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Monopolistic Competition 4161
15. A monopolistically competitive market is like a competitive market in that
a. both market structures feature easy entry by new firms in the long run.
b. the main objective of firms in both market structures is something other than profit
maximization.
c. firms in both market structures produce the welfare-maximizing level of output.
d. firms in both market structures set price above marginal cost.
16. A monopolistically competitive market is like both a competitive market and a monopoly in that
a. all three market structures feature easy entry by new firms in the long run.
b. firms in all three market structures maximize profit by producing an output level where marginal
revenue equals marginal cost.
c. firms in all three market structures produce the welfare-maximizing level of output.
d. All of the above are correct.
4162 Monopolistic Competition
17. A monopolistically competitive market is like both a competitive market and a monopoly in that
firms in all three market structures
a. can earn economic profits in the short run.
b. can earn economic profits in the long run.
c. charge a price above marginal cost.
d. All of the above are correct.
18. The theory of monopolistic competition is somewhat disappointing in that it fails to
a. pinpoint a profit-maximizing level of output for monopolistically competitive firms.
b. yield simple and compelling advice for public policy.
c. explain why product differentiation is observed in monopolistically competitive markets.
d. explain why monopolistically competitive firms have excess capacity.
Monopolistic Competition 4163
19. Which of the following is a feature that is shared between perfect competition and monopolistic
competition, but not between monopolistic competition and monopoly?
a. rule for maximizing profits
b. ability to earn profits in the short run
c. entry in the long run
d. price exceeds marginal cost
True/False and Short Answer
1. There are four basic types of market structure.
a. True
b. False
2. The "competition" in monopolistically competitive markets is most likely a result of having many
sellers in the market.
a. True
b. False
4164 Monopolistic Competition
3. The "monopoly" in monopolistically competitive markets is most likely a result of firms having some
pricing power due to product differentiation.
a. True
b. False
4. Monopolistic competition is characterized by many buyers and sellers, product differentiation, and
free entry.
a. True
b. False
5. Monopolistic competition is characterized by many buyers and sellers, product differentiation, and
barriers to entry.
a. True
b. False
Monopolistic Competition 4165
6. A monopolistically competitive market is characterized by barriers to entry.
a. True
b. False
7. The market for wheat is most likely considered a monopolistically competitive market.
a. True
b. False
8. Monopolistic competition is the only market structure that features many sellers.
a. True
b. False
4166 Monopolistic Competition
9. Product differentiation always leads to some measure of market power.
a. True
b. False
10. Oligopoly is characterized by a few sellers offering similar products, whereas monopolistic
competition is characterized by many sellers offering differentiated products.
a. True
b. False
11. To be considered an oligopoly, the market must have a concentration ratio below 50%.
a. True
b. False
Monopolistic Competition 4167
12. Monopolistic competition is characterized by a few sellers offering similar products, whereas
oligopoly is characterized by many sellers offering differentiated products.
a. True
b. False
13. Oligopoly and monopolistic competition are examples of a market structure called imperfect
competition.
a. True
b. False
14. Monopolistic competition and monopoly are examples of a market structure called imperfect
competition.
a. True
b. False
4168 Monopolistic Competition
15. A markup of price over marginal cost is inconsistent with free entry and zero profit.
a. True
b. False
16. Monopolistically competitive firms, like monopoly firms, maximize their profits by charging a price
that exceeds marginal cost.
a. True
b. False
17. A profit-maximizing firm in a monopolistically competitive market charges a price equal to
marginal cost.
a. True
b. False
Monopolistic Competition 4169
18. For a profit-maximizing firm in a monopolistically competitive market, when price is equal to
average total cost, price must lie above marginal cost.
a. True
b. False
19. A profit-maximizing firm in a monopolistically competitive market can earn positive, negative, or
zero profits in the short run.
a. True
b. False
20. A firm in a monopolistically competitive market can earn both short-run and long-run profits.
a. True
b. False
4170 Monopolistic Competition
21. A firm in a monopolistically competitive market can earn short-run profits but not long-run profits.
a. True
b. False
22. In the long run, monopolistically competitive firms produce where demand equals marginal cost.
a. True
b. False
23. When a firm in a monopolistically competitive market earns zero economic profit, its product price
must equal marginal cost.
