Chapter 15
Monopolistic Competition
15.1 What Is Monopolistic Competition?
1) An industry with a large number of firms, differentiated products, and free entry and exit is
called
A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
E) monopolistic oligopoly.
Answer: B
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Objective: Checkpoint 15.1
Author: SB
2) In monopolistic competition, each firm supplies a small part of the market. This occurs
because
A) there are barriers to entry.
B) there are no barriers to entry.
C) there are a large number of firms.
D) firms produce differentiated products.
E) there are a large number of buyers.
Answer: C
Topic: Monopolistic competition, definition
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: SB
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Bade/Parkin œ Foundations of Economics, Third Edition
3) In monopolistic competition, the products of different sellers are assumed to be
A) identical.
B) similar but slightly different.
C) unique without any close or perfect substitutes.
D) perfect substitutes.
E) either identical or differentiated.
Answer: B
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Objective: Checkpoint 15.1
Author: TS
4) Which of the following is true about monopolistic competition but false about perfect
competition?
A) There are a large number of independently acting sellers.
B) There are no barriers to entry.
C) Firms can earn an economic profit in the short run.
D) Firms compete on their product's price as well as its quality and marketing.
E) Firms cannot earn an economic profit in the long run.
Answer: D
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Objective: Checkpoint 15.1
Author: TS
5) In an industry with a large number of firms,
A) each firm will produce a large quantity, relative to market demand.
B) one firm will dominate the market.
C) collusion is impossible.
D) competition is eliminated.
E) barriers to exit must exist.
Answer: C
Topic: Monopolistic competition, definition
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: SB
Chapter 15 Monopolistic Competition
6) Which of the following is an example of a monopolistically competitive industry?
A) land-based long distance telephone service
B) wheat farming
C) the local electricity producer
D) manufacturing of shirts
E) cable television
Answer: D
Topic: Monopolistic competition, definition
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: TS
7) The United Company competes with many other firms each producing slightly different
products. Firms freely enter and exit this industry. The type of industry United Company
operates in is ____.
A) a monopoly.
B) monopolistic competition.
C) oligopoly.
D) perfect competition.
E) oligopolistic monopoly.
Answer: B
Topic: Monopolistic competition, definition
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: CD
8) A differentiated product has
A) many perfect substitutes.
B) no close substitutes.
C) no substitutes of any kind.
D) close but not perfect substitutes.
E) many different complements.
Answer: D
Topic: Product differentiation
Skill: Level 1: Definition
Objective: Checkpoint 15.1
Author: SB
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9) As the degree of product differentiation increases among the products sold in a
monopolistically competitive industry,
A) the cost of production falls.
B) the demand curve for each seller's product becomes more horizontal.
C) each seller's demand becomes more inelastic.
D) the amount of marketing expenditures decreases for each firm.
E) sellers can no longer earn an economic profit.
Answer: C
Topic: Product differentiation
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: TS
10) For a firm in monopolistic competition, marketing
A) means only selling at a lower price than rivals
B) takes the forms of advertising and packaging
C) means producing more output to lower average costs
D) consists of changing the marginal cost and marginal revenue curves.
E) None of the above answers is correct.
Answer: B
Topic: Product differentiation
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: TS
11) Firms in monopolistic competition have demand curves that are
A) horizontal.
B) vertical.
C) downward sloping.
D) upward sloping.
E) U-shaped.
Answer: C
Topic: Monopolistic competition, demand curve
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: SB
Chapter 15 Monopolistic Competition
631
12) As a firm in monopolistic competition sets the price for its product, the firm faces a tradeoff
between
A) supply and demand.
B) efficiency and equity.
C) internal and external economies of scale.
D) price and the quantity it can sell.
E) its marginal revenue and its price.
Answer: D
Topic: Monopolistic competition, demand curve
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: TS
13) If you have found the percentage of the value of total revenue accounted for by the four
largest firms in an industry, you have found the
A) elasticity of demand value.
B) elasticity of supply value.
C) Herfindahl-Hirschman Index.
D) four-firm concentration ratio.
E) monopolistic concentration index.
Answer: D
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: TS
14) Which of the following four-firm concentration ratios would be the best indication of a
perfectly competitive industry?
