25.1 Monopolistic Competition

The key characteristics of a monopolistically competitive industry​ are: ​[A] A large number of firms that sell differentiated products that are close substitutes. ​[B] Firms can easily enter or exit a monopolistically competitive industry. ​[C] Because monopolistically competitive firms can increase their profits if they can successfully distinguish their products from those of their​ rivals, they have an incentive to engage in sales promotions and advertising. There are a number of​ fast-food restaurants in​ town, and they compete fiercely. Some restaurants cook their hamburgers over open flames. Others fry their hamburgers. In​ addition, some serve broiled fish​ sandwiches, while others serve fried fish sandwiches. A few serve ice cream cones for​ dessert, while others offer frozen ice cream pies. ______ There is a vast number of colleges and universities across the country. Each competes for top students. All offer similar courses and​ programs, but some have better programs in​ business, while others have stronger programs in the arts and humanities. Still others are academically stronger in the sciences. ______

​[A] A large number of firms that sell differentiated products that are close substitutes. [A] A large number of firms that sell differentiated products that are close substitutes.

No individual firm in a monopolistically competitive market will advertise. A. False B. True

A. False

All of the following are key characteristics of a monopolistically competitive industry except A. a homogeneous product. B. a differentiated product. C. the existence of close substitutes. D. a large number of firms.

A. a homogeneous product

The difference between monopolistic competition and perfect competition is that in comparison to perfect​ competition, monopolistic competition has A. fewer​ firms, product​ differentiation, some price​ control, and relatively easy but not​ barrier-free entry. B. more​ firms, product​ differentiation, some price​ control, and relatively easy but not​ barrier-free entry. C. fewer​ firms, no product​ differentiation, price​ control, and relatively​ easy, barrier-free entry. D. more​ firms, no product​ differentiation, some price​ control, and relatively​ easy, barrier-free entry.

A. fewer​ firms, product​ differentiation, some price​ control, and relatively easy but not​ barrier-free entry.

The more it costs to enter a monopolistically competitive​ market, the more a firm currently in that market must worry about losing business. A. True B. False

B. False

Which of the following characteristics applies to a monopolistically competitive​ industry? A. For the product being​ produced, consumers have few substitutes from which to choose. B. Products are​ similar, but not​ identical, to​ competitors' products. C. Firms face a horizontal demand curve. D. The products produced by competing firms are perfect subsitiutes for each other.

B. Products are​ similar, but not​ identical, to​ competitors' products.

In which industry is monopolistic competition most likely to be​ found? A. agriculture B. retail trade C. utilities D. mining

B. retail trade

The number of firms in a monopolistically competitive market means that A. all firms will have substantial monopoly power since there are so few firms in the industry. B. firms will be dependent on other firms to make output and price changes since there are many firms in the industry. C. each firm has a relatively small share of the total market since there are many firms in the industry. D. firms will likely collude since there are only a few firms in the industry.

C. each firm has a relatively small share of the total market since there are many firms in the industry.

The difference between monopolistic competition and pure monopoly is that in comparison to monopolistic​ competition, pure monopoly has A. at least one​ competitor, a patented​ product, little price​ control, and few entry barriers. B. at least one​ firm, a patented​ product, some price​ control, and few entry barriers. C. one​ firm, a unique​ product, price​ control, and entry barriers. D. one​ firm, a patented​ product, some price​ control, and entry barriers.

C. one​ firm, a unique​ product, price​ control, and entry barriers.

If there is no product differentiation at​ all, then the individual firm has a demand curve that is A. slightly downward sloping and identical the firm in monopolistic competition. B. perfectly inelastic and identical to the firm in perfect competition. C. perfectly elastic and identical to the firm in perfect competition. D. unit elastic and identical to the firm in perfect competition.

C. perfectly elastic and identical to the firm in perfect competition.

The greater the monopolistically competitive​ firm's success at product differentiation the lower is​ (are) the​ firm's A. opportunities for collusive behavior. B. options for altering product price. C. price elasticity of demand. D. None of the above are correct.

C. price elasticity of demand.

The downward slope of the demand curve of a monopolistically competitive firm implies that the firm has A. no monopoly power over​ price, and therefore advertising will not increase profits. B. constant returns to scale. C. some monopoly power over​ price, and therefore advertising may increase profits. D. increasing returns to scale.

C. some monopoly power over​ price, and therefore advertising may increase profits.

Which of the following characteristics applies to a monopolistically competitive​ industry? A. There are very few firms in the industry. B. Collusion is common. C. Firms in the industry each control a large share of the market. D. Firms act independently of each other.

D. Firms act independently of each other

Why have U.S. companies opted to increase the amount of advertising in digital​ formats? A wide variety of industries utilize digital ads in order to A. ease the entry of new firms into their respective markets. B. persuade viewers to spend more time on Internet sites and social network pages. C. signal that it intends to stay in business for a long time. D. differentiate their products.

D. differentiate their products.

In a monopolistically competitive​ industry, a relatively ______ number of firms interact in a _______ competitive market. Because monopolistically competitive firms sell ______ ​products, sales promotion and advertising are common features of a monopolistically competitive industry. There is ______ entry​ (or exit) of new firms in a monopolistically competitive industry.

large highly differentiated easy