Principles of Microeconomics, 11e -TB1 (Case/Fair/Oster) Chapter 15 Monopolistic Competition

15.1 Industry Characteristics

1) The restaurant industry is an example of a(n) ________ industry. A) perfectly competitive B) monopolistic C) monopolistically competitive D) oligopolistic Answer: C

2) A monopolistically competitive industry has all of the following characteristics EXCEPT:A) there are no barriers to entry.B) strategic behavior.C) product differentiation.D) a large number of firms.Answer: B

3) A(n) ________ industry does NOT have price as a decision variable. A) perfectly competitively B) monopolistic C) monopolistically competitive D) oligopolistic Answer: A

4) There is easy entry into the ________ and ________ industries. A) perfectly competitive; monopolistically competitive B) monopolistically competitive; oligopolistic C) oligopolistic; monopolistic D) monopolistic; perfectly competitive Answer: A

5) Monopolistic competition differs from perfect competition primarily because in A) monopolistic competition, firms can differentiate their products. B) perfect competition, firms can differentiate their products. C) monopolistic competition, entry into the industry is blocked. D) monopolistic competition, there are relatively few barriers to entry. Answer: A

8) In monopolistic competition, firms can have some market power A) by virtue of size alone. B) by producing differentiated products. C) because of barriers to entry into the industry. D) because of barriers to exit from the industry.

Answer: B

11) In a monopolistically competitive industry, A) firms are large relative to the total market. B) firms are small relative to the total market. C) firms can be either large or small relative to the total market. D) there is only one firm. Answer: B

12) Monopolistically competitive firms use a(n) ________ strategy to achieve market power. A) product differentiation B) dominant C) maximin D) opportunistic behavior Answer: A

2) In order to achieve market power, monopolistically competitive firms use ________.A) their sizeB) product differentiationC) strategic behaviorD) predatory pricingAnswer: B

3) In well-functioning markets, all of the following reflect the degree of product variety EXCEPT:A) differences in consumers' tastes.B) cost economies from standardization.C) gains from network externalities.D) gains from coordination.Answer: C

4) Product differentiation that makes the product better for some consumers and worse for others isA) always welfare decreasing.B) vertical differentiation.C) horizontal differentiation.D) never undertaken by firms.Answer: C

6) Product differentiation can be used by firms to do all of the following EXCEPT:A) gain market share.B) erect barriers to entry for potential firms.C) provide consumers with commitment devices.D) gain complete control over the price of their product.

Answer: D

9) The case for product differentiation does NOT include the fact that A) products that satisfy a real demand survive. B) standards of living rise with product innovation. C) new products satisfy people with different preferences. D) it wastes society's scarce resources. Answer: D

15.3 Price and Output Determination in Monopolistic Competition

1) Compared to a perfectly competitive firm, the demand schedule of a monopolistically competitive firm faces isA) more price elastic.B) less price elastic.C) perfectly price elastic.D) perfectly price inelastic.Answer: BDiff: 2Topic: Price and Output Determination in Monopolistic CompetitionSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-15

2) The demand facing a monopolistically competitive firm is ________ a monopolistic firm and ________ a perfectly competitive firm.A) as elastic as; less elastic thanB) less elastic than; more elastic thanC) more elastic than; less elastic thanD) more elastic than; as elastic asAnswer: CDiff: 2Topic: Price and Output Determination in Monopolistic CompetitionSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-15

3) Unlike a monopolistic firm's product, a monopolistically competitive firm's product A) is homogeneous. B) is a unique product. C) has many close substitutes. D) has no close substitutes. Answer: CDiff: 2

Topic: Price and Output Determination in Monopolistic CompetitionSkill: ConceptualAACSB: Reflective ThinkingLearning Outcome: Micro-15

4) A profit‐maximizing firm in a monopolistically competitive market structure behaves much like a ________ in the short run.A) perfectly competitive firmB) monopolistic firmC) dominant firmD) Cournot duopolistAnswer: BDiff: 2

5) The pizza delivery industry is monopolistically competitive. Little Joe's Pizzeria raises its prices by 10%, but all the other pizzerias in town keep their prices the same. Which of the following is most likely to occur? A) Little Joe's Pizzeria will not be able to sell any pizzas, because it was the only firm to raise its price.B) Little Joe's Pizzeria will lose some of its customers.C) Little Joe's Pizzeria's profits will increase.D) The number of customers served by Little Joe's Pizzeria will increase.Answer: B

6) A monopolistically competitive firm produces where A) marginal revenue equals price. B) its marginal revenue curve lies above its demand curve. C) its marginal revenue curve intersects the quantity axis. D) marginal revenue equals marginal cost.Answer: D

7) A monopolistically competitive firm maximizes profit where A) MR > MC. B) MC > MR. C) MR = MC. D) P = MC. Answer: C

8) If P > ATC, then a profit maximizing, monopolistically competitive firm earns ________ economic profits.A) positiveB) negativeC) zeroD) either positive or negativeAnswer: A

Refer to the information provided in Figure 15.1 below to answer the questions that follow. Below are cost curves for Dom's Barber Shop, a monopolistically competitive firm.

