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Copyright © 2011 Pearson Education, Inc.
Foundations of Microeconomics, 5e (Bade/Parkin)
Chapter 16 Monopolistic Competition
16.1 What Is Monopolistic Competition?
1) An industry with a large number of firms, differentiated products, and free entry and exit is
called
A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
E) monopolistic oligopoly.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: SB
AACSB: Reflective thinking
2) One characteristic of monopolistic competition is that it has
A) many firms producing a slightly differentiated product.
B) many firms producing identical goods.
C) one firm producing a unique good.
D) a few firms producing a slightly differentiated product.
E) large barriers to entry.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: WM
AACSB: Reflective thinking
3) Which market structure is characterized by the following characteristics?
i. a large number of firms compete
ii. each firm produces a differentiated product
iii. firms are free to enter and exit
A) perfect competition
B) duopoly
C) oligopoly
D) monopolistic competition
E) monopoly
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: TM
AACSB: Reflective thinking
2
Copyright © 2011 Pearson Education, Inc.
4) In monopolistic competition, each firm supplies a small part of the market. This occurs
because
A) there are barriers to entry.
B) there are no barriers to exit.
C) there are a large number of firms.
D) firms produce differentiated products.
E) there are a large number of buyers.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: SB
AACSB: Reflective thinking
5) Monopolistic competition is a market structure in which
A) firms face barriers to entry.
B) a large number of firms compete.
C) firms produce and sell an identical product.
D) firms face perfectly elastic demand for their product.
E) the firms have no ability to influence the price of their product.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: MR
AACSB: Reflective thinking
6) Monopolistic competition is defined as a type of market structure in which
A) many firms produce the good.
B) firms produce a homogeneous good.
C) there are barriers to entry.
D) firms can make an economic profit in the long run.
E) firms can easily enter the market but cannot easily exit from it.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: MR
AACSB: Reflective thinking
3
Copyright © 2011 Pearson Education, Inc.
7) What does monopolistic competition have in common with perfect competition?
A) a large number of firms and freedom of entry and exit
B) a standardized product
C) product differentiation
D) the ability to earn an economic profit in the long run
E) barriers to exit but no barriers to entry
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: PH
AACSB: Reflective thinking
8) What does monopolistic competition have in common with monopoly?
A) a large number of firms
B) a downward-sloping demand curve
C) the ability to collude with respect to price
D) mutual interdependence
E) barriers to entry
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: PH
AACSB: Reflective thinking
9) If a large number of firms are competing, the market could be
A) perfect competition or monopolistic competition.
B) perfect competition or monopoly.
C) monopolistic competition or oligopoly.
D) monopolistic competition or monopoly.
E) oligopoly or monopoly.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: SA
AACSB: Reflective thinking
4
Copyright © 2011 Pearson Education, Inc.
10) In both monopolistic competition and perfect competition,
A) firms sell identical products.
B) there is easy entry and exit.
C) firms are price takers.
D) firms face horizontal demand curves.
E) the marginal revenue curve and the demand curve are the same.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: SA
AACSB: Reflective thinking
11) Which of the following is NOT a characteristic of monopolistic competition?
A) few firms compete
B) easy entry and exit
C) small market share
D) differentiated product
E) no barriers to entry or exit
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: SA
AACSB: Reflective thinking
12) A firm in monopolistic competition ________ influence its price and ________ influence the
market average price.
A) can; can
B) can; cannot
C) cannot; can
D) cannot; cannot
E) can; only in the short run can
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: MR
AACSB: Reflective thinking
5
Copyright © 2011 Pearson Education, Inc.
13) The women's dress industry is monopolistically competitive because each firm has
A) a large market share.
B) a very small market share.
C) no market share.
D) no competition for their market share.
E) struck a deal with the many other firms about what price will be charged.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: JC
AACSB: Reflective thinking
14) It would be impossible for members of the fast-food industry to collude to fix prices because
A) there are too many fast-food firms in the market.
B) collusion is illegal.
C) there are not enough fast-food firms in the market.
D) the price of fast-food is too low.
E) demanders would not buy from firms that collude.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: JC
AACSB: Reflective thinking
15) Because of the number of firms in monopolistic competition
A) each firm has a large market share.
B) it is possible for the firms to collude.
C) no one firm can dominate the market.
D) one firm has the ability to dictate market conditions.
E) each firm must carefully monitor what its competitors do.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: WM
AACSB: Reflective thinking
6
Copyright © 2011 Pearson Education, Inc.
16) In an industry with a large number of firms,
A) each firm will produce a large quantity, relative to market demand.
B) one firm will dominate the market.
C) collusion is impossible.
D) competition is eliminated.
E) barriers to exit must exist.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: SB
AACSB: Reflective thinking
17) The freedom of entry and exit in monopolistic competition means that firms
A) enter the market when economic losses are being suffered.
B) exit the market when economic profits are being earned.
C) enter the market when normal profits are being earned.
D) can enter a market to compete for economic profits and leave when economic losses are being
incurred.
E) find it easy to permanently earn an economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: PH
AACSB: Reflective thinking
18) In monopolistic competition, the products of different sellers are
A) identical.
B) similar but slightly different.
C) unique without any close or perfect substitutes.
D) perfect substitutes.
E) either identical or differentiated.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: TS
AACSB: Reflective thinking
7
Copyright © 2011 Pearson Education, Inc.
19) A differentiated product has
A) many perfect substitutes.
B) no close substitutes.
C) no substitutes of any kind.
D) close but not perfect substitutes.
E) many different complements.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: SB
AACSB: Reflective thinking
20) Product differentiation involves making a product that is
A) slightly different from the products of competing firms.
B) no different than the products of competing firms.
C) very different from the products of competing firms.
D) completely different from the products of competing firms.
E) cheaper than the products of competing firms.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: JC
AACSB: Reflective thinking
21) Product differentiation means
A) firms sell products that are very dissimilar.
B) products sold by different firms are slightly different.
C) charging a higher price to consumers with high willingness to pay.
D) charging a lower price to consumers with low willingness to pay.
E) that a single firm sells many different types of products.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: SA
AACSB: Reflective thinking
8
Copyright © 2011 Pearson Education, Inc.
22) Which of the following is the best example of a differentiated product?
A) beets in the local supermarket
B) diamonds
C) airlines
D) running shoes
E) electricity
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: WM
AACSB: Reflective thinking
23) Because of product differentiation, firms
A) do not have to compete because their products are unique.
B) cannot compete on price.
C) can compete on the basis of quality.
D) are unable to compete by using advertising.
E) must compete on only price.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: WM
AACSB: Reflective thinking
24) Which of the following is true about monopolistic competition but false about perfect
competition?
A) There are a large number of independently acting sellers.
B) There are no barriers to entry.
C) Firms can earn an economic profit in the short run.
D) Firms compete on their product's price as well as its quality and marketing.
E) Firms cannot earn an economic profit in the long run.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: TS
AACSB: Reflective thinking
9
Copyright © 2011 Pearson Education, Inc.
25) Product differentiation allows a firm to compete with another firm on the basis of
A) efficiency.
B) elasticity.
C) quality, price, and marketing.
D) the level of output and the price.
E) demand.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: PH
AACSB: Reflective thinking
26) In monopolistic competition, the presence of a large number of firms making a differentiated
product means that
A) each firm can set the price of its particular product.
B) each firm must charge the same price.
C) the price is established by collusive behavior.
D) each firm must produce the same quantity.
E) firms cannot compete with each other on the basis of price.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: MR
AACSB: Reflective thinking
27) In monopolistic competition, a firm can set the price for its product because of
A) easy entry and exit.
B) economic profits.
C) product differentiation.
D) many competitors.
E) the firm's upward sloping demand curve.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: MR
AACSB: Reflective thinking
10
Copyright © 2011 Pearson Education, Inc.
28) Firms in monopolistic competition have demand curves that are
A) horizontal.
B) vertical.
C) downward sloping.
D) upward sloping.
E) U-shaped.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: SB
AACSB: Reflective thinking
29) As a firm in monopolistic competition sets the price for its product, the firm faces a tradeoff
between
A) supply and demand.
B) efficiency and equity.
C) internal and external economies of scale.
D) price and the quantity it can sell.
E) its marginal revenue and its price.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: TS
AACSB: Reflective thinking
30) An example of a firm in monopolistic competition is
A) your local water company.
