Test Bank – Chapter 17 Monopolistic Competition 9th Ed - Foundations of Microeconomics 9e | Test Bank with Answer Key by Robin Bade by Robin Bade. DOCX document preview.
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Foundations of Microeconomics, 9e (Bade)
Chapter 17 Monopolistic Competition
17.1 What Is Monopolistic Competition?
1) An industry with a large number of firms, differentiated products, and free entry and exit is called
A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
E) monopolistic oligopoly.
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
2) One characteristic of monopolistic competition is that it has
A) many firms producing a slightly differentiated product.
B) many firms producing identical goods.
C) one firm producing a unique good.
D) a few firms producing a slightly differentiated product.
E) large barriers to entry.
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
3) Which market structure is characterized by the following characteristics?
i. a large number of firms compete
ii. each firm produces a differentiated product
iii. firms are free to enter and exit
A) perfect competition
B) duopoly
C) oligopoly
D) monopolistic competition
E) monopoly
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
4) In monopolistic competition, each firm supplies a small part of the market. This occurs because
A) there are barriers to entry.
B) there are no barriers to exit.
C) there are a large number of firms.
D) firms produce differentiated products.
E) there are a large number of buyers.
Topic: Monopolistic competition, definition
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
5) Monopolistic competition is a market structure in which
A) firms face barriers to entry.
B) a large number of firms compete.
C) firms produce and sell an identical product.
D) firms face perfectly elastic demand for their product.
E) the firms have no ability to influence the price of their product.
Topic: Monopolistic competition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
6) Monopolistic competition is defined as a type of market structure in which
A) many firms produce the good.
B) firms produce a homogeneous good.
C) there are barriers to entry.
D) firms can make an economic profit in the long run.
E) firms can easily enter the market but cannot easily exit from it.
Topic: Monopolistic competition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
7) What does monopolistic competition have in common with perfect competition?
A) a large number of firms and freedom of entry and exit
B) a standardized product
C) product differentiation
D) the ability to make an economic profit in the long run
E) barriers to exit but no barriers to entry
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
8) What does monopolistic competition have in common with monopoly?
A) a large number of firms
B) a downward-sloping demand curve
C) the ability to collude with respect to price
D) mutual interdependence
E) barriers to entry
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
9) If a large number of firms are competing, the market could be
A) perfect competition or monopolistic competition.
B) perfect competition or monopoly.
C) monopolistic competition or oligopoly.
D) monopolistic competition or monopoly.
E) oligopoly or monopoly.
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
10) In both monopolistic competition and perfect competition
A) firms sell identical products.
B) there is easy entry and exit.
C) firms are price takers.
D) firms face horizontal demand curves.
E) the marginal revenue curve and the demand curve are the same.
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
11) Which of the following is NOT a characteristic of monopolistic competition?
A) few firms compete
B) easy entry and exit
C) small market share
D) differentiated product
E) no barriers to entry or exit
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
12) A firm in monopolistic competition ________ influence its price and ________ influence the market average price.
A) can; can
B) can; cannot
C) cannot; can
D) cannot; cannot
E) can; only in the short run can
Topic: Monopolistic competition, definition
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
13) The women's dress industry is monopolistically competitive because each firm has
A) a large market share.
B) a very small market share.
C) no market share.
D) no competition for their market share.
E) struck a deal with the many other firms about what price will be charged.
Topic: Monopolistic competition, definition
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
14) It would be impossible for members of the fast-food industry to collude to fix prices because
A) there are too many fast-food firms in the market.
B) fast food is not durable.
C) there are not enough fast-food firms in the market.
D) the price of fast-food is too low.
E) demanders would not buy from firms that collude.
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
15) Because of the number of firms in monopolistic competition
A) each firm has a large market share.
B) it is possible for the firms to collude.
C) no one firm can dominate the market.
D) one firm has the ability to dictate market conditions.
E) each firm must carefully monitor what its competitors do.
Topic: Monopolistic competition, definition
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
16) In an industry with a large number of firms
A) each firm will produce a large quantity, relative to market demand.
B) one firm will dominate the market.
C) collusion is impossible.
D) competition is eliminated.
E) barriers to exit must exist.
Topic: Monopolistic competition, definition
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
17) The freedom of entry and exit in monopolistic competition means that firms
A) enter the market when economic losses are being incurred.
B) exit the market when economic profits are being made.
C) enter the market when firms are making zero economic profit.
D) can enter a market to compete for economic profits and leave when economic losses are being incurred.
E) find it easy to permanently make an economic profit.
Topic: Monopolistic competition, definition
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
18) In monopolistic competition, the products of different sellers are
A) identical.
B) similar but slightly different.
C) unique without any close or perfect substitutes.
D) perfect substitutes.
E) either identical or differentiated.
Topic: Product differentiation
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
19) A differentiated product has
A) many perfect substitutes.
B) no close substitutes.
C) no substitutes of any kind.
D) close but not perfect substitutes.
E) many different complements.
Topic: Product differentiation
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
20) Product differentiation involves making a product that is
A) slightly different from the products of competing firms.
B) no different than the products of competing firms.
C) very different from the products of competing firms.
D) completely different from the products of competing firms.
E) cheaper than the products of competing firms.
Topic: Product differentiation
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
21) Product differentiation means
A) firms sell products that are very dissimilar.
B) products sold by different firms are slightly different.
C) charging a higher price to consumers with high willingness to pay.
D) charging a lower price to consumers with low willingness to pay.
E) that a single firm sells many different types of products.
Topic: Product differentiation
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
22) Which of the following is the best example of a differentiated product?
A) beets in the local supermarket
B) diamonds
C) airlines
D) running shoes
E) electricity
Topic: Product differentiation
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
23) Because of product differentiation, firms
A) do not have to compete because their products are unique.
B) cannot compete on price.
C) can compete on the basis of quality.
D) are unable to compete by using advertising.
E) must compete on only price.
Topic: Product differentiation
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
24) Which of the following is TRUE about monopolistic competition but FALSE about perfect competition?
A) There are a large number of independently acting sellers.
B) There are no barriers to entry.
C) Firms can make an economic profit in the short run.
D) Firms compete on their product's price as well as its quality and marketing.
E) Firms cannot make an economic profit in the long run.
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
25) Product differentiation allows a firm to compete with another firm on the basis of
A) efficiency.
B) elasticity.
C) quality, price, and marketing.
D) the level of output and the price.
E) demand.
Topic: Product differentiation
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
26) In monopolistic competition, the presence of a large number of firms making a differentiated product means that
A) each firm can set the price of its particular product.
B) each firm must charge the same price.
C) the price is established by collusive behavior.
D) each firm must produce the same quantity.
E) firms cannot compete with each other on the basis of price.
Topic: Monopolistic competition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
27) In monopolistic competition, a firm can set the price for its product because of
A) easy entry and exit.
B) economic profits.
C) product differentiation.
D) many competitors.
E) the firm's upward sloping demand curve.
Topic: Monopolistic competition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
28) Firms in monopolistic competition have demand curves that are
A) horizontal.
B) vertical.
C) downward sloping.
D) upward sloping.
E) U-shaped.
Topic: Monopolistic competition, demand curve
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
29) As a firm in monopolistic competition sets the price for its product, the firm faces a tradeoff between
A) supply and demand.
B) efficiency and equity.
C) internal and external economies of scale.
D) price and the quantity it can sell.
E) its marginal revenue and its price.
Topic: Monopolistic competition, demand curve
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
30) An example of a firm in monopolistic competition is
A) your local water company.
B) the sole cable television company.
C) the many Chinese restaurants in San Francisco.
D) Kansas Power and Light, the sole provider of electricity in Kansas City.
E) Shaniq, a wheat farmer.
Topic: Monopolistic competition, examples
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
31) Which of the following is the best example of a monopolistically competitive industry?
A) land-based long distance telephone service
B) wheat farming
C) the local electricity producer
D) manufacturing of shirts
E) cable television
Topic: Monopolistic competition, examples
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
32) The United Company competes with many other firms each producing slightly different products. Firms freely enter and exit this industry. The type of industry United Company operates in is
A) a monopoly.
B) monopolistic competition.
C) oligopoly.
D) perfect competition.
E) oligopolistic monopoly.
Topic: Monopolistic competition, examples
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
33) Concentration ratios
A) refer to the concentration of customers in a certain area.
B) measure whether the market is dominated by a small number of firms.
C) measure the concentration of a large number of firms in a certain area.
D) have high values for perfect competition.
E) measure how concentrated a firm's sales are among certain types of goods.
Topic: Four-firm concentration ratio
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
34) The four-firm concentration ratio is the percentage of ________ accounted for by the four largest firms in an industry.