Figure 15.1

18) Refer to Figure 15.1. The profit-maximizing number of haircuts for Dom's Barber Shop isA) 20.B) 23.C) 25.D) 30.Answer: A

19) Refer to Figure 15.1. The profit-maximizing price for a haircut is A) $10. B) $12. C) $14. D) $16. Answer: D

20) Refer to Figure 15.1. If Dom's Barber Shop is maximizing profit, it is earning a profit of A) $0. B) $80. C) $120. D) $320. Answer: B

21) Refer to Figure 15.1. If Dom's Barber Shop is maximizing profit, its total revenue equals A) $200. B) $320. C) $350. D) $360. Answer: BDiff: 2

22) Refer to Figure 15.1. If Dom's Barber Shop is maximizing profit, its total costs are A) $200. B) $240. C) $350. D) $360. Answer: B

23) Refer to Figure 15.1. From society's point of view, the efficient level of output is A) 20 haircuts. B) 23 haircuts. C) 25 haircuts. D) 30 haircuts. Answer: C

24) Refer to Figure 15.1. In this industry, in the long run,A) firms will continue to earn economic profits. B) firms will enter until all firms earn a normal profit. C) demand for the product will decrease so that profits are decreased. D) the government will impose price controls to eliminate any economic profits. Answer: B

Refer to the information provided in Figure 15.2 below to answer the questions that follow.

Figure 15.2

25) Refer to Figure 15.2. The profit-maximizing number of perms for We Do Hair, a monopolistically competitive firm, isA) 60.B) 50.C) 46.D) 40.Answer: D

26) Refer to Figure 15.2. At We Do Hair, a monopolistically competitive firm, the profit-maximizing price for a perm isA) $32.B) $28.C) $24.D) $20.Answer: A

27) Refer to Figure 15.2. If We Do Hair is maximizing profit as a monopolistically competitive firm, it is earning a profit ofA) $180.B) $220.C) $320.D) $480.Answer: C

28) Refer to Figure 15.2. If We Do Hair is maximizing profit as a monopolistically competitive firm, its total revenue equalsA) $1,280.B) $1,320.C) $1,200.D) $600.Answer: A

29) Refer to Figure 15.2. If We Do Hair is maximizing profit as a monopolistically competitive firm, its total costs areA) $1,200.B) $960.C) $800.D) $660.Answer: B

30) Refer to Figure 15.2. From society's point of view, the efficient level of output is A) 40 perms. B) 50 perms. C) 60 perms. D) 80 perms. Answer: B

31) Refer to Figure 15.2. In this monopolistically competitive industry, in the long run, A) firms will enter until all firms earn a normal profit. B) firms will continue to earn economic profits. C) demand for the product will decrease so that profits are decreased. D) the government will impose price controls to eliminate any economic profits. Answer: A

Refer to the information provided in Figure 15.3 below to answer the questions that follow.

Figure 15.3

33) Refer to Figure 15.3. Gwen's Country Curtains is currently manufacturing 1,000 pairs of curtains per month. This firm A) should reduce the number of pairs of curtains it manufacturers to maximize profit. B) should increase the number of pairs of curtains it manufacturers to maximize profit. C) should continue to produce 1,000 pairs of curtains; it is already maximizing profits. D) could increase profits by either increasing or decreasing the number of pairs of curtains it manufactures.Answer: C

34) Refer to Figure 15.3. In the long run, this monopolistic competitive firm should expect A) nothing to change; it will continue to make a profit. B) firms to exit the industry and profits to increase. C) firms to enter the industry until all economic profits are eliminated. D) firms to enter the industry and profits to increase. Answer: CDiff: 2

Refer to the information provided in Figure 15.5 below to answer the questions that follow.

Figure 15.5

42) Refer to Figure 15.5. Assume the Custom Sweater Shop has fixed costs of $500 and is a monopolistically competitive firm. To maximize profits in the short run, this firm should produce ________ personalized sweaters. A) 0 B) 100 C) 140 D) 150 Answer: B

43) Refer to Figure 15.5. Assume the Custom Sweater Shop has fixed costs of $500 and is a monopolistically competitive firm. To maximize profits in the short run, this firm should set a price of A) $36. B) $44. C) $46. D) $50. Answer: C

44) Refer to Figure 15.5. Assume the Custom Sweater Shop has fixed costs of $500 and is a monopolistically competitive firm. If this firm is producing the profit-maximizing level of output and selling it at the profit-maximizing price, the firm's profit is A) -$400. B) -$350. C) -$500. D) -$50. Answer: A

45) Refer to Figure 15.5. Assume the Custom Sweater Shop has fixed costs of $275 and is a monopolistically competitive firm. To maximize profits in the short run, this firm should produce ________ personalized sweaters. A) 0 B) 50