B) the sole cable television company.
C) the many Chinese restaurants in San Francisco .
D) Kansas Power and Light, the sole provider of electricity in Kansas City.
E) Shaniq, a wheat farmer.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: SA
AACSB: Reflective thinking
11
Copyright © 2011 Pearson Education, Inc.
31) Which of the following is the best example of a monopolistically competitive industry?
A) land-based long distance telephone service
B) wheat farming
C) the local electricity producer
D) manufacturing of shirts
E) cable television
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: TS
AACSB: Reflective thinking
32) The United Company competes with many other firms each producing slightly different
products. Firms freely enter and exit this industry. The type of industry United Company
operates in is ________.
A) a monopoly
B) monopolistic competition
C) oligopoly
D) perfect competition
E) oligopolistic monopoly
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: CD
AACSB: Reflective thinking
33) Concentration ratios
A) refer to the concentration of customers in a certain area.
B) measure whether the market is dominated by a small number of firms.
C) measure the concentration of a large number of firms in a certain area.
D) have high values for perfect competition.
E) measure how concentrated a firm's sales are among certain types of goods.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: SA
AACSB: Reflective thinking
12
Copyright © 2011 Pearson Education, Inc.
34) The four-firm concentration ratio is the percentage of ________ accounted for by the four
largest firms in an industry.
A) profit
B) supply
C) total revenue
D) total cost
E) marginal cost
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: JC
AACSB: Reflective thinking
35) If you have found the percentage of the value of total revenue accounted for by the four
largest firms in an industry, you have found the
A) elasticity of demand value.
B) elasticity of supply value.
C) Herfindahl-Hirschman Index.
D) four-firm concentration ratio.
E) monopolistic concentration index.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: TS
AACSB: Reflective thinking
36) If the four-firm concentration ratio of an industry is
A) near 100, the industry is considered very competitive.
B) less than 40, the industry is considered an oligopoly.
C) over 40, the industry is considered monopolistic competition.
D) less than 40, the industry is considered monopolistic competition.
E) close to 0, the industry is considered a monopoly.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: WM
AACSB: Reflective thinking
13
Copyright © 2011 Pearson Education, Inc.
37) Which of the following four-firm concentration ratios would be the best indication of a
perfectly competitive industry?
A) 2 percent
B) 31 percent
C) 78 percent
D) 100 percent
E) 50 percent
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: TS
AACSB: Reflective thinking
38) Which of the following is correct?
A) Monopoly has a four-firm concentration ratio of 100.
B) Perfect competition has a four-firm concentration ratio near zero.
C) Monopolistic competition has a four-firm concentration ratio of more than 40.
D) Both answers A and B are correct.
E) Both answers A and C are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: SA
AACSB: Reflective thinking
39) If the four-firm concentration ratio equals 0.1 percent for the Mexican tomato industry, then
this industry is best characterized as
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) either a monopoly or monopolistic competition.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: JC
AACSB: Reflective thinking
14
Copyright © 2011 Pearson Education, Inc.
40) Which of the following four-firm concentration ratios is consistent with monopolistic
competition?
A) 100 percent
B) 75 percent
C) 25 percent
D) 0 percent
E) 91 percent
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: SB
AACSB: Reflective thinking
41) Which of the following four-firm concentration ratios would be the best indicator of an
oligopoly?
A) 0.25 percent
B) 31 percent
C) 78 percent
D) 100 percent
E) 11 percent
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: TS
AACSB: Reflective thinking
42) If the four-firm concentration ratio for the market for diapers is 73 percent, then this industry
is best characterized as
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) either a monopoly or monopolistic competition.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: JC
AACSB: Reflective thinking
15
Copyright © 2011 Pearson Education, Inc.
43) Which of the following four-firm concentration ratios would be the best indicator of a
monopoly?
A) 0.25 percent
B) 31 percent
C) 78 percent
D) 100 percent
E) 89 percent
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: TS
AACSB: Reflective thinking
44) The table above shows the revenue figures for the top four firms along with a total for the
remaining firms in the fast-food industry. What is the four-firm concentration ratio for the
industry?
A) 200
B) 20 percent
C) 25 percent
D) 80 percent
E) 100 percent
Skill: Level 3: Using models
Section: Checkpoint 16.1
Author: CD
AACSB: Analytical reasoning
16
Copyright © 2011 Pearson Education, Inc.
45) What is the four-firm concentration ratio if the four largest firms in an industry account for 5
percent, 6 percent, 7 percent, and 8 percent of total revenue?
A) 26 percent
B) 174 percent
C) 1,680
D) There is enough information given to answer the question, but none of the answers above are
correct.
E) There is not enough information given to answer the question.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: TS
AACSB: Analytical reasoning
46) The square of the percentage market share of each firm summed over the 50 largest firms in
a market is the
A) elasticity of demand value.
B) elasticity of supply value.
C) Herfindahl-Hirschman Index.
D) four-firm concentration ratio.
E) fifty-firm concentration ratio.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: TS
AACSB: Reflective thinking
47) The Herfindahl-Hirschman Index measures market concentration in an industry by summing
the square of the percentage market shares for
A) the 4 largest firms.
B) the 50 smallest firms.
C) the 4 smallest firms.
D) the 50 largest firms.
E) all firms in the market.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: WM
AACSB: Reflective thinking
17
Copyright © 2011 Pearson Education, Inc.
48) The Herfindahl-Hirschman Index is the ________ of the percentage market share of each
firm summed over the largest 50 firms in a market.
A) sum
B) square
C) square root
D) cube
E) negative
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: JC
AACSB: Reflective thinking
49) If the Herfindahl-Hirschman Index in the market for single-use cameras equals 10,000 , then
the single-use camera industry is best characterized as
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) either a monopoly or monopolistic competition.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: JC
AACSB: Reflective thinking
50) If the HHI for the widget industry is 1,200, then the market structure is
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) impossible to determine
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: DD
AACSB: Reflective thinking
18
Copyright © 2011 Pearson Education, Inc.
51) A market in which the Herfindahl-Hirschman Index exceeds 1,800 is considered to be
A) competitive.
B) not competitive.
C) moderately competitive.
D) purely competitive.
E) either a monopoly or monopolistic competition.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: JC
AACSB: Reflective thinking
52) When the Herfindahl-Hirschman Index for an industry is
A) very small, the industry can be perfectly competitive.
B) very large, the industry can be perfectly competitive.
C) 10,000, the industry is perfectly competitive.
D) very small, the industry can be a monopoly.
E) above 5,000 the industry is considered not very competitive and when it is below 5,000 the
industry is considered very competitive.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: WM
AACSB: Reflective thinking
53) If there are four firms in an industry with market shares of 50 percent, 40 percent, 5 percent,
and 5 percent, the Herfindahl-Hirschman Index is
A) 100.
B) 4150.
C) 25.
D) 3450.
E) undefined because there are not 50 firms in the industry.
Skill: Level 3: Using models
Section: Checkpoint 16.1
Author: SA
AACSB: Analytical reasoning
19
Copyright © 2011 Pearson Education, Inc.
54) What is the Herfindahl-Hirschman Index if the four firms in an industry account have market
shares of 62 percent, 15 percent, 15 percent, and 8 percent?
A) 100
B) 4,358
C) 111,600
D) 2,822
E) 6,200
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: TS
AACSB: Analytical reasoning
55) The three largest firms in an industry have market shares of 40 percent, 30 percent, and 2
percent. The remaining 47 firms in the industry each have a market share of 1 percent. The
Herfindahl-Hirschman Index (HHI) for this industry is ________.
A) 2,551
B) 5,184
C) 24,061
D) 10,000
E) 3,013
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: TM
AACSB: Analytical reasoning
20
Copyright © 2011 Pearson Education, Inc.
56) Suppose there are 7 firms in the candy industry with the market shares shown below. What is
the HHI for the industry?
A) 1850
B) 2000
C) 6400
D) 100
E) 20
Skill: Level 3: Using models
Section: Checkpoint 16.1
Author: CD
AACSB: Analytical reasoning
57) A market is considered competitive if the Herfindahl-Hirschman Index (HHI) is ________
and its four-firm concentration ratio is ________.
A) high; high
B) high; low
C) low; high
D) low; low
E) between 30 percent and 70 percent; greater than 5,000
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: SB
AACSB: Reflective thinking
21
Copyright © 2011 Pearson Education, Inc.
