Week 11

Monopolistically competitive firms are inefficient because they produce at a point on the rising segment of their average cost curves. True False

False

In the long run a monopolistically competitive firm: earns an economic profit. produces where P = ATC. produces where MR exceeds MC. achieves allocative efficiency.

produces where P = ATC.

In the long run, new firms will enter a monopolistically competitive industry: provided economies of scale are being realized. even though losses are incurred in the short run. until minimum average total cost is achieved. until economic profits are zero.

until economic profits are zero.

In the long-run, the price charged by the monopolistically competitive firm attempting to maximize profits: must be less than ATC. must be more than ATC. may be either equal to ATC, less than ATC, or more than ATC. will be equal to ATC.

will be equal to ATC.

When a monopolistically competitive firm is in long-run equilibrium: P = MC = ATC. MR = MC and minimum ATC > P. MR > MC and P = minimum ATC. MR = MC and P > minimum ATC.

MR = MC and P > minimum ATC.

DIAGRAM 35 Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. This firm's profit-maximizing price will be: $10. $13. $16. $19.

$16

DIAGRAM 36 Refer to the above diagram for a monopolistically competitive firm. Long-run equilibrium price will be: above A. EF. A. B.

A.

In the long run monopolistically competitive firms make normal profits because they are forced to operate at the minimum point on their average total cost curve. True False

False

Monopolistically competitive sellers produce efficiently because they obtain only normal profits in the long run. True False

False

Monopolistically competitive sellers realize economic profits in the long run because entry barriers are significant. True False

False

The monopolistically competitive seller equates price and marginal cost in maximizing profits. True False

False

The monopolistically competitive seller maximizes profits by equating price and marginal cost. True False

False

Which of the following statements concerning a monopolistically competitive industry is correct? If there are short-run losses, firms will leave the industry and the demand curves of the remaining firms will shift to the right. If there are short-run economic profits, firms will enter the industry and the demand curves of existing firms will shift to the right. If there are short-run losses, firms will leave the industry and the demand curves of the remaining firms will shift to the left. If there are short-run economic profits, firms will leave the industry and the demand curves of the remaining firms will shift to the right.

If there are short-run losses, firms will leave the industry and the demand curves of the remaining firms will shift to the right.

Which of the following statements is correct? Purely competitive firms, monopolistically competitive firms, and pure monopolies all earn zero economic profits in the long run. Purely competitive firms, monopolistically competitive firms, and pure monopolies all earn positive economic profits in the long run. In the long run purely competitive firms and monopolistically competitive firms earn zero economic profits, while pure monopolies may or may not earn economic profits. Monopolistically competitive firms earn zero economic profits in both the short run and the long run.

In the long run purely competitive firms and monopolistically competitive firms earn zero economic profits, while pure monopolies may or may not earn economic profits.

Which of the following is correct for a monopolistically competitive firm in long-run equilibrium? MC = ATC MC exceeds MR P exceeds minimum ATC P = MC

P exceeds minimum ATC

The demand curve of a monopolistically competitive firm is more elastic than that of a pure monopolist. True False

True

The demand curve of a monopolistically competitive producer is less elastic than that of a purely competitive producer. True False

True

The excess capacity problem associated with monopolistic competition implies that fewer firms could produce the same industry output at a lower total cost. True False

True

The larger the number of firms and the less the degree of product differentiation, the greater will be the elasticity of a monopolistically competitive seller's demand curve. True False

True

DIAGRAM 37 Refer to the above diagram. In short-run equilibrium, the monopolistically competitive firm shown will set its price: below ATC. above ATC. below MC. below MR.

above ATC.

Excess capacity refers to the: amount by which actual production falls short of the minimum ATC output. fact that entry barriers artificially reduce the number of firms in an industry. differential between price and marginal costs which characterizes monopolistically competitive firms. fact that most monopolistically competitive firms encounter diseconomies of scale.

amount by which actual production falls short of the minimum ATC output.

Monopolistic competition resembles pure competition because: both industries emphasize nonprice competition. in both instances firms will operate at the minimum point on their long-run average total cost curves. both industries entail the production of differentiated products. barriers to entry are either weak or nonexistent.

barriers to entry are either weak or nonexistent.

