Deck 9: Monopolistic Competition: The Competitive Model in a More Realistic Setting

Question 1

Firms such as Costa Coffee and Starbucks Coffee operate hundreds of coffeehouses nationwide while firms such as Delight Coffee operate only in few cities. How would you characterize these stores?

A) Costa Coffee and Starbucks Coffee are oligopolists while Delight is a monopolistic competitor.
B) Costa Coffee and Starbucks Coffee are duopolists while Delight is an oligopolist.
C) Costa Coffee and Starbucks Coffee are duopolists while Delight is a monopolistic competitor.
D) They are all monopolistic competitor.

Answer 1

They are all monopolistic competitor.

Question 2

In what sense is a firm in monopolistically competition a monopoly in its market?

A) It acts to maximize market share.
B) It acts independently of other sellers.
C) It sells a unique product.
D) It is able to erect entry barriers by deliberately lowering its price.

Answer 2

It sells a unique product.

Question 3

Suppose Dar Al -Shorouk, the Beirut -based publishing company, is considering expanding its production of an already published book. Dar Al -Shorouk's managers want to estimate the marginal cost of production. How can they best do this?

A) by adding a desirable profit margin to the book's selling price to cover overheads such as rent and editor's salaries and dividing that amount by the planned number of copies to be published
B) by adding up every expense associated with the book, including the overhead like rent and editors' salaries, and then dividing by the planned number of copies to be published
C) by using the book's selling price as an indicator of the marginal cost since price equals marginal cost is a profit maximizing rule
D) by adding up only the variable costs associated with a book, such as printing cost, and excluding overheads like rent and editors' salaries, and then dividing the total variable costs by the planned number of copies number of copies to be published

Answer 3

by adding up only the variable costs associated with a book, such as printing cost, and excluding overheads like rent and editors' salaries, and then dividing the total variable costs by the planned number of copies number of copies to be published

Question 4

-Refer to Figure 9-4. The firm represented in the diagram is currently sellingQ_a units at a price of $P_a. Is this firm maximizing its profit and if it is not, what would you recommend to the firm?

A) No, it is not; it should lower its price to $P_b and sell Q_b units.
B) Yes, it is maximizing its profit by charging the highest price possible.
C) No, it is not; it should lower its price to $P_c and sell Q_c units.
D) No, it is not; since its marginal cost is constant, it should produce and sell as much as it can. It should sell Q_d units at a price of $P_d.

Question 5

You are planning to open a new Italian restaurant in your hometown where there are three other Italian restaurants. You plan to distinguish your restaurant from your competitors by offering northern Italian cuisine and using locally grown organic produce. What is likely to happen in the restaurant market in your hometown after you open?

A) The demand curve facing each restaurant owner becomes more elastic.
B) Your competitors are likely to change their menus to make their products more similar to yours.
C) The demand curve facing each restaurant owner shifts to the right.
D) While the demand curves facing your competitors becomes more elastic, your demand curve will be inelastic.

Question 6

You have just opened a new Lebanese restaurant in your hometown where there are three other Lebanese restaurants. Your restaurant is doing a brisk business and you attribute your success to your distinctive northern Lebanese cuisine using locally grown organic produce. What is likely to happen to your business in the long run?

A) Your success will invite others to open competing restaurants and ultimately your profits will be driven to zero.
B) If you continue to maintain consistent quality, you will be able to earn profits indefinitely.
C) If your success continues, you will be likely to establish a franchise and expand your market size.
D) Your competitors are likely to change their menus to make their products more similar to yours.

Question 7

-Refer to Figure 9 -6. The firm represented in the diagram makes

A) should exit the industry.
B) makes zero accounting profit.
C) should expand its output to take advantage of economies of scale.
D) makes zero economic profit.

Question 8

-Refer to Figure 9 -6. What is the amount of excess capacity?

A) Q₄ -Q₂ units
B) Q₃ -Q₂ units
C) Q₄ -Q₃ units
D) Q₃ -Q₁ units

Question 9

In 1984 when Apple Computer introduced the Macintosh, it was able to sell the product at a hefty premium while comparable personal computers were priced at less than half the price of a Macintosh. Despite its much higher price, Apple was able to achieve a 15 percent market share. Which of the following contributed to Apple's initial success?