58) The U.S. Justice Department
A) scrutinizes any merger of firms in a market in which the four-firm concentration exceeds 25
percent.
B) uses only the Herfindahl-Hirschman Index when considering whether to challenge a merger.
C) is likely to challenge a merger if the Herfindahl-Hirschman Index exceeds 1800.
D) Answers A and B are correct.
E) Answers B and C are correct.
Skill: Level 3: Using models
Section: Checkpoint 16.1
Author: SA
AACSB: Reflective thinking
59) One problem with measures of market concentrations is that they do not
A) account for barriers to entry.
B) allow for all market types.
C) account for the difficulty in collecting total revenue data.
D) create meaningful comparisons across industries.
E) accurately measure concentration in markets with fewer than 4 firms.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: CD
AACSB: Reflective thinking
60) In monopolistic competition there
A) are many firms and many buyers.
B) are several large firms.
C) is one large firm.
D) might be many, several, or one firm.
E) are many firms but only a few buyers.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: STUDY GUIDE
AACSB: Reflective thinking
22
Copyright © 2011 Pearson Education, Inc.
61) A firm in monopolistic competition has a ________ market share and ________ influence
the price of its good or service.
A) large; can
B) large; cannot
C) small; can
D) small; cannot
E) large; might be able to
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: STUDY GUIDE
AACSB: Reflective thinking
62) Product differentiation means
A) making a product that has perfect substitutes.
B) making a product that is entirely unique.
C) the inability to set your own price.
D) making a product that is slightly different from products of competing firms.
E) making your demand curve horizontal.
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: STUDY GUIDE
AACSB: Reflective thinking
63) Firms in monopolistic competition compete on
i. quality.
ii. price.
iii. marketing.
A) i and ii
B) ii only
C) ii and iii
D) i and iii
E) i, ii, and iii
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: STUDY GUIDE
AACSB: Reflective thinking
23
Copyright © 2011 Pearson Education, Inc.
64) A firm in monopolistic competition has ________ demand curve.
A) a downward sloping
B) an upward sloping
C) a vertical
D) a horizontal
E) a U-shaped
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: STUDY GUIDE
AACSB: Reflective thinking
65) The absence of barriers to entry in monopolistic competition means that in the long run firms
A) earn an economic profit.
B) earn zero economic profit.
C) incur an economic loss.
D) earn either an economic profit or zero economic profit.
E) earn either zero economic profit or suffer an economic loss.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: STUDY GUIDE
AACSB: Reflective thinking
66) If the four-firm concentration ratio for the market for pizza is 28 percent, then this industry is
best characterized as
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) oligopolistic competition.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: STUDY GUIDE
AACSB: Reflective thinking
24
Copyright © 2011 Pearson Education, Inc.
67) Each of the ten firms in an industry has 10 percent of the industry's total revenue. The four-
firm concentration ratio is
A) 80.
B) 100.
C) 1,000.
D) 40.
E) 10.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: STUDY GUIDE
AACSB: Analytical reasoning
68) Each of the four firms in an industry has a market share of 25 percent. The Herfindahl-
Hirschman Index equals
A) 3,600.
B) 100.
C) 625.
D) 25.
E) 2,500.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: STUDY GUIDE
AACSB: Analytical reasoning
69) The larger the four-firm concentration ratio, the ________ competition within an industry;
the larger the Herfindahl-Hirschman Index, the ________ competition within an industry.
A) more; more
B) more; less
C) less; more
D) less; less
E) The premise of the question is wrong because the four-firm concentration ratio applies only to
markets with four firms in it and these markets are, by definition, not competitive.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: STUDY GUIDE
AACSB: Reflective thinking
25
Copyright © 2011 Pearson Education, Inc.
16.2 Output and Price Decisions
1) For a monopolistically competitive firm, the demand curve
A) is a horizontal line.
B) has a positive slope.
C) is vertical.
D) has a negative slope.
E) is the same as the marginal revenue curve.
Skill: Level 1: Definition
Section: Checkpoint 16.2
Author: JC
AACSB: Reflective thinking
2) The marginal revenue curve facing a monopolistically competitive firm
A) lies on its demand curve.
B) lies above its demand curve.
C) lies below its demand curve.
D) is equal to its price curve.
E) is parallel to its demand curve.
Skill: Level 1: Definition
Section: Checkpoint 16.2
Author: PH
AACSB: Reflective thinking
3) When a firm maximizes its profit, which of the following is correct for firms in monopolistic
competition and perfect competition?
A) P = MC for both types of firms.
B) P = MR = MC for firms in perfect competition and P > MR = MC for firms in monopolistic
competition.
C) MR = MC for firms in perfect competition and MR > MC for firms in monopolistic
competition.
D) P > MR = MC for firms in both perfect competition and monopolistic competition.
E) P = ATC always for firms in both perfect competition and monopolistic competition.
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: SA
AACSB: Reflective thinking
26
Copyright © 2011 Pearson Education, Inc.
4) Firms in monopolistic competition determine the profit-maximizing level of output by
producing
A) the same output level as rivals do.
B) where average total cost is minimized.
C) at the point of minimum average fixed cost.
D) where marginal revenue equals marginal cost.
E) where price equals average total cost.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: TS
AACSB: Reflective thinking
5) In monopolistic competition, profit is maximized by producing so that marginal revenue
A) equals price.
B) is negative.
C) equals marginal cost and which are less than price.
D) equals average total cost but not marginal cost.
E) equals marginal cost and equals price.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: SB
AACSB: Reflective thinking
6) A firm in monopolistic competition makes its decisions on quantity and price by
A) taking price as given from the market and producing where MR = MC.
B) taking both price and quantity as given from the market.
C) producing where MR = MC and setting the price for this quantity from the demand curve.
D) taking quantity as given from the market and setting the price for this quantity from the
demand curve.
E) producing where MR = MC and setting the price so that P = MR = MC.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: WM
AACSB: Reflective thinking
27
Copyright © 2011 Pearson Education, Inc.
7) To maximize profit, a firm in monopolistic competition will produce the quantity where
marginal revenue
A) is greater than marginal cost.
B) equals zero.
C) is less than marginal cost.
D) equals marginal cost.
E) equals average total cost.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: JC
AACSB: Reflective thinking
8) If a monopolistically competitive seller's marginal cost is $3.56, the firm will increase its
output if
A) its marginal revenue is less than $3.56.
B) its marginal revenue is equal to $3.56.
C) its marginal revenue is more than $3.56.
D) average total cost is less than $3.56.
E) Both answers A and D are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: TS
AACSB: Reflective thinking
9) If a monopolistically competitive seller's marginal cost is $3.56, the firm will decrease its
output if
A) its marginal revenue is less than $3.56.
B) its marginal revenue is equal to $3.56.
C) its marginal revenue is more than $3.56.
D) its average total cost is equal to $4.00.
E) Both answers B and D are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: TS
AACSB: Reflective thinking
28
Copyright © 2011 Pearson Education, Inc.
10) If a monopolistically competitive seller's marginal cost is $3.56, the firm will not change its
output if
A) its marginal revenue is less than $3.56.
B) its marginal revenue is equal to $3.56.
C) its marginal revenue is more than $3.56.
D) its average total cost is equal to $3.56.
E) Both answers B and D are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: TS
AACSB: Reflective thinking
11) Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand
and cost curves for his firm, which competes in a monopolistically competitive market. Kevin
will train how many clients per day?
A) 4
B) 6
C) 10
D) between 2 and 4
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: JC
AACSB: Analytical reasoning
29
Copyright © 2011 Pearson Education, Inc.
12) Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand
and cost curves for his firm, which competes in a monopolistically competitive market. What
price will Kevin charge per session?
A) $100
B) $60
C) $40
D) $20
E) $80
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: JC
AACSB: Analytical reasoning
13) Kevin owns a personal training gymnasium in Orlando. The above figure shows the demand
and cost curves for his firm, which competes in a monopolistically competitive market. If Kevin
trains 5 clients per day, he will ________ his profit and will ________.
A) maximize; earn normal profit
B) not maximize; earn a normal profit anyway
C) maximize; earn an economic profit
D) not maximize; earn an economic profit anyway
E) not maximize; incur an economic loss
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: JC
AACSB: Analytical reasoning
30
Copyright © 2011 Pearson Education, Inc.