A) profit
B) supply
C) total revenue
D) total cost
E) marginal cost
Topic: Four-firm concentration ratio
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
35) If you have found the percentage of the value of total revenue accounted for by the four largest firms in an industry, you have calculated the
A) elasticity of demand.
B) elasticity of supply.
C) Herfindahl-Hirschman Index.
D) four-firm concentration ratio.
E) monopolistic concentration index.
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Revised
AACSB: Reflective thinking
36) If the four-firm concentration ratio of an industry is
A) near 100, the industry is considered very competitive.
B) less than 40, the industry is considered an oligopoly.
C) over 40, the industry is considered monopolistic competition.
D) less than 40, the industry is considered monopolistic competition.
E) close to 0, the industry is considered a monopoly.
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
37) Which of the following four-firm concentration ratios would be the best indication of a perfectly competitive industry?
A) 2 percent
B) 31 percent
C) 78 percent
D) 100 percent
E) 50 percent
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
38) Which of the following is correct?
A) Monopoly has a four-firm concentration ratio of 100.
B) Perfect competition has a four-firm concentration ratio near zero.
C) Monopolistic competition has a four-firm concentration ratio of more than 40.
D) Both answers A and B are correct.
E) Both answers A and C are correct.
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
39) If the four-firm concentration ratio equals 0.1 percent for the Mexican tomato industry, then this industry is best characterized as
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) either a monopoly or monopolistic competition.
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
40) Which of the following four-firm concentration ratios is consistent with monopolistic competition?
A) 100 percent
B) 75 percent
C) 25 percent
D) 0 percent
E) 91 percent
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
41) Which of the following four-firm concentration ratios would be the best indicator of an oligopoly?
A) 0.25 percent
B) 31 percent
C) 78 percent
D) 100 percent
E) 11 percent
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
42) If the four-firm concentration ratio for the market for diapers is 73 percent, then this industry is best characterized as
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) either a monopoly or monopolistic competition.
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
43) Which of the following four-firm concentration ratios would be the best indicator of a monopoly?
A) 0.25 percent
B) 31 percent
C) 78 percent
D) 100 percent
E) 89 percent
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
44) The table above shows the revenue figures for the top four firms along with a total for the remaining firms in the fast-food industry. What is the four-firm concentration ratio for the industry?
A) 200
B) 20 percent
C) 25 percent
D) 80 percent
E) 100 percent
Topic: Four-firm concentration ratio
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
45) What is the four-firm concentration ratio if the four largest firms in an industry account for 5 percent, 6 percent, 7 percent, and 8 percent of total revenue?
A) 26 percent
B) 174 percent
C) 1,680
D) There is enough information given to answer the question, but none of the answers above is correct.
E) There is not enough information given to answer the question.
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
Firm | Sales (millions of dollars) |
Firm 1 | 100 |
Firm 2 | 90 |
Firm 3 | 85 |
Firm 4 | 80 |
Other 50 firms | 645 |
46) The table above shows the revenue figures for a(n) ________ market because its four-firm concentration ratio is ________ percent.
A) competitive; 35.5
B) uncompetitive; 55
C) perfectly competitive; 15.5
D) concentrated; 55
E) perfectly competitive; 35.5
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
47) The square of the percentage market share of each firm summed over the 50 largest firms in a market is the
A) elasticity of demand value.
B) elasticity of supply value.
C) Herfindahl-Hirschman Index.
D) four-firm concentration ratio.
E) fifty-firm concentration ratio.
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
48) The Herfindahl-Hirschman Index measures market concentration in an industry by summing the square of the percentage market shares for
A) the 4 largest firms.
B) the 50 smallest firms.
C) the 4 smallest firms.
D) the 50 largest firms.
E) all firms in the market.
Topic: Herfindahl-Hirschman Index
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
49) The Herfindahl-Hirschman Index is the ________ of the percentage market share of each firm summed over the largest 50 firms in a market.
A) sum
B) square
C) square root
D) cube
E) negative
Topic: Herfindahl-Hirschman Index
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
50) If the Herfindahl-Hirschman Index in the market for single-use cameras equals 10,000, then the single-use camera industry is best characterized as
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) either a monopoly or monopolistic competition.
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
51) If the HHI for the widget industry is 1,200, then the market structure is
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) impossible to determine.
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
52) A market in which the Herfindahl-Hirschman Index exceeds 2,500 is considered to be
A) competitive.
B) not competitive.
C) moderately competitive.
D) purely competitive.
E) either a monopoly or monopolistic competition.
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Revised
AACSB: Reflective thinking
53) When the Herfindahl-Hirschman Index for an industry is
A) very small, the industry can be perfectly competitive.
B) very large, the industry can be perfectly competitive.
C) 10,000, the industry is perfectly competitive.
D) very small, the industry can be a monopoly.
E) above 5,000, the industry is considered not very competitive, and when it is below 5,000, the industry is considered very competitive.
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
54) If there are four firms in an industry with market shares of 50 percent, 40 percent, 5 percent, and 5 percent, the Herfindahl-Hirschman Index is
A) 100.
B) 4,150.
C) 25.
D) 3,450.
E) undefined because there are not 50 firms in the industry.
Topic: Herfindahl-Hirschman Index
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
55) What is the Herfindahl-Hirschman Index if the four firms in an industry account have market shares of 62 percent, 15 percent, 15 percent, and 8 percent?
A) 100
B) 4,358
C) 111,600
D) 2,822
E) 6,200
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
56) The three largest firms in an industry have market shares of 40 percent, 30 percent, and 2 percent. The remaining 47 firms in the industry each have a market share of 1 percent. The Herfindahl-Hirschman Index (HHI) for this industry is
A) 2,551.
B) 5,184.
C) 24,061.
D) 10,000.
E) 3,013.
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
57) Suppose there are 7 firms in the candy industry with the market shares shown above. What is the HHI for the industry?
A) 1,850
B) 2,000
C) 6,400
D) 100
E) 20
Topic: Herfindahl-Hirschman Index
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
58) A market is considered competitive if the Herfindahl-Hirschman Index (HHI) is ________ and its four-firm concentration ratio is ________.
A) high; high
B) high; low
C) low; high
D) low; low
E) between 30 percent and 70 percent; greater than 5,000
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
59) The U.S. Justice Department
A) scrutinizes any merger of firms in a market in which the four-firm concentration exceeds 25 percent.
B) uses only the Herfindahl-Hirschman Index when considering whether to challenge a merger.
C) is likely to challenge a merger if the Herfindahl-Hirschman Index exceeds 1,800.
D) Answers A and B are correct.
E) Answers B and C are correct.
Topic: Herfindahl-Hirschman Index
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
60) One problem with measures of market concentrations is that they do NOT
A) account for barriers to entry.
B) allow for all market types.
C) account for the difficulty in collecting total revenue data.
D) create meaningful comparisons across industries.
E) accurately measure concentration in markets with fewer than 4 firms.
Topic: Limitations of concentrations ratios
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
61) In monopolistic competition there
A) are many firms and many buyers.
B) are several large firms.
C) is one large firm.
D) might be many, several, or one firm.
E) are many firms but only a few buyers.
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
62) A firm in monopolistic competition has a ________ market share and ________ influence the price of its good or service.
A) large; can
B) large; cannot
C) small; can
D) small; cannot
E) large; might be able to
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
63) Product differentiation means
A) making a product that has perfect substitutes.
B) making a product that is entirely unique.
C) the inability to set your own price.
D) making a product that is slightly different from products of competing firms.
E) making your demand curve horizontal.
Topic: Product differentiation
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
64) Firms in monopolistic competition compete on
i. quality.
ii. price.
iii. marketing.
A) i and ii
B) ii only
C) ii and iii
D) i and iii
E) i, ii, and iii
Topic: Product differentiation
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
65) A firm in monopolistic competition has ________ demand curve.
A) a downward sloping
B) an upward sloping
C) a vertical
D) a horizontal
E) a U-shaped
Topic: Monopolistic competition, demand curve
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
66) The absence of barriers to entry in monopolistic competition means that in the long run firms
A) make an economic profit.
B) make zero economic profit.
C) incur an economic loss.
D) make either an economic profit or zero economic profit.
E) make either zero economic profit or incur an economic loss.
Topic: Monopolistic competition, long run profit
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
67) If the four-firm concentration ratio for the market for pizza is 28 percent, then this industry is best characterized as
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) oligopolistic competition.
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
68) Each of the ten firms in an industry has 10 percent of the industry's total revenue. The four-firm concentration ratio is
A) 80.
B) 100.
C) 1,000.
D) 40.
E) 10.
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
69) Each of the four firms in an industry has a market share of 25 percent. The Herfindahl-Hirschman Index equals
A) 3,600.
