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Monopolistic Competition 4141
49. Critics of markets that are characterized by firms that sell brand name products argue that brand
names encourage consumers to pay more for branded products that
a. have elastic demand curves.
b. are very different from generic products.
c. are indistinguishable from generic products.
d. consumer-advocate groups have found to be inferior.
50. Edward Chamberlin argued that brand names
a. hampered market efficiency.
b. were instrumental in enhancing market efficiency.
c. were useful in enhancing market efficiency when the government enforced the use of
exclusive trademarks.
d. were likely to be more socially efficient when used in conjunction with advertising.
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51. Edward Chamberlin argued that governments should
a. ban the use of brand names.
b. not enforce the trademarks that companies use to identify their products.
c. vigorously enforce the trademarks that companies use to identify their products.
d. tax companies whose products have brand names in proportion to how much consumers
recognize their products.
52. The debate over the efficiency of markets in which products with brand names are sold
a. is framed by the role of regulation in advertising.
b. is likely to be resolved by reference to anecdotal evidence.
c. hinges on whether consumers are rational in their choices.
d. hinges on the effectiveness of advertising that identifies price differences.
Monopolistic Competition 4143
53. A recent outbreak of hepatitis was linked to a national fast-food restaurant chain. This is an
example of a case in which
a. brand name identity increases the effectiveness of markets.
b. brand name identity can be detrimental to the profitability of a firm.
c. advertising is ineffective in salvaging perceptions of product quality.
d. advertising cannot be used to establish brand loyalty.
54. In some countries, brand name fast-food restaurants are not allowed to operate. Such restrictions
are likely to
a. enhance the social welfare of society.
b. increase the number of fast-food restaurants.
c. reduce barriers to entry in imperfect markets.
d. reduce the competitive nature of local fast-food markets.
4144 Monopolistic Competition
55. Piper consumes Ragu spaghetti sauce exclusively. She claims that there is a clear taste difference
and that competing brands of spaghetti sauce leave an unsavory taste in her mouth. However, in a
blind taste test, Piper is found to prefer generic store-brand spaghetti sauce to Ragu spaghetti
sauce eight out of ten times. The results of Piper's taste test would reinforce claims by critics of
brand names that
a. consumers are always willing to pay more for brand names.
b. brand names cause consumers to perceive differences that do not really exist.
c. brand names are always preferred to generics.
d. consumers are only willing to buy generics if they are less expensive.
56. Roberto consumes Coke exclusively. He claims that there is a clear taste difference and that
competing brands of cola leave an unsavory taste in his mouth. In a blind taste test, Roberto is
found to prefer Coke to store-brand cola eight out of ten times. The results of Roberto’s taste test
would refute claims by critics of brand names that
a. consumers are always willing to pay more for brand names.
b. brand names cause consumers to perceive differences that do not really exist.
c. consumers with the lowest levels of income are the most likely to be influenced by brand name
advertising.
d. brand names are a form of socially efficient advertising.
Monopolistic Competition 4145
57. Your company has recently requested that you travel to Dhaka, Bangladesh, to work on
negotiations for a new factory to be located in one of the port cities. Your travel agent provides a
list of several hundred local hotels and a Sheraton. In this case, the Sheraton brand-name is likely
to be used as a signal of
a. perceived differences that are not likely to exist among your various options.
b. quality when quality cannot be easily judged.
c. inefficiency in markets characterized by recognizable brand names.
d. the quality of general lodging accommodations in Dhaka.
58. On a vacation to China, you find yourself eating every meal at the local Burger King rather than
buying a meal from one of the street vendors. Your traveling companion claims that you are
irrational, since you never eat Burger King hamburgers when you are home, and Burger King's
hamburgers cost more than the meals prepared and sold by China's street vendors. An economist
would most likely explain your behavior by suggesting that
a. your behavior is rational, but your friend's behavior is clearly irrational.
b. you are clearly irrational, but your friend’s behavior is rational.
c. the Burger King brand name suggests consistent quality.
d. the advertising by Burger King in China is more persuasive than the advertising by Burger King
in your home town.
4146 Monopolistic Competition
59. Two college students, Mary and Maggie, are spending spring break in Florida. Mary buys a cup of
coffee each morning at the local Starbucks rather than from one of the local coffee shops. Maggie
claims that Mary is irrational because she never purchases Starbucks coffee at home, and
Starbucks coffee costs more than the coffee sold by local shops. An economist would most likely
explain Mary’s behavior by suggesting that
a. Mary’s behavior is rational, but Maggie's behavior is clearly irrational.
b. Mary’s behavior is clearly irrational, but Maggie’s behavior is rational.
c. the Starbucks brand name suggests consistent quality.
d. the advertising by Starbucks in Florida is more persuasive than the advertising by Starbucks in
Mary and Maggie’s home town.
60. It has been said that many of the patrons in McDonald’s restaurants in foreign locations are
American tourists. A likely reason why many Americans dine at McDonald’s while vacationing
abroad is
a. they can’t get enough McDonald’s food when they are at home.
b. they know and trust the quality associated with the McDonald’s brand name.
c. the food at local restaurants is of inferior quality.
d. that Americans, by their nature, are not very adventurous.
