Quiz 11: Market Entry and Monopolistic Competition

A monopolistically competitive market is characterized by: A)many firms that sell slightly different products. B)many barriers to entry and few firms. C)many firms that sell the same products. D)few firms that sell the same products.

No barriers to entry in a market implies that,in the long run,economic profit will be: A)above average. B)zero. C)equal to accounting profit. D)none of the above.

What encourages firms to enter markets? A)The diversity of products offered must be small. B)Firms believe they can violate patent protection with impunity. C)No firms in the industry can experience losses. D)Some existing firms in the market must be earning economic profits.

Assume that there is a single firm producing toilet paper and the firm specific demand curve is the same as the market demand curve.If a second firm that also produces toilet paper enters the market what will happen to the firm-specific demand curve of the original firm? A)There is a movement up along the demand curve. B)There is a movement down along the demand curve. C)shifts to the right D)shifts to the left

Assume that there is only one firm producing electric toothbrushes and its firm specific demand curve is the same as the market demand curve.If a second firm that also produces electric toothbrushes enters the market,profit of the first firm decreases because: A)the competition between the two firms causes the price to go down. B)it produces less electric toothbrushes. C)its average cost of production raises due to higher demand. D)A and B are correct.

Which of the following statements is true? A)An assumption of monopolistic competition is that firms can differentiate their products. B)An assumption of perfect competition is that firms can differentiate their products. C)Monopolistic competition is not subject to free entry and exit. D)An assumption of monopolistic competition is that there are only a few large firms in the industry.

Which of the following characteristics is shared by both monopolistically competitive markets and perfectly competitive markets? A)no barriers to entry B)identical products across sellers C)small number of interdependent sellers D)firms face downward sloping demand curves

Which of the following characteristics is shared by both monopolistically competitive markets and monopoly markets? A)free entry B)identical products across sellers C)Firms face downward sloping demand curves. D)Firms are price takers.

As a result of product differentiation,a firm in a monopolistically competitive market: A)always has some market power. B)is very similar to a firm in a perfectly competitive market. C)faces a perfectly elastic demand curve. D)is very similar to a monopolist.

In a monopolistically competitive market,product differentiation ensures that in the long run: A)price will equal marginal cost. B)marginal revenue will exceed marginal cost. C)marginal revenue will equal average total cost. D)price will exceed marginal revenue.

Recall the application about satellite vs.cable,how will an existing cable-TV provider respond in most cases to the entry of a firm that provides TV signals via satellite? A)The cable firm improves the quality of service and leaves the price the same. B)The cable firm lower the quality of services and lower the price. C)The cable firm increases the price without any improvements to its service. D)The cable firm improves the quality of service and decreases its price.

Additional Application For many years North Carolina-based Krispy Kreme Doughnuts have been the choice of many Southerners.But now rival Dunkin' Donuts is working on changing the way Southerners expect a doughnut to taste.The Northeastern-based Dunkin' Donuts has plans to become a national brand in the next 15 years by tripling the number of stores in the U.S.The difference is in the doughnut itself.Krispy Kreme offers a glazed,hot,lighter doughnut while the product of Dunkin' Donuts can be described as "thicker and cakier." Do consumers notice the difference? Rosemary Evans from Alabama states,"Dunkin' Donuts just don't have much flavor." And Jack Lehnhart from Ohio says Krispy Kremes are "wax doughnuts." As the size of the industry grows the efforts to differentiate each product remain strong.Dunkin' Donuts focuses on coffee and baked goods as important components in its long term business plan.When discussing the two companies and their approaches to success,the brand officer at Dunkin' Donuts succinctly said,"We're very different." Just take note of the different ways they spell the product they produce! Source: Beth Rucker,"Dunkin' Donuts Raids Krispy Kreme's Turf," October 22,2006,http://hosted.ap.org/dynamic/stories/D/DONUT_WARS,accessed 10/30/2006. -What market structure best describes the doughnut industry discussed in the article above? A)monopolistic competition B)monopoly C)governmental D)perfect competition

Why would Dunkin' Donuts want to keep their product different from Krispy Kreme? A)They do not want Southerners confusing the two doughnuts. B)They want to maintain a specific brand identity. C)They do not have the level of technology to produce a Krispy Kreme-like doughnut. D)They do not want customers to accuse them of stealing trade secrets.

