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In monopolistic competition, a firm
Has no market power.
Captures significant economies of scale.
→
Has a downward-sloping demand curve.
Has a standardized product that all firms produce.
The competition is less intense in monopolistic competition than in a perfectly competitive market where firms have a
horizontal demand curve. A monopolistically competitive firm confronts a downward-sloping demand curve for its
output because of brand loyalty and product differentiation.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 26-01 The
unique structure of monopolistic
competition.
award:
0.00 points
Which of the following is not characteristic of monopolistic competition?
Many firms in an industry.
Low concentration ratios.
Some market power.
→
Firms have zero control over price.
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. Firms in perfect competition have
zero control over price; they must accept the going equilibrium price.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-01 The
unique structure of monopolistic
competition.
11/12/2013 11:52 AM
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A monopolistically competitive industry is characterized by ________ concentration ratios and ________ entry barriers.
high; high
high; low
low; high
→
low; low
Monopolistically competitive markets have low barriers to entry and low or modest concentration ratios.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-03 How
monopolistically competitive firms
maximize profits.
award:
0.00 points
Each producer in monopolistic competition has
Complete market power.
Substantial market power.
→
Some market power.
No market power.
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.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 26-01 The
unique structure of monopolistic
competition.
award:
0.00 points
The demand curve faced by a monopolistically competitive firm is
→
Downward-sloping.
Flat.
Kinked.
Upward-sloping.
The competition is less intense in monopolistic competition than in a perfectly competitive market where firms have a
horizontal demand curve. A monopolistically competitive firm confronts a downward-sloping demand curve for its
output because of brand loyalty and product differentiation.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 26-01 The
unique structure of monopolistic
competition.
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If a monopolistically competitive firm raises its price, it will
Not lose any of its customers.
Lose most of its customers.
→
Lose some of its customers, but nowhere close to all its customers.
Lose all of its customers.
A monopolistically competitive firm confronts a downward-sloping demand curve for its output. So when a company
increases the price of its product, it loses some customers, but not all or even most of them.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-01 The
unique structure of monopolistic
competition.
award:
0.00 points
Which of the following most characterizes monopolistic competition?
Price leadership.
→
Product differentiation.
Price discrimination.
Economies of scale.
Product differentiation, a characteristic of monopolistic competition, occurs when one product is different (actually or
perceived) from competing products in the same market.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-01 The
unique structure of monopolistic
competition.
award:
0.00 points
The cross-price elasticity of demand for the products of monopolistically competitive firms is
Very high.
→
Low.
An indication that most of the products are complementary goods.
The same as in perfect competition.
Cross-price elasticity is very low when consumers are brand loyal and do not view other available products as good
substitutes. Remember that cross-price elasticity measures the change in quantity demanded of one good due to a
price change of another good. For pure substitutes, the cross-price elasticity will be positive and high.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-02 The
unique behavior of monopolistically
competitive firms.
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When a monopolistically competitive firm advertises, it is attempting to increase
→
The demand and decrease the price elasticity of demand for its product.
The demand and increase the price elasticity of demand for its product.
Long-run profits.
Market demand.
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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-01 The
unique structure of monopolistic
competition.
award:
0.00 points
A monopolistically competitive firm maximizes profits or minimizes losses in the short run by
Setting price equal to marginal cost.
Producing at the output level where ATC is minimized.
→
Producing at the output level where MR equals MC.
Producing at the output level where MC equals ATC.
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.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-02 The
unique behavior of monopolistically
competitive firms.
11/12/2013 11:52 AM
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Refer to Table 26.2. At the profit-maximizing output and price, Sylvie's Shampoo Company. will earn a ________
economic profit, and ________ the market will occur.
negative; entry into
negative; exit from
→
positive; entry into
positive; exit from
Positive economic profit ($36) entices firms to enter the market for the opportunity to earn greater-than-normal profits.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 26-02 The
unique behavior of monopolistically
competitive firms.
11/12/2013 11:52 AM
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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.
Given the ease of entry and exit in 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.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 26-04 Why
economic profits tend toward zero in
monopolistic competition.
award:
0.00 points
Which of the following market structures will have only normal profit in the long run?
Monopoly.
Duopoly.
→
Monopolistic competition.
Oligopoly.