Monopolistic Competition 4147
61. Two bottles of body wash sit side-by-side in a grocery store: Olay (a brand name) sells for $6.00,
while Up and Up (not a brand name) sells for $3.00. Even defenders of brand names would have
to admit that
a. no rational consumer would spend twice as much for Olay as she would for Up and Up.
b. the side-by-side presence of these two body washes conveys no useful information to
consumers.
c. Olay has no incentive to maintain the quality of its product just because of the Olay brand
name.
d. None of the above is correct.
62. Two bottles of over-the-counter pain reliever sit side-by-side in a grocery store: Advil (a brand
name) sells for $5.00, while Feel Better (not a brand name) sells for $2.50. In a typical day the
store sells some of each type of pain reliever, which suggests that
a. no rational consumer would spend twice as much for Advil as he would for Feel Better.
b. some consumers must perceive that Advil is a higher quality product.
c. Advil has no incentive to maintain the quality of its product just because of the Advil brand
name.
d. Advil spends money on advertising to reduce competition in the market.
4148 Monopolistic Competition
63. Which of the following statements regarding brand names in advertising is not correct?
a. Brand names provide consumers with information about quality when quality cannot be easily
judged in advance of purchase.
b. Brand names give firms an incentive to maintain high quality to maintain the reputation of the
firm.
c. Brand names allow firms to produce and sell inferior products in the long run since people will
continue to purchase the brand-name product.
d. Brand names can cause consumers to perceive differences in products that do not actually
exist.
64. Economists defend brand names as useful to consumers because brand names
a. provide consumers with information about quality when quality cannot easily be judged in
advance of purchase.
b. give firms a financial incentive to maintain the high quality associated with their brand name.
c. convince consumers to spend more for products nearly identical to generic versions.
d. Both a and b are correct.
Monopolistic Competition 4149
65. When quality cannot be easily judged in advance, what provides consumers with information about
the quality of a product?
a. a brand name
b. a tie-in
c. the quantity available for sale
d. the amount of deadweight loss
66. When monopolistically competitive firms advertise, in the long run
a. they will still earn zero economic profit.
b. they can earn positive economic profit by increasing market share.
c. the market price must fall.
d. the market price must rise.
4150 Monopolistic Competition
67. Which of the following statements is not correct?
a. The typical monopolistically competitive firm could reduce its average total cost if it produced
more output.
b. Monopolistically competitive firms advertise in order to increase the elasticity of the demand
curve they face.
c. Expensive advertising might help consumers if it is a signal that the product is good.
d. Brand names acquired at great cost might help consumers by assuring quality.
68. Which of the following statements is correct?
a. The more similar Firm A’s product is to Firm B’s product, the more likely Firm A is to
advertise.
b. Monopolistically competitive firms advertise in order to increase the elasticity of the demand
curve they face.
c. According to the signaling theory, the more product information an advertisement contains, the
more effective it is.
d. Brand names may help consumers if they provide information about the quality of a product
when acquiring such information is difficult.
Monopolistic Competition 4151
69. Which of the following statements is not correct?
a. Critics of advertising argue that firms advertise to manipulate consumers’ tastes.
b. Defenders of advertising argue that advertising provides valuable product information to
consumers.
c. An industry with many brand name products will be more competitive than one with many
generic products.
d. The willingness of a firm to spend a large amount of money on advertising can signal the quality
of the product.
4152 Monopolistic Competition
Scenario 16-7
Consider the problem facing two firms, YumYum and Bertollini, in the frozen food market. Each
firm has just come up with an idea for a new “frozen meal for two” which it would sell for $9.
Assume that the marginal cost for each new product is a constant $2, and the only fixed cost is for
advertising. Each company knows that if it spends $12 million on advertising it will get 1.5 million
consumers to try its new product. YumYum has done market research which suggests that its
product does not have any "staying" power in the market. Even though it could get 1.5 million
consumers to buy the product once, it is unlikely that they will continue to buy the product in the
future. Bertollini's market research suggests that its product is very good, and consumers who try
the product will continue to be consumers over the ensuing year. On the basis of its market
research, Bertollini estimates that its initial 1.5 million customers will buy one unit of the product
each month in the coming year, for a total of 18 million units.
70. Refer to Scenario 16-7. If YumYum decides to advertise its product it can expect to
a. incur a loss of $15 million.
b. incur a loss of $1.5 million.
c. earn a profit of $1.5 million.
d. earn a profit of $13.5 million.
71. Refer to Scenario 16-7. If Bertollini decides to advertise its product it can expect to
a. earn a profit of $162 million per year.
b. earn a profit of $147 million per year.
c. earn a profit of $114 million per year.
d. earn a profit of $48 million per year.
