Chapter 13: Monopolistic Competition

When measuring industry concentration, the ____ is the ratio of sales of the four largest firms in an industry relative to total industry sales.

four-firm concentration ratio

The demand curve faced by a monopolistically competitive firm is _____.

highly but not perfectly elastic.

Suppose an industry has 10 firms and each has a 10% share of the market. This industry's Herfindahl index is .

1000

If the four largest firms in an industry produce 20, 10, 7, and 3 units of output, respectively, and total industry output is 100 units, then the four-firm concentration ratio equals ______.

40%

Suppose an industry has two firms each with 50% market share. The Herfindahl index for this industry is ______.

5,000

Suppose an industry has ten firms. Three of the firms produce 200 units of output each, one produces 150 units, two of the firms produce 75 units each, and four of the firms produce 25 units each. The four-firm concentration ratio for this industry equals ______.

75%

Which of the following best exemplifies a firm with excess capacity?

A fast-food restaurant where customers never have to wait to place an order.

In the long run, a monopolistic competitor fails to achieve which of the following?

Allocative efficiency Productive efficiency

Why does each monopolistically competitive firm generally have limited control over market price?

Each firm has a relatively small percentage of the total market.

Why do firms engage in product differentiation if it adds to the firm's costs?

Increased differentiation may increase demand enough to compensate for the added costs.

Which of the following are typical characteristics of monopolistic competition?

Independent action No collusion Small market share

What will happen to a monopolistically competitive firm in the long run?

It will only break even.

Andrea and Robert are considering operating a retail jewelry store. Robert has been designing jewelry for a wholesaler since graduating from college. Andrea was a business major and is evaluating if they can increase their income by being in business for themselves. Which of the following characteristics show that the industry they wish to enter is a monopolistically competitive industry?

There are many places to buy jewelry. Opening a retail jewelry store is relatively easy.

The equality of price and marginal cost yields _ (allocative/productive) efficiency.

allocative

Entry of new firms into monopolistically competitive industries is relatively easy because ______.

capital requirements are low

When Mary tried to get an appointment with a local dentist she was told that the earliest the doctor could see her was in three weeks. This may have been due to a lack of ______.

excess capacity

A monopolistic competitor's demand curve is ______.

more elastic than that of a pure monopoly but less elastic than that of a firm in pure competition

competition is competition illustrated through product differentiation and advertising.

nonprice

Entry to and exit from monopolistically competitive industries is ______.

relatively easy

Monopolistically competitive firms typically have a(n) ______ share of the market.

relatively small

The Herfindahl index equals the ______.

sum of the squared percentage market shares of all firms in an industry

Which of the following factors is most likely to help a monopolistically competitive firm postpone earning only a normal profit?

Product differentiation

B-Balls, a manufacturer of athletic balls, is facing increased competition due to the entry of several new firms into the industry. These new competitors have resulted in reduced demand for B-Balls' basketballs, and the company is losing money. Which of the following steps should B-Balls take regarding price in order to minimize losses until some firms exit the industry?

Set its price at its new reduced level of demand where the MC curve intersects the MR curve

When plant and equipment are underutilized because firms are producing less than the minimum-ATC output, this is known as having ______.

excess capacity productive inefficiency

Concentration ratios that use national market share numbers are limited in usefulness because they ______.

fail to account for highly localized industries

The four-firm concentration ratio and the Herfindahl index measure ______.

industry concentration

Productive efficiency in monopolistically competitive markets does not occur in the long run because firms set the price

on the demand curve where MR=MC to maximize economic profit, making output less than optimal from society's perspective.

The equality of price and minimum average total cost yields efficiency; the equality of price and marginal cost yields efficiency. (Enter one word in each blank.)

productive allocative

When a firm's price is equal to its minimum average total cost of producing a product, ___ exists.

productive efficiency

The four-firm concentration ratio, expressed as a percentage, is the ratio of the total industry ______ _ of the four largest firms in an industry relative to total industry sales.

sales

If a monopolistically competitive firm is producing where its marginal revenue is less than its marginal cost, then the firm

should produce less output to increase profits or reduce losses.

Monopolistic competition normally consists of 25 to 75 firms rather than hundreds or thousands and involves which of the following characteristics?

small market shares no collusion independent action

Industry concentration measures the extent to which ______.

the largest firms account for industry output

In order for a monopolistically competitive firm to maximize profits, it must juggle which of the following factors?

the selling price of the product the variety of product the level of advertising

True or false: Concentration ratios that use national market share numbers are of limited help because they do not account for the fact that competition in many industries is concentrated in local markets.

true

Firms in monopolistic competition produce goods with ______.

varying degrees of customer service slightly varying physical characteristics

Allocative efficiency is achieved in the short run when the equality of which of the following occurs?

P = MC

_ (one word) competition is a market characterized by having many sellers, differentiated products, and ease of entry and exit from an industry.

Monopolistically

Which of the following produce variations of a particular product?

Monopolistically competitive firms

Excess capacity is best described as underused plant resources that are a result of ______.

a firm producing less output than what is associated with achieving minimum average total cost

In long-run equilibrium, monopolistically competitive firms will show a(n) _____.

normal profit

In the short run, monopolistically competitive firms maximize profits or minimize losses by producing the output level where

marginal revenue equals marginal cost.

A good way to describe (monopolistic/oligopolistic) competition is that it mixes a small amount of monopoly power with a large amount of competition, while (monopoly/oligopoly) blends a large amount of monopoly power with a small amount of competition through entry and considerable rivalry among firms.

monopolistic oligopolistic

Two types of market models that closely approximate many markets in the real world are

monopolistic competition and oligopoly.

The goal of advertising a product to differentiate it from competitor's products so that price is less of a factor when a consumer makes a purchase is considered ______ competition.

nonprice