B) 100.
C) 625.
D) 25.
E) 2,500.
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
70) The larger the four-firm concentration ratio, the ________ competition within an industry; the larger the Herfindahl-Hirschman Index, the ________ competition within an industry.
A) more; more
B) more; less
C) less; more
D) less; less
E) The premise of the question is wrong because the four-firm concentration ratio applies only to markets with four firms in it and these markets are, by definition, not competitive.
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
71) Girlfriend's Salon is the only hair salon in Sunnyvale, a small town. Which of the following statements correctly describes a concentration measure for salons in Sunnyvale?
A) The measure would incorrectly show an uncompetitive market structure because many firms could open in Sunnyvale without any restrictions.
B) The measure would incorrectly show an uncompetitive market because the measure does not reflect the low prices charged at Girlfriend's Salon.
C) The measure would correctly show a monopoly exists in town because there are so few residents.
D) The measure would correctly show a monopoly exists because Girlfriend's revenues are low.
E) The measure would incorrectly show a perfectly competitive market exists because new salons can open and compete with Girlfriend's.
Topic: Limitations of concentrations ratios
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
17.2 Output and Price Decisions
1) For a monopolistically competitive firm, the demand curve
A) is a horizontal line.
B) has a positive slope.
C) is vertical.
D) has a negative slope.
E) is the same as the marginal revenue curve.
Topic: Monopolistic competition
Skill: Level 1: Definition
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
2) The marginal revenue curve facing a monopolistically competitive firm
A) lies on its demand curve.
B) lies above its demand curve.
C) lies below its demand curve.
D) is equal to its price curve.
E) is parallel to its demand curve.
Topic: Monopolistic competition
Skill: Level 1: Definition
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
3) When a firm maximizes its profit, which of the following is correct for firms in monopolistic competition and perfect competition?
A) P = MC for both types of firms.
B) P = MR = MC for firms in perfect competition, and P > MR = MC for firms in monopolistic competition.
C) MR = MC for firms in perfect competition and MR > MC for firms in monopolistic competition.
D) P > MR = MC for firms in both perfect competition and monopolistic competition.
E) P = ATC always for firms in both perfect competition and monopolistic competition.
Topic: Monopolistic competition
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
4) Firms in monopolistic competition determine the profit-maximizing level of output by producing
A) the same output level as rivals do.
B) where average total cost is minimized.
C) at the point of minimum average fixed cost.
D) where marginal revenue equals marginal cost.
E) where price equals average total cost.
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
5) In monopolistic competition, profit is maximized by producing so that marginal revenue
A) equals price.
B) is negative.
C) equals marginal cost and which are less than price.
D) equals average total cost but not marginal cost.
E) equals marginal cost and equals price.
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
6) A firm in monopolistic competition makes its decisions on quantity and price by
A) taking price as given from the market and producing where MR = MC.
B) taking both price and quantity as given from the market.
C) producing where MR = MC and setting the price for this quantity from the demand curve.
D) taking quantity as given from the market and setting the price for this quantity from the demand curve.
E) producing where MR = MC and setting the price so that P = MR = MC.
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
7) To maximize profit, a firm in monopolistic competition will produce the quantity where marginal revenue
A) is greater than marginal cost.
B) equals zero.
C) is less than marginal cost.
D) equals marginal cost.
E) equals average total cost.
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
8) If a monopolistically competitive seller's marginal cost is $3.56, the firm will increase its output if
A) its marginal revenue is less than $3.56.
B) its marginal revenue is equal to $3.56.
C) its marginal revenue is more than $3.56.
D) average total cost is less than $3.56.
E) Both answers A and D are correct.
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
9) If a monopolistically competitive seller's marginal cost is $3.56, the firm will decrease its output if
A) its marginal revenue is less than $3.56.
B) its marginal revenue is equal to $3.56.
C) its marginal revenue is more than $3.56.
D) its average total cost is equal to $4.00.
E) Both answers B and D are correct.
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
10) If a monopolistically competitive seller's marginal cost is $3.56, the firm will not change its output if
A) its marginal revenue is less than $3.56.
B) its marginal revenue is equal to $3.56.
C) its marginal revenue is more than $3.56.
D) its average total cost is equal to $3.56.
E) Both answers B and D are correct.
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
11) Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. Kevin will train how many clients per day?
A) 4
B) 6
C) 10
D) between 2 and 4
E) None of the above answers is correct.
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
12) Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. What price will Kevin charge per session?
A) $100
B) $60
C) $40
D) $20
E) $80
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
13) Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. If Kevin trains 5 clients per day, he will ________ his profit and will ________.
A) maximize; make zero economic profit
B) not maximize; make zero economic profit anyway
C) maximize; make an economic profit
D) not maximize; make an economic profit anyway
E) not maximize; incur an economic loss
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
14) The figure above shows a firm operating in a monopolistically competitive market. If the firm stays open, to maximize profit, the firm produces
A) 80 units sold at $80 per unit and incurs an economic loss of $20 per unit.
B) 100 units sold at $60 per unit.
C) 80 units sold at $40 per unit and makes an economic profit of $60 per unit.
D) 120 units in order to minimize cost.
E) 80 units sold at $40 per unit and incurs an economic loss of $60 per unit.
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Revised
AACSB: Application of knowledge
15) The figure above shows a firm operating in a monopolistically competitive market. If nothing changes, in the long run this firm
A) should increase production to 120 units in order to reduce its cost.
B) should stay open but decrease production below 80 units in order to reduce its cost.
C) will exit the market because it is currently incurring an economic loss in the short run.
D) will produce 100 units to eliminate the deadweight loss.
E) will charge $100 per unit to eliminate the loss.
Topic: Monopolistic competition, economic loss
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Revised
AACSB: Application of knowledge
16) The above figure shows a restaurant engaged in monopolistic competition with other restaurants. The equilibrium price at this restaurant is ________ per meal.
A) $20
B) $30
C) $50
D) less than $20
E) more than $50
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
17) The above figure shows a restaurant engaged in monopolistic competition with other restaurants. The equilibrium quantity at this restaurant is ________ meals per day.
A) less than 150
B) between 151 and 250
C) between 251 and 350
D) between 451 and 450
E) more than 451
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
18) The above figure shows a motel engaged in monopolistic competition with other motels. The equilibrium price at this motel is ________ per room.
A) $20
B) $30
C) $40
D) $50
E) $10
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
19) The above figure shows a motel engaged in monopolistic competition with other motels. The equilibrium quantity at this motel is ________ rooms per day.
A) 200
B) 300
C) 400
D) 500
E) 100
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
20) The above figure shows a motel engaged in monopolistic competition with other motels. The figure above shows the ________ equilibrium in which the motel is ________.
A) short-run; making an economic profit
B) short-run; making zero economic profit
C) long-run; making an economic profit
D) long-run; making zero economic profit
E) short-run; incurring an economic loss
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
21) The figure above shows Firm X, a firm that is maximizing profit. When it maximizes its profit (or minimizes its loss), the firm is making an economic ________ because it produces ________ units and charges ________ per unit.
A) loss; 100; $20
B) profit; 100; $10
C) profit; 100; $30
D) loss; 120; $28
E) loss; 110; $20
Topic: Monopolistic competition, economic loss
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Revised
AACSB: Analytical thinking
22) The figure above shows Firm X. The firm stays open, so we know that it is operating in the ________ because it ________.
A) short run; minimizes its loss when it produces 100 units
B) short run; maximizes profit when it produces 110 units
C) short run; minimizes its loss when it produces 110 units
D) long run; minimizes its loss when it produces 100 units
E) long run; maximizes profit when it charges $30 per unit
Topic: Monopolistic competition, economic loss
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Revised
AACSB: Analytical thinking
23) The figure above shows Firm X. The firm is a monopolistically competitive market. The firm makes an ________ in the short run if it is open but will ________ in the long run.
A) economic loss of $10 per unit; go out of business or make a zero economic profit
B) economic loss of $2 per unit; make an economic profit
C) economic profit $10 per unit; make zero economic profit
D) economic profit of $1,000; definitely go out of business
E) economic loss of $10 per unit; definitely face more competition
Topic: Monopolistic competition, economic loss
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Revised
AACSB: Analytical thinking
24) The major difference between monopolistic competition and monopoly is
A) monopoly is a price setter, and a firm in monopolistic competition is a price taker.
B) only a monopoly can make an economic profit in the long run.
C) only a firm in monopolistic competition can make an economic profit in the short run.
D) how the quantity of output is determined.
E) only firms in monopolistic competition are protected by barriers to entry.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
25) In the long run in monopolistic competition, firms
A) can make an economic profit.
