Chapter 14
Choose the correct statement.
A brand name provides an incentive to the producer to achieve high and consistent quality.
In monopolistic competition _______.
each firm has limited power to influence the price of its product
Excess capacity is the amount by which the _____ exceeds the quantity that the firm produces.
efficient scale
Markup is the amount by which price _____ cost
exceeds marginal
Starbucks' new plan will ______ product differentiation and ______, which will increase economic profit.
increase; increase demand
The figure shows the situation facing a producer of running shoes. In the market for running shoes, all the firms face a similar demand curve and have similar cost . In the long run, how does the number of firms producing running shoes change? In the long run, the number of firms producing running shoes ______.
increases because the economic profit that the firm is making encourages entry
There is a price markup over marginal cost in monopolistic competition because at the profit-maximizing quantity _______.
marginal revenue equals marginal cost and with a downward-sloping demand curve, price exceeds marginal revenue
Complete the sentence. In the long run, a firm in monopolistic competition _______.
produces a profit-maximizing output that is less than its efficient scale
Which of the following industries is an example of monopolistic competition?
shampoo
A signal is an action taken by an _____ person (or firm) to send a message to _____ people.
informed; uninformed
Firms in monopolistic competition compete in three areas, which are _______.
quality, price, and marketing
Tommy Hilfiger uses advertising as a signal because ______.
by spending large sums on advertising Tommy Hilfiger is signaling that its jackets are high quality
Why might product development be efficient and why might it be inefficient? Product development is efficient if the marginal social benefit from an improved product _______. Product development is inefficient because in monopolistic competition, _______.
equals its marginal social cost; profit is maximized when marginal revenue equals marginal cost, and marginal revenue is less than price
How does a firm in monopolistic competition decide how much to produce and at what price to offer its product for sale? A firm in monopolistic competition _______.
produces the output at which marginal revenue equals marginal cost, and charges the price that buyers are willing to pay for this quantity
How, other than by adjusting price, do firms in monopolistic competition compete? Other than by adjusting price, the two main ways in which a firm in monopolistic competition competes with other firms are by ______ and ______.
product development; advertising
Which of the following firms produce at the efficient scale?
Dell produces 100 computers a week at which its average total cost is minimized.
Having a brand name helps Tommy Hilfiger increase its economic profit because _______.
a brand name provides an incentive to achieve high and consistent quality, and consumers will purchase goods from Tommy Hilfiger rather than from an unknown producer because they know what to expect from Tommy Hilfiger
Are advertising and brand names efficient? Advertising and brand names ______.
can be efficient but are not always efficient
In the short run, a firm in monopolistic competition ______.
can incur an economic loss
The Shoe that Won't Quit I finally decided to buy a pair of Uggs, but when I got around to shopping for my Uggs, the style that I wanted was sold out. The scarcity factor is a strategy by Ugg's parent Deckers Outdoor that is one of the big reasons behind the brand's success. Deckers tightly controls distribution to ensure that supply does not outstrip demand. If Deckers ever opened up the supply of Uggs to meet demand, sales would shoot up like a rocket, but they'd come back down just as fast. Deckers intentionally restricts the quantity of Uggs that it sells to _______.
differentiate its product
Food's Next Billion-Dollar Brand? While it's not the biggest brand in margarine, Smart Balance has an edge on its rivals in that it's made with a patented blend of vegetable and fruit oils that has been shown to help improve consumers' cholesterol levels. Smart Balance sales have skyrocketed while overall sales for margarine have stagnated. It remains to be seen if Smart Balance's healthy message and high price will resound with consumers. How do you expect advertising and the Smart Balance brand name will affect Smart Balance's ability to make a positive economic profit? Advertising and the Smart Balance brand name ______ for Smart Balance because ______.
increase demand and may increase economic profit; advertising is a signal that Smart Balance improves cholesterol levels
Product differentiation ________.
is making a product that is a close substitute but not a perfect substitute for the products of other firms
The market for sugar ______ an example of monopolistic competition. The market for athletic footwear ______ an example of monopolistic competition.
is not; is
The market for hydroelectricity ______ an example of monopolistic competition. The market for jewelry ______ an example of monopolistic competition.
is not; is
Food's Next Billion-Dollar Brand? While it's not the biggest brand in margarine, Smart Balance has an edge on its rivals in that it's made with a patented blend of vegetable and fruit oils that has been shown to help improve consumers' cholesterol levels. Smart Balance sales have skyrocketed while overall sales for margarine have stagnated. It remains to be seen if Smart Balance's healthy message and high price will resound with consumers. Source: Fortune, June 4, 2008 Are long-run economic profits a possibility for Smart Balance? In long-run equilibrium, will Smart Balance have excess capacity or a markup? In the long run, economic profit ______ a possibility for Smart Balance. In the long run, Smart Balance ______ have excess capacity.
is not; does has
Hair gel ______ sold by firms in monopolistic competition because_______.
is; many firms produce differentiated hair gel and entry into the market is easy
If in the short run, firms in monopolistic competition _______, then in the long run, new firms will enter the market.
make an economic profit
In the new long-run equilibrium, firms _______.
make zero economic profit
In monopolistic competition in the long run, firms _______.
make zero economic profit and have excess capacity
The graph shows the marginal cost curve, average total cost curve, demand curve, and marginal revenue curve of a firm in monopolistic competition. In the short run, a firm in monopolistic competition _______.
