Question 1

Monopolistic competition is considered inefficient because
A)price exceeds marginal cost.
B)output is excessive.
C)long-run profits are positive.
D)barriers to entry limit the number of firms in the market.

Accepted Answer

Monopolistic competition is considered inefficient because firms in this market structure have some market power and are able to charge prices that exceed marginal cost. This leads to a deadweight loss, as consumers are willing to pay more for the product than what it costs the firm to produce it. Therefore, monopolistic competition is not allocatively efficient.

Question 2

Monopolistic competition is an
A)inefficient market structure because there is deadweight loss.
B)inefficient market structure because price exceeds marginal cost.
C)efficient market structure because free entry drives long-run profits to zero.
D)Both a and b are correct.

Accepted Answer

The answer of Monopolistic competition is an
A)inefficient market structure because...

Question 3

In which of the following market structures do firms produce the welfare-maximizing level of output?
A)perfect competition
B)monopolistic competition
C)monopoly
D)Both a and b are correct.

Accepted Answer

In perfect competition, firms produce the welfare-maximizing level of output because they are price takers and cannot influence the market price. As a result, they have no market power and produce at the point where marginal cost equals marginal revenue, which maximizes overall social welfare. Monopolistic competition, on the other hand, involves firms having some market power and producing at a level of output where marginal revenue equals marginal cost, but this may not necessarily be the welfare-maximizing level. In a monopoly, the firm has market power and may restrict output, resulting in a level of production that is not welfare-maximizing.

Question 4

If regulators required firms in monopolistically competitive markets to set price equal to marginal cost,
A)firms would respond by lowering their costs.
B)firms would require a subsidy to stay in business
C)new firms that enter the market would operate at efficient scale.
D)the most efficient firms would not be affected.

Accepted Answer

The answer of If regulators required firms in monopolistically competitive...

Question 5

A monopolistically competitive market
A)usually has too many firms, reducing the economic profit of each firm to zero.
B)usually has too few firms, reducing the product variety for consumers.
C)may have too many or too few firms, and the government can intervene to achieve the optimal number of firms.
D)may have too many or too few firms, but the government can do little to rectify the situation.

Accepted Answer

The answer of A monopolistically competitive market
A)usually has too many...

Question 6

The administrative burden of regulating price in a monopolistically competitive market is
A)small due to economies of scale.
B)large because price is usually below marginal cost.
C)large because of the large number of firms that produce differentiated products.
D)small because firms produce with excess capacity.

Accepted Answer

In a monopolistically competitive market, there are a large number of firms producing differentiated products, meaning regulators would need to monitor and regulate the prices of each firm and their respective products. This leads to a large administrative burden as it requires a significant amount of resources and manpower.

Question 7

Both monopolistic competition and oligopoly are market structures
A)that fail to achieve the total surplus achieved by perfect competition.
B)that feature only a few firms in each market.
C)to which the concept of Nash equilibrium is frequently applied by economists.
D)in which firms earn zero economic profit in the long run.

Accepted Answer

The answer of Both monopolistic competition and oligopoly are market...

Question 8

The traditional view of monopolistic competition holds that this type of industrial structure is inefficient because
A)there are too few firms to reach an efficient level of production.
B)firms do not operate at the output that minimizes average costs.
C)more advertising is needed to inform customers about product differences.
D)consumers do not have enough choice among the product varieties available.

Accepted Answer

In monopolistic competition, firms do not operate at the output that minimizes average costs as they differentiate their products to attract customers, which leads to excess capacity and higher costs. Therefore, this type of industrial structure is considered inefficient.

Question 9

Monopolistic competition is an inefficient market structure because
A)price exceeds marginal cost.
B)it has a deadweight loss, just as monopoly does.
C)at the equilibrium, some consumers will value the good at more than the marginal cost of production.
D)All of the above are correct.