C) 75 D) 100 Answer: A

46) Refer to Figure 15.5. Assume the Custom Sweater Shop has fixed costs of $275 and is a monopolistically competitive firm. If this firm is producing the profit-maximizing output level, the firm's profit is A) -$275.B) -$100.C) -$75.D) $0.Answer: A

48) Refer to Figure 15.5. If the Custom Sweater Shop is monopolistically competitive, what is the minimum level of fixed cost that would lead to the firm continuing to operate in the short run?A) $400B) $4600C) $5000D) The firm would continue to operate regardless of the level of fixed costs.Answer: A

49) If firms in a monopolistically competitive industry are incurring losses, in the long run A) investment in this industry will increase to reduce production costs. B) firms will leave this industry until the remaining firms are earning a normal profit. C) firms will leave this industry until the firms that remain are earning a positive economic profit. D) the government will subsidize the losses incurred by these firms so as to maintain competition in the industry.Answer: B

50) As new firms enter a monopolistically competitive industry, the demand curve facing each existing firm will A) shift to the left and become more elastic because there are now more substitutes for its product. B) shift to the left and become less elastic because there are now more substitutes for its product. C) not be affected because the new firms do not produce a perfect substitute for its product. D) shift to the left, but the elasticity of demand will not be affected.Answer: A

51) If firms in a monopolistically competitive industry are earning economic profits, then in the long run A) these firms can continue earning economic profits because entry into the industry is blocked. B) new firms producing close substitutes will enter the industry and this entry will continue until economic profits are eliminated. C) new firms producing the exact same product will enter the industry and this entry will continue until economic profits are eliminated. D) the government will most likely regulate firms in this industry to reduce these economic profits.Answer: B

52) As new firms enter a monopolistically competitive industry, the demand A) and marginal revenue curves facing each firm begin to shift to the right. B) curve facing each firm begins to shift to the right but the marginal revenue curve remains constant.

C) and marginal revenue curves facing each firm begin to shift to the left. D) curve facing each firm shifts to the left, but the marginal revenue curve remains constant.Answer: C

53) For a monopolistically competitive firm in long-run equilibrium, A) the demand curve must intersect the average total cost curve at the ATC curve minimum. B) the demand curve must be tangent to the average total cost curve at the ATC curve minimum. C) at the profit-maximizing quantity, the demand curve must intersect the average total cost curve. D) at the profit-maximizing quantity, the demand curve must be tangent to the average total cost curve.Answer: D

Refer to the information provided in Figure 15.6 below to answer the questions that follow.

Figure 15.6

54) Refer to Figure 15.6. If Trollio's T-shirts is in long-run equilibrium, it is producing ________ silk-screened T-shirts and selling each T-shirt at a price of ________.A) 20; $5B) 50; $10C) 50; $16D) 60; $15Answer: C

55) Refer to Figure 15.6. If Trollio's T-shirts is producing 50 silk-screened T-shirts and selling each T-shirt at $16, then in the long run this firm shouldA) exit the industry, as it is earning a zero economic profit.B) increase output to 60 silk-screened T-shirts.C) reduce output to try to increase profits.D) continue to produce 50 silk-screened T-shirts and sell each T-shirt for $16.Answer: D

56) In long run monopolistic competition equilibrium, there can be A) economic profits, but not losses. B) economic profits or losses. C) no economic profits, but losses. D) neither economic profits nor losses. Answer: D

57) Monopolistically competitive firms prevent the efficient use of resources because in long-run equilibrium,A) price is less than marginal cost.B) price is greater than marginal cost.C) price equals marginal cost.D) marginal cost is greater than average total cost.Answer: B

58) When monopolistically competitive firms earn ________ economic profits, other firms ________ an industry in the long run.A) positive; enterB) zero; enterC) negative; enterD) zero; exitAnswer: A

59) Firms will ________ a monopolistically competitive market until ________ are eliminated. A) enter; losses B) enter; profits C) exit; short run profits D) exit; long run profits Answer: B

60) When MR = MC and P = ATC for a monopolistically competitive firm, the firm is in A) short‐run disequilibrium. B) long‐run disequilibrium. C) long‐run equilibrium. D) neither short‐run nor long‐run equilibrium. Answer: C

61) In long‐run equilibrium for a monopolistically competitive firm, the firm's demand curve is ________ its average total cost curve.A) aboveB) belowC) just tangent toD) either above or belowAnswer: C

62) When some firms exit a monopolistic competitive industry, the demand curves of the remaining firms in the industry ________.A) do not changeB) shift to the leftC) shift downwardD) shift to the rightAnswer: D

3) Monopolistically competitive firms in long‐run equilibrium produce at ________ the optimal scale.A) more thanB) exactlyC) less thanD) sometimes more and sometimes less thanAnswer: C

4) Monopolies can earn positive economic profits in the long run while monopolistically competitive firms cannot due toA) economies of scale in monopolies but not in monopolistic competition.B) barriers to entry in monopoly but not in monopolistic competition.C) market power of monopolies while monopolistically competitive firms have no market power.D) the less elastic demand faced by monopolies as compared to monopolistically competitive firms.Answer: B