DIAGRAM 32 In short-run equilibrium, the monopolistically competitive firm shown above will set its price: below ATC. above ATC. below MC. below MR.

below ATC.

DIAGRAM 32 The monopolistically competitive firm shown in the above figure: is in long-run equilibrium. might realize an economic profit or a loss, depending on its choice of output level. cannot operate profitably in the short run. can realize an economic profit.

cannot operate profitably in the short run.

The economic inefficiencies of monopolistic competition may be offset by the fact that: advertising expenditures shift the average cost curve upward. available capacity is fully utilized. resources are optimally allocated to the production of the product. consumers have a number of variations of the product from which to choose.

consumers have a number of variations of the product from which to choose.

DIAGRAM 34 Refer to the above diagram for a monopolistically competitive producer. If this firm were to realize productive efficiency, it would: also realize an economic profit. incur a loss. also achieve allocative efficiency. have to produce a smaller output.

incur a loss.

DIAGRAM 31 Refer to the above diagrams, which pertain to monopolistically competitive firms. Long-run equilibrium is shown by: diagram a only. diagram b only. diagram c only. both diagrams b and c.

diagram a only.

DIAGRAM 31 Refer to the above diagrams, which pertain to monopolistically competitive firms. A short-run equilibrium entailing economic profits is shown by: diagram a only. diagram b only. diagram c only. both diagrams b and c.

diagram b only.

DIAGRAM 31 Refer to the above diagrams, which pertain to monopolistically competitive firms. Short-run equilibrium entailing economic loss is shown by: diagram a only. diagram b only. diagram c only. both diagrams a and c.

diagram c only.

DIAGRAM 33 In long-run equilibrium, the firm shown in the diagram above will: earn a normal profit. go bankrupt. incur a loss. realize an economic profit.

earn a normal profit.

An important similarity between a monopolistically competitive firm and a purely competitive firm is that: both face perfectly elastic demand schedules. economic profit tends toward zero for both. both realize productive efficiency. both realize allocative efficiency.

economic profit tends toward zero for both.

In long-run equilibrium both purely competitive and monopolistically competitive firms will: produce at minimum average total cost. earn economic profits. achieve allocative efficiency. equate marginal cost and marginal revenue.

equate marginal cost and marginal revenue.

An important similarity between a monopolistically competitive firm and a pure monopolist is that both: realize an economic profit in the long run. achieve allocative efficiency. face demand curves which are less than perfectly elastic. achieve productive efficiency.

face demand curves which are less than perfectly elastic.

A significant difference between a monopolistically competitive firm and a purely competitive firm is that the: former does not seek to maximize profits. latter recognizes that price must be reduced to sell more output. former sells similar, although not identical, products. former's demand curve is perfectly inelastic.

former sells similar, although not identical, products.

In comparing the demand curve of a pure monopolist with that of a monopolistically competitive firm, we would expect the monopolistic competitor to have a: perfectly elastic demand curve and the monopolist to have a perfectly inelastic demand curve. generally more elastic demand curve. generally less elastic demand curve. demand curve whose elasticity coefficient is 1 at all possible prices.

generally more elastic demand curve.

A significant benefit of monopolistic competition compared with pure competition is: less likelihood of X-inefficiency. improved resource allocation. greater product variety. stronger incentives to achieve economies of scale.

greater product variety.

In the long-run, economic theory predicts that a monopolistically competitive firm will: earn an economic profit. realize all economies of scale. equate price and marginal cost. have excess production capacity.

have excess production capacity.

A monopolistically competitive firm has a: highly elastic demand curve. highly inelastic demand curve. perfectly inelastic demand curve. perfectly elastic demand curve.

highly elastic demand curve.

A monopolistically competitive firm's marginal revenue curve: is downsloping and coincides with the demand curve. coincides with the demand curve and is parallel to the horizontal axis. is downsloping and lies below the demand curve. does not exist because the firm is a "price maker."

is downsloping and lies below the demand curve.

DIAGRAM 37 Refer to the above diagram. The monopolistically competitive firm shown: will realize allocative efficiency at its profit-maximizing output. cannot operate at a loss. is in long-run equilibrium. is realizing an economic profit.

is realizing an economic profit.