As more Dunkin' Donuts outlets open in the areas where Krispy Kreme has been dominant,market prices will ________ and profits will ________. A)increase;increase B)increase;decrease C)decrease;increase D)decrease;decrease

As new firms enter an industry,the demand curve facing each existing firm will shift to the right.

If there is free entry in a market,then in the long run economic profit will be above average.

Positive economic profit encourages new firms to enter an industry.

As new firms enter an industry the price charged will increase.

As new firms enter an industry the existing firms will decrease their output.

Empirical studies have shown that entry leads to lower prices and profit.

What causes firms to want to enter a monopolistically competitive market?

Why do existing firms earn smaller profits as new firms enter an industry?

On South Street in Philadelphia,there are many Italian restaurants.Each Italian restaurant carries a slightly different menu.In what type of market structure do these Italian restaurants belong? A)perfect competition B)monopolistic competition C)oligopoly D)monopoly

In monopolistic competition,firms can have some market power based on the fact that: A)they are large in size. B)there are barriers to entry. C)there is only one firm in the industry. D)they produce differentiated goods.

In monopolistic competition,the firm can increase price and still sell some output because: A)there is no free entry. B)they are producing a product for which there is no close substitute. C)they are colluding with other firms to set price. D)they are producing a product that has some degree of differentiation.

The feature that distinguishes monopolistic competition from perfect competition is that monopolistically competitive firms are: A)large relative to the market. B)price takers. C)able to block the entry of other firms. D)able to differentiate their product.

In a monopolistically competitive industry,there are many firms because: A)there are relatively large economies of scale. B)there are relatively small economies of scale. C)individual firms are not distinguishable from the total market. D)products are easily produced.

Assume that the Indian restaurant industry is monopolistically competitive in London.Garam Masala,an Indian restaurant near Piccadilly Circus,lowers its prices by 10%,but all the other Indian restaurants in London keep their prices unchanged.Which of the following is most likely to occur? A)Garam Masala will not be able to sell any bagels since it was the only bakery to raise its price. B)Garam Masala will lose some of its customers. C)Garam Masala's profits will increase. D)The number of customers served by Garam Masala will increase.

The demand for a product of a monopolistically competitive firm is: A)price inelastic. B)price elastic. C)unit elastic. D)undefined.

To maximize profit,a monopolistically competitive firm will produce where: A)marginal revenue exceeds price. B)price is less than marginal cost. C)price equals average total cost. D)marginal revenue equals marginal cost.

If firms in a monopolistically competitive industry are earning economic profits,then in the long run: A)these firms can continue earning economic profits because entry into the industry is blocked. B)new firms producing close substitutes will continue to enter the market until economic profit is zero. C)new firms producing the exact same product will enter the industry and this entry will continue until economic profit is zero. D)the government will most likely regulate firms in this industry to reduce the economic profits.

What effect does the absence of barriers to entry in a monopolistically competitive industry have on the existing firms' demand and marginal revenue curves? A)The demand and marginal revenue curves begin to shift to the right. B)The demand curve begins to shift to the right,but the marginal revenue curve shifts to the left. C)Both curves shift to the left. D)The demand curve shifts to the left,but the marginal revenue curve shifts to the right.