Given the ease of entry and exit in perfect and monopolistic competition markets, 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.
This means that firms will produce where MR = MC and where price = ATC. Economic profit of zero is a normal
profit— just not more than if those same resources were being used in a different capacity.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-04 Why
economic profits tend toward zero in
monopolistic competition.
award:
0.00 points
Which of the following is true about a monopolistically competitive industry?
Marginal cost pricing occurs.
→
There is excess capacity.
Resources are allocated efficiently.
It produces at the minimum of ATC.
The typical firm in a monopolistically competitive market produces at a rate of output that is less than its
minimum-ATC output rate. This implies that the same level of industry output could be produced at lower cost with
fewer firms.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-01 The
unique structure of monopolistic
competition.
11/12/2013 11:52 AM
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Which of the following real-world situations is the result of excess capacity in a monopolistically competitive market?
A factory producing women's clothing produces more than it can sell during a season.
→
Gas stations with infrequently used pumps are located at all four corners of an intersection.
A retail auto tire store orders too much inventory.
Monopolistically competitive firms do not exist in the real world.
One symptom of the inefficiencies associated with monopolistic competition is industrywide excess capacity. Each
firm tries to gain market share by building more outlets, and the result is more locations at less than full utilization.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 26-01 The
unique structure of monopolistic
competition.
award:
0.00 points
Marginal cost pricing means that
Goods are offered for sale at prices equal to average total cost.
Firms produce where marginal cost equals marginal revenue.
Firms produce where marginal cost equals zero.
→
Goods are offered for sale at prices equal to marginal cost.
Perfectly competitive firms charge a price equal to marginal costs, which is the practice of marginal cost pricing.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-04 Why
economic profits tend toward zero in
monopolistic competition.
award:
0.00 points
Suppose that an economy wants to eliminate the resource waste associated with excess capacity in monopolistically
competitive markets. Which of the following would achieve this goal?
Firms are allowed to establish significant barriers to entry.
Firms are encouraged to produce less output.
→
Firms are required to set price equal to marginal cost.
Firms are required to charge the same price.
Competitive firms compete by achieving greater efficiency and offering their products at the lowest possible price.
Firms in imperfectly competitive markets don't "compete" in the same way. In monopolistic competition, firms have
their own captive markets—consumers who prefer their particular brands over competing brands—and therefore
price reductions by one firm won't induce many consumers to switch brands. In this case, the only way to achieve
efficiency is to require firms to charge a price equal to marginal cost.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 26-01 The
unique structure of monopolistic
competition.
11/12/2013 11:52 AM
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In monopolistic competition there is allocative inefficiency because
Price is greater than the minimum ATC.
Production is not at the minimum ATC.
Of excess capacity.
→
Price is greater than MC.
Because the demand curve facing a firm in monopolistic competition slopes downward, firms will charge a price
greater than marginal cost (higher price) and will produce to the left of the efficient point (less output).
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-01 The
unique structure of monopolistic
competition.
11/12/2013 11:52 AM
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Refer to Figure 26.1 for a monopolistically competitive firm. The profit-maximizing output and price combination for this
firm in the short run is
Q ,P .
1
→
1
Q ,P .
2
4
Q ,P .
2
1
Q ,P .
4
3
Profit is maximized at the output level where the MR is equal to MC, at an output level of Q and a price of P .
2
Multiple Choice
Difficulty: 2 Medium
4
Learning Objective: 26-02 The
unique behavior of monopolistically
competitive firms.
11/12/2013 11:52 AM
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Refer to Figure 26.1. The output that maximizes production efficiency for this firm is
Q .
1
Q .
2
→
Q .
3
Q .
4
Production efficiency is at the output level that minimizes ATC; that output in Figure 26.1 is Q .
3
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-02 The
unique behavior of monopolistically
competitive firms.
11/12/2013 11:52 AM
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Refer to Figure 26.3 for a monopolistically competitive firm. The allocatively efficient output for this firm is
Q .
1
→
Q .
2
Q .
3
Zero. The firm should shut down because it is not earning an economic profit.
The allocative efficient output and price combination is where price is equal to marginal cost, at Q .
2
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-03 How
monopolistically competitive firms
maximize profits.
