Chapter 17 Monopolistic Competition ECON 2302

Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. Kevin will train how many clients per day? A) 4 B) 6 C) 10 D) between 2 and 4 E) None of the above answers is correct.

A) 4

The above figure shows a restaurant engaged in monopolistic competition with other restaurants. The equilibrium price at this restaurant is ________ per meal. A) $20 B) $30 C) $50 D) less than $20 E) more than $50

C) $50

In monopolistic competition, profit is maximized by producing so that marginal revenue A) equals price. B) is negative. C) equals marginal cost and which are less than price. D) equals average total cost but not marginal cost. E) equals marginal cost and equals price.

C) equals marginal cost and which are less than price.

A firm in monopolistic competition is A) efficient because in the long run it makes zero economic profit. B) efficient because it produces at the minimum average total cost. C) inefficient because price exceeds marginal cost. D) efficient because of the ease of entry. E) efficient because it produces where MR = MC.

C) inefficient because price exceeds marginal cost.

If a monopolistically competitive seller's marginal cost is $3.56, the firm will increase its output if A) its marginal revenue is less than $3.56. B) its marginal revenue is equal to $3.56. C) its marginal revenue is more than $3.56. D) average total cost is less than $3.56. E) Both answers A and D are correct.

C) its marginal revenue is more than $3.56.

The marginal revenue curve facing a monopolistically competitive firm A) lies on its demand curve. B) lies above its demand curve. C) lies below its demand curve. D) is equal to its price curve. E) is parallel to its demand curve.

C) lies below its demand curve.

In the long run in monopolistic competition, firms A) can make an economic profit. B) incur an economic loss. C) make zero economic profit. D) shut down if they are making zero economic profit. E) make either an economic profit or zero economic profit

C) make zero economic profit.

Because of the number of firms in monopolistic competition, A) each firm has a large market share. B) it is possible for the firms to collude. C) no one firm can dominate the market. D) one firm has the ability to dictate market conditions. E) each firm must carefully monitor what its competitors do

C) no one firm can dominate the market.

A firm in monopolistic competition makes its decisions on quantity and price by A) taking price as given from the market and producing where MR = MC. B) taking both price and quantity as given from the market. C) producing where MR = MC and setting the price for this quantity from the demand curve. D) taking quantity as given from the market and setting the price for this quantity from the demand curve. E) producing where MR = MC and setting the price so that P = MR = MC.

C) producing where MR = MC and setting the price for this quantity from the demand curve.

28) One of the major benefits to society of monopolistic competition is A) high prices. B) restricted output. C) product differentiation. D) the excess capacity. E) the markup.

C) product differentiation.

In monopolistic competition, each firm supplies a small part of the market. This occurs because A) there are barriers to entry. B) there are no barriers to exit. C) there are a large number of firms. D) firms produce differentiated products. E) there are a large number of buyers.

C) there are a large number of firms.

The figure above shows a firm operating in a monopolistically competitive market. If nothing else changes, this firm A) should increase production to 120 units in order to reduce its cost. B) should stay open but decrease production below 80 units in order to reduce its cost. C) will exit the market because it is currently incurring an economic loss in the short run. D) will produce 100 units to eliminate the deadweight loss. E) will charge $100 per unit to eliminate the loss.

C) will exit the market because it is currently incurring an economic loss in the short run.

In long-run equilibrium, a firm in monopolistic competition makes A) an economic profit but the economic profit is less than it would be if the firm was a monopoly. B) an economic profit that is higher than what it would be if the firm was a monopoly. C) zero economic profit. D) an economic profit that is the same amount as it would be if the firm was a monopoly. E) an economic profit, an economic loss, or zero economic profit.

C) zero economic profit.

What does monopolistic competition have in common with perfect competition? A) a large number of firms and freedom of entry and exit B) a standardized product C) product differentiation D) the ability to make an economic profit in the long run E) barriers to exit but no barriers to entry

a large number of firms and freedom of entry and exit

Excess capacity -

A firm has excess capacity if the quantity it produces is less that the quantity at which average total cost is a minimum.

A markup of price over marginal cost -

A firm's markup is the amount by which price exceeds marginal cost.

