25-1. Which of the following characterizes monopolistic
competition?
Many interdependent firms sell a homogeneous
product.
A few firms produce a particular type of product.
→ Many firms produce a particular type of product, but
each maintains some independent control over its own
price.
A few firms produce all of the market supply of a good.
25-2. Which of the following is not characteristic of
monopolistic competition?
Many firms in an industry
Low concentration ratios
Some market power
→ Price takers
25-3. The combined market share of the top four firms in
a monopolistically competitive industry will typically be
in the range of:
Zero to 2 percent.
Zero to 5 percent.
→ 20 to 40 percent.
70 to 100 percent.
25-4. A monopolistically competitive industry is
characterized by ________ concentration ratios and ________
entry barriers.
High; high
High; low
Low; high
→ Low; low
25-5. Each producer in monopolistic competition has:
Complete market power.
Substantial market power.
→ Some market power.
No market power.
25-6. One of the main differences between an oligopoly
and a monopolistically competitive firm is that a
monopolistically competitive firm:
Faces a horizontal demand curve; an oligopoly does
not.
→ Is relatively independent; an oligopoly is
interdependent.
Has no market power; an oligopoly has some market
power.
Has high barriers to entry; an oligopoly does not.
25-7. The kinked oligopoly demand curve does not
describe the demand curve for monopolistic competition,
because in monopolistically competitive markets:
→ Firms are not as interdependent as oligopolistic firms.
Firms have no market power.
There is not as much product differentiation as in
oligopoly.
There is no nonprice competition.
25-8. Large cities typically have many drug stores, which
offer different levels of service and product selection. The
drug store market in big cities can best be classified as:
A competitive market.
→ Monopolistic competition.
Oligopoly.
Monopoly.
25-9. Brand loyalty usually makes the demand curve for a
product:
More price elastic.
→ Less price elastic.
Unitary elastic.
More income elastic.
25-10. A monopolistically competitive firm maximizes
profits or minimizes losses in the short run by:
Using marginal cost pricing.
Producing output at the level where ATC is minimized.
Producing output at the level where price equals ATC.
→ Producing output at the level where MC = MR.
25-2. Monopolistic competition is a market in which
many firms produce similar but somewhat differentiated
goods or services and therefore each maintains some
independent control of its own price. Monopolistic
competitive markets have low barriers to entry and low
or modest concentration ratios.
25-1. Monopolistic competition is a market in which
many firms produce similar but somewhat differentiated
goods or services and therefore each maintains some
independent control of its own price.
25-4. Monopolistic competitive markets have low
barriers to entry and low or modest concentration ratios.
25-3. Concentration ratios between 70 to 100 percent are
common in oligopolies. Although a few firms may stand
above the rest in a monopolistic competitive market, the
combined market share of the top four firms will
typically be in the range of 20 to 40 percent.
25-6. An oligopoly is characterized by high concentration
ratios, market power and interdependence where as
monopolistic competition is characterized by a high
degree of brand loyalty, low concentration ratios, some
market power and independent product decisions.
25-5. Monopolistic competition is a market in which
many firms produce similar but somewhat differentiated
goods or services and therefore each maintains some
independent control of its own price.
25-8. Product differentiation, a characteristic of
monopolistic competition, is when one product is
different (actually or perceived) from competing
products in the same market by consumers.
25-7. A monopolistically competitive firm confronts a
downward-sloping demand curve for its output because
of brand loyalty, product differentiation and
independence where as an oligopolistic firm faces a
kinked demand curve because of the interdependence of
the market structure.
25-10. Profit maximizing (or loss minimizing) firms,
regardless of the market structure, will choose to
produce at the output level where MR = MC as long as
P>AVC.
25-9. The more brand loyalty a firm can establish, the
less likely consumers are to switch brands when price is
increased. In other words, brand loyalty makes the
demand curve facing the firm less price-elastic.
25-11. If a monopolistically competitor is maximizing
profit, he is producing at a point where marginal cost:
→ Is less than price.
Equals price.
Is greater than price.
Equals average total cost.
25-12. Refer to Table 25.1. In order to maximize profit,
Will's Beach Ball Co. should produce _______ and charge a
price of _______ each.
6 beach balls, $11
→ 7 beach balls, $10
8 beach balls, $9
9 beach balls, $8
25-13. Refer to Table 25.1. At the profit-maximizing
output and price, Will's Beach Ball Co. will earn a profit
equal to:
→ $18.
$70.
$72.
-$12.
25-14. Entry into a market characterized by monopolistic
competition:
Is rare because firms have market power.
→ Is frequent because barriers to entry are low.
Occurs when a firm's demand is everywhere below its
long-run average cost curve.
Results from economies of scale.
25-15. In monopolistic competition, a firm's demand
curve is tangent to the ATC curve in the long run because:
Barriers to entry are very high.
→ Entry eliminates economic profit, and exit eliminates
losses.
Advertising is ineffective in differentiating the
product.
Producers are price takers.
25-16. In a monopolistically competitive market with
negative economic profits:
Firms will enter until accounting profits are zero.
Firms will enter until economic profits are zero.
→ Firms will exit until economic profits are zero.
No entry or exit will occur.
25-17. In monopolistic competition, the entry of new
firms will cause all of the following to happen except:
Long-run economic profits to be zero.
→ The industry cost curves to shift to the left.
The firm's demand curve to shift to the left.
The market supply curve to shift to the right.
25-11. Profit maximizing (or loss minimizing) firms,
regardless of the market structure, will choose to
produce at the output level where MR = MC as long as
P>AVC. Because the monopolistically competitor faces a
downward sloping demand curve, price is greater than
MR.