14) The above figure shows a restaurant engaged in monopolistic competition with other
restaurants. The equilibrium price at this restaurant is ________ per meal.
A) $20
B) $30
C) $50
D) less than $20
E) more than $50
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: MR
AACSB: Analytical reasoning
15) The above figure shows a restaurant engaged in monopolistic competition with other
restaurants. The equilibrium quantity at this restaurant is ________ meals per day.
A) less than 150
B) between 151 and 250
C) between 251 and 350
D) between 451 and 450
E) more than 451
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: MR
AACSB: Analytical reasoning
31
Copyright © 2011 Pearson Education, Inc.
16) The above figure shows a motel engaged in monopolistic competition with other motels. The
equilibrium price at this motel is ________ per room.
A) $20
B) $30
C) $40
D) $50
E) $10
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: MR
AACSB: Analytical reasoning
17) The above figure shows a motel engaged in monopolistic competition with other motels. The
equilibrium quantity at this motel is ________ rooms per day.
A) 200
B) 300
C) 400
D) 500
E) 100
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: MR
AACSB: Analytical reasoning
32
Copyright © 2011 Pearson Education, Inc.
18) The above figure shows a motel engaged in monopolistic competition with other motels. the
figure above shows the ________ equilibrium in which the motel is ________ .
A) short-run; earning an economic profit
B) short-run; earning a normal profit
C) long-run; earning an economic profit
D) long-run; earning a normal profit
E) short-run; incurring an economic loss
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: MR
AACSB: Analytical reasoning
19) The major difference between monopolistic competition and monopoly is
A) monopoly is a price setter and a firm in monopolistic competition is a price taker.
B) only a monopoly can earn an economic profit in the long run.
C) only a firm in monopolistic competition can earn an economic profit in the short run.
D) how the quantity of output is determined.
E) only firms in monopolistic competition are protected by barriers to entry.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: WM
AACSB: Reflective thinking
20) In the long run in monopolistic competition, firms
A) can earn an economic profit.
B) incur an economic loss.
C) can earn zero economic profit but not an economic profit.
D) shut down if they are earning zero economic profit.
E) earn either an economic profit or zero economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: SB
AACSB: Reflective thinking
33
Copyright © 2011 Pearson Education, Inc.
21) If firms in monopolistic competition are earning economic profits, eventually
A) they shut down.
B) they exit the industry.
C) the market turns into a monopoly.
D) new firms enter the industry.
E) the firms in the market increase their production so that their economic profit disappears.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: SB
AACSB: Reflective thinking
22) If a firm in monopolistic competition is earning an economic profit,
A) it is in the long run.
B) other firms can enter the market.
C) it can do so because it is "monopolistic" and other firms will have a hard time competing with
it.
D) its average cost must exceed its marginal cost.
E) The question errs because firms in monopolistic competition cannot earn an economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: SA
AACSB: Reflective thinking
23) In the long run, firms in monopolistic competition earn zero economic profit because
A) firms are free to enter and exit.
B) their products are similar but slightly different.
C) of over-reliance on product marketing.
D) of collusion among the various sellers.
E) their demand curves are horizontal.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: TS
AACSB: Reflective thinking
34
Copyright © 2011 Pearson Education, Inc.
24) In long-run equilibrium, a firm in monopolistic competition makes
A) an economic profit but the economic profit is less than it would be if the firm was a
monopoly.
B) an economic profit that is higher than what it would be if the firm was a monopoly.
C) zero economic profit.
D) an economic profit that is the same amount as it would be if the firm was a monopoly.
E) an economic profit, an economic loss, or zero economic profit.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: MR
AACSB: Reflective thinking
25) In monopolistic competition there are ________ barriers to entry, so therefore in the long
run, economic profit ________.
A) no; is substantial
B) no; equals zero
C) many; equals zero
D) many; is substantial
E) many; might be earned depending on the degree of product differentiation
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: JC
AACSB: Reflective thinking
26) In monopolistic competition, there are ________ barriers to entry and so firms in
monopolistic competition ________ earn an economic profit in the long run.
A) high; can
B) high; cannot
C) no; can
D) no; cannot
E) sometimes; can sometimes
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: WM
AACSB: Reflective thinking
35
Copyright © 2011 Pearson Education, Inc.
27) Entry and exit continue in monopolistic competition until the remaining firms are
A) earning an economic profit.
B) incurring an economic loss.
C) earning less than a normal profit.
D) earning zero economic profit.
E) producing the normal amount of product differentiation.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: PH
AACSB: Reflective thinking
28) A firm in monopolistic competition is similar to a firm in perfect competition because they
both
A) can earn only zero economic profit in the long run.
B) can earn only zero economic profit in the short run.
C) maximize their profits by producing where P = MR = MC.
D) Both answers A and C are correct.
E) Both answers B and C are correct.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: SA
AACSB: Reflective thinking
29) The primary reason why monopolistically competitive firms cannot earn an economic profit
in the long run is because
A) there are barriers to entry.
B) there is freedom of entry.
C) the antitrust laws prevent profit from increasing.
D) recessions occur.
E) they collude to earn a normal profit.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: JC
AACSB: Reflective thinking
36
Copyright © 2011 Pearson Education, Inc.
30) In monopolistic competition, the entry of new firms
A) shifts existing firms' demand curves rightward.
B) shifts existing firms' demand curves leftward.
C) only results in a movement along the existing firms' demand curves.
D) has no effect on the existing firms' demand curves.
E) shifts existing firms' supply curves rightward.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: SB
AACSB: Reflective thinking
31) When a monopolistically competitive firm's demand curve shifts leftward, what happens to
its marginal revenue curve?
A) Nothing, the marginal revenue curve is unchanged.
B) It disappears.
C) It shifts rightward.
D) It shifts leftward.
E) None of the above is correct because the effect on the marginal revenue curve depends on
whether the demand was initially elastic or inelastic.
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: SB
AACSB: Analytical reasoning
32) If firms in monopolistic competition are earning economic profits, then
A) they can expect to earn the profits indefinitely.
B) new rivals enter the industry and the demand for any seller's good decreases.
C) the market demand becomes more inelastic.
D) the industry is in long-run equilibrium.
E) new rivals enter the industry and the demand for any seller's good increases.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: TS
AACSB: Reflective thinking
37
Copyright © 2011 Pearson Education, Inc.
33) Nike is a firm in monopolistic competition. If Nike is earning an economic profit from new
cross-training shoe, over time the demand for these shoes
A) increases as new firms enter the market.
B) decreases as new firms enter the market.
C) does not change as new firms enter the market.
D) decreases as firms exit the market.
E) increases as firms exit the market.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: JC
AACSB: Reflective thinking
34) In the long run, firms in monopolistic competition earn zero economic profit. When firms
earn zero economic profit, in the long run hey exit the industry.
A) The first sentence is correct and the second sentence is incorrect.
B) The first sentence is incorrect and the second sentence is correct.
C) Both sentences are correct.
D) Both sentences are incorrect.
E) More information about the presence or absence of barriers to entry and exit is needed to
determine if the statements are true or false.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: MR
AACSB: Reflective thinking
35) When firms in monopolistic competition incur an economic loss, some firms will
A) enter the industry and produce more products.
B) exit the industry, and demand will increase for the firms that remain.
C) exit the industry, and demand will decrease for the firms that remain.
D) enter the industry, and demand will become more elastic for the original firms.
E) exit the industry and other firms will enter.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: MR
AACSB: Reflective thinking
38
Copyright © 2011 Pearson Education, Inc.
36) When firms in monopolistic competition are making an economic profit, firms will
A) enter the industry, and demand will increase for the original firms.
B) exit the industry, and demand will increase for the firms that remain.
C) exit the industry, and demand will decrease for the firms that remain.
D) enter the industry, and demand will decrease for the original firms.
E) enter the industry and then will exit the industry.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: MR
AACSB: Reflective thinking
37) At a long-run equilibrium in monopolistic competition, price equals
A) average total cost.
B) marginal cost but not marginal revenue.
C) marginal revenue but not marginal cost.
D) zero.
E) marginal revenue and marginal cost.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: SB
AACSB: Analytical reasoning
38) In the long run, a firm in monopolistic competition will produce
A) where average total cost is minimized.
B) where price equals average total cost but average total cost is not at its minimum.
C) zero output.
D) any possible amount of output.
E) where price equals marginal cost.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: TS
AACSB: Analytical reasoning
39
Copyright © 2011 Pearson Education, Inc.
