graph 17-4. Panel b in the set of figures shown is consistent with a firm in a monopolistically competitive market that is:
A. | incurring economic gains |
B. | in a short-run equilibrium, but not a long-run equilibrium |
C. | in both a short-run and a long-run equilibrium |
D. | in a long-run equilibrium, but not a short-run equilibrium |
DIF: Difficult TOP: The monopolistically competitive firm in the short run
34. Refer to Graph 17-4. Which of the panels shown depicts a firm in a monopolistically competitive market earning economic profits in the short run?
A. | both panels c and d |
B. | panel d |
C. | panel c |
D. | none of the above |
DIF: Difficult TOP: The monopolistically competitive firm in the short run
35. Refer to Graph 17-4. Which of the markets depicted in each panel is likely to see a firm enter in the long run?
A. | panels A and B |
B. | panels B and C |
C. | panels A and D |
D. | panels C and D |
DIF: Difficult TOP: The monopolistically competitive firm in the short run
36. Refer to Graph 17-4. Which of the markets depicted in each panel is likely to see firms exit in the long run?
A. | panel A |
B. | panel B |
C. | panel C |
D. | panel D |
DIF: Difficult TOP: The monopolistically competitive firm in the short run
37. If a firm is making zero profits, then which of the following must be true?
A. | price equals average total cost |
B. | price equals marginal cost |
C. | the firm is operating at its efficient scale |
D. | the firm is not marking up over marginal cost |
DIF: easy TOP: The long-run equilibrium
38. In the long-run equilibrium, a difference between monopolistically competitive firms and perfectly competitive firms is:
A. | monopolistically competitive firms produce on the downward sloping section of their ATC curves, while perfectly competitive firms produce at the minimum of ATC |
B. | monopolistically competitive firms set P=MC, while competitive firms set P=MR |
C. | individual firm demand slopes down for monopolistically competitive firms, while market demand is horizontal for perfectly competitive markets |
D. | average total cost is U-shaped for monopolistically competitive firms, while it is downward sloping for perfectly competitive firms |
DIF: Moderate TOP: Monopolistic vs perfect competition
39. The efficient scale occurs when the firm’s:
A. | average total cost curve must be falling |
B. | average total cost curve must be rising |
C. | average revenue must be equal to the minimum of average total cost |
D. | average revenue must exceed the minimum of average total cost |
DIF: Moderate TOP: Excess capacity
40. In the short run, a firm in a perfectly competitive market operates at:
A. | efficient scale and a monopolistically competitive firm operates at excess capacity |
B. | efficient scale and a monopolistically competitive firm operates at efficient scale |
C. | excess capacity and a monopolistically competitive firm operates at excess capacity |
D. | we cannot say without more information |
DIF: Moderate TOP: Excess capacity
41. In the long run, a profit-maximising firm in a monopolistically competitive market operates at:
A. | some point above its average total cost curve |
B. | the minimum point on its average total cost curve |
C. | some point along the upward-sloping portion of its average total cost curve |
D. | some point along the downward-sloping portion of its average total cost curve |
DIF: Moderate TOP: Excess capacity
42. A monopolistically competitive market can have too many firms enter, that is, the number of firms in a market can be greater than the socially optimal number. For there to be too much entry, which of the following needs to occur?
A. | the product-variety externality is greater than the business-stealing externality |
B. | the business-stealing externality is greater than the product-variety externality |
C. | price needs to be below average total cost, leading to negative profits |
D. | some consumers must value the product at less than the price they paid |
DIF: Moderate TOP: Monopolistic competition and welfare
43. In equilibrium, product differentiation in monopolistically competitive markets ensures that:
A. | price will exceed marginal cost |
B. | price will equal marginal cost |
C. | average revenue will equal marginal revenue |
D. | average variable cost will be declining |
DIF: Moderate TOP: Introduction
44. A firm in a monopolistically competitive market operates on the:
A. | rising portion of its average total cost curve |
B. | declining portion of its average total cost curve |
C. | rising portion of its demand curve |
D. | rising portion of its supply curve |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
45. Hotels in Sydney observe that on most nights, about 80 per cent of their rooms are occupied, with the remainder being empty. This kind of excess capacity is indicative of what kind of market?
