Chapter 16

The quantity that minimizes average total cost

Efficient Scale

A situation where firms can enter the market without restriction

Free Entry

A market structure in which may firms sell products that are similar but not identical

Monopolistic Competition

15. For the economy as a whole, what percentage of firms revenue is spent on advertising? a. 1 percent b. 2 percent c. 4 percent d. 6 percent e. 10 percent

b. 2 percent

A market structure in which only a few sellers offer similar or identical products

Oligopoly

13. The use the word "monopoly" in the name of the market structure called "monopolistic competition to the fact that a. a monopolistically competitive firm faces a downward-sloping demand curve for its differentiated product and so does a monopolist b. monopolistically competitive market have a free entry and exit just like a monopolist market c. monopolistically competitive firms charge prices equal to their marginal costs just like monopolists d. monopolistically competitive firms produce beyond their efficient scale and so do monopolists

a. a monopolistically competitive firm faces a downward-sloping demand curve for its differentiated product and so does a monopolist

5) If the monopolistic competitor described by exhibit 3 is producing at the profit-maximizing (loss-minimizing level of output, it a. is generating losses b. is generating profits c. is generating zero profits d. could be generating either profits or losses depending on what quantity it chooses to produce

a. is generating losses

11. When a firms enter a monopolistically competitive market and the business-stealing externality is larger than the product-variety externality, then a. there are too many firms in the market and market efficiency could be increased if firms exited the market b. there are too few firms in the market and market efficiency could be increased with additional entry c. the number of firms in the market is optimal and the market is efficient d. the only way to improve efficiency in this market is for the government to regulate it like a natural monopoly

a. there are too many firms in the market and market efficiency could be increased if firms exited the market

3. Which of the following is true regarding the similarities and differences in monopolistically competition and monopoly? a. The monopolist faces a downwards-sloping demand-curve while the monopolistic competitor aces an elastic demand curve b. The monopolist makes economic profits in the long run while the monopolistic competitor makes zero economic profits in the long run c. Both the monopolist and the monopolistic competitor operate at the efficient scale d. The monopolist charges a price above marginal cost while the monopolistic competitor charges a price equal to marginal cost

b. The monopolist makes economic profits in the long run while the monopolistic competitor makes zero economic profits in the long run

16. Which of the following is not put forth as a criticism of advertising and brand names? a. advertising manipulates people's tastes to create a desire that otherwise would not exist b. advertising increases competition, which causes unnecessary bankruptcies and layoffs c. advertising brand loyalty, causes demand to be more inelastic, and thus, increases markup marginal cost d. brand names cause consumers to perceive differences that do not exist between goods e. all the above are criticisms of advertising and brand names

b. advertising increases competition, which causes unnecessary bankruptcies and layoffs

18. Which of the following is not an argument put forth by economists in support of the use of advertising? a. advertising provides information to customers about prices, new products, and location of retail outlets b. advertising provides a creative outlet for artists and writers c. advertising increases production d. advertising provides new firms with the means to attract customers from existing firms

b. advertising provides a creative outlet for artists and writers

10. One source of inefficiency in monopolistic competition is that a. because price is above marginal cost, surplus is redistributed from buyers to sellers b. because price is above marginal cost, some units are not produced that buyers value in excess of the cost of production and this causes a deadweight loss c. monopolistically competitive firms produce beyond their efficient scale d. with excess capacity and charge a price above marginal cost

b. because price is above marginal cost, some units are not produced that buyers value in excess

7. Which of the following is true regarding he production and pricing decisions of monopolistically competitive firms? Monopolistically competitive firms choose the quantity at which marginal cost equals a. average total cost and then use the demand curve to determine the price consistent with this quantity b. marginal revenue and then use the demand curve to determine the price consistent with this quantity c. average total cost and then use the supply curve to determine the price consistent with this quantity d. marginal revenue and then the supply curve to determine the price consistent with this quantity

b. marginal revenue and then use the demand curve to determine the price consistent with this quantity

20. Which of the following firms has the least incentive to advertise? a. a manufacturer of home heating and air conditioning b. a manufacturer of breakfast cereal c. a wholesaler of crude oil d. a restaurant

c. a wholesaler of crude oil

6) The monopolistically competitive market shown in exhibit 3 will, in the long run, a. attract new producers into the market, which will shift the demand faces by incumbent firms to the right b. attract new producers into the market, which will shit the demand faces by incumbent firms to the left c. cause producers to exit the market, which will shift the demand faced by incumbent firms to the right d. cause producers to exit the market, which will shift the demand faced by incumbent firms to the right

c. cause producers to exit the market, which will shift the demand faced by incumbent firms to the right

