Deck 16: Monopolistic Competition

Question 1

For a profit-maximizing firm in a monopolistically competitive market, when price is equal to average total cost, price must lie above marginal cost.

Answer 1

True

Question 2

Oligopoly and monopolistic competition are examples of a market structure called imperfect competition.

Answer 2

True

Question 3

Monopolistically competitive firms, like monopoly firms, maximize their profits by charging a price that exceeds marginal cost.

Answer 3

True

Question 4

Monopolistic competition is the only market structure that features many sellers.

Question 5

A profit-maximizing firm in a monopolistically competitive market charges a price equal to marginal cost.

Question 6

A firm in a monopolistically competitive market can earn both short-run and long-run profits.

Question 7

The "competition" in monopolistically competitive markets is most likely a result of having many sellers in the market.

Question 8

Product differentiation always leads to some measure of market power.

Question 9

The market for wheat is most likely considered a monopolistically competitive market.

Question 10

Monopolistic competition is characterized by many buyers and sellers, product differentiation, and barriers to entry.

Question 11

A markup of price over marginal cost is inconsistent with free entry and zero profit.

Question 12

Oligopoly is characterized by a few sellers offering similar products, whereas monopolistic competition is characterized by many sellers offering differentiated products.

Question 13

To be considered an oligopoly, the market must have a concentration ratio below 50%.

Question 14

A profit-maximizing firm in a monopolistically competitive market can earn positive, negative, or zero profits in the short run.

Question 15

There are four basic types of market structure.

Question 16

Monopolistic competition is characterized by a few sellers offering similar products, whereas oligopoly is characterized by many sellers offering differentiated products.

Question 17

A monopolistically competitive market is characterized by barriers to entry.

Question 18

The "monopoly" in monopolistically competitive markets is most likely a result of firms having some pricing power due to product differentiation.

Question 19

Monopolistic competition and monopoly are examples of a market structure called imperfect competition.

Question 20

Monopolistic competition is characterized by many buyers and sellers, product differentiation, and free entry.

Question 21

In a long-run equilibrium, both perfectly competitive markets and monopolistically competitive markets have price equal to average total cost.

Question 22

In a monopolistically competitive market, the number of firms adjusts until economic profits are driven to zero.

Question 23

The term excess capacity refers to the fact that a firm operates on the upward-sloping portion of its average-total-cost curve.

Question 24

A firm in a monopolistically competitive market is usually indifferent to an additional customer walking through the door, since a sale to that customer will not increase the firm's profit.

Question 25

A monopolistically competitive firm faces a downward-sloping demand curve because there are few firms in the market.

Question 26

A firm in a monopolistically competitive market can earn short-run profits but not long-run profits.

Question 27

The product-variety externality states that entry of a new firm conveys a negative externality on consumers.

Question 28

When a firm in a monopolistically competitive market earns zero economic profit, its product price must equal marginal cost.

Question 29

In a monopolistically competitive market, the demand curves faced by incumbent firms are unaffected by the entry of new firms into the market.

Question 30

A firm that would experience higher average total cost by increasing production is operating with excess capacity.

Question 31

The product-variety externality states the benefits to consumers from the introduction of a new product.

Question 32

When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium, marginal cost must lie below average total cost.

Question 33

In a long-run equilibrium, firms in both perfectly competitive markets and monopolistically competitive markets produce a quantity below the efficient scale of production.

Question 34

The term excess capacity refers to the fact that a firm produces a lower quantity than it would if it operated at the efficient scale.

Question 35

In the long run, monopolistically competitive firms produce where demand equals average total cost.

Question 36

In the long run, monopolistically competitive firms produce where demand equals marginal cost.

Question 37

When a firm operates at efficient scale, it is producing at the minimum point on its average total cost curve.

Question 38

When a firm operates with excess capacity, it must be in a monopolistically competitive market.

Question 39

Excess capacity characterizes firms in monopolistically competitive markets, even in situations of long-run equilibrium.

Question 40

When a monopolistically competitive firm is in a long-run equilibrium, the values of marginal cost, average total cost, and price are all the same.

Question 41

The product-variety externality and the business-stealing externality are both spillover costs of new firms entering a monopolistically competitive market.

Question 42

The claim that advertising reduces the elasticity of demand is likely to be made by a defender of advertising.

Question 43

Economists are unanimous in their belief that advertising is socially inefficient.