11/12/2013 11:52 AM
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Refer to Figure 26.4 for a monopolistically competitive firm. In the long run this firm is most likely to face
Demand and MR .
1
1
Demand and MR .
1
→
2
Demand and MR .
2
2
A demand curve between Demand and Demand .
1
2
In the long run the firm will produce where MR is equal to MC and price is just tangent to ATC.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-03 How
monopolistically competitive firms
maximize profits.
11/12/2013 11:52 AM
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Refer to Figure 26.4 for a monopolistically competitive firm. If the firm currently faces Demand and MR , then it will
2
2
earn
A positive economic profit, and firms will enter the industry.
A positive economic profit, and firms will exit the industry.
A negative economic profit, and firms will exit the industry.
→
Zero economic profit, and neither entry nor exit will occur.
If the firm currently faces Demand and MR , then its price is equal to ATC, profits are zero, and no firms will be
2
2
inclined to enter or exit with normal profits being made.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 26-04 Why
economic profits tend toward zero in
monopolistic competition.
11/12/2013 11:52 AM
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Refer to Figure 26.4 for a monopolistically competitive firm. If the firm currently faces Demand and MR , then it will
1
1
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.
If the firm currently faces Demand and MR , then its price is less than ATC, profits are negative, and firms will exit
1
1
the market.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 26-04 Why
economic profits tend toward zero in
monopolistic competition.
11/12/2013 11:52 AM
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Refer to Figure 26.5. Which firm faces possible retaliation from rival firms?
→
Firm C.
Firm A.
Firm D.
Firm B.
Oligopolists are interdependent and face a kinked demand curve, which is illustrated by Firm C's diagram.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 26-02 The
unique behavior of monopolistically
competitive firms.
11/12/2013 11:52 AM
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Which firm in Figure 26.5 is using marginal cost pricing?
Firms B and D only.
→
Firm B only.
Firm C only.
All of the firms are using marginal cost pricing.
Firm B's price is equal to MC; therefore this firm is using marginal cost pricing.
Multiple Choice
Difficulty: 3 Hard
Learning Objective: 26-02 The
unique behavior of monopolistically
competitive firms.
11/12/2013 11:52 AM
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An In the News article titled "Water, Water Everywhere" refers to the use of advertising. Successful advertising can do
all of the following except
Differentiate products.
Create brand loyalty.
Decrease the price elasticity of demand for the product.
→
Maximize efficiency.
By differentiating their products through advertising, monopolistic competitors establish brand loyalty. Brand loyalty
gives producers greater control over the price of their products by making the demand less elastic.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-01 The
unique structure of monopolistic
competition.
award:
0.00 points
An In the News article titled "Water, Water Everywhere" refers to the use of advertising. When a firm successfully
advertises its product, the firm
→
Has more control over its price.
Has less control over its price.
Still has no control over its price because all firms are price takers.
Has total control over its price.
By differentiating their products through advertising, monopolistic competitors establish brand loyalty. Brand loyalty
gives producers greater control over the price of their products by making the demand less elastic.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-01 The
unique structure of monopolistic
competition.
award:
0.00 points
According to the article "What's Behind Starbucks' Price Hike?" in October 2006, Starbucks raised the price of its lattes,
cappuccinos, drip coffee, and other drinks because of increases in wages and fuel costs. When it chose to hike prices,
Starbucks was
Losing sales to its competitors and therefore needed higher prices to maintain revenue.
Relying on the economy to improve in order to offset the loss in sales as a result of the price hikes.
→
Relying on brand loyalty to prevent a significant loss in sales.
Relying on very elastic demand.
Brand loyalty gives producers greater control over the price of their products.
Multiple Choice
Difficulty: 2 Medium
Learning Objective: 26-02 The
unique behavior of monopolistically
competitive firms.
11/12/2013 11:52 AM
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A World View article titled "The Best Global Brands" discusses the value of brand names. In 2008 which of the following
was the most valuable brand name?
→
Coca-Cola.
Google.
Intel.
McDonalds.
The most valuable brand names in 2008 from highest to lowest were Coca-Cola, IBM, Microsoft, and GE.
Multiple Choice
Difficulty: 1 Easy
Learning Objective: 26-01 The
unique structure of monopolistic
competition.
11/12/2013 11:52 AM