Microeconomics, 4e (Hubbard/O’Brien)
Chapter 13 Monopolistic Competition: The Competitive Model in a More Realistic Setting
13.1 Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market
1) One reason why the coffeehouse market is competitive is that
A) demand for specialty coffee is very high.
B) it is trendy and therefore is likely to have a customer following.
C) barriers to entry are low.
D) consumption takes place in public.
2) The reason that the coffeehouse market is monopolistically competitive rather than perfectly
competitive is because
A) barriers to entry are very low.
B) there are many firms in the market.
C) products are differentiated.
D) entry into the market is blocked.
3) The key characteristics of a monopolistically competitive market structure include
A) many small (relative to the total market) sellers acting independently.
B) all sellers sell a homogeneous product.
C) barriers to entry are strong.
D) sellers have no incentive to advertise their products.
4) Which of the following characteristics is not common to monopolistic competition and perfect
competition?
A) Firms act to maximize profit.
B) Entry barriers into the industry are low.
C) The market demand curve is downward -sloping.
D) Firms take market prices as given.
5) Which of the following characteristics is common to monopolistic competition and perfect
competition?
A) Firms produce identical products.
B) Entry barriers into the industry are low.
C) Each firm faces a downward -sloping demand curve.
D) Firms take market prices as given.
6) A major difference between monopolistic competition and perfect competition is
A) the number of sellers in the markets.
B) the degree by which the market demand curves slope downwards.
C) that products are not standardized in monopolistic competition unlike in perfect competition.
D) the barriers to entry in the two markets.
7) The key characteristics of a monopolistically competitive market structure include
A) few sellers.
B) sellers selling similar but differentiated products.
C) high barriers to entry.
D) sellers acting to maximize revenue.
8) Which of the following is not an example of a monopolistically competitive market?
A) automobile producers
B) supermarkets
C) video stores
D) makers of women’s clothing
9) In monopolistic competition there is/are
A) many sellers who each face a downward-sloping demand curve.
B) a few sellers who each face a downward-sloping demand curve.
C) only one seller who faces a downward-sloping demand curve.
D) many sellers who each face a perfectly elastic demand curve.
10) Which of the following is true for a firm with a downward-sloping demand curve for its
product?
A) Price, average revenue, and marginal revenue are all equal.
B) Price, average revenue, and marginal revenue are all different.
C) Price equals average revenue but is greater than marginal revenue.
D) Price equals average revenue but is less than marginal revenue.
11) If a firm faces a downward-sloping demand curve,
A) the demand for its product must be inelastic.
B) it can control both price and quantity sold.
C) it must reduce its price to sell more units.
D) it will always make a profit.
12) A monopolistically competitive firm faces a downward-sloping demand curve because
A) it is able to control price and quantity demanded.
B) there are few substitutes for its product.
C) of product differentiation.
D) its market decisions are affected by the decisions of its rivals.
13) A monopolistically competitive firm will
A) charge the same price as its competitors do.
B) always produce at the minimum efficient scale of production.
C) have some control over its price because its product is differentiated.
D) produce an output level that is productively and allocatively efficient.
14) Which of the following is true of a typical firm in a monopolistically competitive industry?
A) Product differentiation allows a successful firm to emerge as a market leader in the industry.
B) All firms have identical cost structures.
C) The more successful firms have an incentive to merge in order to exert greater market power.
D) Each firm acts independently.
15) For a monopolistically competitive firm, marginal revenue
A) equals the price.
B) is greater than the price.
C) is less than the price.
D) and price are unrelated.
16) If the demand curve for a firm is downward-sloping, its marginal revenue curve
A) will lie above the demand curve.
B) will lie below the demand curve.
C) is the same as the demand curve.
D) is horizontal.
17) When a monopolistically competitive firm cuts its price to increase its sales, it experiences a
gain in revenue due to the
A) substitution effect.
B) income effect.
C) price effect.
D) output effect.
18) When a monopolistically competitive firm cuts its price to increase its sales, it experiences a
loss in revenue due to the
A) substitution effect.
B) income effect.
C) price effect.
D) output effect.
