Question 1

Consumers in monopolistically competitive markets face a trade-off between paying prices greater than marginal costs and purchasing products that are more closely suited to their tastes.

Accepted Answer

In monopolistically competitive markets, firms have some market power and can charge a price greater than marginal cost, but they also differentiate their products from competitors to appeal to consumer preferences. Consumers then decide whether the higher price is worth the product's unique features.

Question 2

What is the trade-off that consumers face when buying the product of a monopolistically competitive firm?
A)Consumers pay higher prices but receive better quality goods compared to the output of perfectly competitive firms.
B)Consumers pay a price greater than marginal cost, but have the luxury of choices more suited to their tastes.
C)Consumers pay higher prices but the products are produced by highly efficient firms.
D)Consumers pay lower prices but have fewer choices.

Accepted Answer

Monopolistically competitive firms have some power to set prices above marginal cost due to their product differentiation, but they also must compete with other firms offering similar but slightly different products. This gives consumers more choices that better suit their preferences, but they may have to pay a higher price than under perfect competition. Therefore, the trade-off that consumers face when purchasing from a monopolistically competitive firm is paying a price greater than marginal cost but having more choices available to them.

Question 3

A monopolistic competitor does not earn profits in the long run unless it can successfully differentiate its product in the minds of its consumers.

Accepted Answer

Monopolistic competitors often face competition from similar products, and if they cannot successfully differentiate their product, they will eventually lose sales and profits in the long run. Therefore, differentiation is necessary for a monopolistic competitor to earn profits in the long run.

Question 4

In contrast with perfect competition, excess capacity characterizes monopolistic competition.Excess capacity is due to which of the following?
A)Monopolistically competitive firms produce at the minimum point on their average total cost curves.
B)Monopolistically competitive firms face downward-sloping demand curves. In the long run, firms produce where their demand curves are tangent to their long-run average total cost curves.
C)Monopolistically competitive firms produce where marginal revenue is equal to marginal cost.
D)Monopolistically competitive markets have low barriers to entry.

Accepted Answer

In the long run, monopolistically competitive firms produce where their demand curves are tangent to their long-run average total cost curves. This means they produce at a quantity lower than the one that would minimize their average total cost. Therefore, they have excess capacity, which is the difference between their actual output and the output that would minimize their average total cost. This is in contrast with perfect competition, where firms produce at the minimum point of their average total cost curves and have no excess capacity.

Question 5

Which of the following is not a characteristic of a monopolistically competitive firm in long-run equilibrium?
A)Marginal revenue is equal to marginal cost.
B)Price is equal to average revenue.
C)The firm has excess capacity.
D)Price is equal to marginal cost.

Accepted Answer

In monopolistically competitive firms, in long-run equilibrium, price is greater than marginal cost. This is due to the existence of differentiated products and the ability of the firm to set prices above their marginal cost. Therefore, D, where price is equal to marginal cost, is not a characteristic of a monopolistically competitive firm in long-run equilibrium.

Question 6

Long-run equilibrium in a monopolistically competitive market is similar to long-run equilibrium in a perfectly competitive market in that in both markets, firms
A)produce at the minimum point of their average total cost curves.
B)produce where price equals marginal cost.
C)break even.
D)produce where price equals marginal revenue.

Accepted Answer

In long-run equilibrium, both monopolistically competitive and perfectly competitive firms break even, meaning they earn zero economic profit.

Question 7

Economists have long debated whether there is a significant loss of well-being to society in markets that are monopolistically competitive rather than perfectly competitive.Which of the following offers the best reason why some economists believe that monopolistically competitive markets benefit consumers despite any loss of well-being?
A)Although consumers may pay a price greater than marginal cost for a product, the product is produced at the minimum average total cost.
B)Although consumers may pay a price greater than marginal cost and the product is not produced at minimum average total cost, they benefit from being able to buy a differentiated product more closely suited to their tastes.
C)Consumers pay a price equal to the marginal cost of producing a product, even though it is not produced at the minimum average total cost.
D)Consumers are better off choosing from a variety of differentiated products, even though product differentiation causes barriers that restrict entry into monopolistically competitive markets.

Accepted Answer

Some economists argue that monopolistically competitive markets benefit consumers because they are able to buy a differentiated product that better suits their tastes, even if it comes at a higher price than marginal cost and is not produced at minimum average total cost. This variety of products may not exist in a perfectly competitive market and gives consumers a wider range of options to choose from.