B) incur an economic loss.
C) make zero economic profit.
D) shut down if they are making zero economic profit.
E) make either an economic profit or zero economic profit.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
26) If firms in monopolistic competition are making economic profits, eventually
A) they shut down.
B) they exit the industry.
C) the market turns into a monopoly.
D) new firms enter the industry.
E) the firms in the market increase their production so that their economic profit disappears.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
27) If a firm in monopolistic competition is making an economic profit
A) it is in the long run.
B) other firms can enter the market.
C) it can do so because it is "monopolistic" and other firms will have a hard time competing with it.
D) its average cost must exceed its marginal cost.
E) The question errs because firms in monopolistic competition cannot make an economic profit.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
28) In the long run, firms in monopolistic competition make zero economic profit because
A) firms are free to enter and exit.
B) their products are similar but slightly different.
C) of over-reliance on product marketing.
D) of collusion among the various sellers.
E) their demand curves are horizontal.
Topic: Monopolistic competition, efficiency
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
29) In long-run equilibrium, a firm in monopolistic competition makes
A) an economic profit but the economic profit is less than it would be if the firm was a monopoly.
B) an economic profit that is higher than what it would be if the firm was a monopoly.
C) zero economic profit.
D) an economic profit that is the same amount as it would be if the firm was a monopoly.
E) an economic profit, an economic loss, or zero economic profit.
Topic: Monopolistic competition, long run profit
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
30) In monopolistic competition there are ________ barriers to entry, so therefore in the long run, economic profit ________.
A) no; is substantial
B) no; equals zero
C) many; equals zero
D) many; is substantial
E) many; might be earned depending on the degree of product differentiation
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
31) In monopolistic competition, there are ________ barriers to entry and so firms in monopolistic competition ________ make an economic profit in the long run.
A) high; can
B) high; cannot
C) no; can
D) no; cannot
E) sometimes; can sometimes
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
32) Entry and exit continue in monopolistic competition until the remaining firms are
A) making an economic profit.
B) incurring an economic loss.
C) making less than a normal profit.
D) making zero economic profit.
E) producing the normal amount of product differentiation.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
33) A firm in monopolistic competition is similar to a firm in perfect competition because they both
A) can make only zero economic profit in the long run.
B) can make only zero economic profit in the short run.
C) maximize their profits by producing where P = MR = MC.
D) Both answers A and C are correct.
E) Both answers B and C are correct.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
34) The primary reason why monopolistically competitive firms cannot make an economic profit in the long run is because
A) there are barriers to entry.
B) there is freedom of entry.
C) the antitrust laws prevent profit from increasing.
D) recessions occur.
E) they collude to make a normal profit.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
35) In monopolistic competition, the entry of new firms
A) shifts existing firms' demand curves rightward.
B) shifts existing firms' demand curves leftward.
C) only results in a movement along the existing firms' demand curves.
D) has no effect on the existing firms' demand curves.
E) shifts existing firms' supply curves rightward.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
36) When a monopolistically competitive firm's demand curve shifts leftward, what happens to its marginal revenue curve?
A) Nothing, the marginal revenue curve is unchanged.
B) It disappears.
C) It shifts rightward.
D) It shifts leftward.
E) None of the above is correct because the effect on the marginal revenue curve depends on whether the demand was initially elastic or inelastic.
Topic: Monopolistic competition, long run
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
37) If firms in monopolistic competition are making economic profits, then
A) they can expect to earn the profits indefinitely.
B) new rivals enter the industry and the demand for any seller's good decreases.
C) the market demand becomes more inelastic.
D) the industry is in long-run equilibrium.
E) new rivals enter the industry and the demand for any seller's good increases.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
38) Nike is a firm in monopolistic competition. If Nike is making an economic profit from new cross-training shoe, over time the demand for these shoes
A) increases as new firms enter the market.
B) decreases as new firms enter the market.
C) does not change as new firms enter the market.
D) decreases as firms exit the market.
E) increases as firms exit the market.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
39) In the long run, firms in monopolistic competition make zero economic profit. When firms make zero economic profit, in the long run they exit the industry.
A) The first sentence is correct and the second sentence is incorrect.
B) The first sentence is incorrect and the second sentence is correct.
C) Both sentences are correct.
D) Both sentences are incorrect.
E) More information about the presence or absence of barriers to entry and exit is needed to determine if the statements are true or false.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
40) When firms in monopolistic competition incur an economic loss, some firms will
A) enter the industry and produce more products.
B) exit the industry, and demand will increase for the firms that remain.
C) exit the industry, and demand will decrease for the firms that remain.
D) enter the industry, and demand will become more elastic for the original firms.
E) exit the industry and other firms will enter.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
41) When firms in monopolistic competition are making an economic profit, firms will
A) enter the industry, and demand will increase for the original firms.
B) exit the industry, and demand will increase for the firms that remain.
C) exit the industry, and demand will decrease for the firms that remain.
D) enter the industry, and demand will decrease for the original firms.
E) enter the industry and then will exit the industry.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
42) At a long-run equilibrium in monopolistic competition, price equals
A) average total cost.
B) marginal cost but not marginal revenue.
C) marginal revenue but not marginal cost.
D) zero.
E) marginal revenue and marginal cost.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
43) In the long run, a firm in monopolistic competition will produce
A) where average total cost is minimized.
B) where price equals average total cost, but average total cost is not at its minimum.
C) zero output.
D) any possible amount of output.
E) where price equals marginal cost.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
44) Which of the following is NOT a characteristic of long-run equilibrium in monopolistic competition?
A) The firm makes zero economic profit.
B) Price is equal to average total cost.
C) Production occurs at minimum average total cost.
D) Marginal revenue is equal to marginal cost.
E) Price exceeds marginal revenue.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
45) In the long run, a firm in monopolistic competition will
A) produce so that its price equals marginal cost.
B) operate at the minimum of the long-run average cost.
C) overutilize its insufficient capacity.
D) produce so that its price equals average total cost.
E) be dependent on the other firms in the industry.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
46) Which of the following is TRUE about a firm in monopolistic competition in the long run?
A) P = MC
B) P = MR
C) ATC = MC
D) P = ATC
E) MC = ATC
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
47) In the long-run, a firm in monopolistic competition produces at an output level where
A) P > ATC and MR = MC.
B) P > ATC and MR > MC.
C) P = ATC and MR = MC.
D) P = ATC and MR > MC.
E) P = ATC and MC = ATC.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
48) Which of the following is TRUE of monopolistic competition in long-run equilibrium?
A) P = MR and P = MC
B) P > ATC and MR = MC
C) P = ATC and MR = MC
D) P = ATC and P = MC
E) P > ATC and P > MR
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
49) In monopolistic competition in the long run, firms
A) make zero economic profit and require more capacity.
B) incur an economic loss and require more capacity.
C) make an economic profit and have excess capacity.
D) make zero economic profit and have excess capacity.
E) make an economic profit and require more capacity.
Topic: Monopolistic competition, excess capacity
Skill: Level 1: Definition
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
50) A monopolistically competitive firm ________ have excess capacity because its ________.
A) does; demand curve is downward sloping
B) does not; demand curve is downward sloping
C) does; average total cost curve is U-shaped
D) does not; average total cost curve is U-shaped
E) does; marginal revenue curve lies below its demand curve
Topic: Monopolistic competition, excess capacity
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
51) The figure above shows Firm X. The ________ firm charges a markup of ________.
A) monopolistically competitive; $10 per unit because price exceeds marginal cost
B) monopolistically competitive; $20 per unit because prices exceeds average total cost
C) perfectly competitive; $10 per unit because price equals average total cost
D) perfectly competitive; $20 per unit because price exceeds average total cost
E) monopolistically competitive; $10 per unit because the demand curve lies above the marginal revenue curve
Topic: Monopolistic competition, markup
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
52) Excess capacity is the
A) difference between a perfectly competitive firm's short-run output and a monopolistically competitive firm's short-run output.
B) difference between a perfectly competitive firm's long-run output and a monopoly's long-run output.
C) output at the maximum point of the ATC curve.
D) difference between the price charged by a monopoly and a monopolistically competitive firm with the same costs.
E) None of the above answers is correct.
Topic: Monopolistic competition, excess capacity
Skill: Level 1: Definition
Section: Checkpoint 17.2
Status: Revised
AACSB: Reflective thinking
53) In the long run, firms in monopolistic competition produce at a level that is ________ the efficient scale of output.
A) less than
B) equal to
C) more than
D) not comparable to
E) All of the above are possible depending on market conditions.
Topic: Monopolistic competition, excess capacity
Skill: Level 1: Definition
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
54) For a firm in monopolistic competition, the efficient scale is the amount of output at which ________ is a minimum.