Accepted Answer

Option A is correct because in monopolistic competition, firms charge a price above marginal cost, making it an inefficient market structure. Option B is also correct as monopolistic competition creates a deadweight loss, which reduces consumer surplus and total surplus for the society. Option C is related to the inefficiency of monopolistic competition, as some consumers are willing to pay more than the marginal cost, which indicates that the market is not producing goods at the lowest possible cost. Hence, all options are correct, making option D the best choice.

Question 10

Which of the following markets impose deadweight losses on society?
(i)perfect competition
(ii)monopolistic competition
(iii)monopoly
A)(i) and (ii) only
B)(ii) and (iii) only
C)(i) and (iii) only
D)(i) only

Accepted Answer

Monopolistic competition and monopoly both result in deadweight losses due to pricing above marginal cost, leading to reduced output compared to perfect competition, which is allocatively efficient.

Question 11

Monopolistic competition is an inefficient market structure because
A)marginal revenue equals marginal cost.
B)it has a deadweight loss, just as monopoly does.
C)long-run profits are zero due to free entry.
D)All of the above are correct.

Accepted Answer

Monopolistic competition, like monopoly, has a deadweight loss due to price being set above marginal cost. While long-run profits may be lower due to potential entry, this does not eliminate the inefficiency of the market structure. Choice A is incorrect because marginal revenue equals marginal cost in both perfect competition and monopolistic competition, but this does not necessarily lead to market efficiency. And choice C is also incorrect because even if long-run profits are zero, there is still a deadweight loss present in the market structure.

Question 12

Monopolistically competitive markets may be socially inefficient because
A)most firms produce inferior products.
B)government programs cannot effectively regulate price.
C)firms earn zero economic profit.
D)the market may have too much or too little entry by new firms.

Accepted Answer

Monopolistically competitive markets may suffer from too little or too much entry of new firms, which can lead to inefficiencies. Too little entry can result in prices that are higher than they would be in a more competitive market, while too much entry can result in firms earning only normal profits, which may not provide enough incentive for innovation or efficient production. Therefore, the market may have too much or too little entry by new firms, making it socially inefficient.

Question 13

Monopolistic competition is an
A)efficient market structure because long-run profits are zero.
B)efficient market structure because each firm produces at its efficient scale.
C)inefficient market structure because there is deadweight loss.
D)Both a and b are correct.

Accepted Answer

Monopolistic competition is an inefficient market structure because firms have some market power due to differentiation of their products, which leads to deadweight loss. In the long run, although there is no entry barrier, firms do not produce at their efficient scale, unlike in perfect competition. Additionally, firms in monopolistic competition can earn positive long-run profits due to product differentiation.

Question 14

Which of the following represents the best government policy to reduce the deadweight loss associated with a monopolistically competitive market?
A)The government should regulate firms in a manner similar to natural monopolies.
B)The government should encourage more firms to enter the industry because without government intervention, there are likely to be "too few" firms.
C)The government should encourage some firms to exit the industry because without government intervention, there are likely to be "too many" firms.
D)There is no government policy that can reduce deadweight loss without creating other problems.

Accepted Answer

The answer of Which of the following represents the best...

Question 15

A monopolistically competitive market could be considered inefficient because
A)marginal revenue exceeds average revenue.
B)price exceeds marginal cost.
C)the efficient scale of production is only achieved in the long run, not in the short run.
D)markup pricing does not occur in any other market structure.

Accepted Answer

In a monopolistically competitive market, price exceeds marginal cost, which means that resources are not being used efficiently. This is because firms in this market have some market power to set prices above their marginal cost, resulting in a higher price and lower output level. This leads to a deadweight loss, which represents the loss of potential economic efficiency that could have been achieved if resources were allocated more efficiently.

Question 16

Senator Hubris wants to pass a law that would require all monopolistically competitive firms to operate at their efficient scale. If this law were to pass and be enforced, we would expect that monopolistically competitive firms would
A)see their profits increase.
B)break even.
C)lose money.
D)not really be affected by the law.

