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.
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.
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
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
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
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
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
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.
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.
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.
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.
16.6 Essay: What Is Monopolistic Competition?
1) List four characteristics of monopolistic competition.
2) “One of the defining features of monopolistic competition is product variety.” Is the previous
statement correct or incorrect?
3) How do the characteristics of perfect competition and monopolistic competition differ?
4) Why is collusion about the price and amount of output impossible in monopolistic
competition?
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?
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?
7) What is the Herfindahl-Hirschman Index and what does it measure?
8) If the Herfindahl-Hirschman Index for an industry is 8,528, is the industry competitive or
concentrated?
9) What is the difference between a four-firm concentration ratio and a Herfindahl-Hirschman
Index?
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?
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?
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?
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?
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.
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.
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
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?
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?
3) What type of profit can a firm in monopolistic competition earn in the long run? Explain your
answer.
4) Why are firms in monopolistic competition unable to earn an economic profit in the long run?
5) Why does a firm in monopolistic competition earn zero economic profit rather than an
economic profit in the long run?
6) What is excess capacity? What industry has excess capacity in the long run: perfect
competition or monopolistic competition?
7) For a firm in monopolistic competition, define efficient scale and excess capacity. Briefly
explain each.
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?
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?
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.
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?
16.8 Essay: Product Development and Marketing
1) How do product development and marketing affect a firm in monopolistic competition?
2) Why would a firm in a monopolistically competitive industry advertise?
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.
4) Why are selling costs high in monopolistic competition?
5) Explain how selling costs in monopolistic competition affect the efficiency of monopolistic
competition.