39) Which of the following is NOT a characteristic of long-run equilibrium in monopolistic
competition?
A) the firm earns zero economic profit
B) price equal to average total cost
C) production occurs at minimum average total cost
D) marginal revenue is equal to marginal cost
E) price exceeds marginal revenue
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: TS
AACSB: Analytical reasoning
40) Which of the following is TRUE about a firm in monopolistic competition in the long run?
A) P = MC
B) P = MR
C) ATC = MC
D) P = ATC
E) MC = ATC
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: MR
AACSB: Reflective thinking
41) In the long-run, a firm in monopolistic competition produces at an output level where
A) P > ATC and MR = MC.
B) P > ATC and MR > MC.
C) P = ATC and MR = MC.
D) P = ATC and MR > MC.
E) P = ATC and MC = ATC.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: MR
AACSB: Reflective thinking
40
Copyright © 2011 Pearson Education, Inc.
42) In monopolistic competition in the long run, firms ________.
A) make zero economic profit and require more capacity
B) incur an economic loss and require more capacity
C) make an economic profit and have excess capacity
D) make zero economic profit and have excess capacity
E) make an economic profit and require more capacity
Skill: Level 1: Definition
Section: Checkpoint 16.2
Author: MR
AACSB: Reflective thinking
43) Excess capacity is the
A) difference between a perfectly competitive firm's and a monopolistically competitive firm's
output.
B) difference between a perfectly competitive firm's and a monopoly's output.
C) output at the maximum point of the ATC curve.
D) difference between the price charged by a monopoly and a monopolistically competitive firm
with the same costs.
E) None of the above answers is correct.
Skill: Level 1: Definition
Section: Checkpoint 16.2
Author: MR
AACSB: Reflective thinking
44) In the long run, firms in monopolistic competition produce at a level that is ________ the
efficient scale of output.
A) less than
B) equal to
C) more than
D) not comparable to
E) All of the above are possible depending on market conditions.
Skill: Level 1: Definition
Section: Checkpoint 16.2
Author: MR
AACSB: Reflective thinking
41
Copyright © 2011 Pearson Education, Inc.
45) For a firm in monopolistic competition, the efficient scale is the amount of output at which
________ is a minimum.
A) fixed cost
B) average total cost
C) average variable cost
D) average fixed cost
E) marginal cost
Skill: Level 1: Definition
Section: Checkpoint 16.2
Author: JC
AACSB: Reflective thinking
46) Excess capacity exists when a firm produces
A) more than the profit-maximizing level of output.
B) less than the quantity that minimizes average total cost.
C) less than the quantity that minimizes marginal cost.
D) more than the quantity that minimizes marginal cost.
E) None of the above answers is correct.
Skill: Level 1: Definition
Section: Checkpoint 16.2
Author: JC
AACSB: Reflective thinking
47) If a firm is maximizing its profit and producing less than the output at which its average total
cost is minimized, then that firm
A) must be suffering an economic loss.
B) must be earning an economic profit.
C) has excess capacity.
D) is producing at its capacity output.
E) must be earning a normal profit.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: SB
AACSB: Reflective thinking
42
Copyright © 2011 Pearson Education, Inc.
48) Which of the following is correct?
A) A firm in monopolistic competition does not have excess capacity in the long run.
B) A firm in perfect competition operates at maximum average total cost in the long run.
C) In the long run, a firm in monopolistic competition maximizes its profit at a point where price
is equal to average total cost but the average total cost is not minimized.
D) In the long run, a firm in monopolistic competition earns zero economic profit and its price is
equal to the minimum average total cost.
E) In the long run, a firm in monopolistic competition can earn an economic profit because of
product differentiation.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: SA
AACSB: Reflective thinking
49) A firm in monopolistic competition is
A) efficient because in the long run it earns zero economic profit.
B) efficient because it produces at the minimum average total cost.
C) inefficient because price exceeds marginal cost.
D) efficient because of the ease of entry.
E) efficient because it produces where MR = MC.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: WM
AACSB: Reflective thinking
50) Monopolistic competition is judged to be economically inefficient because
A) the price is greater than marginal cost.
B) firms earn zero economic profit in the long run.
C) marginal revenue equals marginal cost.
D) firms have deficient capacity in the long run.
E) firms earn an economic profit in the long run.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: TS
AACSB: Reflective thinking
43
Copyright © 2011 Pearson Education, Inc.
51) One of the major benefits to society of monopolistic competition is
A) high prices.
B) restricted output.
C) product differentiation.
D) the excess capacity.
E) the markup.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: JC
AACSB: Reflective thinking
52) In monopolistic competition, there is inefficiency because price is greater than marginal cost.
What brings about this inefficiency?
A) high concentration, as indicated by the large concentration ratio
B) product differentiation
C) freedom of entry and exit
D) marginal cost rises as more output is produced
E) the fact there are many firms in the market
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: PH
AACSB: Reflective thinking
53) Even though monopolistic competition results in inefficiency, it does have which of the
following benefits for society?
A) Firms earn zero economic profit in the long run.
B) Firms can earn an economic profit in the short run.
C) Product variety benefits consumers.
D) Marginal cost equals price in the long run.
E) The premise of the question is incorrect because nothing in monopolistic competition justifies
any economic inefficiency.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: TS
AACSB: Reflective thinking
44
Copyright © 2011 Pearson Education, Inc.
54) Which of the following is an advantage to society of monopolistic competition?
A) production at the lowest possible average cost
B) product variety
C) only essential costs are incurred
D) long-run profitability
E) the firms have excess capacity so they are are always willing to increase their production.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: TS
AACSB: Reflective thinking
55) A firm in monopolistic competition maximizes profit by equating
A) price and marginal revenue.
B) price and marginal cost.
C) demand and marginal cost.
D) marginal revenue and marginal cost.
E) price and average total cost.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: STUDY GUIDE
AACSB: Reflective thinking
56) Once a firm in monopolistic competition has determined how much to produce, the firm
determines its price by referring to its
A) demand curve.
B) marginal cost curve.
C) marginal revenue curve.
D) average total cost curve.
E) average variable cost curve.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: STUDY GUIDE
AACSB: Reflective thinking
45
Copyright © 2011 Pearson Education, Inc.
57) A firm in monopolistic competition definitely incurs an economic loss if
A) price equals marginal revenue.
B) price is less than average total cost.
C) marginal revenue equals marginal cost.
D) marginal revenue is less than average total cost.
E) price is greater than marginal cost.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: STUDY GUIDE
AACSB: Reflective thinking
58) In the long run, a firm in monopolistic competition
A) earns zero economic profit.
B) produces at a minimum average total cost.
C) has deficient capacity.
D) can earn either a normal profit or an economic profit.
E) produces a quantity where its demand curve is upward sloping.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: STUDY GUIDE
AACSB: Reflective thinking
59) A firm's efficient scale of production is the output at which its
A) marginal cost is at a minimum.
B) average total cost is at a minimum.
C) profit is maximized.
D) marginal revenue is at a maximum.
E) marginal revenue equals marginal cost.
Skill: Level 1: Definition
Section: Checkpoint 16.2
Author: STUDY GUIDE
AACSB: Reflective thinking
46
Copyright © 2011 Pearson Education, Inc.
60) In the long run, a firm in monopolistic competition ________ excess capacity and a firm in
perfect competition ________ excess capacity.
A) has; has
B) has; does not have
C) does not have; has
D) does not have; does not have
E) might have; might have
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: STUDY GUIDE
AACSB: Reflective thinking
61) In the long run, a firm in monopolistic competition ________ a markup of price over
marginal cost and a firm in perfect competition ________ a markup of price over marginal cost.
A) has; has
B) has; does not have
C) does not have; has
D) does not have; does not have
E) might have; might have
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: STUDY GUIDE
AACSB: Reflective thinking
62) Monopolistic competition is efficient when compared to
A) to perfect competition.
B) complete product uniformity.
C) the short run.
D) the long run.
E) None of the above answers is correct.
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: STUDY GUIDE
AACSB: Reflective thinking
47
Copyright © 2011 Pearson Education, Inc.
16.3 Product Development and Marketing
1) For a firm in monopolistic competition, innovation and product development are
A) senseless because economic profit is always zero in the long run.
B) necessary in order to have a chance of earning at least a short-run economic profit.