A) Apple had successfully introduced a personal computer that was strongly differentiated from its competitors.
B) Apple spent heavily on advertising to inform consumers about its product.
C) Apple used superior materials to produce its product which justified the higher price.
D) Apple was catering to a small segment of the market in which demand is relatively inelastic.

Question 10

At the peak of its success in the mid -1980s to the early 1990s, Apple Computer commanded a 15 percent share of the personal computers market. During this period what happened to Apple's demand curve?

A) The demanded curve shifted to the left and became more elastic throughout the relevant range of prices.
B) The demanded curve shifted to the left and became less elastic throughout the relevant range of prices.
C) The demanded curve shifted to the right and became less elastic throughout the relevant range of prices.
D) The demanded curve stagnated which is why Apple lost market share.

Question 11

At the peak of its success in the mid -1980s to the early 1990s, Apple Computer commanded a 15 percent share of the personal computers market. If iPad sales are included, Apple's share of the market was 10.8% in 2010.. Which of the following best accounts for its dwindling market share?

A) Apple was not able to keep up with technological advancements in the personal computers market.
B) Rivals engaged in predatory pricing but Apple was not willing to engage in a price war.
C) The entry of rivals eliminated Apple's product differentiation.
D) The entry of rivals revealed that Apples was producing sub -standard computers.

Question 12

Aramex is a worldwide provider of integrated supply-chain solutions. In the last 18 years, it has grown to compete with the big four of this industry: DHL, FedEx, UPS, and TNT. Aramex has a widespread presence and partial dominance of the express and postal market in the Middle East and North Africa region. This is an example of a ________ for Aramex.

A) differentiation strategy.
B) supply -side solution.
C) chain -edge.
D) competitive advantage.

Question 13

How does the long run equilibrium of a monopolistically competitive industry differ from that of a perfectly competitive industry?

A) A firm in monopolistic competition will charge a price higher than the average cost of production but a firm in perfect competition charges a price equal to the average cost of production.
B) A firm in monopolistic competition produces an allocatively efficient output level while a firm in perfect competition produces a productively efficient output level.
C) A firm in monopolistic competition will earn economic profits but a firm in perfect competition earns zero profit.
D) A firm in monopolistic competition does not take full advantage of its economies of scale but a firm in perfect competition produces at the lowest average cost possible.

Question 14

For allocative efficiency to hold,

A) average total cost is minimized in production.
B) average variable cost is minimized in production.
C) price must equal marginal revenue of the last unit sold.
D) price must equal the marginal cost of the last unit produced.

Question 15

-Refer to Figure 9 -8. What is the amount of excess capacity?

A) Q_h -Q_g units
B) Q_h -Q_f units
C) Q_j -Q_h units
D) Q_j -Q_f units

Question 16

-Refer to Figure 9 -8. In the long run, why will the firm produce Q_f units and not Q_g units, which has a lower its average cost of production?

A) At Q_g, marginal revenue t is less than average revenue cost which will result in a loss for the firm.
B) At Q_g, average cost exceeds marginal cost so the firm will actually make a loss.
C) The firm's goal is to charge a high price and make a small profit rather than a low price and no profit.
D) Although its average cost of production is lower when the firm produces Q_g units, to be able to sell its output the firm will have to charge a price below average cost, resulting in a loss.

Question 17

-Refer to Figure 9 -9. Which of the following statements is true?

A) D_a represents the long run demand curve facing a monopolistic competitor in a constant cost industry while D_b depicts the long run demand curve in an increasing cost industry.
B) D_a represents the long run demand curve facing a monopolistic competitor in a constant cost industry while D_b depicts the demand curve in the short run.
C) D_a represents the long run supply curve in a perfectly competitive constant cost industry while D_b depicts the long run demand curve facing a monopolizing competitor in a decreasing cost industry.
D) D_a represents the long run demand curve facing a perfect competitor while D_b depicts the long run demand curve facing a monopolizing competitor.

Question 18

-Refer to Figure 9 -9. The diagram demonstrates that

A) it is not possible for a monopolistic competitor to produce the productively efficient output level, Q_a, because of product differentiation.
B) it is possible for a monopolistic competitor to produce the productively efficient output level, Q_a, , if it is willing to lower its price from P_b to P_a.
C) in the long run the monopolistic competitor produces the minimum cost output level, Q_a, but in the short run its output of Q_b is not cost minimizing.
D) in the short run the monopolistic competitor produces an output Q_b but in the long run after it adjusts its capacity, it will produce run the allocatively efficient output, Q_a.