A) fixed cost
B) average total cost
C) average variable cost
D) average fixed cost
E) marginal cost
Topic: Monopolistic competition, excess capacity
Skill: Level 1: Definition
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
55) Excess capacity exists when a firm produces
A) more than the profit-maximizing level of output.
B) less than the quantity that minimizes average total cost.
C) less than the quantity that minimizes marginal cost.
D) more than the quantity that minimizes marginal cost.
E) None of the above answers is correct.
Topic: Monopolistic competition, excess capacity
Skill: Level 1: Definition
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
56) If a firm is maximizing its profit and producing less output than the amount that minimizes its average total cost, then that firm
A) must be suffering an economic loss.
B) must be earning an economic profit.
C) has excess capacity.
D) is producing at its capacity output.
E) must be earning a normal profit.
Topic: Monopolistic competition, excess capacity
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Revised
AACSB: Reflective thinking
57) Which of the following is correct?
A) A firm in monopolistic competition does not have excess capacity in the long run.
B) A firm in perfect competition operates at maximum average total cost in the long run.
C) In the long run, a firm in monopolistic competition that maximizes its profit has price equal to average total cost but the average total cost is not minimized.
D) In the long run, a firm in monopolistic competition makes zero economic profit and its price is equal to the minimum average total cost.
E) In the long run, a firm in monopolistic competition can make an economic profit because of product differentiation.
Topic: Monopolistic competition, excess capacity
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Revised
AACSB: Reflective thinking
58) Which of the following statements about a firm in long-run equilibrium is TRUE?
A) P > MC for a firm in monopolistic competition, and P = ATC for a firm in perfect competition
B) MR > P for a firm in monopolistic competition, and P = ATC for a firm in perfect competition
C) P = MC for firms in both monopolistic competition and perfect competition
D) P = MC for a firm in perfect competition, and P < ATC for a firm in monopolistic competition
E) Both answers A and B are correct.
Topic: Monopolistic competition versus perfect competition
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
59) A firm in monopolistic competition is
A) efficient because in the long run it makes zero economic profit.
B) efficient because it produces at the minimum average total cost.
C) inefficient because price exceeds marginal cost.
D) efficient because of the ease of entry.
E) efficient because it produces where MR = MC.
Topic: Monopolistic competition, efficiency
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
60) A monopolistically competitive firm is inefficient because the
A) firm makes positive economic profit in the long run.
B) firm produces the quantity that sets marginal cost equal to price.
C) is not maximizing its profits.
D) firm produces a product identical to that of its competitors.
E) production is not the amount that minimizes its average total cost.
Topic: Monopolistic competition, efficiency
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Revised
AACSB: Reflective thinking
61) Monopolistic competition is judged to be economically inefficient because
A) the price is greater than marginal cost.
B) firms make zero economic profit in the long run.
C) marginal revenue equals marginal cost.
D) firms have deficient capacity in the long run.
E) firms make an economic profit in the long run.
Topic: Monopolistic competition, efficiency
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
62) One of the major benefits to society of monopolistic competition is
A) high prices.
B) restricted output.
C) product differentiation.
D) the excess capacity.
E) the markup.
Topic: Monopolistic competition, efficiency
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
63) In monopolistic competition, there is inefficiency because price is greater than marginal cost. What brings about this inefficiency?
A) high concentration, as indicated by the large concentration ratio
B) product differentiation
C) freedom of entry and exit
D) marginal cost rises as more output is produced
E) the fact there are many firms in the market
Topic: Monopolistic competition, efficiency
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
64) Even though monopolistic competition results in inefficiency, it does have which of the following benefits for society?
A) Firms make zero economic profit in the long run.
B) Firms can make an economic profit in the short run.
C) Product variety benefits consumers.
D) Marginal cost equals price in the long run.
E) The premise of the question is incorrect because nothing in monopolistic competition justifies any economic inefficiency.
Topic: Monopolistic competition, efficiency
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
65) Which of the following is an advantage to society of monopolistic competition?
A) production at the lowest possible average cost
B) product variety
C) Only essential costs are incurred.
D) long-run profitability
E) The firms have excess capacity so they are always willing to increase their production.
Topic: Monopolistic competition, efficiency
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
66) A firm in monopolistic competition maximizes profit by equating
A) price and marginal revenue.
B) price and marginal cost.
C) demand and marginal cost.
D) marginal revenue and marginal cost.
E) price and average total cost.
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
67) Once a firm in monopolistic competition has determined how much to produce, the firm determines its price by referring to its
A) demand curve.
B) marginal cost curve.
C) marginal revenue curve.
D) average total cost curve.
E) average variable cost curve.
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
68) A firm in monopolistic competition definitely incurs an economic loss if
A) price equals marginal revenue.
B) price is less than average total cost.
C) marginal revenue equals marginal cost.
D) marginal revenue is less than average total cost.
E) price is greater than marginal cost.
Topic: Monopolistic competition, economic loss
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
69) In the long run, a firm in monopolistic competition
A) makes zero economic profit.
B) produces at a minimum average total cost.
C) has deficient capacity.
D) makes an economic profit.
E) produces a quantity where its demand curve is upward sloping.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Revised
AACSB: Reflective thinking
70) A firm's efficient scale of production is the amount of output at which its
A) marginal cost is at a minimum.
B) average total cost is at a minimum.
C) profit is maximized.
D) marginal revenue is at a maximum.
E) marginal revenue equals marginal cost.
Topic: Monopolistic competition, excess capacity
Skill: Level 1: Definition
Section: Checkpoint 17.2
Status: Revised
AACSB: Reflective thinking
71) In the long run, a firm in monopolistic competition ________ excess capacity and a firm in perfect competition ________ excess capacity.
A) has; has
B) has; does not have
C) does not have; has
D) does not have; does not have
E) might have; might have
Topic: Monopolistic competition versus perfect competition
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
72) In the long run, a firm in monopolistic competition ________ a markup of price over marginal cost, and a firm in perfect competition ________ a markup of price over marginal cost.
A) has; has
B) has; does not have
C) does not have; has
D) does not have; does not have
E) might have; might have
Topic: Monopolistic competition versus perfect competition
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
73) Monopolistic competition is efficient when compared to
A) perfect competition.
B) complete product uniformity.
C) the short run.
D) the long run.
E) None of the above answers is correct.
Topic: Monopolistic competition, efficiency
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Reflective thinking
74) The graph shows a profit-maximizing monopolistically competitive firm producing ________ units in a ________ equilibrium with ________.
A) 80; long-run; an excess capacity
B) 80; short-run; an excess capacity
C) 120; long-run; no excess capacity
D) 110; long-run; no excess capacity
E) 120; short-run; an excess capacity
Topic: Monopolistic competition, long run
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Application of knowledge
75) The graph above shows a
A) monopolistically competitive firm in the short run because there is excess capacity.
B) monopolistically competitive firm in the short run making an economic profit of $60 per unit.
C) perfectly competitive firm in the long run earning $0 economic profit.
D) monopolistically competitive firm in the long run making $0 economic profit.
E) monopolistically competitive firm in the short run making an economic profit of $80 per unit.
Topic: Monopolistic competition, long run
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Application of knowledge
76) Which of the following characteristics describe the competitive market shown in the graph above?
i. The market has easy entry and exit.
ii. A firm in this type of market has many competitors.
iii. The graph show the long run for this firm.
A) i, ii and iii
B) i and ii only
C) iii only
D) i and iii only
E) ii and iii only
Topic: Monopolistic competition, long run
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Revised
AACSB: Application of knowledge
77) The graph above shows a monopolistically competitive firm. Which of the following statements is TRUE?
A) To maximize profit, the firm makes 80 units at a price of $80 per unit.
B) The firm is operating in the long run.
C) There is excess capacity of 40 units.
D) A, B and C are true statements.
E) Only A and B are true.
Topic: Monopolistic competition, long run
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Application of knowledge
78) Use the graph above to answer this question. The firm is maximizing profit if it produces ________ units and as a result ________ occurs.
A) 80; inefficiency
B) 120; inefficiency
C) 110; inefficiency
D) 120; efficiency
E) 80; efficiency
Topic: Monopolistic competition, long run
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Application of knowledge
17.3 Product Development and Marketing
1) For a firm in monopolistic competition, innovation and product development are
A) senseless because economic profit is always zero in the long run.
B) necessary in order to have a chance of making at least a short-run economic profit.
C) inconsequential because each firm produces a different product.
D) necessary to allow new firms to enter.
E) uncommon because other firms already produce similar products.
Topic: Innovation and product development
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
2) To maintain their economic profits, firms in monopolistic competition must continually engage in
A) product development and marketing.