C) inconsequential because each firm produces a different product.
D) necessary to allow new firms to enter.
E) uncommon because other firms already produce similar products.
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: WM
AACSB: Reflective thinking
2) To maintain their economic profits, firms in monopolistic competition must continually
engage in
A) product innovation and development.
B) lowering their product's price.
C) raising their product's price.
D) realizing short-run losses.
E) making the demand for their product more elastic.
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: PH
AACSB: Reflective thinking
3) The shampoo industry is constantly coming out with new products. The reason is that when a
firm introduces a new shampoo into the market, the demand for the shampoo becomes ________
temporarily and economic profit ________.
A) more elastic; decreases
B) less elastic; increases
C) more elastic; increases
D) less elastic; decreases
E) unit elastic; increases
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: JC
AACSB: Reflective thinking
48
Copyright © 2011 Pearson Education, Inc.
4) A firm is spending the profit-maximizing amount on product development when
A) people perceive the firm's product to be better than those of its competitors.
B) the marginal cost of product development is equal to the marginal revenue from product
development.
C) the price of the good is higher than its marginal cost.
D) the advertising costs are covered.
E) the firm's total revenue exceeds its total costs.
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: SA
AACSB: Reflective thinking
5) Firms decide how much to spend on product development and marketing by
A) spending the same amount as they did in previous years.
B) spending the historical average of 1/4 of total production cost.
C) determining what it will take to eliminate excess capacity.
D) balancing the cost and the benefit of product development and marketing.
E) ensuring that the marginal cost of product development and marketing is less than or equal to
the marginal cost of producing the good or service.
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: TS
AACSB: Reflective thinking
6) For a firm in monopolistic competition to undertake product development, the marginal cost
of the development must be ________ the marginal benefit of the development to consumers.
A) greater than
B) less than
C) not comparable to
D) equal to or less than
E) None of the above because a monopolistically competitive firm undertakes product
development if the marginal cost of the development is less than or equal to the marginal revenue
to the firm from the development.
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: CD
AACSB: Reflective thinking
49
Copyright © 2011 Pearson Education, Inc.
7) Which of the following statements about product development in monopolistic competition is
correct?
i. Firms in monopolistic competition undertake too much product development for efficiency.
ii. Firms in monopolistic competition undertake too little product development for efficiency.
iii. Product development might allow the firm to temporarily earn an economic profit.
A) i only
B) ii only
C) ii and iii
D) i and iii
E) iii only
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: TS
AACSB: Reflective thinking
8) A firm in monopolistic competition
A) has no control over the price of the product it is selling.
B) might be selling a brand name product.
C) does not advertise nor market its product.
D) Both answers A and B are correct.
E) Answers A, B, and C are correct.
Skill: Level 1: Definition
Section: Checkpoint 16.3
Author: SA
AACSB: Reflective thinking
9) Firms attempt to create a consumer perception of product differentiation through
i. packaging.
ii. marketing.
iii. advertising.
A) i only
B) ii only
C) ii and iii
D) i and iii
E) i, ii, and iii
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: SB
AACSB: Reflective thinking
50
Copyright © 2011 Pearson Education, Inc.
10) Advertising is a ________ cost that is incurred by ________.
A) variable; monopolies
B) variable; perfectly competitive firms
C) fixed; perfectly competitive firms
D) fixed; monopolistically competitive firms
E) marginal; monopolistically competitive firms
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: CD
AACSB: Reflective thinking
11) How do advertising and other selling costs affect a firm?
A) They shift the marginal cost curve upward.
B) The only effect is that the excess capacity is reduced.
C) The only effect is that the demand for the product increases.
D) They shift the average total cost curve upward.
E) The do not change demand and shift the average total cost curve downward.
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: TS
AACSB: Analytical reasoning
12) In which of the following ways do advertising and other selling costs affect a firm's cost
curves?
i. Advertising expenditures increase total fixed costs.
ii. Selling costs increase total fixed costs.
iii. Advertising and other selling costs per unit of output decrease as output increases.
A) i only
B) i and ii
C) iii only
D) i and iii
E) i, ii, and iii
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: TS
AACSB: Analytical reasoning
51
Copyright © 2011 Pearson Education, Inc.
13) In the long run, advertising by all firms in a monopolistically competitive industry
A) increases all firms' demand.
B) decreases all firms' demand.
C) lowers all firms' costs.
D) might increase or decrease the firms' prices.
E) lowers all firms' prices.
Skill: Level 4: Applying models
Section: Checkpoint 16.3
Author: SB
AACSB: Reflective thinking
14) In the example of the Nike running shoe, we see that
A) selling costs account for over half of a shoe's retail price.
B) materials actually account for two-thirds of the retail price of the shoes.
C) taxes account for one-quarter of the retail price of the shoes.
D) production costs exceed selling costs by a wide margin.
E) raw materials costs are by far the largest component of the total costs of producing the shoes.
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: WM
AACSB: Reflective thinking
15) A sunglass manufacturer spends a lot of money to promote its brand name. This promotion
________ consumers because ________.
A) helps; it lowers marginal cost
B) harms; definitely increases average total cost
C) helps; it provides a signal and information about the sunglasses
D) harms; increases the elasticity of demand
E) helps; it is a fixed cost and not a variable cost
Skill: Level 4: Applying models
Section: Checkpoint 16.3
Author: CD
AACSB: Reflective thinking
52
Copyright © 2011 Pearson Education, Inc.
16) When weighing the efficiency of monopolistic competition, which of the following should be
considered?
i. The information provided by advertising
ii. Product variety
iii. The extra cost of excess capacity
A) ii only
B) i and iii
C) ii and iii
D) i, ii, and iii
E) iii only
Skill: Level 4: Applying models
Section: Checkpoint 16.3
Author: CD
AACSB: Reflective thinking
17) Because economic profits are eliminated in the long run in monopolistic competition, to earn
an economic profit firms continuously
A) shut down.
B) exit the industry.
C) innovate and develop new products.
D) declare bankruptcy.
E) decrease their costs by decreasing their selling costs.
Skill: Level 3: Using models
Section: Checkpoint 16.3
Author: STUDY GUIDE
AACSB: Reflective thinking
18) A firm in monopolistic competition that introduces a new and differentiated product will
temporarily have a ________ demand for its product and is able to charge a ________.
A) less elastic; a lower price than before
B) less elastic; a higher price than before
C) more elastic; a lower price than before
D) more elastic; a higher price than before
E) less elastic; the same price as before
Skill: Level 3: Using models
Section: Checkpoint 16.3
Author: STUDY GUIDE
AACSB: Analytical reasoning
53
Copyright © 2011 Pearson Education, Inc.
19) The decision to innovate
A) depends on the marketing department's needs.
B) depends on whether the firm wants to benefit its customers.
C) is based on the marginal cost and the marginal revenue of innovation.
D) is unnecessary in a monopolistically competitive market.
E) None of the above answers is correct.
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: STUDY GUIDE
AACSB: Reflective thinking
20) Advertising costs and other selling costs are
A) efficient.
B) fixed costs.
C) variable costs.
D) marginal costs.
E) considered as part of demand because they affect the demand for the good.
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: STUDY GUIDE
AACSB: Reflective thinking
21) For a firm in monopolistic competition, selling costs
A) increase costs and reduce profits.
B) always increase demand.
C) can change the quantity produced and lower the average total cost.
D) can lower total cost.
E) has no effect on the quantity sold.
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: STUDY GUIDE
AACSB: Reflective thinking
54
Copyright © 2011 Pearson Education, Inc.
22) If advertising increases the numbers of firms in an industry, each firm's demand
A) increases.
B) does not change.
C) decreases.
D) might increase or decrease depending on whether the new firms produce exactly the same
product or a product that is slightly differentiated.
E) None of the above answers is correct.
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: STUDY GUIDE
AACSB: Reflective thinking
23) One reason a company advertises is to
A) signal consumers that its product is high quality.
B) lower its total cost.
C) produce more efficiently.
D) lower its variable costs.
E) lower its fixed costs.
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: STUDY GUIDE
AACSB: Reflective thinking
24) The efficiency of monopolistic competition
A) is as clear-cut as the efficiency of perfect competition.
B) depends on whether the gain from extra product variety offsets the selling costs and the extra
cost that arises from excess capacity.
C) comes from its excess capacity.
D) is eliminated in the long run.
E) is equal to that of monopoly.