Question 8

In what way does long-run equilibrium under monopolistic competition differ from long-run equilibrium under perfect competition?
A)Firms in perfect competition achieve productive and allocative efficiency while firms in monopolistic competition achieve neither allocative nor productive efficiency.
B)The only difference is that in a monopolistically competitive market there are many brands to choose from while in a perfectly competitive market there is one standard product.
C)Firms in perfect competition achieve productive efficiency while firms in monopolistic competition achieve allocative efficiency.
D)Firms in perfect competition achieve allocative efficiency while firms in monopolistic competition achieve brand efficiency.

Accepted Answer

In perfect competition, firms achieve both productive and allocative efficiency, while in monopolistic competition, due to product differentiation and the ability to charge higher prices, firms do not achieve either productive or allocative efficiency.

Question 9

Only one of the following statements is correct.The statements compare perfectly competitive (PC)markets and monopolistically competitive (MC)markets.Which statement is correct?
A)Productive efficiency is achieved in both PC and MC markets. Allocative efficiency is achieved only in MC markets.
B)Allocative efficiency is achieved in both PC and MC markets. Productive efficiency is achieved only in PC markets.
C)Productive efficiency and allocative efficiency are both achieved in PC markets. Neither is achieved in MC markets.
D)Allocative efficiency is achieved only in PC markets. Productive efficiency is achieved only in MC markets.

Accepted Answer

The answer of Only one of the following statements is...

Question 10

Productive efficiency does not hold for a profit-maximizing, monopolistically competitive firm in the long-run equilibrium because the firm operates along the diseconomies-of-scale region of its average total cost curve.

Accepted Answer

The answer of Productive efficiency does not hold for a...

Question 11

In the long-run equilibrium, a monopolistically competitive firm earning normal profit produces the allocatively efficient output level.

Accepted Answer

In the long-run equilibrium, a monopolistically competitive firm earning normal profit produces at a level where marginal revenue equals marginal cost, but this level is not necessarily allocatively efficient as the price exceeds the marginal cost. Hence, the firm produces a level of output that generates excess capacity and leads to a deadweight loss.

Question 12

If a monopolistically competitive firm has excess capacity
A)it has exhausted all economies of scale.
B)it is producing beyond the minimum efficient scale.
C)it is experiencing diseconomies of scale.
D)it produces a level of output that places it on the negatively sloped portion of its average total cost curve.

Accepted Answer

If a monopolistically competitive firm has excess capacity, it means that the firm is producing less than the output level that would minimize its average total cost. This indicates that the firm is operating on the negatively sloped portion of its average total cost curve, where increasing output would result in decreasing average total cost. Therefore, the correct answer is D. Option A is incorrect because having excess capacity does not necessarily imply an absence of economies of scale. Option B is incorrect because the minimum efficient scale refers to the lowest level of output at which a firm can achieve the lowest long-run average cost. Option C is incorrect because diseconomies of scale occur when the firm experiences rising average total cost as output increases beyond a certain level, which is not the case here.

Question 13

Economists have long debated whether there is a significant loss of well-being to society in markets that are monopolistically competitive rather than perfectly competitive.Which of the following offers the best reason why some economists believe that monopolistically competitive markets are less efficient than perfectly competitive markets?
A)In contrast to perfectly competitive markets, neither allocative efficiency nor productive efficiency are achieved in monopolistically competitive markets.
B)In contrast to perfectly competitive markets, firms in monopolistically competitive markets earn economic profits in long-run equilibrium.
C)In contrast to perfectly competitive markets, firms in monopolistically competitive markets do not produce where price equals average total cost in long-run equilibrium.
D)In contrast to perfectly competitive markets, firms in monopolistically competitive markets can charge a price greater than average total cost in the short run.

Accepted Answer

Allocative efficiency and productive efficiency are achieved in perfectly competitive markets, but they are not achieved in monopolistically competitive markets. In monopolistically competitive markets, firms have some market power and can charge higher prices than in perfectly competitive markets, leading to a loss of consumer surplus. Additionally, firms in monopolistically competitive markets may not produce at minimum average total cost, leading to a loss of productive efficiency. These factors contribute to a less efficient outcome in monopolistically competitive markets compared to perfectly competitive markets.

Question 14

Excess capacity is a characteristic of monopolistically competitive firms.What does excess capacity mean?
A)It means that firms do not produce the output level that corresponds to the minimum point on their average total cost curves.
B)It means that firms hire more than the minimum number of workers needed to produce the profit-maximizing level of output.
C)It means that firms produce with inefficient combinations of resources.
D)It means that firms build plants that are not large enough to achieve minimum efficient scale.

Accepted Answer

Excess capacity means that firms operate at a production level that is below the minimum point on their average total cost curve. This is because in monopolistically competitive markets, firms have some pricing power due to product differentiation, but they still face competition. Therefore, they may not produce at the point of minimum efficient scale, leading to excess capacity.

