Question 1

Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to a shift in:

Accepted Answer

In the long run, new firms enter the market if existing firms are making profits, which shifts the demand curve for each firm to the left until profits are driven to zero, reaching the competitive level.

Question 2

You intend travelling to Shanghai, China, to market truck-parts to local manufacturers.Your travel agent provides a list of 120 local hotels and a Sheraton.In this case, the Sheraton brand-name is likely to be used as a signal of:

Accepted Answer

The use of the Sheraton brand-name as an option signal suggests that it serves as a quality signal when quality cannot be easily judged. As the traveler is not familiar with the local hotels, the Sheraton's established brand name can be relied upon as an indicator of quality standards.

Question 3

Trademarks are a form of branding products in communist countries.This was deemed necessary so that there was:

Accepted Answer

Trademarks provide all of these benefits in communist countries. They ensure accountability for quality, signal market quality in the absence of markets, and allow customers to select preferred goods based on the reputation of the trademark.

Question 4

According to the information provided, if Firm B decides to advertise its product it can expect to:

Accepted Answer

Advertising leads to a profit of $72 million per year for Firm B, as indicated by the provided information.

Question 5

On a holiday to Cancun, Mexico, you find yourself eating every meal at the local McDonald's, rather than having a hamburger from one of the street vendors.Your traveling companion claims that you are irrational, since you never eat McDonald's hamburgers when you are at home and McDonald's hamburgers cost more than those prepared and sold by Cancun's street vendors.An economist would most likely explain your behaviour by suggesting that:

Accepted Answer

The economist would most likely argue that you are choosing to eat at McDonald's in Cancun because of the consistent quality that the McDonald's brand name guarantees, even though it may cost more than the local street vendors. This is a rational decision based on the information available to you as a consumer.

Question 6

What is the main point of difference between a monopolistically competitive market and an oligopoly?

Accepted Answer

The main point of difference between a monopolistically competitive market and an oligopoly is the number of sellers. In a monopolistically competitive market, there are many sellers, each selling differentiated products, while in an oligopoly, there are a few dominant sellers who sell either homogeneous or differentiated products. The other options (A and B) are characteristics that may apply to an oligopoly but do not differentiate it from a monopolistically competitive market. Option C is incorrect because both types of markets can have many buyers.

Question 7

Edward consumes Arnott's Tim Tams exclusively.He claims that there is a clear taste difference and that competing brands of chocolate biscuits leave an unsavoury residual taste in his mouth.However, in a blind taste test, Edward is found to prefer generic store brand chocolate biscuits to Tim Tams eight out of ten times.The results of Edward's taste test would be consistent with which of the following statements?

Accepted Answer

The answer of Edward consumes Arnott's Tim Tams exclusively.He claims...

Question 8

Suppose a current-affairs investigation reveals that in a market that was monopolistically competitive all the goods are actually homogenous, that is, there is no differentiation between them.In the short run, the market is then most likely to represent:

Accepted Answer

If all goods in a monopolistically competitive market are actually homogenous, then there is no differentiation between them. This means that consumers have no reason to prefer one product over another, and firms have no ability to charge a higher price for a differentiated product. In this case, the market becomes more similar to a perfectly competitive market, where firms are price-takers and there is no market power. Therefore, the answer is A) a competitive market.

Question 9

You are trying to decide whether to buy a new camera for your trip.You have a choice of a new Canon or a camera made by a generic manufacturer.You buy the Canon but unfortunately, the camera's shutter quickly breaks and you decide to buy a different brand camera to replace it.This example would reinforce the claim that:

Accepted Answer

The fact that the person decided to switch brands after their negative experience with the Canon camera suggests that they lost trust in the brand and were looking for a different option. This reinforces the idea that firms have a financial stake in maintaining the reputation of their brand names in order to retain customers and avoid negative reviews.

Question 10

Refer to the information provided.On the basis of a theory that people buy a product because it is advertised, the content of advertisements for Firm B's product:

Accepted Answer

If the theory is that people buy a product simply because it is advertised, then the specific content of the advertisement is irrelevant to its success.

Question 11

Eunice consumes Coke exclusively.She claims that there is a clear taste difference and that competing brands of cola leave an unsavoury residual taste in her mouth.However, in a blind taste test, Eunice is found to prefer generic store-brand cola to Coke eight out of 10 times.The results of Eunice's taste test would reinforce claims by critics of brand names that:

Accepted Answer

The results of the blind taste test reveal that Eunice's preference for Coke is based on her perception of differences that do not actually exist. This supports the critics' claim that brand names can cause consumers to perceive differences that are not real.

Question 12

According to the information provided, if Firm A decides to advertise its product, it can expect to:

Accepted Answer

The answer of According to the information provided, if Firm...

Question 13

Refer to the information provided.By its willingness to spend money on advertising, Firm B:

Accepted Answer

By spending money on advertising, Firm B is indicating that it believes its product has value to consumers and is attempting to communicate that value to them. This does not necessarily mean that the company is not profit-maximizing or detracting from market efficiency.

Question 14

Brand names that existed in communist countries were typically associated with:

Accepted Answer

In communist countries, brand names were typically associated with the name of the firm that manufactured the product, as private ownership of businesses was not allowed. Therefore, the state-owned enterprises were the ones manufacturing and branding the products.

Question 15

In some countries, brand name fast-food restaurants are not allowed to operate.Such restrictions are likely to:

Accepted Answer

Restricting brand name fast-food restaurants reduces competition, as local businesses face less competition from large, established brands.

Question 16

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

Accepted Answer

When a firm exits a monopolistically competitive market, the demand for the products of the remaining firms increases because there are fewer firms supplying similar but differentiated products. This causes the individual demand curves of the existing firms to shift to the right.

Question 17

Refer to the information provided.Under what circumstances will both firms choose to advertise?

Accepted Answer

If advertising costs lowered to $15 million, it would be more financially feasible for both firms to choose to advertise, as the reduced cost would likely increase the potential profitability of advertising.

Question 18

When advertising is cheap:

Accepted Answer

The answer of When advertising is cheap:
...

Question 19

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

Accepted Answer

When a new firm enters a monopolistically competitive market, it increases the number of products available, leading to a decrease in demand for the existing firms' products. Hence, the individual demand curves for existing firms shift to the left.

Question 20

Brand names are likely to ensure product quality:

Accepted Answer

Brand names can be found in various economic structures, including pure market-based economies, mixed economies, and developed economies. The association between a brand name and the quality of the product is not specific to any particular economic structure, but rather is a result of the brand's reputation for producing quality products over time. Therefore, the best choice is D, as brand names can ensure product quality in a diverse set of economic structures.

Quiz 16: Monopolistic Competition