Monopolistic Competition 4153
72. Refer to Scenario 16-7. Suppose YumYum has an opportunity to create a cheaper advertising
campaign in newspapers rather than on television for its new product. This campaign will cost $8
million and is expected to result in the same 1.5 million one-time customers. YumYum should
a. invest in the cheaper campaign because they will earn a profit.
b. invest in the cheaper campaign because they will signal the high quality of their product.
c. not invest in the cheaper campaign because they will incur a loss.
d. not invest in the cheaper campaign because their brand name will be negatively affected.
73. Refer to Scenario 16-7. By its willingness to spend money on advertising, Bertollini
a. signals the quality of its new product to consumers.
b. signals that it is not a profit maximizer.
c. is detracting from the efficiency of markets.
d. will drive YumYum out of the market.
4154 Monopolistic Competition
74. Refer to Scenario 16-7. On the basis of a theory that people buy a product because it is
advertised, the content of advertisements for Bertollini’s product
a. must show a consumer taste-test to be successful.
b. must include celebrity endorsements to be successful.
c. is irrelevant to the success of the advertisement.
d. Both a and b would be equally successful.
75. Refer to Scenario 16-7. Which of the following is most likely?
a. Both YumYum and Bertollini will advertise.
b. Neither YumYum nor Bertollini will advertise.
c. YumYum will advertise, but Bertollini will not advertise.
d. Bertollini will advertise, but YumYum will not advertise.
Monopolistic Competition 4155
Multiple Choice – Section 04: Conclusion
1. Firms in a monopolistically competitive market
a. are price takers.
b. produce an output level that minimizes average total cost in the long run.
c. maximize profits by producing where price equals marginal cost.
d. cannot earn economic profits in the long run.
2. Which of the following statements is correct?
a. Firms in monopolistic competition and monopoly can earn economic profits in both the short run
and the long run.
b. Both perfectly competitive and monopolistically competitive firms charge a price equal to
marginal cost.
c. Firms in perfect competition, monopolistic competition, and monopoly maximize profits by
producing where marginal revenue equals marginal cost.
d. Both perfectly competitive and monopolistically competitive firms produce the welfare-
maximizing level of output.
4156 Monopolistic Competition
3. Which of the following statements is correct?
a. Firms in monopolistic competition and monopoly can earn economic profits in both the short run
and the long run.
b. Both perfectly competitive and monopolistically competitive firms are price takers.
c. Both a monopolistically competitive industry and a monopoly are characterized by a very small
number of (or one) firm(s).
d. Firms can easily enter a perfectly competitive or monopolistically competitive industry.
4. Which of the following statements is not correct?
a. Both monopolistically competitive and perfectly competitive firms can earn economic profits in
the short run.
b. Both monopolies and monopolistically competitive firms can earn economic profits in the long
run.
c. Firms in perfect competition, monopolistic competition, and monopoly maximize profits by
producing where marginal revenue equals marginal cost.
d. Only competitive firms produce the welfare-maximizing level of output.
Monopolistic Competition 4157
5. Which of the following statements is not correct?
a. Firms in monopolistic competition and monopoly can earn economic profits in the short run.
b. Firms in monopolistic competition and perfect competition produce the welfare-maximizing level
of output.
c. Monopolistically competitive firms price above marginal cost, whereas competitive firms price at
marginal cost.
d. Firms wishing to enter a monopolistically competitive market can do so freely, whereas firms
wishing to enter a monopoly market will face barriers.
6. A market is comprised of many firms as opposed to just one firm or a few firms
a. only when it is perfectly competitive.
b. only when it is perfectly competitive or oligopolistic.
c. only when it is perfectly competitive or monopolistically competitive.
d. when it is perfectly competitive, monopolistically competitive, or oligopolistic.
4158 Monopolistic Competition
7. A firm is a price taker
a. only when the market is perfectly competitive.
b. only when the market is perfectly competitive or monopolistic.
c. only when the market is perfectly competitive or monopolistically competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.
8. A firm maximizes its profit by producing output up to the point where marginal revenue equals
marginal cost
a. only when the market is a monopoly.
b. only when the market is a monopoly or monopolistically competitive.
c. only when the market is monopolistically competitive or perfectly competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.
9. A firm produces the welfare-maximizing level of output
a. only when the market is perfectly competitive.
b. only when the market is a monopoly or monopolistically competitive.
c. only when the market is monopolistically competitive or perfectly competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.
Monopolistic Competition 4159
10. A firm can earn economic profits in the short run
a. only when the market is perfectly competitive.
b. only when the market is a monopoly or monopolistically competitive.
c. only when the market is monopolistically competitive or perfectly competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.
11. A firm can earn economic profits in the long run
a. only when the market is a monopoly.
b. only when the market is a monopoly or monopolistically competitive.
c. only when the market is monopolistically competitive or perfectly competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.
12. A firm charges a price that exceeds marginal cost
a. when the market is a monopoly.
b. when the market is a monopoly or monopolistically competitive.
c. when the market is monopolistically competitive or perfectly competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.
4160 Monopolistic Competition
13. Firms can freely enter a market
a. only when the market is a monopoly.
b. only when the market is a monopoly or monopolistically competitive.
c. only when the market is monopolistically competitive or perfectly competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.
14. A monopolistically competitive market is like a monopoly 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.