Question 15

In long-run equilibrium, compared to a perfectly competitive market, a monopolistically competitive industry produces a ________ level of output and charges a ________ price.
A)higher; lower
B)lower; lower
C)lower; higher
D)higher; higher

Accepted Answer

In the long-run equilibrium of a monopolistically competitive industry, firms produce a lower level of output than a perfectly competitive market due to the presence of product differentiation and the inability to achieve economies of scale. Additionally, monopolistically competitive firms charge a higher price than a perfectly competitive market due to their ability to differentiate their products and exert some degree of market power. Therefore, the correct answer is C, lower level of output and higher price.

Question 16

Monopolistically competitive firms have downward-sloping demand curves.In the long run, monopolistically competitive firms earn zero economic profits.These two characteristics imply that in the long run
A)monopolistically competitive markets achieve productive efficiency.
B)monopolistically competitive markets achieve allocative efficiency.
C)monopolistically competitive firms earn economic profits.
D)monopolistically competitive firms have excess capacity.

Accepted Answer

Monopolistically competitive firms have excess capacity because they operate at a point where they produce less than the minimum efficient scale of production, leading to higher average costs. In the long run, firms in monopolistically competitive markets earn zero economic profits, as there are low barriers to entry, allowing new firms to enter and compete away any profits. Therefore, monopolistically competitive markets do not achieve productive or allocative efficiency.

Question 17

In the long-run equilibrium, both the perfectly competitive firm and the monopolistically competitive firm produce the output at which MR = MC and charge a price equal to the average total cost of production.

Accepted Answer

The answer of In the long-run equilibrium, both the perfectly...

Question 18

If a significant number of consumers switch from consuming traditional baked goods to consuming vegan baked goods, a vegan bakery will likely find its demand curve shifting to the ________ and its marginal revenue curve shifting to the ________ as more competitors enter the market.
A)right; right
B)right; left
C)left; right
D)left; left

Accepted Answer

The answer of If a significant number of consumers switch...

Question 19

One way by which firms differentiate their products is to find a market niche.

Accepted Answer

Finding a market niche involves identifying a specific segment within a larger market that has unique needs and preferences. By catering to this niche, firms can differentiate their products and establish a competitive advantage. Therefore, the statement is true.

Question 20

Monopolistically competitive firms achieve allocative efficiency but not productive efficiency.

Accepted Answer

Monopolistically competitive firms do not achieve allocative efficiency as they do not produce at the lowest possible cost in order to maximize consumer surplus. They also do not achieve productive efficiency as they do not produce at the lowest point on their average total cost curve, resulting in excess capacity.

Quiz 13: Monopolistic Competition: the Competitive Model in a More Realistic Setting

Consumers in monopolistically competitive markets face a trade-off between paying prices greater than marginal costs and purchasing products that are more closely suited to their tastes.

What is the trade-off that consumers face when buying the product of a monopolistically competitive firm?

A monopolistic competitor does not earn profits in the long run unless it can successfully differentiate its product in the minds of its consumers.

In contrast with perfect competition, excess capacity characterizes monopolistic competition.Excess capacity is due to which of the following?

Which of the following is not a characteristic of a monopolistically competitive firm in long-run equilibrium?

Long-run equilibrium in a monopolistically competitive market is similar to long-run equilibrium in a perfectly competitive market in that in both markets, firms

In what way does long-run equilibrium under monopolistic competition differ from long-run equilibrium under perfect competition?

Only one of the following statements is correct.The statements compare perfectly competitive (PC) markets and monopolistically competitive (MC) markets.Which statement is correct?

Productive efficiency does not hold for a profit-maximizing, monopolistically competitive firm in the long-run equilibrium because the firm operates along the diseconomies-of-scale region of its average total cost curve.

In the long-run equilibrium, a monopolistically competitive firm earning normal profit produces the allocatively efficient output level.

If a monopolistically competitive firm has excess capacity

Excess capacity is a characteristic of monopolistically competitive firms.What does excess capacity mean?

In long-run equilibrium, compared to a perfectly competitive market, a monopolistically competitive industry produces a level of output and charges a price.

Monopolistically competitive firms have downward-sloping demand curves.In the long run, monopolistically competitive firms earn zero economic profits.These two characteristics imply that in the long run

In the long-run equilibrium, both the perfectly competitive firm and the monopolistically competitive firm produce the output at which MR = MC and charge a price equal to the average total cost of production.

If a significant number of consumers switch from consuming traditional baked goods to consuming vegan baked goods, a vegan bakery will likely find its demand curve shifting to the and its marginal revenue curve shifting to the as more competitors enter the market.

One way by which firms differentiate their products is to find a market niche.

Monopolistically competitive firms achieve allocative efficiency but not productive efficiency.