A. | tourist markets |
B. | competitive |
C. | oligopoly |
D. | monopolistically competitive |
DIF: Moderate TOP: The long-run equilibrium
46. In the market for hotel rooms in large metropolitan markets, the cost of a single night’s stay can be several times higher than that of a similar room in a suburban market. If the market for hotel rooms is characterised by monopolistic competition, this difference in price can be partially explained by:
A. | a higher cost for accommodations to compensate for the lower cost of airfare into metropolitan markets |
B. | the mark-up of price over a higher marginal cost in large metropolitan markets |
C. | the cost of living in a large city |
D. | transportation access |
DIF: Difficult TOP: Mark-up over marginal cost
47. For profit-maximising firms in a monopolistically competitive market, another customer me
A. | potential economic losses |
B. | marginal cost could potentially exceed price |
C. | more profit |
D. | zero economic profit |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
48. A profit-maximising firm in a monopolistically competitive market is eager for another customer because:
A. | it has excess capacity |
B. | a mark-up over marginal cost is difficult to maintain |
C. | price exceeds marginal cost |
D. | it earns zero economic profits in the long run |
DIF: Moderate TOP: Mark-up over marginal cost
49. The main reason that a monopolistically competitive market is considered inefficient is because:
A. | marginal cost exceeds average revenue |
B. | excess capacity is a short-run problem |
C. | prices exceed average total cost |
D. | price exceeds marginal cost |
DIF: Moderate TOP: Mark-up over marginal cost
50. When a profit-maximising firm in a monopolistically competitive market charges a price higher than marginal cost, the:
A. | burden of the deadweight loss falls entirely on consumers |
B. | burden of the deadweight loss falls entirely on producers |
C. | deadweight loss is dissipated by the excess capacity |
D. | market experiences a deadweight loss |
DIF: Moderate TOP: Mark-up over marginal cost
51. Fill in the blanks. The deadweight loss that is associated with a ___________ market is a result of ___________.
A. | monopoly, pricing above marginal cost |
B. | monopoly and monopolistically competitive, pricing above marginal cost |
C. | monopoly, operating at inefficient scale |
D. | monopoly and monopolistically competitive, operating at inefficient scale |
DIF: Moderate TOP: Mark-up over marginal cost
52. Regulation of a firm in a monopolistically competitive market:
A. | will lower the firm’s cost |
B. | is unlikely to improve market efficiency |
C. | is commonly used to enhance market efficiency |
D. | usually implies a very small administrative burden |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
53. The administrative burden of regulating price in a monopolistically competitive market is:
A. | large because there are a large number of firms that produce differentiated products |
B. | small due to economies of scale |
C. | large because price is usually below marginal cost |
D. | small because firms produce at under-capacity |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
54. The most likely effect of regulators requiring firms in monopolistically competitive markets to set price equal to marginal cost is that:
A. | new firms would be likely to enter the market |
B. | many firms will experience economic losses |
C. | many firms will experience increased profits |
D. | firms would also operate at maximum efficient scale |
DIF: Moderate TOP: Mark-up over marginal cost
55. If regulators required firms in monopolistically competitive markets to set price equal to marginal cost:
A. | monopolistically competitive firms would respond by lowering their costs |
B. | new firms that enter the market would use better technology |
C. | many firms will experience increased profits |
D. | many firms would require a subsidy to stay in business |
DIF: Moderate TOP: Mark-up over marginal cost
56. Inefficiency in monopolistically competitive markets can be identified with:
A. | their similarities to perfectly competitive markets |
B. | not having the ‘ideal’ number of firms in the industry |
C. | a first–best equilibrium, where price is equal to marginal cost |
D. | government programs that effectively regulate price |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
57. Whenever a new firm considers entry into a monopolistically competitive market with a new product, it considers:
A. | only the profit opportunities |
B. | the business-stealing externality |
C. | the product-variety externality |