Skill: Level 5: Critical thinking
Section: Checkpoint 16.3
Author: STUDY GUIDE
AACSB: Reflective thinking
55
Copyright © 2011 Pearson Education, Inc.
16.4 Chapter Figures
The figure above illustrates a firm's demand and marginal revenue curves and its cost curves.
1) If the firm in the figure above attempted to minimize its average total cost by producing 100
pairs of Tommy jeans per day at an average total cost of $20 per pair and it sold those jeans for
$80 per pair, the firm would ________.
A) earn zero economic profit
B) earn a larger economic profit that a firm that produced 125 jeans because the ATC of
producing 125 jeans is higher than the ATC of producing 100 jeans
C) incur an economic loss
D) earn a smaller economic profit than a firm that produced 125 jeans
E) achieve an efficient use of resources
Skill: Level 3: Using models
Section: Checkpoint 16.3
Author: TM
AACSB: Analytical reasoning
56
Copyright © 2011 Pearson Education, Inc.
2) To maximize its profit, the firm in the figure above will produce ________ jeans and set a
price ________ per pair of jeans.
A) 150; between $50 and $25
B) 125; $25
C) 125; $50
D) 125; $75
E) None of the above answers are correct.
Skill: Level 3: Using models
Section: Checkpoint 16.3
Author: MR
AACSB: Analytical reasoning
3) When the firm in the figure above maximizes its profit, it earns an economic profit of
A) $3,125.
B) $6,250.
C) $9,375.
D) $5,625.
E) None of the above answers are correct because the firm incurs an economic loss.
Skill: Level 3: Using models
Section: Checkpoint 16.3
Author: MR
AACSB: Analytical reasoning
4) The darkened area in the figure above is the
A) deadweight loss.
B) firm's economic profit.
C) consumer surplus.
D) firm's total cost.
E) firm's total revenue.
Skill: Level 3: Using models
Section: Checkpoint 16.3
Author: MR
AACSB: Analytical reasoning
57
Copyright © 2011 Pearson Education, Inc.
The figure above shows a firm's demand and marginal revenue curves and its cost curves.
5) As long as the firm illustrated above remains open, it will set a price of ________ per month
and it will ________.
A) $50; earn an economic profit
B) $50; incur an economic loss
C) $40; earn an economic profit
D) $40; incur an economic loss
E) less than $20; incur an economic loss
Skill: Level 3: Using models
Section: Checkpoint 16.3
Author: MR
AACSB: Analytical reasoning
6) The firm illustrated above is
A) earning an economic profit of $400,000 per month.
B) earning an economic profit of $2,000,000 per month.
C) earning an economic profit of $1,600,000 per month.
D) incurring an economic loss of $400,000 per month.
E) incurring an economic loss of $1,600,000 per month.
Skill: Level 3: Using models
Section: Checkpoint 16.3
Author: MR
AACSB: Analytical reasoning
58
Copyright © 2011 Pearson Education, Inc.
7) The darkened area in the figure above is the
A) deadweight loss.
B) firm's economic loss.
C) consumer surplus.
D) firm's total cost.
E) firm's total revenue.
Skill: Level 3: Using models
Section: Checkpoint 16.3
Author: MR
AACSB: Analytical reasoning
8) If all firms in the industry have similar demand, marginal revenue, and cost curves as the firm
in the figure above, in the long run
A) nothing changes.
B) some firms exit the industry and the economic losses of the remaining firms decrease.
C) some firms exit the industry and the economic profits of the remaining firms increase.
D) new firms enter the industry and the economic losses of the original firms decrease.
E) new firms enter the industry and the economic profits of the original firms increase.
Skill: Level 3: Using models
Section: Checkpoint 16.3
Author: MR
AACSB: Analytical reasoning
16.5 Integrative Questions
1) In a market in which firms operate in monopolistic competition,
A) the HHI for a single firm exceeds 2500.
B) firms compete on price, quality and marketing.
C) in the long run firms produce at their efficient scale.
D) in the long run firms are not able to charge a markup.
E) advertising is nonexistent.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
59
Copyright © 2011 Pearson Education, Inc.
2) Firms in monopolistic competition
A) face a downward-sloping demand curve.
B) cannot charge a markup because there are no dominant firms.
C) definitely do not benefit from advertising.
D) produce at the efficient scale in the long run.
E) generally have low to nonexistent selling costs.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
3) Which of the following is NOT similar between monopolistic competition and perfect
competition?
A) Many firms compete in the market.
B) It's easy to enter the market.
C) The firms have downward sloping demand curves.
D) The firms might incur economic losses in the short run.
E) In the long run, the firms earn zero economic profit.
Skill: Level 2: Using definitions
Section: Integrative
Author: DD
AACSB: Reflective thinking
4) The clothing industry has many firms with differentiated products and no barriers to entry.
The cereal industry has a few firms with either identical or differentiated products and moderate
barriers to entry. The food industry is characterized as ________ and the cereal industry is
characterized as ________.
A) perfect competition; monopolistic competition
B) monopolistic competition; oligopoly
C) oligopoly; monopolistic competition
D) perfect competition; perfect competition
E) monopolistic competition; monopoly
Skill: Level 1: Definition
Section: Integrative
Author: TM
AACSB: Reflective thinking
60
Copyright © 2011 Pearson Education, Inc.
5) Advertising costs
A) make the marginal revenue more elastic.
B) shift the ATC curve upward.
C) shift the marginal cost curve rightward.
D) indirectly shift the marginal cost curve upward.
E) affect the marginal cost but not the total cost.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Analytical reasoning
6) The above figure definitely shows
A) a long-run equilibrium for a monopolistically competitive firm.
B) an industry with few firms.
C) a long-run equilibrium for a perfectly competitive firm.
D) a long-run equilibrium for a perfectly competitive market.
E) a short-run equilibrium for a monopoly.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
61
Copyright © 2011 Pearson Education, Inc.
7) The firm in the above figure has excess capacity of ________ meals per day.
A) 0
B) between 1 and 10
C) between 11 and 20
D) more than 21 and 30
E) more than 31
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
8) The firm in the above figure has a markup of ________ per meal.
A) $0
B) $4
C) $8
D) $10
E) more than $10
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
9) The firm in the above figure has an economic profit of ________.
A) $0
B) $80
C) $160
D) more than $161
E) less than zero, that is, the firm has an economic loss
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Analytical reasoning
62
Copyright © 2011 Pearson Education, Inc.
10) Which of the following characterize a firm in monopolistic competition in the long run?
i) operating at the minimum efficient scale
ii) markups of price over marginal cost
iii) zero economic profit
A) i and ii
B) i and iii
C) ii and iii
D) i, ii, and iii
E) only ii
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
11) Firms in which of the following industries can earn an economic profit in the long run?
A) both monopolistic competition and monopoly
B) perfect competition
C) monopoly
D) monopolistic competition
E) monopolistic competition and perfect competition
Skill: Level 2: Using definitions
Section: Integrative
Author: SA
AACSB: Reflective thinking
12) If a firm has excess capacity, it
A) produces less than its efficient scale.
B) should advertise to maximize profits.
C) should decrease its markup to increase its profit.
D) is a perfectly competitive firm.
E) must face a horizontal demand curve.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
63
Copyright © 2011 Pearson Education, Inc.
13) If a firm in the long run produces less than its efficient scale, it
A) should raise its markup to increase its profit.
B) should lower its markup to increase its profit.
C) cannot be a perfectly competitive firm.
D) should not advertise to increase its profit.
E) must have its markup equal to zero.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
14) A firm's markup is
A) the difference between average total cost with and without advertising.
B) the difference between demand and marginal revenue.
C) a signal of product quality.
D) the difference between price and marginal cost.
E) the result of producing less than the efficient scale.
Skill: Level 2: Using definitions
Section: Integrative
Author: CD
AACSB: Reflective thinking
15) Crest Toothpaste offers new whitening toothpaste one year, a new gel swirl design the next
year, and an improved cleaning formula the year after. Crest Toothpaste does this because it is
A) a monopoly trying to decrease its costs.
B) a perfectly competitive firm trying to increase its price.
C) a monopolistically competitive firm trying to maintain its economic profit.
D) driving its competitors out of business.
E) a perfectly competitive firm trying to increase its costs so it can increase its price.
Skill: Level 3: Using models
Section: Integrative
Author: CD
AACSB: Reflective thinking
64
Copyright © 2011 Pearson Education, Inc.