A) 0.25 percent
B) 31 percent
C) 78 percent
D) 100 percent
E) 50 percent
Answer: A
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: TS
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Bade/Parkin œ Foundations of Economics, Third Edition
15) Which of the following four-firm concentration ratios is consistent with monopolistic
competition?
A) 100 percent
B) 75 percent
C) 25 percent
D) 0 percent
E) 91 percent
Answer: C
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: SB
Sales
Firm
(millions of dollars)
QT Burgers
75
Kwickie Chix
50
Speedy Spuds
50
Hasty Pudding
25
Other 200 firms
800
16) The table above shows the revenue figures for the top four firms along with a total for the
remaining firms in the fast-food industry. What is the four-firm concentration ratio for the
industry?
A) 200
B) 20 percent
C) 25 percent
D) 80 percent
E) 100 percent
Answer: B
Topic: Four-firm concentration ratio
Skill: Level 3: Using models
Objective: Checkpoint 15.1
Author: CD
Chapter 15 Monopolistic Competition
633
17) Which of the following four-firm concentration ratios would be the best indicator of a
monopoly?
A) 0.25 percent
B) 31 percent
C) 78 percent
D) 100 percent
E) 89 percent
Answer: D
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: TS
18) Which of the following four-firm concentration ratios would be the best indicator of an
oligopoly?
A) 0.25 percent
B) 31 percent
C) 78 percent
D) 100 percent
E) 11 percent
Answer: C
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: TS
19) What is the four-firm concentration ratio if the four largest firms in an industry account for
5 percent, 6 percent, 7 percent, and 8 percent of total revenue?
A) 26 percent
B) 174 percent
C) 1,680
D) There is enough information given to answer the question, but none of the answers
above are correct.
E) There is not enough information given to answer the question.
Answer: A
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: TS
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20) The square of the percentage market share of each firm summed over the largest 50 firms in
a market is the
A) elasticity of demand value.
B) elasticity of supply value.
C) Herfindahl-Hirschman Index.
D) four-firm concentration ratio.
E) fifty-firm concentration ratio.
Answer: C
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: TS
21) What is the Herfindahl-Hirschman Index if the four firms in an industry account for 62
percent, 15 percent, 15 percent, and 8 percent of total revenue?
A) 100
B) 4,358
C) 111,600
D) 2,822
E) 6,200
Answer: B
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: TS
Chapter 15 Monopolistic Competition
Firm
Gary's Gourmet
Allen's Extras
Travis' Treats
Orin's Eats
Reed's Riches
Seth's Sweetest
Uriah's Foodfest
635
Market share
(percent)
30
25
15
10
10
5
5
22) Suppose there are 7 firms in the candy industry with the market shares shown below. What
is the HHI for the industry?
A) 1850
B) 2000
C) 6400
D) 100
E) 20
Answer: B
Topic: Herfindahl-Hirschman Index
Skill: Level 3: Using models
Objective: Checkpoint 15.1
Author: CD
23) A market is considered competitive if the Herfindahl-Hirschman Index (HHI) is ____ and
its four-firm concentration ratio is ____.
A) high; high
B) high; low
C) low; high
D) low; low
E) between 30 percent and 70 percent; greater than 5,000
Answer: D
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: SB
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24) One problem with measures of market concentrations is that they do not
A) account for barriers to entry.
B) allow for all market types.
C) account for the difficulty in collecting total revenue data.
D) create meaningful comparisons across industries.
E) accurately measure concentration in markets with fewer than 4 firms.
Answer: A
Topic: Limitations of concentrations ratios
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: CD
25) In monopolistic competition there
A) are many firms and many buyers.
B) are several large firms.
C) is one large firm.
D) might be many, several, or one firm.
E) are many firms but only a few buyers.
Answer: A
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Objective: Checkpoint 15.1
Author: STUDY GUIDE
26) A firm in monopolistic competition has a ____ market share and ____ influence the price of
its good or service.
A) large; can
B) large; cannot
C) small; can
D) small; cannot
E) large; might be able to
Answer: C
Topic: Monopolistic competition, definition
Skill: Level 1: Definition
Objective: Checkpoint 15.1
Author: STUDY GUIDE
Chapter 15 Monopolistic Competition
27) Product differentiation means
A) making a product that has perfect substitutes.