D. | all of the above |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
58. The product-variety externality is associated with:
A. | the producer surplus that accrues to incumbent firms in a monopolistically competitive industry |
B. | loss of consumer surplus from exposure to additional advertising |
C. | the opportunity cost of firms exiting a monopolistically competitive industry |
D. | the consumer surplus that is generated from introduction of a new product |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
59. Suppose a firm enters a monopolistically competitive market with a new product. Consumers now have more choice. This increase in choice means that:
A. | a product-variety externality has occurred |
B. | an advertising externality has occurred |
C. | consumers are now worse off as they must visit more shops |
D. | consumers are likely to experience negative consumption externalities |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
60. A business-stealing externality is:
A. | the act of incumbent firms engaging in hostile takeover of vertically integrated markets |
B. | considered to be an explicit cost of business in monopolistically competitive markets |
C. | the negative externality associated with entry of new firms in a monopolistically competitive market |
D. | likely to be punished under antitrust laws that govern commerce |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
61. Suppose a new competitor enters a market and the incumbent firms lose customers and profits. This means that a:
A. | business-stealing externality has occurred |
B. | product-variety externality has occurred |
C. | predatory pricing externality has occurred |
D. | consumption externality has occurred |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
62. There are externalities associated with entry into a monopolistically competitive market. The product-variety externality arises because:
A. | new firms offer products different to the existing firms, and consumers value choice |
B. | incumbent firms offer a range of differentiated products, which is valued by consumers |
C. | entry increases competition and lowers prices, which benefits all consumers |
D. | firms post a price above marginal cost and are eager to sell too many units |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
63. When the gain from a product-variety externality exceeds the loss from a business stealing externality in a monopolistically competitive market:
A. | market efficiency is likely to be enhanced by the entrance of new firms in the market |
B. | the market structure is likely to be in transition |
C. | firms are more likely to operate at efficient scale |
D. | there are likely to be too many firms in the market |
DIF: Difficult TOP: Monopolistic competition and the welfare of society
64. The entry of new firms into a monopolistically competitive market is characterised by:
A. | only private profit opportunities |
B. | both positive and negative externalities |
C. | only positive externalities |
D. | only negative externalities |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
65. The product-variety externality associated with monopolistic competition arises because in monopolistically competitive markets:
A. | entry and exit are not restricted |
B. | firms produce at excess capacity |
C. | firms try to differentiate their products |
D. | firms produce homogeneous products |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
66. The business-stealing externality associated with monopolistic competition arises because in monopolistically competitive markets:
A. | profit-maximising firms charge a price higher than marginal cost |
B. | profit-maximising firms produce differentiated products |
C. | there are few barriers to entry |
D. | profit-maximising firms produce at a less-than-efficient scale |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
67. A new brewing company announces that it is releasing a new organic ale into the beer market. You can assume that the market for beer is characterised by monopolistic competition. According to the information provided, beer consumers are likely to experience what kind of externality as a result of the new ale?
A. | product-variety |
B. | business-stealing |
C. | market price |
D. | advertising |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
68. A new brewing company announces that it is releasing a new organic ale into the beer market. You can assume that the market for beer is characterised by monopolistic competition. According to the information provided, existing brewing companies are likely to experience what kind of externality as a result of the new ale?