Question 19

A franchise is

A) a firm with the legal right to sell a good or service in a particular area.
B) a firm with no competitors.
C) a branch of a national company.
D) a firm that buys and operates a brand name business in a new market.

Question 20

Coca -Cola has used Nancy Ajram to create the impression that Coca -Cola is superior to any other cola drink. Coca -Coal is attempting to

A) differentiate Coca -Cola from other types of cola drinks.
B) lower the marginal cost of producing Coca -Cola.
C) convince consumers that Coca -Cola is no different from other cola drinks favored by celebrities.
D) increase its profit by raising the price of Coca -Cola.

Question 21

Which of the following statements is true about advertising by a monopolistically competitive firm?

A) Since the monopolistic competitor, like the perfect competitor, makes zero profit in the long run, it is a waste of resources to advertise its products.
B) Advertising could make the monopolistic competitor's demand more inelastic but advertising has no effect on a perfect competitor's demand.
C) Monopolistically competitive firms tend to shun advertising because advertising draws attention to the variety of differentiated products available in the industry.
D) Advertising will be more beneficial if a monopolistic competitor colludes with other firms to advertise the products of the industry as a whole rather than an individual firm's product.

Question 22

One of your classmates asserts that advertising, marketing research, and brand management are redundant expenditures because a firm can obtain the same information by simply looking at what customers are already buying. Which of the following is not a response you might offer her?

A) Advertising and brand management allow a firm to create an entry barrier which will insulate the firm from competition and from undertaking further product innovations.
B) If a firm successfully manages its brand, customers become less price sensitive as they perceive fewer substitutes for the firm's brand.
C) Conducting market research is a good way for firms to keep abreast of changing consumer tastes and preferences.
D) Marketing research could allow a firm to identify new market opportunities and at least, in the short run, a firm can make a profit supplying products to this market segment.

Question 23

Dunkin Donuts' new marketing strategy attempts to make new branches look more like Starbucks as the coffeehouse expands. Dunkin Donuts, a competitor of Starbucks, is most likely imitating Starbucks because:

A) Dunkin Donuts cannot afford to develop any original ideas.
B) Starbucks customers are better than the current loyal Dunkin Donuts custormers.
C) Starbucks was unsuccessful in differentiating its products.
D) Starbucks successfully differentiated its product.

Question 24

By making its shops appear more like Starbucks, Dunkin Donuts is hoping to attract new customers who like both Dunkin Donuts' features and a bit of Starbucks' features. This strategy is unlikely to attract loyal Starbucks customers because:

A) Loyal Starbucks customers think "Dunkin Donuts" is a silly name.
B) Starbucks pays its loyal customers royalty fees.
C) It makes Dunkin Donuts appear unoriginal.
D) None of the above.

Question 25

A firm that is first to the market with a new product frequently discovers that there are design flaws or problems with the product that were not anticipated. How do these problems affect the innovating firm?

A) The firm is protected by a first -mover advantage: initial design flaws tend not to harm a firm significantly because consumers resist changing products for fear of incurring high switching costs.
B) They reduce profits for the new innovations and open the door to competitors who can enter the new market with a better product.
C) The firm's cost increases as it improves the product but it will not be able to raise its price for fear of alienating customers. Consequently, its profits will erode although its market share remains secure.
D) Because these design flaws were not anticipated, consumers tend to be more forgiving and are likely to remain loyal to the company and its products.

Question 26

The demand for coffeehouse products such as the ones produced by Starbucks has been growing exponentially in the Arab region due to a growing young demographic. This has enabled Starbucks to move into the market and achieve positive economic profits. Starbucks' positive economic profits are likely to:

A) Attract even more foreign coffeehouses to open franchises in the Arab region to gain advantage of these positive profits.
B) Cause Starbucks to shutdown in the short -term and exit the market in the long -term.
C) Scare foreign coffeehouses from investing in the Arab region due to Starbucks' powerful market penetration in the region.
D) None of the above.