Monopolistic competition is characterized by a: few dominant firms and low entry barriers. large number of firms and substantial entry barriers. large number of firms and low entry barriers. few dominant firms and substantial entry barriers.

large number of firms and low entry barriers.

The monopolistically competitive seller's demand curve will become more elastic the: more significant the barriers to entering the industry. greater the degree of product differentiation. larger the number of competitors. smaller the number of competitors.

larger the number of competitors.

DIAGRAM 33 In long-run equilibrium, production for the firm shown in the diagram above is: greater than would occur under pure competition. less efficient than in a purely competitive market. more efficient than in a purely competitive market. optimally efficient.

less efficient than in a purely competitive market.

Monopolistic competition means: a market situation where competition is based entirely on product differentiation and advertising. a large number of firms producing a standardized or homogeneous product. many firms producing differentiated products. a few firms producing a standardized or homogeneous product.

many firms producing differentiated products.

When a monopolistically competitive firm is in long-run equilibrium: production takes place where ATC is minimized. marginal revenue equals marginal cost and price equals average total cost. normal profit is zero and price equals marginal cost. economic profit is zero and price equals marginal cost.

marginal revenue equals marginal cost and price equals average total cost.

The monopolistically competitive seller maximizes profit by producing at the point where: total revenue is at a maximum. average costs are at a minimum. marginal revenue equals marginal cost. price equals marginal revenue.

marginal revenue equals marginal cost.

In the short run a monopolistically competitive firm's economic profit: will be maximized where price equals average total cost. may be positive, zero, or negative. are always positive. will always be zero.

may be positive, zero, or negative.

Product variety is likely to be greater in: monopolistic competition than in pure competition. pure competition than in monopolistic competition. homogenous oligopoly than in monopolistic competition. homogenous oligopoly than in differentiated oligopoly.

monopolistic competition than in pure competition.

The demand curve of a monopolistically competitive producer is: less elastic than that of either a pure monopolist or a pure competitor. less elastic than that of a pure monopolist, but more elastic than that of a pure competitor. more elastic than that of a pure monopolist, but less elastic than that of a pure competitor. more elastic than that of either a pure monopolist or a pure competitor.

more elastic than that of a pure monopolist, but less elastic than that of a pure competitor.

Which of the following is not characteristic of long-run equilibrium under monopolistic competition? price equals minimum average total cost marginal cost equals marginal revenue price is equal to average total cost price exceeds marginal cost

price equals minimum average total cost

For a monopolistically competitive firm in long-run equilibrium: price will equal marginal cost. price will equal average total cost. marginal revenue will exceed marginal cost. economic profits will be some positive amount.

price will equal average total cost.

A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from: the likelihood of collusion. high entry barriers. product differentiation. mutual interdependence in decision making.

product differentiation.

Which of the following is not characteristic of monopolistic competition? relatively large numbers of sellers production at minimum ATC in the long-run product differentiation relatively easy entry to the industry

production at minimum ATC in the long-run

DIAGRAM 34 Refer to the above diagram for a monopolistically competitive producer. The firm is: minimizing losses in the long run. minimizing losses in the short run. realizing a normal profit in the long run. about to leave the industry.

realizing a normal profit in the long run.

Which of the following is not a basic characteristic of monopolistic competition? the use of trademarks and brand names recognized mutual interdependence product differentiation a relatively large number of sellers

recognized mutual interdependence

Long-run equilibrium for a monopolistically competitive firm where economic profits are zero results from: rising marginal costs. a perfectly elastic product demand curve. relatively easy entry. product differentiation and development.

relatively easy entry.

If some firms leave a monopolistically competitive industry, the demand curves of the remaining firms will: be unaffected. shift to the left. become more elastic. shift to the right.

shift to the right.

DIAGRAM 32 If all monopolistically competitive firms in the industry have profit circumstances similar to the firm shown above: new firms will enter the industry. some firms will exit the industry. all firms will exit the industry. no firms will exit the industry.

some firms will exit the industry.

Monopolistically competitive and purely competitive industries are similar in that: both are assured of short-run economic profits. both produce differentiated products. the demand curves facing individual firms are perfectly elastic in both industries. there are few, if any, barriers to entry.

there are few, if any, barriers to entry.