A. | product-variety |
B. | competitive |
C. | advertising |
D. | business-stealing |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
69. A new brewing company announces that it is releasing a new organic ale into the beer market. You can assume that the market for beer is characterised by monopolistic competition. According to the information provided, the beer market is likely to be more efficient if the:
A. | product-variety externality exceeds the business-stealing externality |
B. | business-stealing externality exceeds the product-variety externality |
C. | competitive externality exceeds the advertising externality |
D. | advertising externality exceeds the competitive externality |
DIF: Difficult TOP: Monopolistic competition and the welfare of society
70. A new brewing company announces that it is releasing a new organic ale into the beer market. You can assume that the market for beer is characterised by monopolistic competition. As a result of the new organic ale, product-variety externalities would be manifest in the new product:
A. | duplicating the flavours of the most expensive products in the beer market |
B. | duplicating the flavours of the least expensive products in the beer market |
C. | if its flavours were no different to the alternatives in the beer market |
D. | generating flavours that are different to other products in the beer market |
DIF: Moderate TOP: Monopolistic competition and the welfare of society
71. When firms in a monopolistically competitive market are said to experience excess capacity, this fact is:
A. | not relevant when firms price above marginal cost |
B. | likely to be minimised when firms experience a U-shaped average cost curve |
C. | not directly relevant to evaluating economic welfare |
D. | the foundation for evaluating economic welfare of the market structure |
DIF: Moderate TOP: Excess capacity
72. Excess capacity:
A. | is a characteristic of rising average total cost curves |
B. | is solely a characteristic of mark-up pricing |
C. | tells economists little about the desirability of a market outcome |
D. | is the primary source of market inefficiency in monopolistically competitive markets |
DIF: Easy TOP: Excess capacity
73. If firms sell highly differentiated consumer goods, then one significant cost to all such firms is likely to be:
A. | sales taxes |
B. | advertising |
C. | transport |
D. | wages |
DIF: Easy TOP: Monopolistic competition and the welfare of society
74. When advertising is deceptive, critics claim that it:
A. | makes buyers less sensitive to price differences |
B. | lowers the quality of goods in the market |
C. | alters a firm’s supply curve |
D. | increases competition in the market |
DIF: Easy TOP: Advertising
75. If the principal effect of advertising is to decrease the elasticity of demand, the critics argue that firms will be able to:
A. | lower their advertising budget |
B. | charge a lower mark-up over marginal cost |
C. | increase their advertising budget |
D. | charge a larger mark-up over marginal cost |
DIF: Moderate TOP: Advertising
76. When advertising is used to strengthen brand loyalty:
A. | consumers become less sensitive to price differences among similar goods |
B. | demand for the product becomes more elastic |
C. | firms should lower price to increase revenue |
D. | consumer demand for related products is typically unaffected |
DIF: Moderate TOP: Brand names
77. Advertising will be more common in markets that are:
A. | homogenous |
B. | expensive |
C. | industrial |
D. | highly differentiated |
DIF: Moderate TOP: Advertising
78. If an economic justification for advertising is that it enhances the ability of a market to allocate resources, then advertising is probably:
A. | manipulating people’s tastes |
B. | increasing elasticity of supply |
C. | conveying information about price, the existence of new products or locations of retail outlets |
D. | addressing psychological rather than informational characteristics of the good |
DIF: Moderate TOP: The defence of advertising
79. When advertising encourages customers to become more informed about all firms in the market:
A. | demand curves for specific brands in the market are likely to become less elastic |
B. | each firm is likely to have less market power |
C. | firms are able to foster stronger brand loyalty |
D. | the market power of individual firms is strengthened |
DIF: Moderate TOP: The defence of advertising
80. Professional organisations and producer groups have an incentive to:
A. | restrict advertising in order to enhance competition on the basis of price |
B. | encourage advertising in order to reduce competition on the basis of price |
C. | encourage advertising in order to enhance competition on the basis of price |
D. | restrict advertising in order to reduce competition on the basis of price |
DIF: Moderate TOP: The critique of advertising
81. When firms in a monopolistically competitive market engage in price-related advertising, defenders of advertising argue that:
A. | the quality of products sold in the market always increases |
B. | customers are less likely to be informed about other characteristics of the product |
C. | each firm has less market power |
D. | new firms are discouraged from entering the market |
DIF: Moderate TOP: The defence of advertising
82. An important criticism of advertising is that in some markets it may:
A. | expand brand loyalty |
B. | attract products of lower quality in the market |
C. | increase elasticity of demand |
D. | drive market prices down |
DIF: Easy TOP: Brand names
83. Advertising that uses celebrity endorsements is most likely intended to:
A. | provide a signal of product quality |
B. | be useful only for psychological effects |
C. | increase elasticity of demand for the advertised product |
D. | reduce the ability of markets to allocate resources efficiently |
DIF: Moderate TOP: Advertising as a signal of quality
84. An important defence of advertising is that it is not rational for profit-maximising firms to spend money on advertising for products that:
A. | are superior quality |
B. | have low prices |
C. | have high prices |
D. | are inferior quality |
DIF: Easy TOP: Advertising as a signal of quality
85. One theory of advertising suggests that:
A. | information on price is always a requisite for effective advertising |
B. | celebrity advertising is not effective in retail food markets |
C. | the content of advertising may be irrelevant to product success in the market |
D. | Uncle Toby’s and Sanitarium should not advertise new cereals |
DIF: Moderate TOP: Advertising as a signal of quality
86. Critics of markets that are characterised by firms that sell brand-name products argue that brand names encourage consumers to pay more for branded products that:
A. | are indistinguishable from generic products |
B. | are very different from generic products |
C. | have elastic demand curves |
D. | consumer advocate groups have found to be inferior |
DIF: Moderate TOP: Brand names
87. A recent outbreak of hepatitis was linked to a national fast-food restaurant chain. This is an example where:
A. | brand name identity increases the effectiveness of markets |
B. | advertising is ineffective in salvaging perceptions of product quality |
C. | advertising cannot be used to establish brand loyalty |
D. | brand name identity can be detrimental to the profitability of a firm |
DIF: Difficult TOP: Brand names
88. Critics of vacation advertisements that depict ‘beautiful’ human bodies on sun-drenched beaches as the primary focus of the message are likely to claim that the purpose of the advertisement is to:
A. | inflame carnal desire |
B. | encourage sunbathing in general |
C. | provide helpful information about a tourist destination |
D. | manipulate people’s tastes through psychological messages |
DIF: Moderate TOP: The critique of advertising
89. Advertising as a signal of quality is an example of:
A. | profit maximising behaviour by firms |
B. | gullibility on behalf of consumers |
C. | firms attempting to manipulate consumer tastes |
D. | inefficient market practices |
DIF: Moderate TOP: Advertising as a signal of quality
90. If advertising reduces a consumer’s price sensitivity between identical goods, it is likely to:
A. | enhance competition and reduce social wellbeing |
B. | enhance competition and increase social wellbeing |
C. | impede competition and increase social wellbeing |
D. | impede competition and reduce social wellbeing |
DIF: Moderate TOP: Brand names
91. If a firm in a monopolistically competitive market uses advertising to decrease elasticity of demand for its product:
A. | it will be able to increase its mark-up over marginal cost |
B. | the firm will eventually have to lower its price to remain competitive |
C. | it will increase the wellbeing of society |
D. | it will reduce average total cost |
DIF: Moderate TOP: The critique of advertising
92. When advertising is cheap:
A. | it is more likely to impede market power |
B. | consumers are more able to focus on informational content |
C. | consumers learn to ignore it over time |
D. | all of the above are likely to be true |
DIF: Moderate TOP: Advertising as a signal of quality
93. In some countries, brand name fast-food restaurants are not allowed to operate. Such restrictions are likely to:
A. | enhance the choice set of consumers among local restaurants |
B. | reduce barriers to entry in imperfect markets |
C. | reduce the competitive nature of local fast-food markets |
D. | enhance the social wellbeing of society |
DIF: Moderate TOP: Brand names
94. Eunice consumes Coke exclusively. She claims that there is a clear taste difference and that competing brands of cola leave an unsavoury residual taste in her mouth. However, in a blind taste test, Eunice is found to prefer generic store-brand cola to Coke eight out of 10 times. The results of Eunice’s taste test would reinforce claims by critics of brand names that:
A. | consumers are always willing to pay more for brand names |
B. | brand names cause consumers to perceive differences that do not really exist |
C. | brand names are a form of socially efficient advertising |
D. | brand names cause consumers to be more sensitive to product differences |
DIF: Difficult TOP: Brand names
95. Edward consumes Arnott’s Tim Tams exclusively. He claims that there is a clear taste difference and that competing brands of chocolate biscuits leave an unsavoury residual taste in his mouth. However, in a blind taste test, Edward is found to prefer generic store brand chocolate biscuits to Tim Tams eight out of ten times. The results of Edward’s taste test would be consistent with which of the following statements?