makes its output and price decision just like a monopoly firm does
Is the market for running shoes efficient or inefficient in the long run? Explain your answer. In the long run, the market for running shoes _______.
might be efficient if the loss that arises because the quantity of running shoes produced is less than the efficient quantity is offset by the gain that arises from having a greater degree of product variety
All the existing firms in a monopolistically competitive market advertise, and the number of firms in the market increases. The demand for any one firm's product decreases such that the price-maximizing quantity for any one firm decreases. Complete the sentences. The demand faced by any one firm becomes _______ elastic. The profit-maximizing price _______ and the markup _______.
more decreases; decreases
Why can a firm in monopolistic competition make an economic profit only in the short run? When firms in monopolistic competition are making positive economic profit in the short run, ______.
new firms enter, and the demand for the good produced by each firm decreases until price equals average total cost
Is monopolistic competition efficient? Monopolistic competition might be efficient if _______.
the loss that arises because the quantity produced is less than the efficient quantity is offset by the gain that arises from having a greater degree of product variety
The ______ the good produced by each individual firm will ______.
demand for; decrease
Suppose that Tommy Hilfiger's marginal cost of a jacket is a constant $75.00 and the total fixed cost at one of its stores is $2,5002,500 a day. This store sells 2525 jackets a day, which is its profit-maximizing number of jackets. Then the stores nearby start to advertise their jackets. The Tommy Hilfiger store now spends $2,000 a day advertising its jackets, and its profit-maximizing number of jackets sold jumps to 6565 a day. What is this store's average total cost of a jacket sold before the advertising begins and after the advertising begins. >>> Answer to 2 decimal places. Can you say what happens to the price of a Tommy Hilfiger jacket, Tommy's markup, and Tommy's economic profit?
Before the advertising begins, the average total cost of a jacket sold in this store is $175.00. After the advertising begins, the average total cost of a jacket sold in this store is $144.23. If the nearby firms' advertising decreases the demand for Tommy Hilfiger jackets and makes the demand more elastic, the price of a Tommy Hilfiger jacket ______. If Tommy Hilfiger's advertising increases the demand for Tommy Hilfiger jackets and makes the demand less elastic, the price of a Tommy Hilfiger jacket _____. falls; rises If the price falls, Tommy Hilfiger's markup falls. If the price rises, Tommy Hilfiger's markup rises. In the long run, Tommy's economic profit is $0.
Choose the correct statement.
If advertising is a signal, it doesn't need any specific product information.
Which of the following is an example of product differentiation?
I prefer Nike shoes while my friend prefers Puma shoes.
Explain how advertising influences the demand for a firm's product.
Successful advertising increases demand for the firm's product and increases economic profit. New firms enter the market, and demand decreases for any one firm in the market.
______ sold by firms in monopolistic competition because _______.
are not; in the apple market each firm produces an identical product
Wake Up and Smell the Coffee Every change that Starbucks made over the past few yearslong dash—automated espresso machines, preground coffee, drive-throughs, fewer soft chairs and less carpetinglong dash—was made to smooth operations or boost sales. Those may have been the right choices at the time, but they diluted the coffee-centric experience. By 2008, Starbucks experienced a drop in traffic as customers complained that the company has strayed too far from its roots. Starbucks will once again grind beans in its stores for drip coffee, give free drip refills, and provide two hours of wi-fi. Source: Time, April 7, 2008 Explain how Starbucks' past attempts to maximize profits ended up eroding product differentiation. Explain how Starbucks' new plan intends to increase economic profit.
becoming more like the competition; decreased demand for its coffee
Firms in monopolistic competition compete on ______ and firms ______ .
product quality, price, and marketing; are free to enter and exit
Explain how selling costs influence a firm's cost curves and its average total cost. Selling costs ______ and ______ average total cost.
shift the total fixed cost curve and the total cost curve upward; may increase, decrease, or not change
Why do firms in monopolistic competition operate with excess capacity? Firms in monopolistic competition operate with excess capacity because _______.
the demand curve is downward sloping, which in the long run makes marginal cost less than average total cost
The graph shows a firm's average total cost curves with advertising and without advertising. Without advertising, the firm sells 25 pairs of shoes a day. If the firm advertises and sells 100 pairs a day, how do costs change?
total cost increases, but average total cost decreases
Advertising expenditures are _______ costs and the per unit cost _______ as production increases.
fixed; decreases
The four-firm concentration ratio for garden centers is 1212 and for CD manufacturers it is 6868. The HHI for garden centers is 7272 and for CD manufacturers it is 2,8572,857. Which of these markets is an example of monopolistic competition? The garden center market ______ an example of monopolistic competition. The CDCD market ______an example of monopolistic competition.
is; is not
Monopolistic competition is a market in which a _____ number of firms compete by making similar but slightly _____ products.
large; different
Monopolistic competition is a market structure in which a ______ number of firms compete and each firm produces a ______ product.
large; differentiated
The graph shows the long-run situation facing a producer of running shoes. In the market for running shoes, all the firms face a similar demand curve and have similar cost curves. Draw a vertical arrow that shows the firm's markup at the profit-maximizing quantity. Label it. A firm's markup is the amount by which ______ exceeds ______.
price; marginal cost no markup