The figure above shows a firm operating in a monopolistically competitive market. To maximize profit, the firm produces A) 80 units sold at $80 per unit and incurs an economic loss of $20 per unit. B) 100 units sold at $60 per unit. C) 80 units sold at $40 per unit and makes an economic profit of $60 per unit. D) 120 units in order to minimize cost. E) 80 units sold at $40 per unit and incurs an economic loss of $60 per unit.

A) 80 units sold at $80 per unit and incurs an economic loss of $20 per unit.

The above figure definitely shows A) a long-run equilibrium for a monopolistically competitive firm. B) an industry with few firms. C) a long-run equilibrium for a perfectly competitive firm. D) a long-run equilibrium for a perfectly competitive market. E) a short-run equilibrium for a monopoly.

A) a long-run equilibrium for a monopolistically competitive firm.

The figure above shows Firm X. The firm is a monopolistically competitive market. The firm makes an ________ in the short run but will ________ in the long run. A) economic loss of $10 per unit; go out of business or make a zero economic profit B) economic loss of $2 per unit; make an economic profit C) economic profit $10 per unit; make zero economic profit D) economic profit of $1,000; definitely go out of business E) economic loss of $10 per unit; definitely face more competition

A) economic loss of $10 per unit; go out of business or make a zero economic profit

Which of the following is NOT a characteristic of monopolistic competition? A) few firms compete B) easy entry and exit C) small market share D) differentiated product E) no barriers to entry or exit

A) few firms compete

If a monopolistically competitive seller's marginal cost is $3.56, the firm will decrease its output if A) its marginal revenue is less than $3.56. B) its marginal revenue is equal to $3.56. C) its marginal revenue is more than $3.56. D) its average total cost is equal to $4.00. E) Both answers B and D are correct.

A) its marginal revenue is less than $3.56.

The figure above shows Firm X, a firm that is maximizing profit. The firm is making an economic ________ because it produces ________ units and charges ________ per unit. A) loss; 100; $20 B) profit; 100; $10 C) profit; 100; $30 D) loss; 120; $28 E) loss; 110; $20

A) loss; 100; $20

To maintain their economic profits, firms in monopolistic competition must continually engage in A) product development and marketing. B) lowering their product's price. C) raising their product's price. D) realizing short-run losses. E) making the demand for their product more elastic

A) product development and marketing.

The figure above shows Firm X. The firm is operating in the ________ because it ________. A) short run; minimizes its loss when it produces 100 units B) short run; maximizes profit when it produces 110 units C) short run; minimizes its loss when it produces 110 units D) long run; minimizes its loss when it produces 100 units E) long run; maximizes profit when it charges $30 per unit

A) short run; minimizes its loss when it produces 100 units

The above figure shows a motel engaged in monopolistic competition with other motels. the figure above shows the ________ equilibrium in which the motel is ________. A) short-run; making an economic profit B) short-run; making zero economic profit C) long-run; making an economic profit D) long-run; making zero economic profit E) short-run; incurring an economic loss

A) short-run; making an economic profit

As long as the firm illustrated above remains open, it will set a price of ________ per month and it will ________. A) $50; make an economic profit B) $50; incur an economic loss C) $40; make an economic profit D) $40; incur an economic loss E) less than $20; incur an economic loss

B) $50; incur an economic loss

Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand and cost curves for his firm, which competes in a monopolistically competitive market. What price will Kevin charge per session? A) $100 B) $60 C) $40 D) $20 E) $80

B) $60

The above figure shows a motel engaged in monopolistic competition with other motels. The equilibrium quantity at this motel is ________ rooms per day. A) 200 B) 300 C) 400 D) 500 E) 100

B) 300

When a firm maximizes its profit, which of the following is correct for firms in monopolistic competition and perfect competition? A) P = MC for both types of firms. B) P = MR = MC for firms in perfect competition, and P > MR = MC for firms in monopolistic competition. C) MR = MC for firms in perfect competition and MR > MC for firms in monopolistic competition. D) P > MR = MC for firms in both perfect competition and monopolistic competition. E) P = ATC always for firms in both perfect competition and monopolistic competition.

B) P = MR = MC for firms in perfect competition, and P > MR = MC for firms in monopolistic competition.