B) making a product that is entirely unique.
C) the inability to set your own price.
D) making a product that is slightly different from products of competing firms.
E) making your demand curve horizontal.
Answer: D
Topic: Product differentiation
Skill: Level 1: Definition
Objective: Checkpoint 15.1
Author: STUDY GUIDE
28) Firms in monopolistic competition compete on
i. quality.
ii. price.
iii. marketing.
A) i and ii.
B) ii only.
C) ii and iii.
D) i and iii.
E) i, ii, and iii.
Answer: E
Topic: Product differentiation
Skill: Level 1: Definition
Objective: Checkpoint 15.1
Author: STUDY GUIDE
29) A firm in monopolistic competition has ____ demand curve.
A) a downward sloping
B) an upward sloping
C) a vertical
D) a horizontal
E) a U-shaped
Answer: A
Topic: Monopolistic competition, demand curve
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: STUDY GUIDE
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30) The absence of barriers to entry in monopolistic competition means that in the long run
firms
A) earn an economic profit.
B) earn zero economic profit.
C) incur an economic loss.
D) earn either an economic profit or a normal profit.
E) earn either a normal profit or suffer an economic loss.
Answer: B
Topic: Monopolistic competition, long run profit
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: STUDY GUIDE
31) If the four-firm concentration ratio for the market for pizza is 28 percent, then this industry
is best characterized as
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) oligopolistic competition.
Answer: B
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: STUDY GUIDE
32) Each of the ten firms in an industry has 10 percent of the industry's total revenue. The
four-firm concentration ratio is
A) 80.
B) 100.
C) 1,000.
D) 40.
E) 10.
Answer: D
Topic: Four-firm concentration ratio
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: STUDY GUIDE
Chapter 15 Monopolistic Competition
639
33) Each of the four firms in an industry has a market share of 25 percent. The
Herfindahl-Hirschman Index equals
A) 3,600.
B) 100.
C) 625.
D) 25.
E) 2,500.
Answer: E
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: STUDY GUIDE
34) The larger the four-firm concentration, the ____ competition within an industry; the larger
the Herfindahl-Hirschman Index, the ____ competition within an industry.
A) more; more
B) more; less
C) less; more
D) less; less
E) The premise of the question is wrong because the four-firm concentration ratio applies
only to markets with four firms in it and these markets are, by definition, not
competitive.
Answer: D
Topic: Herfindahl-Hirschman Index
Skill: Level 2: Using definitions
Objective: Checkpoint 15.1
Author: STUDY GUIDE
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15.2 Output and Price Decisions
1) Firms in monopolistic competition determine the profit-maximizing level of output by
producing
A) the same output level as rivals do.
B) where average total cost is minimized.
C) at the point of minimum average fixed cost.
D) where marginal revenue equals marginal cost.
E) where price equals average total cost.
Answer: D
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: TS
2) In monopolistic competition, profit is maximized by producing so that marginal revenue
A) equals price.
B) is negative.
C) equals marginal cost and is less than price.
D) equals average total cost but not marginal cost.
E) equals marginal cost and equals price.
Answer: C
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: SB
3) If a monopolistically competitive seller's marginal cost is $3.56, the firm will increase its
output if
A) its marginal revenue is less than $3.56.
B) its marginal revenue is equal to $3.56.
C) its marginal revenue is more than $3.56.
D) average total cost is less than $3.56.
E) Both answers A and D are correct.
Answer: C
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: TS
Chapter 15 Monopolistic Competition
4) If a monopolistically competitive seller's marginal cost is $3.56, the firm will decrease its
output if
A) its marginal revenue is less than $3.56.
B) its marginal revenue is equal to $3.56.
C) its marginal revenue is more than $3.56.
D) its average total cost is equal to $4.00.
E) Both answers B and D are correct.
Answer: A
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: TS
5) If a monopolistically competitive seller's marginal cost is $3.56, the firm will not change its
output if
A) its marginal revenue is less than $3.56.
B) its marginal revenue is equal to $3.56.
C) its marginal revenue is more than $3.56.
D) its average total cost is equal to $3.56.
E) Both answers B and D are correct.
