chapter 16

Exhibit depicts a monopolistically competitive firm

generating zero profits in the long run.

Which of the following markets best fits the definition of monopolistic competition?

haircuts

efficient scale

the quantity that minimizes ATC

concentration ration

the value of sales by the top firms of an industry stated as a percentage of total industry sales

Monopolistic Competition Characteristics

- Many Sellers: there are many firms competing for the same group of customers - Product Differentiation: Each firm produces a product that is at least slightly different from those of other firms. Thus, rather than being a price taker, each firm faces a downward-sloping demand curve. - Free Entry and Exit: Firms can enter or exit the market without restriction. Thus, the number of firms in the market adjusts until economic profits are driven to zero.

Defenders of the use of brand names argue that brand names

- provide information about the quality of the product. - give firms incentive to maintain high quality. - are useful even in socialist economies such as the former Soviet Union.

For the economy as a whole, what percentage of firm revenue is spent on advertising?

2 percent

Which of the following is not put forth as a criticism of advertising and brand names?

Advertising increases competition, which causes unnecessary bankruptcies and layoffs.

Which of the following is not an argument put forth by economists in support of the use of advertising?

Advertising provides a creative outlet for artists and writers.

Because a monopoly is the sole seller of a product without close substitutes, it can earn positive economic profit, even in the long run.

By contrast, because monopolistically competitive markets have free entry, the economic profit of a firm in this type of market is driven to zero in the long run.

the monopolistically competitive firm follows a monopolist's rule for profit maximization:

It chooses to produce the quantity at which marginal revenue equals marginal cost and then uses its demand curve to find the price at which it can sell that quantity.

Which of the following conditions does NOT describe a firm in a monopolistically competitive market?

It takes its price as given by market conditions.

What is true of a monopolistically competitive market in long-run equilibrium?

Price is greater than marginal cost

Which of the following is true regarding the similarities and differences in monopolistic competition and monopoly?

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

perfect competition

a market structure in which a large number of firms all produce the same product

monopolistic competition

a market structure in which many firms sell products that are similar but not identical

Oligopoly

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

imperfect competition

a market structure that does not meet the conditions of perfect competition

The use of the word "monopoly" in the name of the market structure called "monopolistic competition" refers to the fact that

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

Which of the following firms has the least incentive to advertise?

a wholesaler of crude oil

One source of inefficiency in monopolistic competition is that

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.

The monopolistically competitive market shown in Exhibit will, in the long run,

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

Which of the following products is least likely to be sold in a monopolistically competitive market?

cotton

If advertising makes consumers more loyal to particular brands, it could ________ the elasticity of demand and ________ the markup of price over marginal cost.

decrease, increase

Advertising can be a signal of quality

if the benefit of attracting customers is greater for firms with better products.

If advertising makes consumers more aware of alternative products, it could ________ the elasticity of demand and ________ the markup of price over marginal cost.

increase, decrease

If the monopolistic competitor described by Exhibit is producing at the profit-maximizing (loss-minimizing) level of output, it

is generating losses.

Which of the following is not a characteristic of a monopolistically competitive market?

long-run economic profits

Which of the following is true regarding the production and pricing decisions of monopolistically competitive firms? Monopolistically competitive firms choose the quantity at which marginal cost equals

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

A monopolistically competitive firm will increase its production if

marginal revenue is greater than marginal cost.

Expensive television commercials that appear to provide no specific information about the product being advertised

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

Four types of market structure

perfect competition, monopolistic competition, oligopoly, monopoly

New firms will enter a monopolistically competitive market if

price is greater than average total cost.

in the long run equilibrium: as demand falls,

profit falls and vice versa

In the short run, if the price is above average total cost in a monopolistically competitive market, the firm makes

profits and firms enter the market.

Which of the following firms is most likely to spend a large percentage of their revenue on advertising?

the producer of a highly differentiated consumer product

The use of the word "competition" in the name of the market structure called "monopolistic competition" refers to the fact that

there are many sellers in a monopolistically competitive market and there is free entry and exit in the market just like a competitive market.

When firms enter a monopolistically competitive market and the business-stealing externality is larger than the product-variety externality, then

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

Which of the following is true with regard to monopolistically competitive firms' scale of production and pricing decisions? Monopolistically competitive firms produce

with excess capacity and charge a price above marginal cost.