Table 13-1
Quantity
Price
(dollars)
Total Revenue
(dollars)
1
$7.50
$7.50
2
7.00
14.00
3
6.50
19.50
4
6.00
24.00
5
5.50
27.50
6
5.00
30.00
19) Refer to Table 13-1. What is the marginal revenue of the 3rd unit?
A) $6.50
B) $5.50
C) $1.83
D) $0.50
20) Refer to Table 13-1. The Table shows
A) an elastic segment of the demand curve.
B) an inelastic segment of the demand curve.
C) a demand curve with an elastic segment of the demand curve from $7.50 to $6.50 followed by
an inelastic segment.
D) a demand curve with an inelastic segment of the demand curve from $7.50 to $6.50 followed
by an elastic segment.
21) Refer to Table 13-1. What portion of the marginal revenue of the 4th unit is due to the output
effect and what portion is due to the price effect?
A) output effect = $24.00; price effect = $19.50
B) output effect = $6.50; price effect = $2.00
C) output effect = -$0.50; price effect = $5.00
D) output effect = $6.00; price effect = -$1.50
22) Refer to Table 13-1. What portion of the marginal revenue of the 5th unit is due to the output
effect and what portion is due to the price effect?
A) output effect = $3.00; price effect = $0.50
B) output effect = $1.50; price effect = $2.00
C) output effect = $5.50; price effect = -$2.00
D) output effect = $4.00; price effect = -$0.50
Figure 13-1
23) Refer to Figure 13-1. The marginal revenue from the increase in price from P0 to P1 equals
A) the area A.
B) the area (B + D – A).
C) the area (A – D).
D) the area (C – B).
Figure 13-2
24) Refer to Figure 13-2. The marginal revenue from selling the additional unit Qb instead of
Qa equals
A) the area (G + H).
B) the area (H – E).
C) the area (E + F) – (G + H).
D) the area G.
25) Which of the following statements is true about marginal revenue?
A) If marginal revenue is zero, it means that quantity demanded falls to zero when a firm
changes its price.
B) If marginal revenue is negative, the additional revenue received from selling 1 more unit of
the good is smaller than the revenue lost from receiving a lower price on all the units that could
have been sold at the original price.
C) If marginal revenue is positive, the additional revenue received from selling 1 more unit of
the good is smaller than the revenue lost from receiving a lower price on all the units that could
have been sold at the original price.
D) Marginal revenue increases as price falls and quantity sold increases.
26) In monopolistic competition, if a firm produces a highly desirable product relative to its
competitors, the firm will be able to raise its price without losing any customers.
27) When a monopolistically competitive firm cuts its price to increase its sales, it experiences a
loss in revenue due to the income effect and a gain in revenue due to the substitution effect.
28) If marginal revenue is negative then the revenue lost from receiving a lower price on all the
units that could have been sold at the original price is smaller than the additional revenue from
selling one more unit of the good.
29) What are the most important differences between perfectly competitive markets and
monopolistically competitive markets?
30) Explain the differences between total revenue, average revenue, and marginal revenue.
31) Complete the following table.
Energy
Drinks
Consumed
per Week
Price (P)
Total
Revenue (TR)
Average
Revenue (AR)
Marginal
Revenue
(MR)
0
$6.00
1
5.50
2
5.00
3
4.50
4
4.00
5
3.50
6
3.00
7
2.50
8
2.00
Energy
Drinks
Consumed
per Week
Price (P)
Total
Revenue
(TR)
Average
Revenue (AR)
Marginal
Revenue
(MR)
0
$6.00
$0.00
—
—
1
5.50
5.50
$5.50
$5.50
2
5.00
10.00
5.00
4.50
3
4.50
13.50
4.50
3.50
4
4.00
16.00
4.00
2.50
5
3.50
17.50
3.50
1.50
6
3.00
18.00
3.00
0.50
7
2.50
17.50
2.50
-0.50
8
2.00
16.00
2.00
-1.50
13.2 How a Monopolistically Competitive Firm Maximizes Profit in the Short Run
1) What is the profit-maximizing rule for a monopolistically competitive firm?
A) to produce a quantity that maximizes market share
B) to produce a quantity that maximizes total revenue
C) to produce a quantity such that marginal revenue equals marginal cost
D) to produce a quantity such that price equals marginal cost
2) A monopolistically competitive firm maximizes profit where
A) price = marginal revenue.