Answer: B
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: TS
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6) The above figure shows a restaurant engaged in monopolistic competition with other
restaurants. The equilibrium price at this restaurant is ____ per meal.
A) $20
B) $30
C) $50
D) less than $20
E) more than $50
Answer: C
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Objective: Checkpoint 15.2
Author: MR
Chapter 15 Monopolistic Competition
7) The above figure shows a restaurant engaged in monopolistic competition with other
restaurants. The equilibrium quantity at this restaurant is ____ meals per day.
A) less than 150
B) between 151 and 250
C) between 251 and 350
D) between 451 and 450
E) more than 451
Answer: B
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Objective: Checkpoint 15.2
Author: MR
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8) The above figure shows a motel engaged in monopolistic competition with other motels.
The equilibrium price at this motel is ____ per room.
A) $20
B) $30
C) $40
D) $50
E) $10
Answer: D
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Objective: Checkpoint 15.2
Author: MR
Chapter 15 Monopolistic Competition
9) The above figure shows a motel engaged in monopolistic competition with other motels.
The equilibrium quantity at this motel is ____ rooms per day.
A) 200
B) 300
C) 400
D) 500
E) 100
Answer: B
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Objective: Checkpoint 15.2
Author: MR
10) The above figure shows a motel engaged in monopolistic competition with other motels.
Figure shows the ____ equilibrium in which the motel is ____ .
A) short-run; earning an economic profit
B) short-run; earning a normal profit
C) long-run; earning an economic profit
D) long-run; earning a normal profit
E) short-run; incurring an economic loss
Answer: A
Topic: Monopolistic competition, output and price
Skill: Level 3: Using models
Objective: Checkpoint 15.2
Author: MR
11) In the long run in monopolistic competition, firms
A) earn an economic profit but not a normal profit.
B) incur an economic loss.
C) earn a normal profit but not an economic profit.
D) shut down.
E) earn either an economic profit or a normal profit.
Answer: C
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: SB
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12) If firms in monopolistic competition are earning economic profits, eventually
A) they shut down.
B) they exit the industry.
C) the market turns into a monopoly.
D) new firms enter the industry.
E) the firms in the market increase their production so that their economic profit
disappears.
Answer: D
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: SB
13) At a long-run equilibrium in monopolistic competition, price equals
A) average total cost.
B) marginal cost but not marginal revenue.
C) marginal revenue but not marginal cost.
D) zero.
E) marginal revenue and marginal cost.
Answer: A
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: SB
14) In the long run, a firm in monopolistic competition will produce
A) where average total cost is minimized.
B) where price equals average total cost but average total cost is not at its minimum.
C) zero output.
D) any possible amount of output.
E) where price equals marginal cost.
Answer: B
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: TS
Chapter 15 Monopolistic Competition
15) Which of the following is NOT a characteristic of long-run equilibrium in monopolistic
competition?
A) the firm earns a normal profit
B) price equal to average total cost
C) production at minimum average total cost
D) marginal revenue equal to marginal cost
E) price exceeds marginal revenue
Answer: C
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: TS
16) If firms in monopolistic competition are earning economic profits, then
A) they can expect to earn the profits indefinitely.
B) new rivals enter the industry and the demand for any seller's good decreases.
C) the market demand becomes more inelastic.
D) the industry is in long-run equilibrium.
E) new rivals enter the industry and the demand for any seller's good increases.
Answer: B
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: TS
17) In monopolistic competition, the entry of new firms
A) shifts existing firms' demand curves rightward.
B) shifts existing firms' demand curves leftward.
C) only results in a movement along the existing firms' demand curves.
D) has no effect on the existing firms' demand curves.
E) shifts existing firms' supply curves rightward.
Answer: B
Topic: Monopolistic competition, long run
Skill: Level 3: Using models
Objective: Checkpoint 15.2
Author: SB
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18) When a monopolistically competitive firm's demand curve shifts leftward, what happens to
its marginal revenue curve?
A) Nothing, the marginal revenue curve is unchanged.
B) It disappears.
C) It shifts rightward.
D) It shifts leftward.
E) None of the above is correct because the effect on the marginal revenue curve depends
on whether the demand was initially elastic or inelastic.
