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
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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
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
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.
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.
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.
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
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.
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.
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.
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
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.
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
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
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.
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
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.
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.
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
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
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.
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
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.
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.
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.
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.
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.
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.
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
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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