Question 44

Defenders of advertising argue that firms use advertising as a signal of quality, even if the advertising delivers little helpful information about the product.

Question 45

The Mikati Philippines Hard Rock Cafe has the exact same menu as the Hard Rock Cafe in New York. This is an example of a brand name enhancing market efficiency for U.S. tourists visiting the Philippines.

Question 46

Critics of advertising argue that firms use advertising to manipulate consumers' tastes.

Question 47

The debate over whether advertising serves a valuable purpose in society is definitively answered by economists who study the tastes and preferences of individuals.

Question 48

Critics of advertising argue that advertising leads to less elastic demand for products and a larger markup of price over marginal cost.

Question 49

Brand names are rarely used to convey information about product quality.

Question 50

When advertising is used to relay information about price, each firm is able to enhance market power.

Question 51

Empirical evidence suggests that advertising usually leads to an increase in the price for advertised products.

Question 52

Advertising during the Super Bowl is an example of information about quality contained primarily in the existence and expense of the advertising.

Question 53

The government of Italy will not allow any Hard Rock Cafe restaurants to open in Italy. Defenders of the efficiency of brand-name markets would argue that this has hindered restaurant market efficiency in Italy.

Question 54

Policymakers have generally come to accept the view that advertising enhances the efficiency of markets.

Question 55

When McDonald's opens a store in Dhaka, Bangladesh, it has a strong incentive to enforce product quality consistent with stores in the United States.

Question 56

One thing that both critics of advertising and defenders of advertising agree on is that advertising fosters competition.

Question 57

The business-stealing externality states that entry of a new firms imposes a cost on existing firms because they lose customers.

Question 58

If advertising decreases the elasticity of demand for specific brand names of hard liquor, we would expect firms to be able to charge a larger markup over marginal cost.

Question 59

The product-variety externality and the business-stealing externality are both spillover benefits of new firms entering a monopolistically competitive market.

Question 60

Economists who argue that advertising enhances market efficiency suggest that celebrity advertising signals inferior product quality.

Question 61

Economists measure a market's domination by a small number of firms with a statistic called the

Question 62

​In the long run, a monopolistically competitive firm produces at efficient scale.

Question 63

​A monopolistically competitive firm cannot earn an economic profit in the long run.

Question 64

Consider two industries in which firms hold the following market shares:
Industry A: 25%, 20%, 18%, 15%, 8%, 7%, 4%, 2%, 1%
Industry B: 30%, 10%, 9%, 8%, 8%, 8%, 8%, 6%, 6%, 5%, 2%
What are the concentration ratios for each industry? Which is more competitive?

Question 65

​A monopolistically competitive firm is a price-taker.

Question 66

Suppose there is a market in which the firms hold the following market shares: 25%, 20%, 18%, 15%, 8%, 7%, 4%, 2%, 1%. What is the concentration ratio for this market?

Question 67

There is general disagreement among economists about the role of advertising, but there is widespread agreement about the role of brand names on market efficiency.

Question 68

​In the long run, a monopolistically competitive firm's demand curve becomes more elastic and shifts to the left

Question 69

The market structure in which each firm has a monopoly over the product it makes, but many other firms make similar products that compete for the same customers is called

Question 70

Which market structure(s) is(are) considered highly concentrated?

Question 71

Which market structure(s) is(are) imperfectly competitive?

Question 72

Table 16-7
A monopolistically competitive firm faces the following demand schedule for its product. In addition, the firm has total fixed costs equal to 20.
Refer to Table 16-7. If this firm has a constant marginal cost of $7, what is the profit-maximizing level of output?

Question 73

Free entry eliminates long-run profits for firms in competitive and monopolistic industries.

Question 74

Table 16-7
A monopolistically competitive firm faces the following demand schedule for its product. In addition, the firm has total fixed costs equal to 20.
Refer to Table 16-7. When this firm profit maximizes and faces a constant marginal cost of $7, what is the amount of its markup over marginal cost?

Question 75

The government may not be able to improve the inefficiencies of a monopolistically competitive market.

Question 76

Which type of market structure has the fewest number of firms?

Question 77

Firms in monopolistically competitive markets and monopolies can earn long-run profits due to barriers to entry.

Question 78

Describe the shape of the monopolistically competitive firm's demand curve.

Question 79

​If a monopolistically competitive firms incurs an increase in fixed costs, its price will rise and its output will fall.

Question 80

Which market structure(s) include(s) many firms with differentiated products who can enter and exit the market freely?