Answer: D
Topic: Monopolistic competition, long run
Skill: Level 3: Using models
Objective: Checkpoint 15.2
Author: SB
19) In the long run, firms in monopolistic competition earn a normal profit because
A) firms are free to enter and exit.
B) their products are similar but slightly different.
C) of over-reliance on product marketing.
D) of collusion among the various sellers.
E) their demand curves are horizontal.
Answer: A
Topic: Monopolistic competition, efficiency
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: TS
20) Monopolistic competition is judged to be economically inefficient because
A) the selling price is greater than marginal cost.
B) firms earn a normal profit in the long run.
C) marginal revenue equals marginal cost.
D) firms have deficient capacity in the long run.
E) firms earn an economic profit in the long run.
Answer: A
Topic: Monopolistic competition, efficiency
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: TS
Chapter 15 Monopolistic Competition
21) Even though monopolistic competition results in inefficiency, it does have which of the
following benefits for society?
A) Firms earn normal profit in the long run.
B) Firms can earn an economic profit in the short run.
C) Product differentiation benefits consumers.
D) Marginal cost equals price in the long run.
E) The premise of the question is incorrect because nothing in monopolistic competition
justifies any economic inefficiency.
Answer: C
Topic: Monopolistic competition, efficiency
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: TS
22) Which of the following is an advantage of monopolistic competition?
A) production at the lowest possible average cost
B) product variety
C) only essential costs are incurred
D) long-run profitability
E) the firms have excess capacity so they are are always willing to increase their
production.
Answer: B
Topic: Monopolistic competition, efficiency
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: TS
23) If a firm is maximizing its profit and producing less than the output at which its average
total cost is minimized, then that firm
A) must be suffering an economic loss.
B) must be earning an economic profit.
C) has excess capacity.
D) is producing at its capacity output.
E) must be earning a normal profit.
Answer: C
Topic: Monopolistic competition, excess capacity
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: SB
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Bade/Parkin œ Foundations of Economics, Third Edition
24) A monopolistically competitive firm maximizes profit by equating
A) price and marginal revenue.
B) price and marginal cost.
C) demand and marginal cost.
D) marginal revenue and marginal cost.
E) price and average total cost.
Answer: D
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: STUDY GUIDE
25) Once a firm in monopolistic competition has determined how much to produce, the firm
determines its price by referring to its
A) demand curve.
B) marginal cost curve.
C) marginal revenue curve.
D) average total cost curve.
E) average variable cost curve.
Answer: A
Topic: Monopolistic competition, output and price
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: STUDY GUIDE
26) A firm in monopolistic competition definitely incurs an economic loss if
A) price equals marginal revenue.
B) price is less than average total cost.
C) marginal revenue equals marginal cost.
D) marginal revenue is less than average total cost.
E) price is greater than marginal cost.
Answer: B
Topic: Monopolistic competition, economic loss
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: STUDY GUIDE
Chapter 15 Monopolistic Competition
27) In the long run, a firm in monopolistic competition
A) can only earn a normal profit.
B) produces at a minimum average total cost.
C) has deficient capacity.
D) can earn either a normal profit or an economic profit.
E) produces a quantity where its demand curve is upward sloping.
Answer: A
Topic: Monopolistic competition, long run
Skill: Level 2: Using definitions
Objective: Checkpoint 15.2
Author: STUDY GUIDE
28) A firm's efficient scale of production is the output at which its
A) marginal cost is at a minimum.
B) average total cost is at a minimum.
C) profit is maximized.
D) marginal revenue is at a maximum.
E) marginal revenue equals marginal cost.
Answer: B
Topic: Monopolistic competition, excess capacity
Skill: Level 1: Definition
Objective: Checkpoint 15.2
Author: STUDY GUIDE
29) In the long run, a firm in monopolistic competition ____ excess capacity and a firm in
perfect competition ____ excess capacity.
A) has; has
B) has; does not have
C) does not have; has
D) does not have; does not have
E) might have; might have
Answer: B
Topic: Monopolistic competition versus perfect competition
Skill: Level 3: Using models
Objective: Checkpoint 15.2
Author: STUDY GUIDE
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30) In the long run, a firm in monopolistic competition ____ a markup of price over marginal
cost and a firm in perfect competition ____ a markup of price over marginal cost.