25-13. Profit is maximized at the output level where MR
($4) is equal to MC ($4), at an output level of 7. Profit is
equal to total revenue ($66) minus total costs ($48)
which is $18.
25-12. Profit ($18) is maximized at the output level
where MR ($4) is equal to MC ($4), at an output level of 7
beach balls.
25-15. Given the ease of entry and exit, as long as firms
are making a profit or losing money, firms will enter or
exit the market and the disappearance of economic
profits (losses) is inevitable.
25-14. Entry barriers are low in monopolistic
competition so new entrants can't be kept out of the
market.
25-17. Barriers to entry are low in monopolistic
competition. Hence, new firms will enter if economic
profits are available, driving the market cost curves
(supply) to the right and the average price down the
market demand curve. When more firms enter the
market, the firm's demand curve shifts to the left and
becomes more elastic because more close substitutes
(other firms) are available until profit is zero.
25-16. Given the ease of entry and exit, as long as firms
are losing money, firms will exit the market and when all
economic losses disappear, firms will stop exiting.
25-18. When new firms enter a monopolistically
competitive industry, ceteris paribus, the:
→ Market price decreases.
Market price increases.
Market price remains unchanged.
Change in market price cannot be determined based
on the information given.
25-19. Which of the following is not true about a
monopolistic competitor?
It maximizes profit at the point where MC = MR
It produces less output than a perfectly competitive
firm, ceteris paribus
It charges a higher price than a perfectly competitive
firm, ceteris paribus
→ It can earn economic profits in the long run
25-20. Which of the following characterizes the
difference between oligopoly and monopolistic
competition?
Oligopolists are independent of each other;
monopolistically competitive firms are interdependent.
→ Monopolistically competitive firms experience zero
long-run economic profit; oligopolists may experience
positive long-run economic profit.
There are many oligopolists but only a few
monopolistically competitive firms.
Monopolistically competitive firms face horizontal
demand curves; oligopolists face downward-sloping
demand curves.
25-21. Refer to Figure 25.1 for a monopolistically
competitive firm. The profit-maximizing output and price
combination for this firm in the short run is:
Q1, P1.
→ Q2, P4.
Q2, P1.
Q4, P3.
25-22. Refer to Figure 25.1. The output that maximizes
production efficiency for this firm is:
Q1.
Q2.
→ Q3.
Q4.
25-19. Given the ease of entry and exit, as long as firms
are making a profit or losing money, firms will enter or
exit the market and the disappearance of economic
profits (losses) is inevitable.
25-18. Barriers to entry are low in monopolistic
competition. Hence, new firms will enter if economic
profits are available, driving the market cost curves
(supply) to the right and the average market price down
the market demand curve.
25-20. Given the ease of entry and exit of perfect and
monopolistic competition, as long as firms are making a
profit or losing money, firms will enter or exit the market
and the disappearance of economic profits (losses) is
inevitable. Oligopoly markets have high barriers to entry;
therefore it is likely that profits will persist in the long
run.
25-21. Profit is maximized at the output level where the
MR is equal to MC, at an output level of Q2 and a price of
P4.
25-22. Production efficiency is at the output level that
minimizes ATC, that output in Figure 25.1 is Q3.
25-23. Refer to Figure 25.2 for a monopolistically
competitive firm. At the profit-maximizing output and
price, this firm is experiencing economic:
Profits and should stay in this market in the long run.
Profits but could make even higher economic profits
producing the next best alternative good.
→ Losses but should keep producing in the short run.
Losses and should shutdown in the short run.
25-24. Refer to Figure 25.2 for a monopolistically
competitive firm. At the profit-maximizing output and
price, this firm is:
Earning an economic profit.
→ Earning an economic loss.
Breaking even.
Earning a monopoly profit.
Refer to Figure 25.4 for a monopolistically competitive
firm. In the long run this firm will charge a price of
________ and produce an output of ________.
P2; Q1
→ P4; Q3
P1; Q2
P3; Q4
Refer to Figure 25.4 for a monopolistically competitive
firm. In the long run this firm is most likely to face:
Demand1 and MR1.
Demand1 and MR2.
→ Demand2 and MR2.
A demand curve between Demand1 and Demand2.
Refer to Figure 25.4 for a monopolistically competitive
firm. If the firm currently faces Demand1 and MR1, then
it will earn:
A positive economic profit and firms will enter the
industry.
A negative economic profit and firms will enter the
industry.
→ A negative economic profit and firms will exit the
industry.
Zero economic profit and neither entry nor exit will
occur.
25-23. Profit is maximized or losses are minimized at the
output level where the MR is equal to MC. At that output
level, the price is below ATC but above AVC, therefore the
firm is incurring economic losses but is losing less than if
it shut down.
25-24. Profit is maximized or losses are minimized at the
output level where the MR is equal to MC. At that output
level, the price is below ATC but above AVC, therefore the
firm is incurring economic losses but is losing less than if
it shut down.
25-25. In the long run the firm will produce where MR is
equal to MC and price is just tangent to ATC.
25-26. In the long run the firm will produce where MR is
equal to MC and price is just tangent to ATC.
25-27. If the firm currently faces Demand1 and MR1, then
its price is less than ATC, profits are negative and firms
will exit the market.
25-28. Which firm in Figure 25.5 is earning a profit?
→ Firms A and C
Firms B and D
Firm A only
All of the firms are earning a profit
25-29. Which firm in Figure 25.5 is most likely a
monopolistically competitive firm?
Firm A
Firm B
Firm C
→ Firm D
25-29. Firm D is most likely a monopolistically
competitive firm because it has a relatively elastic
demand curve and it is earning zero economic profits.
25-28. Firm A is earning a profit based on the fact that
the price level at the point where MR is equal to MC is
greater than ATC.