B) price > marginal cost.
C) marginal revenue > average revenue.
D) total revenue > marginal cost.
3) Unlike a perfectly competitive firm, for a monopolistically competitive firm
A) price ≠ marginal cost for all output levels.
B) price ≠ marginal revenue for all output levels.
C) price ≠ average revenue for all output levels.
D) marginal revenue = marginal cost at the profit-maximizing output.
Table 13-2
Quantity
(cases)
Price
(dollars)
Total Revenue
(dollars)
Total Cost
(dollars)
1
$75
$75
$60
2
70
140
85
3
65
195
105
4
60
240
115
5
55
275
130
6
50
300
155
7
45
315
190
8
40
320
230
9
35
315
280
Eco Energy is a monopolistically competitive producer of a sports beverage called Power On.
Table 13-2 shows the firm’s demand and cost schedules.
4) Refer to Table 13-2. What is the output (Q) that maximizes profit and what is the price (P)
charged?
A) P=$55; Q=5 cases
B) P=$50; Q=6 cases
C) P=$45; Q=7 cases
D) P=$40; Q=8 cases
5) Refer to Table 13-2. What is Eco Energy’s profit?
A) $125
B) $140
C) $145
D) $150
6) Refer to Table 13-2. What is the marginal profit from producing and selling the 5th case?
A) $275
B) $145
C) $35
D) $20
7) Refer to Table 13-2. What is likely to happen to the product’s price in the long run?
A) It will fall.
B) It will increase.
C) It will remain constant.
D) This cannot be determined without information on its long-run demand curve.
Figure 13-3
Figure 13-3 shows short-run cost and demand curves for a monopolistically competitive firm in
the market for designer watches.
8) Refer to Figure 13-3. If the firm represented in the diagram is currently producing and selling
Qa units, what is the price charged?
A) P0
B) P1
C) P2
D) P3
9) Refer to Figure 13-3.What is the area that represents the total revenue made by the firm?
A) 0P0aQa
B) 0P1bQa
C) 0P2cQa
D) 0P3dQa
10) Refer to Figure 13-3.What is the area that represents the total variable cost of production?
A) 0P0aQa
B) 0P1bQa
C) P0abP1
D) P1bdP3
11) Refer to Figure 13-3.What is the area that represents the total fixed cost of production?
A) 0P1aQa
B) P0adP3
C) P1bdP3
D) That information cannot be determined from the graph.
12) Refer to Figure 13-3.What is the area that represents the loss made by the firm?
A) the area P0adP3
B) the area P1bcP2
C) the area P0acP2
D) the area P2cdP3
13) Refer to Figure 13-3. Should the firm represented in the diagram continue to stay in business
despite its losses?
A) No, it should shut down.
B) Yes, its total revenue covers its variable cost.
C) No, it is not able to cover its fixed cost.
D) Yes, it should increase its revenue by raising its price.
14) In the short run, a profit-maximizing firm’s decision to produce should be guided by whether
A) it makes a profit.
B) its marginal profit is maximized.
C) its total revenue exceeds its fixed cost.
D) its total revenue covers its variable cost.
15) Suppose Jason owns a small pastry shop. Jason wants to maximize his profit, and thinking
back to the college microeconomics class he took in college, he decides he needs to produce a
quantity of pastries which will minimize his average total cost. Will Jason’s strategy necessarily
maximize profits for his pastry shop?
A) Yes; Since jason’s pastry shop is in a perfectly competitive market, the only way to maximize
profit is to produce the quantity where average total cost is minimized.
B) Not necessarily; This strategy will only maximize Jason’s profit in the long run, but not in the
short run.
C) No; In order to maximize profit, Jason would never want to produce the quantity where
average total cost is minimized.
D) Not necessarily; Depending on demand, Jason may maximize profit by producing a quantity
other than that where average total cost is at a minimum.
16) If price exceeds average variable cost but is less than average total cost, a firm
A) should further differentiate its product.
B) should stay in business for a while longer until its fixed costs expire.
C) is making some profit but less than maximum profit.
D) should shut down.