A. | consumers of brand name products are likely to be uninformed about the quality of competing generic products |
B. | consumers of brand name products do not know their true preferences |
C. | consumers may choose brand names to ensure the general quality of the product |
D. | all of the above are consistent |
DIF: Difficult TOP: Brand names
96. You intend travelling to Shanghai, China, to sell parts to local motor vehicle manufacturers. Your travel agent provides a list of 120 local hotels and a Sheraton. In this case, the Sheraton brand-name is likely to be used as a signal of:
A. | quality when quality cannot be easily judged |
B. | perceived differences that are not likely to exist among your various options |
C. | inefficiency in markets characterised by recognisable brand names |
D. | the quality of general lodging accommodations in Shanghai |
DIF: Moderate TOP: Brand names
97. You are trying to decide whether to buy a new camera for your trip. You have a choice of a new Canon or a camera made by a generic manufacturer. You buy the Canon but unfortunately, the camera’s shutter quickly breaks and you decide to buy a different brand camera to replace it. This example would reinforce the claim that:
A. | brand names are a signal of quality |
B. | firms have a financial stake in maintaining the reputation of their brand names |
C. | brand names always maintain consistent quality |
D. | none of the above are true |
DIF: Moderate TOP: Brand names
98. Brand names are likely to ensure product quality:
A. | only in pure market-based economies |
B. | only in mixed economies |
C. | only in developed economies |
D. | in a diverse set of economic structures |
DIF: Easy TOP: Brand names
99. Brand names that existed in communist countries were typically associated with:
A. | the name of the firm that manufactured the product |
B. | very isolated products |
C. | products that were largely homogeneous |
D. | private manufacturers only |
DIF: Difficult TOP: Brand names
100. What is the main point of difference between a monopolistically competitive market and an oligopoly?
A. | the oligopolist has downward-sloping demand curve |
B. | the oligopolist produces where marginal revenue exceeds marginal cost |
C. | there are many buyers only in a monopolistically competitive market |
D. | there are many sellers in a monopolistically competitive market |
DIF: Easy TOP: The monopolistically competitive firm in the short run
101. Suppose a current-affairs investigation reveals that in a market that was monopolistically competitive all the goods are actually homogenous, that is, there is no differentiation between them. In the short run, the market is then most likely to represent:
A. | a competitive market |
B. | a duopoly |
C. | a monopoly |
D. | a monopolistically competitive market |
DIF: Moderate TOP: The monopolistically competitive firm in the short run
102. When a new firm enters a monopolistically competitive market, the individual demand curves faced by all existing firms in that market will:
A. | shift in an unpredictable direction |
B. | shift to the right |
C. | shift to the left |
D. | remain unchanged; only the supply curve will shift |
DIF: Easy TOP: The monopolistically competitive firm in the short run
103. Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to a shift in:
A. | its supply curve |
B. | its demand curve |
C. | its average cost curve |
D. | all of the above |
DIF: Easy TOP: The long-run equilibrium
104. In the long run, the output of a monopolistically competitive firm will be:
A. | less than the efficient scale at zero economic profit |
B. | greater than the efficient scale at a positive economic profit |
C. | equal to the efficient scale at a zero economic profit |
D. | consistent with diseconomies of scale |
DIF: Easy TOP: The long-run equilibrium
105. Fill in the blanks. A monopolistically competitive firm, unlike a ________, could increase the quantity it produces and lower the ____________:
A. | perfectly competitive firm, average total cost |
B. | monopoly firm, average total cost |
C. | perfectly competitive firm, average fixed cost |
D. | monopoly firm, average fixed cost |
DIF: Moderate TOP: The long-run equilibrium
106. Because a monopolistically competitive firm has some market power, in the long run the price of its good exceeds its:
