Chapter 7 MarcoEconomics

The demand curve facing a monopolistic competitor is

downward sloping due to product differentiation but highly elastic due to the prevalence of close substitutes.

How can advertising be used as a signaling behavior?

A company that continually engages in visible advertising signals its competitors that it is serious about staying in business.

What is meant by the term "strategic dependence"?

A situation in which each firm knows that actions regarding price or product quality will prompt a reaction from competitors.

What is a price war?

A situation in which the nondominant firms in a price leadership model undercut the price charged by the dominant firm.

In monopolistic competition, what is meant by "nonprice competition"?

Advertising and product differentiation.

Why do some firms engage in price discrimination?

In order to increase their revenues.

Why does a monopolistic competitor have some control over the price of his product?

Because his product is somewhat unique due to product differentiation.

Why is it that a monopolistically competitive firm has some control over price?

Because of product differentiation.

What do most firms avoid engaging in opportunistic behavior?

Because they want to engage in repeat transactions.

Why are brand names and advertising important features of monopolistic competition?

Both of these techniques can be used to increase the demand for the product.

Why do firms in a monopolistic competitive market engage in product differentiation while firms in perfect competition do not?

Firms in a perfectly competitive market produce homogeneous goods, while firms in monopolistic competition can gain some measure of monopoly power by creating a sense of distinction and uniqueness about their own product.

Which of the following statements is FALSE? -In the long run, both the monopolistically competitive firm and the perfectly competitive firm produce a quantity where price equals marginal cost. -Both the monopolistically competitive firm and the perfectly competitive firm seek to maximize profit. -In the long run, both the monopolistically competitive firm and the perfectly competitive firm produce a quantity where price equals average total cost. -In the long run, both the perfectly competitive firm and the monopolistically competitive will tend toward a zero level of economic profit.

In the long run, both the monopolistically competitive firm and the perfectly competitive firm produce a quantity where price equals marginal cost.

A market situation in which a large number of firms produce similar but not identical products.

Monopolistic competition.

Actions that ignore the possible long-run benefits of cooperation and instead focus solely on short-term gains.

Opportunistic behavior.

Selling a product at more than one price, with the price difference unrelated to differences in production cost.

Price discrimination.

The distinguishing of products by brand name, color, and other minor attributes.

Product differentiation.

A situation in which actions by one firm will produce reactions by competitors.

Strategic dependence.

Which of the following is an aspect of price discrimination? -The firm engages in tacit collusion with all of its competitors. -The advertises its product, but does not mention the price in the advertising. -The firm engages in collusion with one other competitor. -The firm charges a higher price to those with a relatively more inelastic demand.

The firm charges a higher price to those with a relatively more inelastic demand.

How does a monopolistic competitive firm determine the profit-maximizing output and price?

The firm equates marginal revenue to marginal cost in order to determine the profit-maximizing quantity and then charges the price corresponding to that quantity on the demand curve.

Under what condition would a monopolistically competitive firm be earning a positive economic profit?

When price exceeds average total cost.

A monopolistic competitor will most likely

advertise its products in order to differentiate them from those of its competitors.

The term, "monopolistic competition," indicates that the industry has some characteristics of monopoly and some characteristics of perfect competition. Monopolistically competitive firms are

competitive in that firms make zero long-run economic profits but are monopolistic in that they face downward-sloping demand curves.

A market structure in which there are only two sellers of a good is called a

duopoly

In the long run, monopolistically competitive firms tend to

make zero economic profits.

If there is no product differentiation at all in monopolistic competition, then the individual firm has a demand curve that is

perfectly elastic and resembles that faced by the firm in perfect competition.

To the extent that a monopolistically competitive firm succeeds at differentiating its product from those of its competitors, it will have lowered its

price elasticity of demand.

In the short run, a monopolistically competitive firm will

select the level of output at which marginal revenue equals marginal cost.

The downward slope of the demand curve of a monopolistically competitive firm implies that the firm has

some control over price.

Oligopoly is characterized by

strategic dependence.

Price leadership is an example of

tacit collusion.

All of the following are key characteristics of a monopolistic competitive industry except that -each firm's good has many close substitutes. -the firms produce a differentiated product. -there are many firms in the industry. -the firms produce a homogeneous product.

the firms produce a homogeneous product.

If the industry concentration ratio in a given market is 72 percent, this means that

the four largest firms in the industry account for 72 percent of total industry sales.

Monopolistic competition is

the most common form of market structure in the U.S.

One major difference between perfect competition and monopolistic competition is that

the perfect competitor faces a perfectly elastic demand curve and the monopolistic competitor faces a downward-sloping demand

Which one of the following is true of perfect competition and monopolistic competition but is NOT true of monopoly? -If the firm is earning an economic profit, it can expect new firms to enter the industry. -The firm faces a downward-sloping demand curve. -The firm seeks to maximize profit. -The firm produces the quantity at which marginal revenue equals marginal cost.

If the firm is earning an economic profit, it can expect new firms to enter the industry.

Which of the following is true about perfect competition but NOT true about monopolistic competition? -The firm engages in advertising to differentiate its product from those of its competitors. -The firm has some control over the selling price of its product. -In long run equilibrium, the firm produces the quantity corresponding to the minimum point on the ATC curve. -If the firm is currently producing a quantity at which MR exceeds MC, then it can enhance the level of profit by producing another unit.

In long run equilibrium, the firm produces the quantity corresponding to the minimum point on the ATC curve.

The percentage of industry sales accounted for by the top four firms.

Industry concentration ratio.

Which of the following describes the marginal revenue curve for a monopolistic competitor? -It is a vertical line. -It is a downward-sloping line lying above the demand curve. -It is a downward-sloping line lying beneath the demand curve. -It is a horizontal line.

It is a downward-sloping line lying beneath the demand curve.

Which of the following statements is true about monopoly but NOT true about monopolistic competition? -The firm may sustain positive economic profits in the long run. -The firm produces the quantity at which marginal revenue equals marginal cost. -The firm's marginal revenue curve is downward-sloping. -In order to increase the quantity sold, the firm must lower its price.

The firm may sustain positive economic profits in the long run.

In comparing perfect competition and monopolistic competition, which of the following is true? -The perfectly competitive firm is a price taker, but the monopolistic competitor has some control over price. -The monopolistic competitor can earn positive economic profits in the long run, but the perfect competitor cannot. -The perfectly competitive firm can earn positive economic profits in the long run, but the monopolistic competitor cannot. -The perfect competitor seeks to maximize profit, but the monopolistic competitor seeks to minimize costs.

The perfectly competitive firm is a price taker, but the monopolistic competitor has some control over price.