Question 1

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

Accepted Answer

In the long-run equilibrium, perfectly competitive markets achieve a point where price equals average total cost due to free entry and exit of firms, ensuring no economic profits. Similarly, monopolistically competitive markets also adjust to a point where price equals average total cost in the long run, as firms enter and exit the market based on the presence of profits or losses, leading to a situation where firms just cover their costs, including normal profit.

Question 2

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

Accepted Answer

In a monopolistically competitive market, firms are able to differentiate their products to some extent, which allows them to have some degree of market power. This means that in the short run, firms may be able to earn economic profits. However, entry of new firms into the market will eventually increase competition, driving prices down and reducing profits. As a result, in the long run, the number of firms will adjust until economic profits are driven to zero.

Question 3

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

Accepted Answer

Excess capacity refers to a situation where a firm is producing at a level of output that is less than the level associated with minimum average total cost, indicating underutilization of resources, not necessarily operating on the upward-sloping portion of its average-total-cost curve.

Question 4

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.

Accepted Answer

A firm in a monopolistically competitive market may still benefit from an additional customer, as the sale may cover some fixed costs and increase the firm's revenue. However, the profit gained from the additional customer may not be significant due to the market's high level of competition and price sensitivity.

Question 5

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

Accepted Answer

A monopolistically competitive firm faces a downward-sloping demand curve because its products are differentiated, not because there are few firms in the market.

Question 6

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

Accepted Answer

In the long run, firms in a monopolistically competitive market face competition from similar products and may have to lower their prices to remain competitive, leading to lower profits. However, in the short run, firms may be able to earn profits due to market power and the ability to set prices above their marginal cost.

Question 7

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

Accepted Answer

The product-variety externality states that entry of a new firm conveys a positive externality on consumers, as it increases product variety and choice available to them.

Question 8

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

Accepted Answer

In a monopolistically competitive market, a firm can earn zero economic profit in the short run, but in the long run, firms can enter or exit the market thus making positive economic profit. In the short run, a zero economic profit firm may still set its price above marginal cost to differentiate its product and gain market share. Therefore, its product price may not necessarily equal marginal cost.

Question 9

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

Accepted Answer

In a monopolistically competitive market, the entry of new firms can shift the demand curve faced by incumbent firms. This is because the new firms can offer similar products, causing a decrease in demand for the incumbent firms' products.

Question 10

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

Accepted Answer

If a firm would experience higher average total cost by increasing production, it indicates that the firm is operating at or near full capacity. If a firm has excess capacity, it means that it can increase production without experiencing higher average total cost.

Question 11

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

Accepted Answer

The product-variety externality refers to the positive impact that the introduction of a new product has on consumer welfare, as it increases the variety of goods available and can satisfy different preferences and needs.

Question 12

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

Accepted Answer

In monopolistically competitive markets, firms have some market power to set prices above marginal cost but face competition from similar products. In the long run, firms in this market structure earn zero economic profit, which means that price equals average total cost. Since marginal cost must be lower than average total cost at the profit-maximizing output level, this statement is true.

Question 13

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

Accepted Answer

In a long-run equilibrium, firms in perfectly competitive markets produce at the efficient scale (where average total cost is minimized), while firms in monopolistically competitive markets produce below the efficient scale due to product differentiation and market power.

Question 14

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.

Accepted Answer

Excess capacity occurs when a firm produces at a level below its efficient scale, meaning it has the capability to produce more than it currently does without increasing average costs.

Question 15

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

Accepted Answer

In the long run, monopolistically competitive firms will produce where demand equals average total cost because they will not continue producing if they are incurring losses above their average total cost. At the same time, they will not increase their output beyond this point because they cannot charge a price higher than their average total cost in the long run due to the availability of close substitutes.

Question 16

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

Accepted Answer

Monopolistically competitive firms produce where marginal revenue equals marginal cost, not where demand equals marginal cost. This is because they have some market power to set their price slightly above marginal cost, but not enough to fully control the market price like a monopoly would.

Question 17

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

Accepted Answer

When a firm operates at the efficient scale, it produces at the minimum point on its average total cost curve. This is because the efficient scale refers to the production level at which the firm is able to minimize its average total cost by taking advantage of economies of scale.

Question 18

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

Accepted Answer

A firm can operate with excess capacity in any type of market structure, not just monopolistic competition.

Question 19

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

Accepted Answer

In monopolistically competitive markets, firms have some market power and can differentiate their products, which leads to excess capacity. This means that even in the long-run equilibrium, firms will have idle capacity because they do not produce at the minimum efficient scale. This is due to the fact that firms try to differentiate their products, but in doing so, they incur higher costs than if they produced at the efficient scale. As a result, monopolistically competitive firms are not as efficient as perfectly competitive firms, which produce at the efficient scale in the long-run equilibrium.

Question 20

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.

Accepted Answer

In a monopolistically competitive market, firms have some market power and can set prices above marginal cost to earn profits. In the long run, new firms can enter the market and compete away these profits, driving prices down to the level of average total cost but not necessarily equal to marginal cost. Therefore, the values of marginal cost, average total cost, and price may not be the same in the long-run equilibrium of a monopolistically competitive firm.

Quiz 16: Monopolistic Competition