16.6 Essay: What Is Monopolistic Competition?
1) List four characteristics of monopolistic competition.
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: CD
AACSB: Communication
2) "One of the defining features of monopolistic competition is product variety." Is the previous
statement correct or incorrect?
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: WM
AACSB: Reflective thinking
3) How do the characteristics of perfect competition and monopolistic competition differ?
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: TS
AACSB: Communication
4) Why is collusion about the price and amount of output impossible in monopolistic
competition?
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: PH
AACSB: Reflective thinking
65
Copyright © 2011 Pearson Education, Inc.
5) What do demand and marginal revenue curves look like in monopolistic competition? How do
they compare to the demand and marginal revenue curves in perfect competition and monopoly?
Skill: Level 5: Critical thinking
Section: Checkpoint 16.1
Author: SB
AACSB: Communication
6) How would a merger between Coca-Cola and Pepsi Cola affect the four-firm concentration
ratio for the soft drink market? How would it affect the Herfindahl-Hirschman Index for the soft
drink market?
Skill: Level 3: Using models
Section: Checkpoint 16.1
Author: JC
AACSB: Communication
7) What is the Herfindahl-Hirschman Index and what does it measure?
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: SA
AACSB: Communication
66
Copyright © 2011 Pearson Education, Inc.
8) If the Herfindahl-Hirschman Index for an industry is 8,528, is the industry competitive or
concentrated?
Skill: Level 2: Using definitions
Section: Checkpoint 16.1
Author: JC
AACSB: Reflective thinking
9) What is the difference between a four-firm concentration ratio and a Herfindahl-Hirschman
Index?
Skill: Level 1: Definition
Section: Checkpoint 16.1
Author: TS
AACSB: Reflective thinking
10) The four largest firms in an industry account for the following value of industry revenues: 12
percent, 8 percent, 5 percent and 4 percent. Calculate the four-firm concentration ratio. Would
this industry be regarded as competitive or concentrated?
Skill: Level 3: Using models
Section: Checkpoint 16.1
Author: WM
AACSB: Analytical reasoning
67
Copyright © 2011 Pearson Education, Inc.
11) An industry's total revenue is $100 million. The above table shows the total revenue of the
four largest firms in an industry.
a. Calculate this industry's four-firm concentration ratio.
b. Is this industry competitive?
c. What market type does it most likely represent?
Skill: Level 3: Using models
Section: Checkpoint 16.1
Author: SB
AACSB: Analytical reasoning
12) An industry has only four firms, who have market shares of 45 percent, 25 percent, 20
percent, and 10 percent. What is the Herfindahl-Hirschman Index?
Skill: Level 3: Using models
Section: Checkpoint 16.1
Author: WM
AACSB: Analytical reasoning
68
Copyright © 2011 Pearson Education, Inc.
13) Suppose there are ten firms that occupy the Odell, Oregon cherry pie market. The market
share of each firm is listed in the above table.
a. What is the Herfindahl-Hirschman Index for this market?
b. If Firm H and Firm A merge, what is the new Herfindahl-Hirschman Index for this market?
c. A severe winter causes every firm except A, B, and E to close. With only these three firms
operating, Firm A's market share is 71 percent, Firm B's market share is 23 percent, and Firm C's
market share is 6 percent. What is the Herfindahl-Hirschman Index for this market now?
Skill: Level 3: Using models
Section: Checkpoint 16.1
Author: JC
AACSB: Analytical reasoning
69
Copyright © 2011 Pearson Education, Inc.
14) Listed in the above table are the total revenues for the firms in two different industries. Each
industry has only eleven firms. Find the four-firm concentration ratio and the Herfindahl-
Hirschman Index for each industry.
Skill: Level 3: Using models
Section: Checkpoint 16.1
Author: JC
AACSB: Analytical reasoning
15) There are 9 firms in an industry with market shares in the table above. Calculate the HHI for
the industry. What kind of market does this operate in and why.
Skill: Level 3: Using models
Section: Checkpoint 16.1
Author: CD
AACSB: Analytical reasoning
70
Copyright © 2011 Pearson Education, Inc.
16) The Herfindahl-Hirschman Index is used as a guideline to determine if a market is
competitive or concentrated. Calculate the index value for each market described below.
a. 100 firms, each of which produces 1 per cent of market output
b. 50 firms, each of which produces 2 per cent of market output
c. 25 firms, each of which produces 4 per cent of market output
d. 20 firms, each of which produces 5 per cent of market output
e. 10 firms, each of which produces 10 per cent of market output
f. 5 firms, each of which produces 20 per cent of market output
g. 2 firms, each of which produces 50 per cent of market output
Skill: Level 3: Using models
Section: Checkpoint 16.1
Author: SB
AACSB: Analytical reasoning
16.7 Essay: Output and Price Decisions
1) "A firm in monopolistic competition maximizes its profit by producing where its price is equal
to its marginal cost." Is the previous statement correct or incorrect?
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: TS
AACSB: Communication
71
Copyright © 2011 Pearson Education, Inc.
2) How does a firm in monopolistic competition determine its price and quantity? What type of
profit can it earn in the short run and the long run?
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: WM
AACSB: Communication
3) What type of profit can a firm in monopolistic competition earn in the long run? Explain your
answer.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: WM
AACSB: Communication
4) Why are firms in monopolistic competition unable to earn an economic profit in the long run?
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: JC
AACSB: Communication
72
Copyright © 2011 Pearson Education, Inc.
5) Why does a firm in monopolistic competition earn zero economic profit rather than an
economic profit in the long run?
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: SA
AACSB: Communication
6) What is excess capacity? What industry has excess capacity in the long run: perfect
competition or monopolistic competition?
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: PH
AACSB: Communication
7) For a firm in monopolistic competition, define efficient scale and excess capacity. Briefly
explain each.
Skill: Level 2: Using definitions
Section: Checkpoint 16.2
Author: CD
AACSB: Communication
73
Copyright © 2011 Pearson Education, Inc.
8) The demand and cost schedules for a firm in monopolistic competition are in the above tables.
What is the profit-maximizing level of output and price? What amount of profit is the firm
earning? Is this firm in a short-run or long-run equilibrium? Why?
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: TS
AACSB: Analytical reasoning
74
Copyright © 2011 Pearson Education, Inc.
9) The above figure represents Tony's Pizza Parlor, a firm in monopolistic competition.
a. What quantity will be produced?
b. What price will be charged?
c. What is Tony's total cost?
d. What is Tony's total revenue?
e. What is Tony's economic profit or loss?
f. Is this a long-run equilibrium? Why or why not?
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: SB
AACSB: Analytical reasoning
75
Copyright © 2011 Pearson Education, Inc.
10) Draw an example of a firm in monopolistic competition that is earning an economic profit.
Be sure to label all the curves. Indicate the area that equals the firm's economic profit.
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: WM
AACSB: Analytical reasoning
76
Copyright © 2011 Pearson Education, Inc.
11) The above figure represents a restaurant operating in monopolistic competition.
a. What is the profit-maximizing level of output?
b. What price will the firm charge?
c. What is the firm's profit (or loss)?
d. Is this a long-run equilibrium? Why or why not?
e. Is this firm producing its efficient scale of output?
Skill: Level 3: Using models
Section: Checkpoint 16.2
Author: SB
AACSB: Analytical reasoning
77
Copyright © 2011 Pearson Education, Inc.
16.8 Essay: Product Development and Marketing
1) How do product development and marketing affect a firm in monopolistic competition?
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: TS
AACSB: Reflective thinking
2) Why would a firm in a monopolistically competitive industry advertise?
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: JC
AACSB: Reflective thinking
3) Explain the role of advertising in monopolistic competition. Describe how advertising by all
firms in a monopolistically competitive industry impacts a firm's ATC curve, its MC curve, its
demand curve, and its MR curve.
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: CD
AACSB: Reflective thinking
78
Copyright © 2011 Pearson Education, Inc.
4) Why are selling costs high in monopolistic competition?
Skill: Level 3: Using models
Section: Checkpoint 16.3
Author: SB
AACSB: Reflective thinking
5) Explain how selling costs in monopolistic competition affect the efficiency of monopolistic
competition.
Skill: Level 2: Using definitions
Section: Checkpoint 16.3
Author: PH
AACSB: Reflective thinking