Which type of profit maximizing firm will choose to produce where price equals marginal cost? A)perfect competition B)perfect competition and monopolistic competition C)monopolistic competition D)all types of firms

Which type of profit maximizing firm will choose to produce where marginal revenue equals marginal cost? A)perfect competition B)perfect competition and monopolistic competition C)monopolistic competition D)all types of firms

The demand curve facing a monopolistically competitive firm is: A)horizontal at the going market price. B)downward sloping and less than the market demand curve. C)downward sloping and greater than the market demand curve. D)the same as the market demand curve.

For monopolistically competitive firms in long-run equilibrium: A)the demand curve must intersect average total cost at its minimum. B)the demand curve must be tangent to the average total cost curve at its minimum. C)at the profit-maximizing quantity,the demand curve must intersect the average total cost curve quantity. D)at the profit-maximizing quantity,the demand curve must be tangent to the average total cost curve.

-Refer to Figure 11.1.If Trollio's T-shirts is in long-run equilibrium it is producing ________ silk-screened T-shirts and selling each T-shirt at a price of ________. A)20;$5 B)50;$10 C)50;$16 D)60;$15

The condition for long-run equilibrium in a monopolistically competitive industry is: A)price equals average total cost. B)price equals marginal cost. C)price equals marginal revenue. D)marginal cost equals average total cost.

In the short run in monopolistic competition there can be: A)economic profits,but not losses. B)economic profits,losses or break even. C)no economic profits,but losses D)no economic profits or losses.

-Refer to Figure 11.2.In the long run the monopolistic competitor would generate total revenue equal to the area: A)0BGD. B)AHE0. C)AFGB. D)0AFD.

-Refer to Figure 11.2.In the long run the monopolistic competitor would generate total cost equal to the area: A)0AFD. B)AHE0. C)AFGB. D)0BGD.

-Refer to Figure 11.2.In the long run the monopolistic competitor would produce ________ units. A)0C B)0D C)0E D)none of these

-Refer to Figure 11.2.In the long run the monopolistic competitor would charge a price of ________ per unit. A)0A B)0B C)0F D)BA

-Refer to Figure 11.2.In the long run the monopolistic competitor would earn an economic profit equal to the area: A)0AFD. B)AHE0. C)0BGD. D)none of these.

Which of the following is a characteristic of monopolistic competition? A)Many firms compete for essentially the same customers,but each firm produces a slightly different product. B)Competitors have some price-setting power but it is limited because of the many close substitutes available. C)Entry is relatively inexpensive. D)all of the above

Monopolistic competition is NOT characterized by: A)slightly different products. B)many sellers. C)firms with no control over price. D)no barriers to entry.

The toothpaste industry with 5 firms is a monopolistic competition,if a sixth firm decides to entry the market,what will happen to firms' specific demand curve? A)shifts to the right B)shifts to the left C)stays the same D)none of the above

In the short run,a firm in monopolistic competition operates much like a: A)monopolist. B)firm in perfect competition. C)price taker. D)all of the above

In monopolistic competition,the presence of free entry suggests that: A)some firms will earn economic profits in the long run. B)some firms will be forced to incur losses in the long run. C)all firms will earn zero economic profit in the long run. D)all firms will earn zero economic profit in both the short run and the long run.

When a profit-maximizing firm in monopolistic competition is producing its long-run equilibrium quantity: A)it will be earning economic profit. B)its marginal revenue will exceed its marginal cost. C)its price will equal its marginal cost. D)its price will be equal to its average total cost.

When a profit-maximizing firm in monopolistic competition is in long-run equilibrium: A)the demand curve it faces will be perfectly elastic. B)its marginal cost will be falling. C)its price will be greater than its marginal cost. D)its marginal revenue will be greater than its marginal cost.