A) has; has
B) has; does not have
C) does not have; has
D) does not have; does not have
E) might have; might have
Answer: B
Topic: Monopolistic competition versus perfect competition
Skill: Level 3: Using models
Objective: Checkpoint 15.2
Author: STUDY GUIDE
31) Monopolistic competition is efficient when compared to
A) to perfect competition.
B) complete product uniformity.
C) the short run.
D) the long run.
E) None of the above answers is correct.
Answer: B
Topic: Monopolistic competition, efficiency
Skill: Level 3: Using models
Objective: Checkpoint 15.2
Author: STUDY GUIDE
15.3 Product Development and Marketing
1) Firms decide how much to spend on product development and marketing by
A) spending the same amount as they did in previous years.
B) spending the historical average of 1/4 of total production cost.
C) determining what it will take to eliminate excess capacity.
D) balancing the cost and the benefit of product development and marketing.
E) ensuring that the marginal cost of product development and marketing is less than or
equal to the marginal cost of producing the good or service.
Answer: D
Topic: Innovation and product development
Skill: Level 2: Using definitions
Objective: Checkpoint 15.3
Author: TS
Chapter 15 Monopolistic Competition
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2) For a firm in monopolistic competition to undertake product development, the marginal
cost of the development must be ____ the marginal benefit of the development to
consumers.
A) greater than
B) less than
C) not comparable to
D) equal to or less than
E) None of the above because a monopolistically competitive firm undertakes product
development if the marginal cost of the development is less than or equal to the
marginal revenue from the development.
Answer: E
Topic: Innovation and product development
Skill: Level 2: Using definitions
Objective: Checkpoint 15.3
Author: CD
3) Which of the following statements about product development in monopolistic competition
is (are) correct?
i. Firms in monopolistic competition undertake too much product development for
efficiency.
ii. Firms in monopolistic competition undertake too little product development for
efficiency.
iii. Product development might allow the firm to temporarily earn an economic profit.
A) i only.
B) ii only
C) ii and iii.
D) i and iii.
E) iii only.
Answer: C
Topic: Innovation and product development
Skill: Level 2: Using definitions
Objective: Checkpoint 15.3
Author: TS
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Bade/Parkin œ Foundations of Economics, Third Edition
4) Firms attempt to create a consumer perception of product differentiation through
i. packaging.
ii. marketing.
iii. advertising.
A) i only.
B) ii only.
C) ii and iii.
D) i and iii.
E) i, ii, and iii.
Answer: E
Topic: Selling costs
Skill: Level 2: Using definitions
Objective: Checkpoint 15.3
Author: SB
5) Advertising is a ____ cost that is incurred by ____.
A) variable; monopolies
B) variable; perfectly competitive firms
C) fixed; perfectly competitive firms
D) fixed; monopolistically competitive firms
E) marginal; monopolistically competitive firms
Answer: D
Topic: Selling costs
Skill: Level 2: Using definitions
Objective: Checkpoint 15.3
Author: CD
6) How do advertising and other selling costs affect a firm?
A) They shift the marginal cost curve upward.
B) The only effect is that the excess capacity is reduced.
C) The only effect is that the demand for the product increases.
D) They shift the average total cost curve upward.
E) The do not change demand and shift the average total cost curve downward.
Answer: D
Topic: Selling costs
Skill: Level 2: Using definitions
Objective: Checkpoint 15.3
Author: TS
Chapter 15 Monopolistic Competition
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7) In which of the following ways do advertising and other selling costs affect a firm's cost
curves?
i. Advertising expenditures increase total fixed costs.
ii. Selling costs increase total fixed costs.
iii. Advertising and other selling costs per unit of output decrease as output increases.
A) i only.
B) i and ii.
C) iii only.
D) i and iii.
E) i, ii, and iii.
Answer: E
Topic: Selling costs
Skill: Level 2: Using definitions
Objective: Checkpoint 15.3
Author: TS
8) In the long run, advertising by all firms in a monopolistically competitive industry
A) increases all firms' demand.
B) decreases all firms' demand.
C) lowers all firms' costs.
D) might increase or decrease all firms' demand.
E) lowers all firms' prices.
