Chapter 16

Monopolistic competition is characterized by many buyers and sellers, product differentiation, and free entry.

True

Monopolistically competitive firms, like monopoly firms, maximize their profits by charging a price that exceeds marginal cost.

True

Product differentiation always leads to some measure of market power.

True

The "monopoly" in monopolistically competitive markets is most likely a result of firms having some pricing power due to product differentiation.

True

If advertising decreases the elasticity of demand for specific brand names of hard liquor, we would expect firms to be able to charge a larger markup over marginal cost.

True

In a long-run equilibrium, both perfectly competitive markets and monopolistically competitive markets have price equal to average total cost.

True

When a monopolistically competitive firm is in long-run equilibrium,

price is equal to average total cost.

The higher the concentration ratio, the

(a) more control an individual firm has to set prices. (c) less competitive the industry. Both a and c are correct.

A firm in a monopolistically competitive market is similar to a monopoly in the sense that (i) they both face downward-sloping demand curves. (ii) they both charge a price that exceeds marginal cost. (iii) free entry and exit determines the long-run equilibrium.

(i) and (ii) only

Monopolistic competition is characterized by a few sellers offering similar products, whereas oligopoly is characterized by many sellers offering differentiated products.

False

The market for wheat is most likely considered a monopolistically competitive market.

False

When a firm in a monopolistically competitive market earns zero economic profit, its product price must equal marginal cost.

False

Which of the following is a characteristic of monopolistic competition?

free entry

Monopolistic competition is an inefficient market structure because

it has a deadweight loss, just as monopoly does.

Evidence from the market for eyeglasses suggests that advertising leads to

lower prices for consumers.

Which of the following is not a key feature of monopolistic competition?

Positive economic profits for firms in the long run

McDonald's restaurants has recently announced intentions to open a new restaurant in Smalltown, Indiana. Assume that the fast-food restaurant market in Smalltown is characterized by monopolistic competition. As a result of the new McDonald's, residents of Smalltown are likely to benefit from

a product-variety externality.

A monopolistically competitive market is like a competitive market in that

both market structures feature easy entry by new firms in the long run.

"In a long-run equilibrium, price is equal to average total cost." This statement applies to

competitive and monopolistically competitive markets, but not to monopolies.

Critics of advertising argue that advertising

creates demand for products that people otherwise do not want or need.

Joe's Juice Shop operates in a monopolistically competitive market. Joe's is currently producing where its average total cost is minimized. In the long run we would expect Joe's output to

decrease and average total cost to increase.

Critics of advertising argue that in some markets advertising may

decrease elasticity of demand allowing firms to charge a larger markup over marginal cost.

Monopolistic competition differs from perfect competition because in monopolistically competitive markets

each of the sellers offers a somewhat different product.

Edward Chamberlin argued that governments should

not enforce the trademarks that companies use to identify their products.

The commercial jetliner industry consisting of Boeing and Airbus would best be described as a (an)

oligopoly.

A firm can earn economic profits in the long run

only when the market is a monopoly.

According to one theory, advertising sends a signal to consumers about the quality of the product being offered. An implication of this theory is that

the content of the advertisement is irrelevant.

Monopolistic competition is considered inefficient because

price exceeds marginal cost.

A firm that would experience higher average total cost by increasing production is operating with excess capacity.

False

A monopolistically competitive firm faces a downward-sloping demand curve because there are few firms in the market.

False

Empirical evidence suggests that advertising usually leads to an increase in the price for advertised products.

False

Monopolistic competition and monopoly are examples of a market structure called imperfect competition.

False

When a monopolistically competitive firm is in a long-run equilibrium, the values of marginal cost, average total cost, and price are all the same.

False

When advertising is used to relay information about price, each firm is able to enhance market power.

False

Which of the following statements is not correct?

Milk is likely to be produced in a monopolistically competitive industry.

Critics of advertising argue that advertising leads to less elastic demand for products and a larger markup of price over marginal cost.

True

Critics of advertising argue that firms use advertising to manipulate consumers' tastes.

True

Excess capacity characterizes firms in monopolistically competitive markets, even in situations of long-run equilibrium.

True

The product-variety externality states the benefits to consumers from the introduction of a new product.

True

There are four basic types of market structure.

True

According to the signaling theory of advertising, consumers

are often more impressed by a firm's willingness to spend money on advertising than they are by the content of the advertisement.

Monopolistically competitive firms have excess capacity. To maximize profits, firms will

maintain the excess capacity.

If "too much choice" is a problem for consumers, it would occur in which market structure(s)?

monopolistic competition

A market structure in which there are many firms selling products that are similar but not identical is known as

monopolistic competition.

The market for novels is

monopolistically competitive.

Which of the following is an example of a monopolistically competitive industry?

movies

A firm is a price taker

only when the market is perfectly competitive.

As firms exit a monopolistically competitive market, profits of remaining firms

rise, and product diversity in the market decreases.

A similarity between monopoly and monopolistic competition is that in both market structures

sellers are price makers rather than price takers.