Since a firm in monopolistic competition has some market power,its long-run price will be greater than its: A)average total cost. B)marginal cost. C)total cost. D)none of the above

Which of the following goods are NOT sold in a monopolistically competitive market? A)computer software B)toothpaste C)toilet paper D)oil

In the long run,which two curves are tangent for a firm in monopolistic competition? A)marginal cost and marginal revenue B)marginal cost and demand C)average total cost and demand D)average total cost and marginal revenue

Recall the application regarding opening a Dunkin' Donuts shop and the small barriers to entering the donut business.What should an owner of a Dunkin' Donut shop expect in a monopolistically competitive market? A)total revenue equal to total cost B)keen competition for consumers C)his economic profit to be zero D)all of the above

Recall the application about opening a Dunkin' Donuts shop and the small barriers to entering the donut business.Which of the following is NOT required to operate a Dunkin' Donuts franchise? A)paying a franchise fee B)earning an economic profit C)paying a royalty rate on profits D)selling a specific brand of donuts

In some monopolistically competitive markets,differentiation is obtained simply by location.Which of the followings is NOT a good sample of differentiation by location? A)gas stations B)movie theaters C)music stores D)restaurants

Firms in a monopolistically competitive industry have small economies of scale which causes no barriers to entry.

Under a monopolistically competitive market structure,firms will continue to enter the market until the economic profit is eliminated.

Firms in monopolistically competitive markets sell identical products.

There are patents and regulations that can prevent firms from entering a monopolistically competitive market.

Firms gain control over price in monopolistic competition by differentiating their products.

A monopolistically competitive firm influences market price by virtue of its size.

A monopolistically competitive firm maximizes profit by producing where marginal revenue is less than marginal cost.

Firms in monopolistic competition sell their products at a price equal to marginal cost.

Under monopolistic competition,the typical firm maximizes profit at the point where marginal revenue equals marginal cost.

Like firms in perfect competition,firms in monopolistic competition will earn zero economic profit in the long run.

The demand for a product of a monopolistically competitive firm is very price inelastic.

In a monopolistically competitive market,price will be equal to minimum average total cost in the long run.

In some monopolistically competitive markets,products are differentiated by location.

Explain the characteristics of monopolistic competition.Explain how price and output are determined in monopolistic competition.

What is meant by product differentiation? Why is it employed by firms?

List four ways in which product differentiation can be achieved.

Provide four examples of goods that are sold in monopolistically competitive markets.

Why does a firm in monopolistic competition face a downward sloping demand curve?

How is it possible that monopolistically competitive firms have market power and yet cannot earn long-run profit?

What happens in the long run if firms in a monopolistically competitive industry are earning positive economic profits? Explain.

Explain the process by which long-run equilibrium will be achieved in a monopolistically competitive industry if some firms are incurring losses.

Explain the conditions that must be satisfied for a monopolistically competitive industry to be in long-run equilibrium.

One key difference between profit maximizing firms in monopolistic competition versus perfect competition is that: A)monopolistically competitive firms will earn a positive profit in the long run. B)perfectly competitive firms break even in the long run,but monopolistically competitive firms do not. C)monopolistically competitive firms charge a price greater than marginal revenue. D)none of the above

When products are differentiated by location what kind of tradeoffs exist? A)Firms that sell the same product at different locations have a monopoly in their location and buyers pay a higher price. B)the larger the numbers of firms that sell the same product at different locations,the higher the level of variety C)the smaller the numbers of firms that sell the same product at different locations,the higher the average cost of production D)the larger the numbers of firms that sell the same product at different locations,the higher the average cost of production

Monopolistically competitive firms achieve the degree of market power they command through: A)size. B)product differentiation. C)collusion. D)barriers to entry.

An Italian restaurant is profit-maximizing firm in monopolistic competition differs from a firm in perfect competition because the firm in monopolistic competition: A)faces a perfectly elastic demand curve at the market price. B)faces no barriers to entry. C)faces a downward sloping demand curve for its product. D)can earn economic profits in the long run.

With respect to output production,a monopolistically competitive firm produces: A)more amount of output than a perfectly competitive firm. B)identical amount of output as a perfectly competitive firm. C)less amount of output than a perfectly competitive firm. D)none of the above.