B) lowering their product's price.
C) raising their product's price.
D) realizing short-run losses.
E) making the demand for their product more elastic.
Topic: Innovation and product development
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
3) Bounty paper towels is an example of a good produced in ________ market. This means that the firm ________ engage in advertising which will ________.
A) a monopolistically competitive; will; increase average total cost
B) a monopolistically competitive; will; not change average total cost
C) a perfect competitively; will; increase average total cost
D) a perfect competitively; will not; create an efficient outcome
E) an oligopolistic; will not; create an efficient outcome
Topic: Monopolistic competition - innovation & advertising
Skill: Level 3: Using models
Section: Checkpoint 17.3
Status: Old
AACSB: Application of knowledge
4) Crest toothpaste, produced by Proctor & Gamble, is produced in a ________ market. This means that Proctor & Gamble must advertise in order to ________.
A) perfectly competitive; differentiate their product
B) monopolistically competitive; increase excess capacity
C) monopolistically competitive; differentiate their product
D) perfectly competitive; decrease the deadweight loss
E) monopoly; differentiate their product
Topic: Monopolistic competition - innovation & advertising
Skill: Level 3: Using models
Section: Checkpoint 17.3
Status: Old
AACSB: Application of knowledge
5) Smart phone manufacturers differentiate their products because
A) it is cheaper than using advertising.
B) this is required to keep operating in an oligopoly.
C) average total cost would otherwise increase.
D) they want to prevent competition from driving their economic profit to $0 in the long run.
E) it's the best way to signal their product's quality.
Topic: Monopolistic competition - innovation & advertising
Skill: Level 5: Critical thinking
Section: Checkpoint 17.3
Status: Old
AACSB: Analytical thinking
6) Nike hires professional athletes to advertise their products. What is Nike trying to accomplish with this advertising?
i. Increase the elasticity of demand for its product.
ii. Signal the products' quality.
iii. Decrease the products' markup.
A) ii only
B) i and ii
C) i, ii and iii
D) i and iii
E) ii and iii
Topic: Monopolistic competition - innovation & advertising
Skill: Level 5: Critical thinking
Section: Checkpoint 17.3
Status: Old
AACSB: Analytical thinking
7) Which of the following could occur when a monopolistically competitive firm decides to advertise?
A) Demand will become more elastic and average total cost will increase.
B) The firm's markup will increase.
C) Excess capacity will be eliminated.
D) A two-sided market can be created.
E) Decrease the market's deadweight loss.
Topic: Monopolistic competition - innovation & advertising
Skill: Level 5: Critical thinking
Section: Checkpoint 17.3
Status: Old
AACSB: Analytical thinking
8) The shampoo industry is constantly coming out with new products. The reason is that when a firm introduces a new shampoo into the market, the demand for the shampoo becomes ________ temporarily and economic profit ________.
A) more elastic; decreases
B) less elastic; increases
C) more elastic; increases
D) less elastic; decreases
E) unit elastic; increases
Topic: Innovation and product development
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
9) A firm is spending the profit-maximizing amount on product development when
A) people perceive the firm's product to be better than those of its competitors.
B) the marginal cost of product development is equal to the marginal revenue from product development.
C) the price of the good is higher than its marginal cost.
D) the advertising costs are covered.
E) the firm's total revenue exceeds its total costs.
Topic: Innovation and product development
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
10) Firms decide how much to spend on product development and marketing by
A) spending the same amount as they did in previous years.
B) spending the historical average of 1/4 of total production cost.
C) determining what it will take to eliminate excess capacity.
D) balancing the marginal cost and the marginal benefit of product development and marketing.
E) ensuring that the marginal cost of product development and marketing is less than or equal to the marginal cost of producing the good or service.
Topic: Innovation and product development
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Revised
AACSB: Reflective thinking
11) For a firm in monopolistic competition to undertake product development, the marginal cost to consumers of the development must be ________ the marginal benefit of the development to consumers.
A) greater than
B) less than
C) not comparable to
D) equal to or less than
E) None of the above because a monopolistically competitive firm undertakes product development if the marginal cost of the development is less than or equal to the marginal benefit to the firm from the development.
Topic: Innovation and product development
Skill: Level 3: Using models
Section: Checkpoint 17.3
Status: Revised
AACSB: Reflective thinking
12) Which of the following statements about product development in monopolistic competition is correct?
i. Firms in monopolistic competition undertake too much product development for efficiency.
ii. Firms in monopolistic competition undertake too little product development for efficiency.
iii. Product development might allow the firm to make a temporary economic profit.
A) i only
B) ii only
C) ii and iii
D) i and iii
E) iii only
Topic: Innovation and product development
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
13) A firm in monopolistic competition
A) has no control over the price of the product it is selling.
B) might be selling a brand name product.
C) does not advertise nor market its product.
D) Both answers A and B are correct.
E) Answers A, B, and C are correct.
Topic: Selling costs
Skill: Level 1: Definition
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
14) Firms attempt to create a consumer perception of product differentiation through
i. packaging.
ii. marketing.
iii. advertising.
A) i only
B) ii only
C) ii and iii
D) i and iii
E) i, ii, and iii
Topic: Selling costs
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
15) Advertising is a ________ cost that is incurred by ________.
A) variable; monopolies
B) variable; perfectly competitive firms
C) fixed; perfectly competitive firms
D) fixed; monopolistically competitive firms
E) marginal; monopolistically competitive firms
Topic: Selling costs
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
16) How do advertising and other selling costs affect a firm?
A) They shift the marginal cost curve upward.
B) The only effect is that the excess capacity is reduced.
C) The only effect is that the demand for the product increases.
D) They shift the average total cost curve upward.
E) They do not change demand and shift the average total cost curve downward.
Topic: Selling costs
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Analytical thinking
17) In which of the following ways do advertising and other selling costs affect a firm's cost curves?
i. Advertising expenditures increase total fixed costs.
ii. Selling costs increase total fixed costs.
iii. Advertising and other selling costs per unit of output decrease as output increases.
A) i only
B) i and ii
C) iii only
D) i and iii
E) i, ii, and iii
Topic: Selling costs
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Analytical thinking
18) In the long run, advertising by all firms in a monopolistically competitive industry
A) increases all firms' demand.
B) decreases all firms' demand.
C) lowers all firms' costs.
D) might increase or decrease the firms' prices.
E) lowers all firms' prices.
Topic: Selling costs
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
19) A sunglass manufacturer spends a lot of money to promote its brand name. This promotion ________ consumers because it ________.
A) helps; lowers marginal cost
B) harms; definitely increases average total cost
C) helps; provides a signal and information about the sunglasses
D) harms; increases the elasticity of demand
E) helps; is a fixed cost and not a variable cost
Topic: Efficiency of advertising
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
20) When weighing the efficiency of monopolistic competition, which of the following should be considered?
i. the information provided by advertising
ii. product variety
iii. the extra cost of excess capacity
A) ii only
B) i and iii
C) ii and iii
D) i, ii, and iii
E) iii only
Topic: Efficiency of advertising
Skill: Level 4: Applying models
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
21) Because economic profits are eliminated in the long run in monopolistic competition, to make an economic profit, firms continuously
A) shut down.
B) exit the industry.
C) develop and market new products.
D) declare bankruptcy.
E) decrease their costs by decreasing their selling costs.
Topic: Innovation and product development
Skill: Level 3: Using models
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
22) A firm in monopolistic competition that introduces a new and differentiated product will temporarily have a ________ demand for its product and is able to charge ________.
A) less elastic; a lower price than before
B) less elastic; a higher price than before
C) more elastic; a lower price than before
D) more elastic; a higher price than before
E) less elastic; the same price as before
Topic: Innovation and product development
Skill: Level 3: Using models
Section: Checkpoint 17.3
Status: Old
AACSB: Analytical thinking
23) The decision to innovate
A) depends on the marketing department's needs.
B) depends on whether the firm wants to benefit its customers.
C) is based on the marginal cost and the marginal revenue of innovation.
D) is unnecessary in a monopolistically competitive market.
E) None of the above answers is correct.
Topic: Innovation and product development
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
24) Advertising costs and other selling costs are
A) efficient.
B) fixed costs.
C) variable costs.
D) marginal costs.
E) considered as part of demand because they affect the demand for the good.
Topic: Selling costs
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
25) For a firm in monopolistic competition, selling costs
A) increase costs and reduce profits.
B) always increase demand.
C) can change the quantity produced and lower the average total cost.
D) can lower total cost.
E) have no effect on the quantity sold.
Topic: Selling costs
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
26) If advertising increases the numbers of firms in an industry, each firm's demand
A) increases.
B) does not change.
C) decreases.