A. | average revenue |
B. | total cost |
C. | average cost |
D. | marginal cost |
DIF: Moderate TOP: The long-run equilibrium
107. In the long run, the profit for a monopolistically competitive firm moves to the competitive level due to:
A. | moving demand for its product |
B. | rising average total cost |
C. | rising average variable cost |
D. | the cost of advertising |
DIF: Moderate TOP: The long-run equilibrium
108. A small number of sellers in a market makes rigorous competition:
A. | less likely and strategic interactions among them vitally important |
B. | less likely and strategic interactions among them unimportant |
C. | more likely and strategic interactions among them vitally important |
D. | more likely and strategic interactions among them unimportant |
DIF: Moderate TOP: Introduction
109. A monopolistically competitive firm chooses its production level the same way as a(n):
A. | duopolist |
B. | oligopolist |
C. | perfectly competitive firm |
D. | monopolist |
DIF: Easy TOP: Conclusion
110. New firms will necessarily enter a monopolistically competitive market when price exceeds:
A. | marginal cost |
B. | marginal revenue |
C. | average total cost |
D. | average revenue |
DIF: Easy TOP: The long-run equilibrium
111. Which two curves are tangent in a monopolistically competitive market with zero economic profit?
A. | demand and marginal revenue |
B. | demand and total revenue |
C. | demand and average total cost |
D. | demand and average fixed cost |
DIF: Easy TOP: The long-run equilibrium
112. A downward-sloping demand curve:
A. | is common to all monopolistically competitive firms |
B. | is common to all monopoly firms |
C. | causes price to exceed marginal revenue |
D. | all of the above are true |
DIF: Easy TOP: Introduction
113. As in a monopoly market, monopolistically competitive firms:
A. | earn economic profit in the long run |
B. | sell their product at a price that equals marginal cost |
C. | are generally driven by altruistic motives |
D. | find that price and marginal revenue are not necessarily equal |
DIF: Easy TOP: Conclusion
SHORT ANSWER
1. What is the similarity between a long-run equilibrium in a monopolistically competitive market with a monopoly? What is the difference?
DIF: Moderate TOP: The monopolistically competitive firm in the short run
2. Monopolistically competitive markets have two main sources of inefficiency: mark-up over marginal cost, and externalities associated with entry of new firms. Explain how these inefficiencies can have an impact on total welfare (Hint: there are both positive and negative externalities associated with firms entering the market).
DIF: Moderate TOP: Monopolistic competition and the welfare of society
3. Are the resources devoted to advertising wasted? Explain how advertising may not be of social value.
DIF: Moderate TOP: Advertising as a signal of quality
4. What two characteristics describe the long-run equilibrium in a monopolistically competitive market? What markets (monopoly, competitive, or oligopoly) does the monopolistically competitive market share each characteristic with?
DIF: Moderate TOP: The long-run equilibrium
5. For many years, Pepsi operated a ‘taste-test’ booth across the US. Visitors to the booth would be encouraged to take a blind ‘taste-test’ between Pepsi and its primary market competitor, Coke.
Pepsi then used the taste-test results in advertising Pepsi. What advertising theory does such an approach support? Pepsi no longer uses this as an advertising strategy, instead relying on celebrity endorsements and other forms of advertising. What advertising theory do you think now dominates the market between Pepsi and Coke? Explain.
DIF: Moderate TOP: Advertising as a signal of quality
6. Use a graph to demonstrate why a profit-maximising monopolistically competitive firm must operate at excess capacity. Explain why a perfectly competitive firm is not subject to the same constraint.
DIF: Difficult TOP: Excess capacity
7. In a small university town, four micro-breweries have opened in the last two years. Demonstrate the effect of these new market entrants on demand for incumbent firms (micro-breweries) that already served this market.
Assume that the local community now places a moratorium on new liquor licenses for micro-breweries. How will this moratorium affect the long-run profitability of incumbent firms?
DIF: Difficult TOP: The long-run equilibrium
8. In many university towns, private independent bookstores typically locate on the periphery of the campus. However, in some university towns, the university has used political power to restrict private bookstores near the campus through community zoning laws. Use your knowledge of markets to predict the price and quality of service difference in the market for university textbooks under these two different market regimes.
DIF: Difficult TOP: Conclusion
9. In markets where the government imposes an excise tax on unit sales, it also has a tendency to dabble with restrictions on advertising (e.g. of cigarettes and liquor). Do potential (or actual) restrictions on advertising in these markets serve the interest of a government that is interested in maximising its tax revenue from the sale of these products? Explain your answer.
DIF: Difficult TOP: Brand names
10. As developing countries make the transition to market-based economies, one of the first major capital investments is in ‘Western-quality’ hotels. Explain why the establishment of brand-name hotel accommodation is a critical step in attracting foreign investment.
DIF: Moderate TOP: Brand names
11. The costs and benefits of advertising are still open to debate. What are the critiques of advertising? If advertising contains no information about the product, is it necessarily welfare destroying?
DIF: Moderate TOP: Advertising
12. What is meant by the term ‘excess capacity’ as it relates to monopolistically competitive firms?
DIF: Moderate TOP: Excess capacity