ECON 221- Chapter 15

Excess capacity is a problem in monopolistic competition because if there were fewer firms in the industry:

average total costs would be lower and the prices paid by consumers could be lower.

(Figure: The Restaurant Market) The figure The Restaurant Market shows curves facing a typical restaurant. Assume that many firms, differentiated products, and easy entry and exit characterize the market. In the long run:

restaurants will enter the market.

(Figure: Firms in Monopolistic Competition) Look at the figure Firms in Monopolistic Competition. A positive economic profit will be earned if the profit-maximizing price is _____ in panel _____.

F; (A)

A firm in monopolistic competition maximizes its profit by producing so that:

MC = MR.

The sources of product differentiation do NOT include:

consumers' value in uniformity.

(Figure: Monopolistic Competitor) If the firm shown in the figure Monopolistic Competitor maximizes its returns, it will:

earn a positive economic profit.

In monopolistic competition, each firm:

has some ability to set the price of its differentiated good.

If a firm operating in monopolistic competition is producing a quantity at which MC < MR, then profit can be _____ by _____.

increased; increasing production

Toby operates a small deli downtown. The deli industry is monopolistically competitive. In the long run, Toby will produce where:

marginal revenue equals marginal cost.

Suppose a monopolistically competitive firm can increase its profits by decreasing its output. At the current output:

marginal revenue is less than marginal cost.

In large shopping malls, the retail clothing market is most illustrative of:

monopolistic competition.

An industry with a large number of relatively small firms producing differentiated products in a market with easy entry and exit of firms is:

monopolistically competitive.

The market for soft drinks, which is dominated by Coca Cola and Pepsi, is best considered to be an example of:

oligopoly.

If the toothpaste market is monopolistically competitive, product differentiation may take the form of:

production of many varieties of toothpaste, including those with whitening agents; differentiation in the locations where certain toothpastes are available; and quality differences among the various brands.

Many customers will walk right past a diner that serves coffee and go to Starbucks, where they pay more for a cup of java. For these customers, coffee is differentiated by:

quality.

A monopolistically competitive industry, such as corn snack chips, and a perfectly competitive industry, like wheat farming, are alike in that:

there are many firms in each industry.

(Figure: The Restaurant Market) The figure The Restaurant Market shows curves facing a typical restaurant. Assume that many firms, differentiated products, and easy entry and exit characterize the restaurant market. In long-run equilibrium, the economic profit earned by the typical restaurant in the community will be:

zero.

(Figure: Comparing Long-Run Equilibriums) In the figure Comparing Long-Run Equilibriums, which of the following statements is TRUE?

Both panels show markets that have many firms.

Monopolistic competition in an industry will result in _____ because firms produce _____.

chronic excess capacity; less than the minimum-cost output

Advertising is an economically productive activity and NOT a waste of resources because it:

can convey information about the product.

(Figure: Profit Maximization for a Firm in Monopolistic Competition) Look at the figure Profit Maximization for a Firm in Monopolistic Competition. Suppose that an innovation reduces a firm's costs from ATC to ATC′. Before the innovation reduced the cost, the firm's maximum economic profit was:

$0.

(Figure: Comparing Long-Run Equilibriums) In the figure Comparing Long-Run Equilibriums, which of the following statements is FALSE?

The firm in panel (b) produces where price equals marginal cost.

(Figure: Profits in Monopolistic Competition) Look at the figure Profits in Monopolistic Competition. A negative economic profit (or economic loss) is earned if the profit-maximizing price is _____ in panel _____.

O; (C)

In the long run, monopolistically competitive firms:

cannot earn an economic profit.

Monopolistically competitive firms have zero economic profits in the long run because of:

easy entry and exit.

(Figure: Monopolistic Competition V) In the figure Monopolistic Competition V, in the long run firms will:

enter this market until all firms earn zero economic profit.

In a long-run equilibrium, firms in a monopolistically competitive industry sell at a price:

greater than marginal cost.

(Figure: Monopolistic Competition III) The figure Monopolistic Competition III shows the demand, marginal revenue, marginal cost, and average total cost curves for Pat's Pizza Parlor, a monopolistic competitor in the food-to-go industry. In the long run, the demand curve for Pat's Pizza Parlor will shift to the _____ as competitors _____ the market.

left; enter

In many cities you can stay at a Holiday Inn in the downtown area, in a suburban community, or near the airport. These Holiday Inn establishments are examples of product differentiation by:

location.

Because most communities have a large number of similar but not identical substitutes, the market for chiropractors is best considered to be:

monopolistically competitive.

(Figure: Monopolistic Competition V) The figure Monopolistic Competition V illustrates a firm in the _____; in the _____, the demand and marginal revenue curves will shift to the _____.

short run; long run; left

(Figure: Monopolistic Competition VI) The figure Monopolistic Competition VI illustrates a firm in the _____; in the _____, the demand and marginal revenue curves will shift to the _____.

short run; long run; right

When a monopolistically competitive firm is making zero economic profits, it is producing so that the average total cost curve is tangent to the demand curve. At this output:

the firm is maximizing profits, and marginal cost must equal marginal revenue.