The big advantage to consumers of product differentiation is that it: A)allows for a large number of firms. B)provides variety. C)prevents monopoly. D)improves technology.

Product differentiation is beneficial because it: A)ensures larger companies can grow while smaller companies fail. B)allows the economy to satisfy a wide range of tastes and preferences. C)reduces competition in the market. D)all of the above

-In the long run,the monopolistically competitive firm in Figure 11.3 would produce ________ units and charge ________ per unit. A)7;$50 B)10;$48 C)11;$48 D)10;$45

-In the long run,the monopolistically competitive firm in Figure 11.3 would earn $ ________ of economic profit. A)14 B)30 C)35 D)0

-In the long run,the monopolistically competitive firm in Figure 11.3 would generate $ ________ of total revenue. A)350 B)450 C)238 D)480

-In the long run,a perfectly competitive firm facing the same costs as in Figure 11.3 would produce ________ units and charge ________ per unit. A)7;$50 B)10;$48 C)11;$48 D)10;$45

-In the long run,a perfectly competitive firm facing the same costs as in Figure 11.3 would earn $________ of economic profit. A)20 B)33 C)42 D)0

-In the long run,a perfectly competitive firm facing the same costs as in Figure 11.3 would generate $________ of total revenue. A)350 B)528 C)450 D)238

-In a perfectly competitive market,the firm specific demand curve is ________ at the market price,compared to in a monopolistically competitive market,the firm specific demand curve is ________. A)negatively sloped;positively sloped B)negatively sloped;horizontal C)horizontal;negatively sloped D)positively sloped;negatively sloped

Recall the application on happy hour pricing,each bar has a local monopoly within its neighborhood,but faces competition from other bars outside its neighborhood.The bars respond by decreasing its prices,in what happens to the demand curve facing each bar? A)It becomes flatter. B)It becomes downward slopping. C)It shifts to the right. D)A and C are correct.

As new firms enter a monopolistically competitive market,existing firms will face a lower average cost of production because the cost is spread across more firms.

Monopolistically competitive firms tend to operate on the positively sloped portion of their average cost curves.

As new firms enter a monopolistically competitive market,there is more product variety and lower prices.

If product differentiation continues to diminish,the firm's demand curve becomes more elastic.

In a perfect competitive market,the firm specific demand curve is horizontal at the market price.

If producers differentiate themselves by location,consumers can reduce their travel costs.

In long-run equilibrium,a monopolistically competitive firm's price is equal to its marginal cost.

In long-run equilibrium,a monopolistically competitive firm's marginal revenue is equal to its marginal cost.

Describe two features of monopolistic competition that differentiate it from monopoly.

Explain the tradeoffs associated with monopolistic competition relative to monopoly.

Monopolistically competitive firms can use advertising: A)to lower economies of scale. B)to collude against other firms. C)to inform consumers about the features of their products. D)to increase the price charged for their products.

By using celebrities to promote a product,a firm is attempting to: A)send a signal to consumers. B)increases repeat customers. C)increase sales. D)all of these

Recall the application about a South African consumer lender that advertised its products including a picture of man in some mailings and a picture of woman in others,what did the South African consumer lender conclude from the respond from men vs.women when the loan offer included a picture of a woman? A)not release the movie to the public B)not pay the actors high salaries C)rewrite the script and refilm most scenes D)not spend money on advertising

Firms in monopolistic competition differentiate their products through: A)physical characteristics. B)price. C)both A and B. D)neither A nor B.

The cost of paying celebrities to advertise a product is always less than the increase in profits.

The main purpose of advertising is to inform the consumers about a product's features.

According to the textbook,a famous study of the eyeglass market found that advertising promoted price competition.

The main purpose of advertising is to make a product appealing.

if a product is an inferior product,it is not worthwhile to pay for an advertisement because the repeat customers will be fewer.

Using celebrities and other expensive advertising to advertise a product can signal consumers that the producer expects few repeat customers.