Question 1

When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium,
A)the demand curve will be perfectly elastic.
B)price exceeds marginal cost.
C)marginal cost must be falling.
D)marginal revenue exceeds marginal cost.

Accepted Answer

In long-run equilibrium, the firm will produce where marginal revenue equals marginal cost. However, in a monopolistically competitive market, the firm will still have some market power and therefore will charge a price that exceeds marginal cost. This is because the demand curve will be downward sloping but not perfectly elastic (like in perfect competition), meaning the firm can charge a slightly higher price without losing all of its customers. Therefore, choice B is correct. Choices A, C, and D are not necessarily true in monopolistically competitive markets.

Question 2

In a monopolistically competitive market,
A)strategic interactions among the firms are very important.
B)the threat of entry by new firms is not an important consideration.
C)the attainment of a Nash equilibrium is an important objective.
D)firms may enter even though they will earn zero economic profit in the long run.

Accepted Answer

The answer of In a monopolistically competitive market,
A)strategic interactions among...

Question 3

When a firm's demand curve is tangent to its average total cost curve, the
A)firm's economic profit is zero.
B)firm must be earning economic profits.
C)firm must be incurring economic losses.
D)firm must be operating at its efficient scale.

Accepted Answer

The answer of When a firm's demand curve is tangent...

Question 4

The free entry and exit of firms in a monopolistically competitive market guarantees that
A)both economic profits and economic losses can persist in the long run.
B)both economic profits and economic losses disappear in the long run.
C)economic profits, but not economic losses, can persist in the long run.
D)economic losses, but not economic profits, can persist in the long run.

Accepted Answer

The answer of The free entry and exit of firms...

Question 5

If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios would best describe the change existing firms would face as the market adjusts to the long-run equilibrium?
A)an increase in demand for each firm
B)a decrease in demand for each firm
C)a downward shift in the marginal cost curve for each firm
D)an upward shift in the marginal cost curve for each firm

Accepted Answer

In the long-run, firms in a monopolistically competitive market will face entry and exit of firms. As new firms enter the market, the demand for existing firms' products will decrease, thereby reducing their market share and economic profits. This will lead to a decrease in demand for each firm as the market becomes more competitive. Option A is incorrect because an increase in demand for each firm would only fuel higher profits and not bring in any changes in the long-run. Option C and D are incorrect as neither a downward shift nor an upward shift in the marginal cost curve for each firm would affect the demand for each firm.

Question 6

In monopolistically competitive markets, positive economic profits
A)suggest that some existing firms will exit the market.
B)suggest that new firms will enter the market.
C)are sustained through government-imposed barriers to entry.
D)are never possible.

Accepted Answer

The answer of In monopolistically competitive markets, positive economic profits
A)suggest...

Question 7

In monopolistically competitive markets, free entry and exit suggests that
A)the market structure will eventually be characterized by perfect competition in the long run.
B)all firms earn zero economic profits in the long run.
C)some firms will be able to earn economic profits in the long run.
D)some firms will be forced to incur economic losses in the long run.

Accepted Answer

In monopolistically competitive markets, free entry and exit lead to a situation where, in the long run, firms earn zero economic profits. This is because if firms are earning positive economic profits, new firms will enter the market, increasing competition and driving down profits. Conversely, if firms are incurring losses, some will exit the market, reducing competition and allowing the remaining firms to increase their profits back to zero.

Question 8

When a new firm enters a monopolistically competitive market, the individual demand curves faced by all existing firms in that market will
A)shift to the left.
B)shift to the right.
C)shift in a direction that is unpredictable without further information.
D)remain unchanged. It is the supply curve that will shift.

Accepted Answer

A new firm entering a monopolistically competitive market will increase the number of available substitutes for consumers, which will shift the demand curves of all existing firms in the market to the left. This is because consumers will now have more options to choose from, reducing the demand for each individual firm's product.

Question 9

Which two curves are tangent to each other in a monopolistically competitive market with zero economic profit?
A)demand and average variable cost
B)demand and average total cost
C)marginal revenue and average variable cost
D)marginal revenue and average total cost

Accepted Answer

The answer of Which two curves are tangent to each...

Question 10

As firms exit a monopolistically competitive market, profits of remaining firms
A)decline, and product diversity in the market decreases.
B)decline, and product diversity in the market increases.
C)rise, and product diversity in the market decreases.
D)rise, and product diversity in the market increases.

Accepted Answer

The answer of As firms exit a monopolistically competitive market,...

Question 11

When a profit-maximizing firm in a monopolistically competitive market is producing the long-run equilibrium quantity,
A)its average revenue will equal its marginal cost.
B)its marginal revenue will exceed its marginal cost.
C)it will be earning positive economic profits.
D)its demand curve will be tangent to its average total cost curve.

Accepted Answer

In the long-run equilibrium of a monopolistically competitive market, the firm will produce where MR=MC, just like in a perfectly competitive market. However, because of product differentiation, the firm's demand curve will be downward sloping and not perfectly elastic. At the long-run equilibrium quantity, the firm's demand curve will be tangent to its ATC curve, meaning it is producing at minimum average total cost. Therefore, the correct choice is D.