Accepted Answer

Monopolistically competitive firms operate at a level of output where marginal revenue equals marginal cost, which is not necessarily at the minimum point of the average total cost curve. Therefore, if a law were to require them to operate at their efficient scale, which is the point of minimum average total cost, they would have to decrease their level of output, leading to a decrease in revenue and potentially losses.

Question 17

The deadweight loss that is associated with a monopolistically competitive market is a result of
A)price falling short of marginal cost in order to increase market share.
B)price exceeding marginal cost.
C)the firm operating in a regulated industry.
D)excessive advertising costs.

Accepted Answer

In a monopolistically competitive market, firms have some market power, allowing them to charge a price above their marginal cost. This results in a deadweight loss, as some consumers are unable to afford the product at the higher price and some potential suppliers are unable to enter the market due to the high price. This deadweight loss represents a loss of societal welfare.

Question 18

Regulation of a firm in a monopolistically competitive market
A)usually implies a very small administrative burden.
B)will lower the firm's costs.
C)is commonly used to enhance market efficiency.
D)is unlikely to improve market efficiency.

Accepted Answer

Regulation of a firm in a monopolistically competitive market is unlikely to improve market efficiency. This is because in such a market, firms have some degree of market power and are free to set prices and output levels. Any attempt to regulate them may lead to unintended consequences such as reducing competition and innovation. Moreover, the administrative burden of regulating firms in a monopolistically competitive market may outweigh any potential benefits. Therefore, it is generally preferable to rely on market forces to regulate firms in such a market.

Question 19

If regulators required firms in monopolistically competitive markets to set price equal to marginal cost,
A)firms would most likely experience economic losses.
B)firms would also operate at their efficient scale.
C)new firms would likely to enter the market.
D)the most efficient firms would not likely to be affected.

Accepted Answer

In monopolistically competitive markets, firms have some market power to set prices higher than marginal cost in order to differentiate their products and attract customers. If regulators require firms to set price equal to marginal cost, firms would not be able to cover their costs and would likely experience economic losses.

Question 20

Monopolistic competition is characterized by
i.efficient scale
ii.markup pricing over marginal cost
iii.deadweight loss
iv.excess capacity
A)i) and ii) only
B)ii) and iv) only
C)i), ii), and iii) only
D)ii), iii), and iv) only

Accepted Answer

Monopolistic competition is characterized by markup pricing over marginal cost (ii), deadweight loss (iii), and excess capacity (iv). Firms in monopolistic competition do not produce at efficient scale, leading to excess capacity and deadweight loss.

Quiz 16: Monopolistic Competition

Monopolistic competition is considered inefficient because

Monopolistic competition is an

In which of the following market structures do firms produce the welfare-maximizing level of output?

If regulators required firms in monopolistically competitive markets to set price equal to marginal cost,

A monopolistically competitive market

The administrative burden of regulating price in a monopolistically competitive market is

Both monopolistic competition and oligopoly are market structures

The traditional view of monopolistic competition holds that this type of industrial structure is inefficient because

Monopolistic competition is an inefficient market structure because

Which of the following markets impose deadweight losses on society? (i) perfect competition (ii) monopolistic competition (iii) monopoly

Monopolistic competition is an inefficient market structure because

Monopolistically competitive markets may be socially inefficient because

Monopolistic competition is an

Which of the following represents the best government policy to reduce the deadweight loss associated with a monopolistically competitive market?

A monopolistically competitive market could be considered inefficient because

Senator Hubris wants to pass a law that would require all monopolistically competitive firms to operate at their efficient scale. If this law were to pass and be enforced, we would expect that monopolistically competitive firms would

The deadweight loss that is associated with a monopolistically competitive market is a result of

Regulation of a firm in a monopolistically competitive market

If regulators required firms in monopolistically competitive markets to set price equal to marginal cost,

Monopolistic competition is characterized by i.efficient scale ii.markup pricing over marginal cost iii.deadweight loss iv.excess capacity