D) might increase or decrease depending on whether the new firms produce exactly the same product or a product that is slightly differentiated.
E) None of the above answers is correct.
Topic: Advertising
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
27) One reason a company advertises is to
A) signal consumers that its product is high quality.
B) lower its total cost.
C) produce more efficiently.
D) lower its variable costs.
E) lower its fixed costs.
Topic: Advertising
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
28) The efficiency of monopolistic competition
A) is as clear-cut as the efficiency of perfect competition.
B) depends on whether the gain from extra product variety offsets the selling costs and the extra cost that arises from excess capacity.
C) comes from its excess capacity.
D) is eliminated in the long run.
E) is equal to that of monopoly.
Topic: Efficiency, the bottom line
Skill: Level 5: Critical thinking
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
29) Consider the monopolistically competitive market for blue jeans. The lack of efficiency of the blue jean market is evidenced by ________ which may be offset by ________.
A) excess capacity; variety and innovation
B) variety and innovation; excess capacity
C) the firms making zero economic profit; excess capacity
D) signalling; economic profits
E) advertising; economic profits
Topic: Monopolistic competition, efficiency
Skill: Level 5: Critical thinking
Section: Checkpoint 17.3
Status: Old
AACSB: Analytical thinking
30) Consider the monopolistically competitive market for running shoes. The market is considered inefficient because ________ but runners ________ which may make the inefficiency worthwhile.
A) excess capacity occurs; pay lower prices
B) a deadweight loss occurs; enjoy variety and innovation
C) consumers obtain variety; pay lower prices
D) demand is elastic; enjoy variety and innovation
E) signalling occurs; pay lower prices
Topic: Monopolistic competition, efficiency
Skill: Level 5: Critical thinking
Section: Checkpoint 17.3
Status: Old
AACSB: Analytical thinking
17.4 Chapter Figures
The figure above illustrates a firm's demand and marginal revenue curves and its cost curves.
1) If the firm in the figure above attempted to minimize its average total cost by producing 100 pairs of Tommy jeans per day at an average total cost of $20 per pair and it sold those jeans for $80 per pair, the firm would
A) make zero economic profit.
B) make a larger economic profit than a firm that produced 125 jeans because the ATC of producing 125 jeans is higher than the ATC of producing 100 jeans.
C) incur an economic loss.
D) make a smaller economic profit than a firm that produced 125 jeans.
E) achieve an efficient use of resources.
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
2) To maximize its profit, the firm in the figure above will produce ________ jeans and set a price of ________ per pair of jeans.
A) 150; between $50 and $25
B) 125; $25
C) 125; $50
D) 125; $75
E) None of the above answers is correct.
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
3) When the firm in the figure above maximizes its profit, it makes an economic profit of
A) $3,125.
B) $6,250.
C) $9,375.
D) $5,625.
E) None of the above answers is correct because the firm incurs an economic loss.
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
4) The darkened area in the figure above is the
A) deadweight loss.
B) firm's economic profit.
C) consumer surplus.
D) firm's total cost.
E) firm's total revenue.
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
The figure above shows a firm's demand and marginal revenue curves and its cost curves.
5) As long as the firm illustrated above remains open, it will set a price of ________ per month and it will ________.
A) $50; make an economic profit
B) $50; incur an economic loss
C) $40; make an economic profit
D) $40; incur an economic loss
E) less than $20; incur an economic loss
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
6) The firm illustrated above is
A) making an economic profit of $400,000 per month.
B) making an economic profit of $2,000,000 per month.
C) making an economic profit of $1,600,000 per month.
D) incurring an economic loss of $400,000 per month.
E) incurring an economic loss of $1,600,000 per month.
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
7) The darkened area in the figure above is the
A) deadweight loss.
B) firm's economic loss.
C) consumer surplus.
D) firm's total cost.
E) firm's total revenue.
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
8) If all firms in the industry have similar demand, marginal revenue, and cost curves as the firm in the figure above, in the long run
A) nothing changes.
B) some firms exit the industry, and the economic losses of the remaining firms decrease.
C) some firms exit the industry, and the economic profits of the remaining firms increase.
D) new firms enter the industry, and the economic losses of the original firms decrease.
E) new firms enter the industry, and the economic profits of the original firms increase.
Topic: Monopolistic competition, long run
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
17.5 Integrative Questions
1) In a market in which firms operate in monopolistic competition
A) the HHI for a single firm exceeds 2,500.
B) firms compete on price, quality and marketing.
C) in the long run, firms produce at their efficient scale.
D) in the long run, firms are not able to charge a markup.
E) advertising is nonexistent.
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
2) Firms in monopolistic competition
A) face a downward-sloping demand curve.
B) cannot charge a markup because there are no dominant firms.
C) definitely do not benefit from advertising.
D) produce at the efficient scale in the long run.
E) generally have low to nonexistent selling costs.
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
3) The clothing industry has many firms with differentiated products and no barriers to entry. The cereal industry has a few firms with either identical or differentiated products and moderate barriers to entry. The food industry is characterized as ________, and the cereal industry is characterized as ________.
A) perfect competition; monopolistic competition
B) monopolistic competition; oligopoly
C) oligopoly; monopolistic competition
D) perfect competition; perfect competition
E) monopolistic competition; monopoly
Topic: Integrative
Skill: Level 1: Definition
Section: Integrative
Status: Old
AACSB: Reflective thinking
4) Advertising costs
A) make the marginal revenue more elastic.
B) shift the ATC curve upward.
C) shift the marginal cost curve rightward.
D) indirectly shift the marginal cost curve upward.
E) affect the marginal cost but not the total cost.
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Analytical thinking
5) The above figure definitely shows
A) a long-run equilibrium for a monopolistically competitive firm.
B) an industry with few firms.
C) a long-run equilibrium for a perfectly competitive firm.
D) a long-run equilibrium for a perfectly competitive market.
E) a short-run equilibrium for a monopoly.
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
6) The firm in the above figure has excess capacity of ________ meals per day.
A) 0
B) between 1 and 10
C) between 11 and 20
D) more than 21 and 30
E) more than 31
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
7) The firm in the above figure has a markup of ________ per meal.
A) $0
B) $4
C) $8
D) $10
E) more than $10
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
8) The firm in the above figure has an economic profit of
A) $0.
B) $80.
C) $160.
D) more than $161.
E) less than zero, that is, the firm has an economic loss.
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Analytical thinking
9) Which of the following characterize a firm in monopolistic competition in the long run?
i. operating at the minimum efficient scale
ii. markups of price over marginal cost
iii. zero economic profit
A) i and ii
B) i and iii
C) ii and iii
D) i, ii, and iii
E) only ii
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Reflective thinking
10) Firms in which of the following industries can make an economic profit in the long run?
A) both monopolistic competition and monopoly
B) perfect competition
C) monopoly
D) monopolistic competition
E) monopolistic competition and perfect competition
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
11) If a firm has excess capacity, it
A) produces less than its efficient scale.
B) should advertise to maximize profits.
C) should decrease its markup to increase its profit.
D) is a perfectly competitive firm.
E) must face a horizontal demand curve.
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Reflective thinking
12) If a firm in the long run produces less than its efficient scale, it
A) should raise its markup to increase its profit.
B) should lower its markup to increase its profit.
C) cannot be a perfectly competitive firm.
D) should not advertise to increase its profit.
E) must have its markup equal to zero.
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Reflective thinking
13) A firm's markup is
A) the difference between average total cost with and without advertising.
B) the difference between demand and marginal revenue.
C) a signal of product quality.
D) the difference between price and marginal cost.
E) the result of producing less than the efficient scale.
Topic: Integrative
Skill: Level 2: Using definitions
Section: Integrative
Status: Old
AACSB: Reflective thinking
14) Crest Toothpaste offers new whitening toothpaste one year, a new gel swirl design the next year, and an improved cleaning formula the year after. Crest Toothpaste does this because it is
A) a monopoly trying to decrease its costs.
B) a perfectly competitive firm trying to increase its price.
C) a monopolistically competitive firm trying to maintain its economic profit.
D) driving its competitors out of business.
E) a perfectly competitive firm trying to increase its costs so it can increase its price.
Topic: Integrative
Skill: Level 3: Using models
Section: Integrative
Status: Old
AACSB: Reflective thinking
17.6 Essay: What Is Monopolistic Competition?
1) List four characteristics of monopolistic competition.
Topic: Monopolistic competition, definition
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Written and oral communication
2) "One of the defining features of monopolistic competition is product variety." Is the previous statement correct or incorrect?
Topic: Monopolistic competition, definition
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
3) How do the characteristics of perfect competition and monopolistic competition differ?