8) Exhibit 4 depicts a monopolistic competitive firm a. generating profits in the short run b. generating losses in the short run c. generating zero profits in the long run d. it is impossible to determine from this graph whether the firm is generating profits or losses

c. generating zero profits in the long run

1. Which of the following is not a characteristic of a monopolistically competitive market? a. many sellers b. differentiated products c. long-run economic profits d. free entry and exit

c. long-run economic profits

17. Expensive television commercials that appear to provide no specific information about the product being advertised a. are most likely used by firms that are perfect competitors b. should be banned by regulators because they add to the cost of the product without providing the consumer with any useful information about the product c. may be useful because they provide a signal to the consumers about the quality of the product d. only affect the buying habits of irrational consumers

c. may be useful because they provide a signal to the consumers about the quality of the product

4. In the short run, if the price is above average total cost in a monopolistically competitive market, the firm makes a. losses and firms enter the market b. losses and firms exit the market c. profits and firms enter the market d. profits and firms exit the market

c. profits and firms enter the market

2. Which of the following products is least to be sold in a monopolistically competitive market a. video games b. breakfast cereal c. beer d. cotton

d. cotton

19. Defenders of the use of brand names argue that brand names a. provide information about the quality of the product b. give firms an incentive to maintain high quality c. are useful even in socialist economies such as the former Soviet Union d. do all of the above

d. do all of the above

14. Which of the following firms is most likely to spend a large percentage of their revenue on advertising? a. the manufacturer of an undifferentiated commodity b. a perfect competitor c. the manufacturer of an industrial product d. the producer of a highly differentiated consumer product e. the producer of a low-quality product that costs the same to produce as a similar high-quality product

d. the producer of a highly differentiated consumer product

12. The use of the word "competition" in the name of the market structure called "monopolistic competition" refers to the fact that a. monopolistically competitive firms charge prices equal to the minimum of their average total cost just like competitive firms b. monopolistically competitive firms face a downward-sloping demand curve just like competitive firms c. the products are differentiated in a monopolistically competitive market just like in a competitive market d. there are many sellers in a monopolistically competitive competitive market and there is free entry exits in the market just like a competitive market

d. there are many sellers in a monopolistically competitive competitive market and there is free

9. Which of the following is true with regard to monopolistically competitive firms' scale of production and pricing decisions? Monopolistically competitive firms produce a. at the efficient scale and charge a price equal to marginal cost b. at the efficient scale and charge a price above marginal cost c. with excess capacity and charge a price equal to marginal cost d. with excess capacity and charge a price above marginal cost

d. with excess capacity and charge a price above marginal cost

T/F: 10. Advertising, must be socially wasteful because advertising simply adds to the cost of producing a product

false; advertising may increase competition, which could increase social welfare

T/F: 13. Brand names allow firms to make economic profits in the long run because they are able to sell inferior products based on the apparent connection of those products to the firm's unrelated high-quality products

false; brand names give the firm incentive to maintain high quality

T/F: 8. Economists generally agree that monopolistically competitive firms should be regulated in order to increase economic efficiency

false; it is not clear how one would regulate a monopolistically competitive firm in order to increases efficiency

T/F: 1. Monopolistic competition is a market structure in which a few firms sell similar prodcuts

false; monopolistic competition is a market structure in which many firms sell differentiated products

T/F: 3. In the long run, firms in monopolistically competitive markets produce at the minimum of their average-total-cost curve

false; monopolistic competitors produce in the downward-sloping portion of their ATC curve where the ATC curve is tangent to the demand curve face by the firm

T/F: 7. In the long run, a monopolistically competitive firm charges a price that exceeds average total cost

false; monopolistically competitive firms charge a price equal to ATC

T/F: 15. In the long run, a monopolistically competitive firm produces at the efficient scale while a competitive firm has excess capacity

false; monopolistically competitive firms have excess capacity while competitive firms produce at the efficient scale

T/F: 11. Critics of advertising argue that advertising decreases competition while defenders of advertising argue that advertising increases competition

true

T/F: 12. Even advertising that appears to contain little information about the product may be useful because it provides a signal about the quality of the product

true

T/F: 14. Policymakers are starting to view restrictions on advertising by professionals such as doctors, lawyers, and pharmacists as anticompetitive

true

T/F: 2. Similar to firms in perfectly competitive markets, firms in monopolistically competitive markets can enter and exit the market without restriction so profits are driven to zero in the long run

true

T/F: 4. Similar to a monopolist, a monopolistically competitive firm faces a downward-sloping demand curve for its product

true

T/F: 5. Both monopolists and monopolistically competitive firms produce the quantity at which marginal revenue equals marginal cost and then use the demand curve facing the firm to determine the price consistent with that quantity

true

T/F: 6. Because a monopolistically competitive firm charges a price that exceeds marginal cost, the firm fails to produce some units that the buyers value in excess o the cost of production, and thus, monopolistic competition is inefficient

true

T/F: 9. Firms that sell highly differentiated consumer products are more likely to spend a large percentage of their revenue on advertising

true