What does monopolistic competition have in common with monopoly? A) a large number of firms B) a downward-sloping demand curve C) the ability to collude with respect to price D) mutual interdependence E) barriers to entry

B) a downward-sloping demand curve

A firm in monopolistic competition ________ influence its price and ________ influence the market average price. A) can; can B) can; cannot C) cannot; can D) cannot; cannot E) can; only in the short run can

B) can; cannot

If a monopolistically competitive seller's marginal cost is $3.56, the firm will not change its output if A) its marginal revenue is less than $3.56. B) its marginal revenue is equal to $3.56. C) its marginal revenue is more than $3.56. D) its average total cost is equal to $3.56. E) Both answers B and D are correct.

B) its marginal revenue is equal to $3.56.

An industry with a large number of firms, differentiated products, and free entry and exit is called A) perfect competition. B) monopolistic competition. C) oligopoly. D) monopoly. E) monopolistic oligopoly.

B) monopolistic competition.

For a firm in monopolistic competition, innovation and product development are A) senseless because economic profit is always zero in the long run. B) necessary in order to have a chance of making at least a short-run economic profit. C) inconsequential because each firm produces a different product. D) necessary to allow new firms to enter. E) uncommon because other firms already produce similar products.

B) necessary in order to have a chance of making at least a short-run economic profit.

The major difference between monopolistic competition and monopoly is A) monopoly is a price setter, and a firm in monopolistic competition is a price taker. B) only a monopoly can make an economic profit in the long run. C) only a firm in monopolistic competition can make an economic profit in the short run. D) how the quantity of output is determined. E) only firms in monopolistic competition are protected by barriers to entry.

B) only a monopoly can make an economic profit in the long run.

In monopolistic competition, the products of different sellers are A) identical. B) similar but slightly different. C) unique without any close or perfect substitutes. D) perfect substitutes. E) either identical or differentiated.

B) similar but slightly different.

In the long run, a firm in monopolistic competition will produce A) where average total cost is minimized. 12 B) where price equals average total cost, but average total cost is not at its minimum. C) zero output. D) any possible amount of output. E) where price equals marginal cost.

B) where price equals average total cost, but average total cost is not at its minimum.

The above figure shows a motel engaged in monopolistic competition with other motels. The equilibrium price at this motel is ________ per room. A) $20 B) $30 C) $40 D) $50 E) $10

D) $50

The freedom of entry and exit in monopolistic competition means that firms A) enter the market when economic losses are being incurred. B) exit the market when economic profits are being made. C) enter the market when firms are making zero economic profit. D) can enter a market to compete for economic profits and leave when economic losses are being incurred. E) find it easy to permanently make an economic profit.

D) can enter a market to compete for economic profits and leave when economic losses are being incurred.

For a monopolistically competitive firm, the demand curve A) is a horizontal line. B) has a positive slope. C) is vertical. D) has a negative slope. E) is the same as the marginal revenue curve.

D) has a negative slope.

The firm illustrated above is A) making an economic profit of $400,000 per month. B) making an economic profit of $2,000,000 per month. 14 C) making an economic profit of $1,600,000 per month. D) incurring an economic loss of $400,000 per month. E) incurring an economic loss of $1,600,000 per month.

D) incurring an economic loss of $400,000 per month.

If firms in monopolistic competition are making economic profits, eventually A) they shut down. B) they exit the industry. C) the market turns into a monopoly. D) new firms enter the industry. E) the firms in the market increase their production so that their economic profit disappears.

D) new firms enter the industry.

Firms in monopolistic competition determine the profit-maximizing level of output by producing A) the same output level as rivals do. B) where average total cost is minimized. C) at the point of minimum average fixed cost. D) where marginal revenue equals marginal cost. E) where price equals average total cost.

D) where marginal revenue equals marginal cost.

Is Monopolistic Competition Efficient?

Deadweight Loss Because price exceeds marginal cost, monopolistic competition creates deadweight loss—an indicator of inefficiency.

27) A monopolistically competitive firm is inefficient because the firm A) makes positive economic profit in the long run. B) is producing at an output where marginal cost equals price. C) is not maximizing its profits. D) produces a product identical to that of its competitors. E) produces at an output level where average total cost is not at its minimum.

E) produces at an output level where average total cost is not at its minimum.

Making the Relevant Comparison

Price exceeds marginal cost because of product differentiation. But product variety is valued.

A firm's efficient scale is

the quantity of production at which average total cost is a minimum.