Asnwers to Problem set 14 ECON 101 Monopolitically Competitive Firm
1. Refer to the graph below that represents a monopolistically competitive firm to answer the
following questions. This firm earns no economic profit.
a. What is the profit-maximizing level of
output? What price will it charge?
200 units at $20 each
b. Is this monopolistically competitive firm in
long-run equilibrium? Why or why not?
Yes because ATC=Price which means there
is no economic profit which is an essential
prerequisite of the long run equilibrium
2. A purpose of advertising is to make the:
A. demand for one's product less inelastic.
B. demand for one's product more inelastic.
C. supply for one's product less elastic.
D. market closer to perfectly competitive.
3.
3. Which of the following statements for a monopolistic competitor in long-run equilibrium is
true?
A. P = ATC = MC = MR.
B. P > ATC > (MC = MR).
C. P > (ATC = MC = MR).
D. (P = ATC) > (MC = MR).
P = ATC because of easy entry, which continues until zero economic profits prevail. MC = MR
because of profit maximization, and P > MR because each monopolistic competitor has limited
monopoly power.
4. Monopolistic competition is similar to perfect competition in that:
A. long-run profits tend to zero in both.
B. output is at minimum average total cost in both.
C. both entail the production of differentiated products.
D. firms advertise in both cases.
The absence of barriers ensures that entry or exit continues until there are zero economic profits.
5.
Refer to the graph shown depicting a monopolistically competitive firm.
A. Indicate which curve is represented by A, B,C and D curves.
A= MC,
B=ATC,
C= Demand,
D= MR
B. To maximize profit, the monopolistically competitive firm represented in this graph will produce at
which level of output and at which price?
Q1 and P4
C. According to the graph, is economic profit currently positive, negative, zero or impossible to
determine?
Positive because Price is above ATC when Q1 is produced.
D. According to the graph, is this monopolistically competitive industry attractive for firms to enter the
industry or not?
Sure, new firms will enter because there are lucrative economic profits to enjoy here.
MONEY TALKS 
E. No because in the long run equilibrium level there needs to be no economic profit which means
price is equal to ATC.
6.
Refer to the graph shown.
A. If this monopolistically competitive firm maximizes profit, how much will it charge as its price?
85$
B.What can you conclude about other firms entering or exiting this market?
Since ATC =P there is no economic profit here so no firms will be entering or exiting
C.How much will it produce it it maximizes profit?
8000 because that’s where MC=MR
D.If it maximizes profits, how much profit will it earn?
No profit since P=ATC at 8000 units of production.
7.
Refer to the graph shown. The firm in this monopolistically competitive industry will:
A. earn economic profits of $70,000 per year.
B. earn economic profits of $140,000 per year.
C. incur economic losses of $140,000 per year.
D. incur economic losses of $70,000 per year.
8. Will new firms enter this market, existing ones leave the market or is the industry in the long run
equilibrium? No because economic losses are made in this market so there is no money to be made
here, no one will be coming in.
9. Under monopolistic competition, a firm's ability to influence the price of the product it sells
arises because:
A. sellers in the market have large market shares.
B. sellers in the market have small market shares.
C. the product of each seller is differentiated from that of others.
D. each seller sells a standardized product.
10. As firms leave a monopolistically competitive industry that is sustaining economic losses:
A. the demand curves facing the remaining firms in the industry shift to the right.
B. the demand curves facing the remaining firms in the industry shift to the left.
C. total quantity demanded increases for the industry.
D. the market supply curve shifts to the right.
11. If the fast-food industry is monopolistically competitive, a profit-maximizing firm in this industry
sells its product at a price:
A. equal to average variable cost.
B. that maximizes the difference between marginal revenue and marginal cost.
C. that ensures that marginal revenue and marginal cost are equal.
D. equal to marginal cost.
12. Recently, Wendy's fast-food restaurants began to offer fruit or salad as a substitute for French fries
in their value meals. It made sense for Wendy's to advertise this fact as long as doing so:
A. raised revenue by more than it raised the cost of advertising.
B. raised any revenue at all.
C. did raise costs.
D. raised revenue by less than the cost of advertising.
13. When IBM sold its personal computer business to Lenovo, one analyst remarked that the PC
business was "a corner of the technology market where few companies have been able to
generate consistent profits." This low-profit result would be expected if the PC business:
A. is a cartel.
B. has barriers to entry.
C. is a winner-take-all market.
D. is monopolistically competitive.
An industry with easy entry and exit and limited economies of scale will not be able to sustain long-run
profit. This is what happens with monopolistic competition.