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Written and oral communication
4) Why is collusion about the price and amount of output impossible in monopolistic competition?
Topic: Monopolistic competition, definition
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
5) What do demand and marginal revenue curves look like in monopolistic competition? How do they compare to the demand and marginal revenue curves in perfect competition and monopoly?
In perfect competition, the product is homogeneous, which makes firms price-takers, able to sell as much as they wish at the market price. Therefore, marginal revenue equals price, and the marginal revenue curve and the demand curve are the same and are horizontal.
In monopoly, there is only one firm. The firm faces the market demand, which is steep, because there are no close substitutes for the good. The firm must lower its price to sell more, so for a single-price monopoly, the marginal revenue curve is beneath the demand curve.
Topic: Monopolistic competition, definition
Skill: Level 5: Critical thinking
Section: Checkpoint 17.1
Status: Old
AACSB: Written and oral communication
6) How would a merger between Coca-Cola and Pepsi Cola affect the four-firm concentration ratio for the soft drink market? How would it affect the Herfindahl-Hirschman Index for the soft drink market?
Topic: Four-firm concentration ratio
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Written and oral communication
7) What is the Herfindahl-Hirschman Index and what does it measure?
Topic: Herfindahl-Hirschman Index
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Written and oral communication
8) If the Herfindahl-Hirschman Index for an industry is 8,528, is the industry competitive or concentrated?
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
9) What is the difference between a four-firm concentration ratio and a Herfindahl-Hirschman Index?
Topic: Herfindahl-Hirschman Index
Skill: Level 1: Definition
Section: Checkpoint 17.1
Status: Old
AACSB: Reflective thinking
10) The four largest firms in an industry account for the following value of industry revenues: 12 percent, 8 percent, 5 percent and 4 percent. Calculate the four-firm concentration ratio. Would this industry be regarded as competitive or concentrated?
Topic: Four-firm concentration ratio
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
11) An industry's total revenue is $100 million. The above table shows the total revenue of the four largest firms in an industry.
a. Calculate this industry's four-firm concentration ratio.
b. Is this industry competitive?
c. What market type does it most likely represent?
a. The four-firm concentration rate is 30 percent.
b. Because the four-firm concentration ratio is relatively low, the industry is competitive.
c. The industry is most likely monopolistic competition.
Topic: Four-firm concentration ratio
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
12) An industry has only four firms, who have market shares of 45 percent, 25 percent, 20 percent, and 10 percent. What is the Herfindahl-Hirschman Index?
Topic: Herfindahl-Hirschman Index
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
13) Suppose there are ten firms that occupy the Odell, Oregon cherry pie market. The market share of each firm is listed in the above table.
a. What is the Herfindahl-Hirschman Index for this market?
b. If Firm H and Firm A merge, what is the new Herfindahl-Hirschman Index for this market?
c. A severe winter causes every firm except A, B, and E to close. With only these three firms operating, Firm A's market share is 71 percent, Firm B's market share is 23 percent, and Firm C's market share is 6 percent. What is the Herfindahl-Hirschman Index for this market now?
a. The Herfindahl-Hirschman Index is 1,782.
b. Once firms H and A merge, the new Herfindahl-Hirschman Index is 2,038.
c. The Herfindahl-Hirschman Index is now 5,606.
Topic: Herfindahl-Hirschman Index
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
14) Listed in the above table are the total revenues for the firms in two different industries. Each industry has only eleven firms. Find the four-firm concentration ratio and the Herfindahl-Hirschman Index for each industry.
Topic: Herfindahl-Hirschman Index
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
15) There are 9 firms in an industry with market shares in the table above. Calculate the HHI for the industry. What kind of market does this operate in and why?
Topic: Herfindahl-Hirschman Index
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
16) The Herfindahl-Hirschman Index is used as a guideline to determine if a market is competitive or concentrated. Calculate the index value for each market described below.
a. 100 firms, each of which produces 1 per cent of market output
b. 50 firms, each of which produces 2 per cent of market output
c. 25 firms, each of which produces 4 per cent of market output
d. 20 firms, each of which produces 5 per cent of market output
e. 10 firms, each of which produces 10 per cent of market output
f. 5 firms, each of which produces 20 per cent of market output
g. 2 firms, each of which produces 50 per cent of market output
a. 100 × 1 = 100
b. 50 × 4 = 200
c. 25 × 16 = 400
d. 20 × 25 = 500
e. 10 × 100 = 1,000
f. 5 × 400 = 2,000
g. 2 × 2,500 = 5,000
Topic: Herfindahl-Hirschman Index
Skill: Level 3: Using models
Section: Checkpoint 17.1
Status: Old
AACSB: Analytical thinking
17.7 Essay: Output and Price Decisions
1) "A firm in monopolistic competition maximizes its profit by producing where its price is equal to its marginal cost." Is the previous statement correct or incorrect?
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
2) How does a firm in monopolistic competition determine its price and quantity? What type of profit can it make in the short run and the long run?
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
3) What type of profit can a firm in monopolistic competition make in the long run? Explain your answer.
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
4) Why are firms in monopolistic competition unable to make an economic profit in the long run?
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
5) Why does a firm in monopolistic competition make zero economic profit rather than an economic profit in the long run?
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
6) What is excess capacity? What industry has excess capacity in the long run: perfect competition or monopolistic competition?
Topic: Monopolistic competition, excess capacity
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
7) For a firm in monopolistic competition, define efficient scale and excess capacity. Briefly explain each.
Topic: Monopolistic competition, excess capacity
Skill: Level 2: Using definitions
Section: Checkpoint 17.2
Status: Old
AACSB: Written and oral communication
8) The demand and cost schedules for a firm in monopolistic competition are in the above tables. What is the profit-maximizing level of output and price? What amount of profit is the firm making? Is this firm in a short-run or long-run equilibrium? Why?
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
9) The above figure represents Tony's Pizza Parlor, a firm in monopolistic competition.
a. What quantity will be produced?
b. What price will be charged?
c. What is Tony's total cost?
d. What is Tony's total revenue?
e. What is Tony's economic profit or loss?
f. Is this a long-run equilibrium? Why or why not?
a. 40 pizzas per day
b. $12.00 per pizza
c. $320
d. $480
e. Tony has an economic profit of $160.
f. This is not a long-run equilibrium because Tony is making an economic profit. In the long run, new firms will enter and Tony's economic profit will be eliminated.
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
10) Draw an example of a firm in monopolistic competition that is earning an economic profit. Be sure to label all the curves. Indicate the area that equals the firm's economic profit.
The completed figure is above.
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
11) The above figure represents a restaurant operating in monopolistic competition.
a. What is the profit-maximizing level of output?
b. What price will the firm charge?
c. What is the firm's profit (or loss)?
d. Is this a long-run equilibrium? Why or why not?
e. Is this firm producing its efficient scale of output?
a. The quantity is 20 meals a day.
b. The price is $12 per meal.
c. The firm is making zero economic profit, that is, the firm is earning a normal profit.
d. This is a long-run equilibrium because the firm is making zero economic profits so there is no incentive for either entry or exit.
e. No, the firm is not producing its efficient scale of output. It is producing less than the efficient scale. The efficient scale, where the average total cost is at is minimum, is 50 meals a day. Hence the firm has excess capacity.
Topic: Monopolistic competition, long run
Skill: Level 3: Using models
Section: Checkpoint 17.2
Status: Old
AACSB: Analytical thinking
17.8 Essay: Product Development and Marketing
1) How do product development and marketing affect a firm in monopolistic competition?
Topic: Innovation and product development
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
2) Why would a firm in a monopolistically competitive industry advertise?
Topic: Advertising
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
3) Explain the role of advertising in monopolistic competition. Describe how advertising by all firms in a monopolistically competitive industry impacts a firm's ATC curve, its MC curve, its demand curve, and its MR curve.
Advertising is a fixed cost and it shifts the ATC curve upward. Even though it shifts to the ATC curve upward, the total average cost might be lower if it increases the amount sold by enough. Because advertising is a fixed cost, it has no effect on the marginal cost, so the MC curve does not change. Because all firms advertise, advertising might or might not increase demand for a specific firm. When all firms advertise, the demand curve and marginal revenue curve for a specific firm become more elastic.
Topic: Advertising
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
4) Why are selling costs high in monopolistic competition?
Topic: Selling costs
Skill: Level 3: Using models
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
5) Explain how selling costs in monopolistic competition affect the efficiency of monopolistic competition.
Topic: Selling costs and efficiency
Skill: Level 2: Using definitions
Section: Checkpoint 17.3
Status: Old
AACSB: Reflective thinking
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Connected Book
Foundations of Microeconomics 9e | Test Bank with Answer Key by Robin Bade
By Robin Bade