Answer: D
Topic: Selling costs
Skill: Level 4: Applying models
Objective: Checkpoint 15.3
Author: SB
9) A sunglass manufacturer spends a lot of money to promote its brand name. This promotion
____ consumers because ____.
A) helps; it lowers marginal cost
B) harms; definitely increases average total cost
C) helps; it provides a signal and information about the sunglasses
D) harms; increases the elasticity of demand
E) helps; it is a fixed cost and not a variable cost
Answer: C
Topic: Efficiency of advertising
Skill: Level 4: Applying models
Objective: Checkpoint 15.3
Author: CD
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Bade/Parkin œ Foundations of Economics, Third Edition
10) When weighing the efficiency of monopolistic competition, which of the following should
be considered?
i) The information provided by advertising.
ii) Extra product variety.
iii) The extra cost of excess capacity.
A) ii only.
B) i and iii.
C) ii and iii.
D) i, ii, and iii.
E) iii only.
Answer: D
Topic: Efficiency of advertising
Skill: Level 4: Applying models
Objective: Checkpoint 15.3
Author: CD
11) Because economic profits are eliminated in the long run in monopolistic competition, to
earn an economic profit firms continuously
A) shut down.
B) exit the industry.
C) innovate and develop new products.
D) declare bankruptcy.
E) decrease their costs by decreasing their selling costs.
Answer: C
Topic: Innovation and product development
Skill: Level 3: Using models
Objective: Checkpoint 15.3
Author: STUDY GUIDE
12) A firm in monopolistic competition that introduces a new and differentiated product will
temporarily have a ____ demand for its product and is able to charge a
A) less elastic; a lower price than before.
B) less elastic; a higher price than before.
C) more elastic; a lower price than before.
D) more elastic; a higher price than before.
E) less elastic; the same price as before.
Answer: B
Topic: Innovation and product development
Skill: Level 3: Using models
Objective: Checkpoint 15.3
Author: STUDY GUIDE
Chapter 15 Monopolistic Competition
13) The decision to innovate
A) depends on the marketing department's needs.
B) depends on whether the firm wants to benefit its customers.
C) is based on the marginal cost and the marginal revenue of innovation.
D) is unnecessary in a monopolistically competitive market.
E) None of the above answers is correct.
Answer: C
Topic: Innovation and product development
Skill: Level 2: Using definitions
Objective: Checkpoint 15.3
Author: STUDY GUIDE
14) Advertising costs and other selling costs are
A) efficient.
B) fixed costs.
C) variable costs.
D) marginal costs.
E) considered as part of demand because they affect the demand for the good.
Answer: B
Topic: Selling costs
Skill: Level 2: Using definitions
Objective: Checkpoint 15.3
Author: STUDY GUIDE
15) For a firm in monopolistic competition, selling costs
A) increase costs and reduce profits.
B) always increase demand.
C) can change the quantity produced and lower the average total cost.
D) can lower total cost.
E) has no effect on the quantity sold.
Answer: C
Topic: Selling costs
Skill: Level 2: Using definitions
Objective: Checkpoint 15.3
Author: STUDY GUIDE
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16) If advertising increases the numbers of firms in an industry, each firm's demand
A) increases.
B) does not change.
C) decreases.
D) might increase or decrease depending on whether the new firms produce exactly the
same product or a product that is slightly differentiated.
E) None of the above answers is correct.
Answer: C
Topic: Advertising
Skill: Level 2: Using definitions
Objective: Checkpoint 15.3
Author: STUDY GUIDE
17) One reason a company advertises is to
A) signal consumers that its product is high quality.
B) lower its total cost.
C) produce more efficiently.
D) lower its variable costs.
E) lower its fixed costs.
Answer: A
Topic: Advertising
Skill: Level 2: Using definitions
Objective: Checkpoint 15.3
Author: STUDY GUIDE
18) The efficiency of monopolistic competition
A) is as clear-cut as the efficiency of perfect competition.
B) depends on whether the gain from extra product variety offsets the selling costs and
the extra cost that arises from excess capacity.
C) comes from its excess capacity.
D) is eliminated in the long run.
E) is equal to that of monopoly.
Answer: B
Topic: Efficiency: the bottom line
Skill: Level 5: Critical thinking
Objective: Checkpoint 15.3
Author: STUDY GUIDE