Microecon Chapter 16: Monopolistic Competition

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

Free entry

A situation where firms can enter the market without restriction

Efficient Scale

The quantity that minimizes average total cost

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

b. 2%

Which of the following firms has the least incentive to advertise a. a manufacturer or 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

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

c. long-run economic profits.

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

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. monopolistcally competitive firms face a downward sloping demand curve just like competitive firms c. the products are differenciated in a monopolistically competitive market just like a competitive market. d. there are many sellers in a monopolistically competitive market and there is free entry and exit in the market just like a competitve market.

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

Which of the following is ture 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 the 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.

The use of the word "monopoly" in the name of the market structure called "monopolistic competition" refers to the fact that a. a monopolistically competitive firm faces a downward sloping demand curve for its differenciated product and so does a monopolist b. monopolistically competitive markets have free entry and exit just like a monopolistic 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 differenciated product and so does a monopolist

When 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 increase 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.

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

b. 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? 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 competition. d. Advertising provides new firms with the means to attract customers from existing firms.

b. Advertising provides a creative outlet for artists and writers.

Which of the following is true regarding the similarities and differences in monopolistic competition and monopoly? a. The monopolist faces a downward sloping demand curve while the monopolistic competitor faces and 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.

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. monopolistically competitive firms earn economic profits in the long run.

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.

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 a. ATC 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. ATC and then use the supply curve to determine the price consistent with this quantity d. marginal revenue and then use 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

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 consumer 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 consumer about the quality of the product

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

d. cotton

Defenders of the use of brand names argue that brand names a. provide information about the quality of the product b. gives firms 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.

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.