Question 12

A profit-maximizing firm operating in a monopolistically competitive market that is in a long-run equilibrium has
A)minimized average total cost.
B)chosen to produce where demand is unitary elastic.
C)produced the efficient scale of output.
D)chosen a quantity of output where average revenue equals average total cost.

Accepted Answer

The answer of A profit-maximizing firm operating in a monopolistically...

Question 13

Because a monopolistically competitive firm has some market power, in the long-run the price of its product exceeds its
A)average revenue.
B)average total cost.
C)marginal cost.
D)None of the above is correct.

Accepted Answer

The answer of Because a monopolistically competitive firm has some...

Question 14

New firms will likely enter a monopolistically competitive market when price exceeds
A)marginal revenue.
B)average revenue.
C)marginal cost.
D)average total cost.

Accepted Answer

The answer of New firms will likely enter a monopolistically...

Question 15

In a long-run equilibrium, a firm in a monopolistically competitive market operates
A)where marginal revenue is zero.
B)where marginal revenue is negative.
C)on the rising portion of its average total cost curve.
D)on the declining portion of its average total cost curve.

Accepted Answer

In the long-run equilibrium of a monopolistically competitive market, a firm produces where it earns zero economic profit, or where marginal revenue (MR) equals marginal cost (MC). Since the demand curve is downward sloping, the firm's price will exceed its marginal cost, but not as much as in a monopoly. Therefore, the firm will produce a quantity that generates a price equal to the average total cost (ATC) at its minimum point, which is on the declining portion of the ATC curve. Therefore, the correct choice is D.

Question 16

If firms in a monopolistically competitive market are incurring economic losses, which of the following statements describes the changes that occur as the market adjusts to the long-run equilibrium?
A)Each existing firm's demand curve shifts to the right.
B)More firms exit the market.
C)Each firm eliminates its excess capacity.
D)Both a and b are correct.

Accepted Answer

In monopolistically competitive markets, firms can earn economic profits in the short run, but in the long run, new firms enter the market, which increases competition and reduces the demand for each firm's product, leading to economic losses. As a result, firms may exit the market in the long run, shifting the demand curve for the remaining firms to the right, allowing them to raise prices and earn profits. Additionally, firms may eliminate excess capacity in the long run in order to reduce costs and maintain profitability. Therefore, both answer choices a and b are correct.

Question 17

When a firm exits a monopolistically competitive market, the individual demand curves faced by all remaining firms in that market will
A)shift in a direction that is unpredictable without further information.
B)shift to the right.
C)shift to the left.
D)remain unchanged. It is the supply curve that will shift.

Accepted Answer

The answer of When a firm exits a monopolistically competitive...

Question 18

Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to a(n)
A)change in the technology that the firm utilizes.
B)shift of its demand curve.
C)shift of its supply curve.
D)increase in the firm's average cost of production.

Accepted Answer

The answer of Long-run profit earned by a monopolistically competitive...

Question 19

In monopolistically competitive markets, economic losses
A)suggest that some existing firms will exit the market.
B)suggest that new firms will enter the market.
C)are minimized through government-imposed barriers to entry.
D)are never possible.

Accepted Answer

The answer of In monopolistically competitive markets, economic losses
A)suggest that...

Question 20

As new firms enter a monopolistically competitive market, profits of existing firms
A)rise, and product diversity in the market increases.
B)rise, and product diversity in the market decreases.
C)decline, and product diversity in the market increases.
D)decline, and product diversity in the market decreases.

Accepted Answer

The answer of As new firms enter a monopolistically competitive...

Quiz 16: Monopolistic Competition

When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium,

In a monopolistically competitive market,

When a firm's demand curve is tangent to its average total cost curve, the

The free entry and exit of firms in a monopolistically competitive market guarantees that

If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios would best describe the change existing firms would face as the market adjusts to the long-run equilibrium?

In monopolistically competitive markets, positive economic profits

In monopolistically competitive markets, free entry and exit suggests that

When a new firm enters a monopolistically competitive market, the individual demand curves faced by all existing firms in that market will

Which two curves are tangent to each other in a monopolistically competitive market with zero economic profit?

As firms exit a monopolistically competitive market, profits of remaining firms

When a profit-maximizing firm in a monopolistically competitive market is producing the long-run equilibrium quantity,

A profit-maximizing firm operating in a monopolistically competitive market that is in a long-run equilibrium has

Because a monopolistically competitive firm has some market power, in the long-run the price of its product exceeds its

New firms will likely enter a monopolistically competitive market when price exceeds

In a long-run equilibrium, a firm in a monopolistically competitive market operates

If firms in a monopolistically competitive market are incurring economic losses, which of the following statements describes the changes that occur as the market adjusts to the long-run equilibrium?

When a firm exits a monopolistically competitive market, the individual demand curves faced by all remaining firms in that market will

Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to a(n)

In monopolistically competitive markets, economic losses

As new firms enter a monopolistically competitive market, profits of existing firms