a. True
b. False
Monopolistic Competition 4171
24. In the long run, monopolistically competitive firms produce where demand equals average total
cost.
a. True
b. False
25. In a long-run equilibrium, both perfectly competitive markets and monopolistically competitive
markets have price equal to average total cost.
a. True
b. False
26. In a long-run equilibrium, firms in both perfectly competitive markets and monopolistically
competitive markets produce a quantity below the efficient scale of production.
a. True
b. False
4172 Monopolistic Competition
27. When a monopolistically competitive firm is in a long-run equilibrium, the values of marginal cost,
average total cost, and price are all the same.
a. True
b. False
28. In a monopolistically competitive market, the number of firms adjusts until economic profits are
driven to zero.
a. True
b. False
29. When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium,
marginal cost must lie below average total cost.
a. True
b. False
Monopolistic Competition 4173
30. In a monopolistically competitive market, the demand curves faced by incumbent firms are
unaffected by the entry of new firms into the market.
a. True
b. False
31. A monopolistically competitive firm faces a downward-sloping demand curve because there are
few firms in the market.
a. True
b. False
32. A firm in a monopolistically competitive market is usually indifferent to an additional customer
walking through the door, since a sale to that customer will not increase the firm's profit.
a. True
b. False
4174 Monopolistic Competition
33. The term excess capacity refers to the fact that a firm operates on the upward-sloping portion of
its average-total- cost curve.
a. True
b. False
34. The term excess capacity refers to the fact that a firm produces a lower quantity than it would if
it operated at the efficient scale.
a. True
b. False
35. Excess capacity characterizes firms in monopolistically competitive markets, even in situations of
long-run equilibrium.
a. True
b. False
Monopolistic Competition 4175
36. When a firm operates with excess capacity, it must be in a monopolistically competitive market.
a. True
b. False
37. A firm that would experience higher average total cost by increasing production is operating with
excess capacity.
a. True
b. False
38. When a firm operates at efficient scale, it is producing at the minimum point on its average total
cost curve.
a. True
b. False
4176 Monopolistic Competition
39. The product-variety externality states that entry of a new firm conveys a negative externality
on consumers.
a. True
b. False
40. The product-variety externality states the benefits to consumers from the introduction of a new
product.
a. True
b. False
41. The business-stealing externality states that entry of a new firms imposes a cost on existing
firms because they lose customers.
a. True
b. False
Monopolistic Competition 4177
42. The product-variety externality and the business-stealing externality are both spillover costs
of new firms entering a monopolistically competitive market.
a. True
b. False
43. The product-variety externality and the business-stealing externality are both spillover
benefits of new firms entering a monopolistically competitive market.
a. True
b. False
44. Defenders of advertising argue that firms use advertising as a signal of quality, even if the
advertising delivers little helpful information about the product.
a. True
b. False
4178 Monopolistic Competition
45. Critics of advertising argue that advertising leads to less elastic demand for products and a larger
markup of price over marginal cost.
a. True
b. False
46. The claim that advertising reduces the elasticity of demand is likely to be made by a defender of
advertising.
a. True
b. False
47. Critics of advertising argue that firms use advertising to manipulate consumers’ tastes.
a. True
b. False
Monopolistic Competition 4179
48. One thing that both critics of advertising and defenders of advertising agree on is that advertising
fosters competition.
a. True
b. False
49. When advertising is used to relay information about price, each firm is able to enhance market
power.
a. True
b. False
50. Policymakers have generally come to accept the view that advertising enhances the efficiency of
markets.
a. True
b. False
4180 Monopolistic Competition
51. Economists are unanimous in their belief that advertising is socially inefficient.
a. True
b. False
52. When McDonald’s opens a store in Dhaka, Bangladesh, it has a strong incentive to enforce
product quality consistent with stores in the United States.
a. True
b. False
53. The Mikati Philippines Hard Rock Cafe has the exact same menu as the Hard Rock Cafe in New
York. This is an example of a brand name enhancing market efficiency for U.S. tourists visiting
the Philippines.
a. True
b. False
