inquizitive 12 - monopolistic competition and advertising

Advertising expenses occupy approximately what percentage of global economic activity?

1%

Match each type of market to a possible incentive or disincentive for advertising in it.

Competitive: - Firms in this market sell nearly identical products for nearly identical prices. Monopoly: - Consumer choice is limited because a particular good is unique and has few close substitutes. Monopolistic Competition: - Consumers must choose among several distinct variations of the same basic product type.

Karla owns a monopolistically competitive firm that has many competitors that advertise. What can Karla realistically hope to achieve if she decides to advertise as well?

Correct: - Karla can educate her consumers about the differences between her store and her competitors. - Karla can protect her consumer base. Incorrect: - Karla can take over a large market share. - Karla can lower costs and make her store more efficient.

What are some of the differences between a monopolistically competitive firm and a competitive firm?

Correct: - Monopolistically competitive firms use markup to increase profits, while markup is not possible in competitive industries. - In monopolistically competitive industries, products are more differentiated than in competitive industries. - Firms in competitive industries must sell at market price, while firms in monopolistically competitive industries can charge more. Incorrect: - The barriers to entry are high in competitive industries and very low in monopolistically competitive industries. - There are usually few competitors in a monopolistically competitive industry, while there can be many competitors in a competitive industry. - There are strict government regulations on monopolistically competitive industries, while competitive industries are regulation free.

What are the characteristics of monopolistic competition?

Correct: - low barriers to entry - many different firms - product differentiation Incorrect: - only a few sellers - limited advertising

Which of the following are reasons a firm might choose to advertise?

Correct: - to improve product visibility - to signal that a product is of high quality - to educate consumers about a product Incorrect: - to make demand for its product more elastic - to lower costs - to improve efficiency

Which shift in the demand curve is most likely to describe a company in a monopolistically competitive market that begins to spend more on advertising?

Demand curve shifts out and becomes steeper (more inelastic)

How does advertising affect consumers? Fill in the blanks to complete the passage. Advertising creates ______ for a particular product because it builds _____. When consumers are unwilling to switch to a substitute product, they face ______.

inelastic demand, brand loyalty, higher prices

Fill in the blanks to complete the passage about the consequences of government intervention in the bottled water industry. Government regulation of prices in the bottled water industry may not benefit consumers because it is a _____ industry. Although _____ might increase because of government regulation in the short run, in the long run many companies would likely _____. If so, this would harm consumers because they would have less convenience and fewer options.

monopolistically competitive, efficiency, close

How does advertising affect industries in competitive markets? Fill in the blanks to complete the passage. It is _____ for individual firms in competitive markets to invest in advertising because they sell _____. Advertising in this market increases _____ without directly influencing sales. However, _____ will still advertise to increase demand for the common product.

not productive, an undifferentiated good, costs, an industry as a whole

Mrunal opened the first flower shop in her town. For a while, she was the only provider of flowers, until people noticed how profitable her business had been. Now several new flower shops have opened. What might happen to Mrunal's business in the long run? When it is easy for competitors to enter the market, _____ will increase. In the _____ run, as more competitors enter the market, it _____ be possible for existing companies to earn economic profit. This means that the price charged must be equal to _____.

competition, long, won't, average total cost

Match each inequality or equality to the corresponding term for the monopolistic competitor operating at optimal, short-run production levels.

Short run economic loss: - price < ATC Zero economic profit: - price = ATC Short run economic profit: - price > ATC Market power: - price > marginal revenue Markup: - price > marginal cost

T/F: Excess capacity will not be visually recognizable to consumers, only to firms.

False

T/F: In a promotional advertisement, Jets Pizza reminds its customers that "Life is short. Eat better pizza." The primary purpose of such advertising is to boost market supply.

False

T/F: In the short run, low barriers to entry and exit allow new entrants into a monopolistically competitive market.

False

T/F: Store-bought frozen ice cream, soft-serve ice cream, and frozen custard all represent different levels of product quality.

False

T/F: A pizza company that charges five dollars more for its pizzas than a competitor's pizza will find it impossible to survive in a monopolistically competitive market.

False This company's pizzas may be more expensive because they have a higher quality. The pizza company may target consumers who have high standards for their pizza. Remember, monopolistically competitive firms have some market power, which allows them to set higher prices than firms in competitive markets.

What does a shift from point 1 to point 3 illustrate about the result of advertising in monopolistically competitive markets?

If all firms in the market advertise, then each one sees its costs go up without an increase in sales

Order the following firms from least efficient to most efficient.

Least Efficient - Comcast is the only high speed internet provider for a particular urban area - Javier's shoe store sells many types of shoes and operates with a lot of excess capacity - Michael opens a food cart serving a type of food that is only slightly differentiated from his nearby competitors' - Kayla's cranberry bog produces one product and sells it at a market price Most Efficient

In which market type(s) are individual firms likely to advertise regularly?

Likely: - monopolistic competition Not Likely: - competitive - monopoly

Match the type of product differentiation to the situation it describes.

Location: - A gas station right off the highway attracts more customers than a gas station five miles away. Style/type: - One computer company sells desktops, whereas another sells tablets. - One clothing company releases a new line of cutting-edge fashions every year, whereas another sticks to popular, classic designs. Quality: - An online clothing retailer sells fitted men's suits, whereas a traditional retailer sells pre-cut versions in standard sizes. - One restaurant chain sells $2 burgers, whereas another sells burgers using fresher ingredients for $7. - During the global health pandemic, some retailers created masks with two layers of fabric, whereas others created them with three layers to improve filtration.

Identify each situation as either a competitive market or a monopolistically competitive market.

Monopolistic Competition: - A candy company produces a level of output that is smaller than the level needed to minimize average total cost. - A clothing retailer charges a price $10 higher than its marginal cost to produce the clothing. - An ice cream parlor that makes its product on the premises operates with excess capacity. Competitive Markets: - A manufacturer of copper wire sells its product at a price equal to the marginal cost. - A lobster fisherman produces at an output level equal to the efficient scale.

For each industry, drag the label into the column of the table that describes what type of market it is.

Monopolistic Competition: - shoe store Competitive Markets: - dairy farms Monopoly: - government owned railroads

Drag the industries to the graph that would best represent them.

Monopolistically Competitive Graph: - specialty coffee shops - televisions Competitive Market Graph: - wheat - cranberries

Match the description of the industry to the type of market in which it belongs.

Monopolistically Competitive: - After seeing the success of Jimena's chocolate shop, three more stores have opened in one town. Each offers its own distinctive style of chocolate confection. Competitive: - Crab fishermen in Alaska charge similar prices for their products. Monopoly: - Consumers have only one option where they can get their tap water.

Which of the following are sources of inefficiency in a monopolistically competitive industry?

Source of Inefficiency: - higher average total cost - markup - product differentiation Not a Source of Inefficiency: - government regulation

How do the actions of the Federal Trade Commission influence advertising?

The commission enforces truth-in-advertising laws

T/F: Domino's Pizza is monopolistically competitive with both Taco Bell and Burger King.

True Even though each chain specializes in very different product categories, they all compete for the taste palate of those who want fast food.