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Monopolistic Competition 4181
54. Empirical evidence suggests that advertising usually leads to an increase in the price for
advertised products.
a. True
b. False
55. Economists who argue that advertising enhances market efficiency suggest that celebrity
advertising signals inferior product quality.
a. True
b. False
56. Advertising during the Super Bowl is an example of information about quality contained primarily
in the existence and expense of the advertising.
a. True
b. False
4182 Monopolistic Competition
57. Brand names are rarely used to convey information about product quality.
a. True
b. False
58. The government of Italy will not allow any Hard Rock Cafe restaurants to open in Italy.
Defenders of the efficiency of brand-name markets would argue that this has hindered restaurant
market efficiency in Italy.
a. True
b. False
59. The debate over whether advertising serves a valuable purpose in society is definitively answered
by economists who study the tastes and preferences of individuals.
a. True
b. False
Monopolistic Competition 4183
60. If advertising decreases the elasticity of demand for specific brand names of hard liquor, we
would expect firms to be able to charge a larger markup over marginal cost.
a. True
b. False
61. There is general disagreement among economists about the role of advertising, but there is
widespread agreement about the role of brand names on market efficiency.
a. True
b. False
62. The government may not be able to improve the inefficiencies of a monopolistically competitive
market.
a. True
b. False
4184 Monopolistic Competition
63. Firms in monopolistically competitive markets and monopolies can earn long-run profits due to
barriers to entry.
a. True
b. False
64. Free entry eliminates long-run profits for firms in competitive and monopolistic industries.
a. True
b. False
65. List five goods that are likely sold in a monopolistically competitive market.
Monopolistic Competition 4185
66. Why does a typical monopolistically competitive firm face a downward-sloping demand curve?
67. In many college towns, private independent bookstores typically locate on the periphery of the
college campus. However, in some college towns, the university has used political power to
restrict private bookstores near campus through community zoning laws. Use your knowledge of
markets to predict the price and quality of service differences in the market for college textbooks
under the two different market regimes.
4186 Monopolistic Competition
68. Use a graph to demonstrate why a profit-maximizing monopolistically competitive firm must
operate at excess capacity. Explain why a perfectly competitive firm is not subject to the same
constraint.
Monopolistic Competition 4187
69. In a small college town, four microbreweries have opened in the last two years. Demonstrate the
effect of new market entrants on demand for existing firms (microbreweries) that already served
this market. Assume that the local community now places a moratorium on new liquor licenses for
microbreweries. How will this moratorium affect the long-run profitability of incumbent firms?
4188 Monopolistic Competition
70. What is meant by the term "excess capacity" as it relates to monopolistically competitive firms?
71. Entry of firms in a monopolistically competitive industry is characterized by two externalities. List
them and briefly describe how consumers and existing firms are influenced by them.
72. Evaluate the following statement in the context of business-stealing and product-variety
externalities: "We have too many student apartments in this town already. Statistics show that
vacancy rates average 15 percent during any given semester."
Monopolistic Competition 4189
73. Assume the role of a critic of advertising. Describe the characteristics of advertising that reduce
the effectiveness of markets and decrease the social welfare of society.
74. Assume the role of a defender of advertising. Describe the characteristics of advertising that
enhance the effectiveness of markets and increase the social welfare of society.
75. Evaluate the following statement: "Advertisements that use celebrity endorsements are devoid of
any value and do not enhance the efficient functioning of markets."
4190 Monopolistic Competition
76. Professional organizations (for example, the American Medical Association and the American
Bar Association) have been active advocates for regulation to restrict the right of professionals to
advertise. Describe what economic incentives might exist for existing professionals to restrict
advertising.
77. Discuss how brand names may enhance the efficiency of markets in a less developed country.
78. As developing countries make a transition to market-based economies, one of the first major
capital investments is in "Western-quality" hotels. Explain why brand-name hotel accommodations
are a critical step in attracting foreign investment.
Monopolistic Competition 4191
79. In markets where the government imposes an excise tax on unit sales, it also has a tendency to
dabble with restrictions on advertising (for example, cigarettes and hard liquor). Do potential (or
actual) restrictions on advertising in these markets serve the interest of a government that is
interested in maximizing its tax revenue from the sale of these products? Explain your answer.
Problems
1. Which market structure(s) is(are) imperfectly competitive?
2. Which market structure(s) is(are) considered highly concentrated?
4192 Monopolistic Competition
3. The market structure in which each firm has a monopoly over the product it makes, but many other
firms make similar products that compete for the same customers is called
4. Which type of market structure has the fewest number of firms?
5. Which market structure(s) include(s) many firms with differentiated products who can enter and
exit the market freely?
6. Describe the shape of the monopolistically competitive firm’s demand curve.
Monopolistic Competition 4193
7. Economists measure a market’s domination by a small number of firms with a statistic called the
8. Suppose there is a market in which the firms hold the following market shares: 25%, 20%, 18%,
15%, 8%, 7%, 4%, 2%, 1%. What is the concentration ratio for this market?
9. Consider two industries in which firms hold the following market shares:
Industry A: 25%, 20%, 18%, 15%, 8%, 7%, 4%, 2%, 1%
Industry B: 30%, 10%, 9%, 8%, 8%, 8%, 8%, 6%, 6%, 5%, 2%
What are the concentration ratios for each industry? Which is more competitive?
4194 Monopolistic Competition
Table 16-7
A monopolistically competitive firm faces the following demand schedule for its product. In
addition, the firm has total fixed costs equal to 20.
Price
Quantity
$30
1
$26
2
$22
3
$18
4
$14
5
$10
6
$6
7
10. Refer to Table 16-7. If this firm has a constant marginal cost of $7, what is the profit-
maximizing level of output?
11. Refer to Table 16-7. When this firm profit maximizes and faces a constant marginal cost of $7,
what is the amount of its markup over marginal cost?
Monopolistic Competition 4195
12. Refer to Table 16-7. If this firm profit maximizes and faces a constant marginal cost of $7, does
it have excess capacity? How do you know?
Figure 16-11
13. Refer to Figure 16-11. If this firm profit-maximizes, how much output will it produce?
4196 Monopolistic Competition
14. Refer to Figure 16-11. If this firm profit-maximizes, what price will it charge?
15. Refer to Figure 16-11. If this firm profit-maximizes, how much revenue will it earn?
16. Refer to Figure 16-11. If this firm profit-maximizes, how much cost will it incur?
17. Refer to Figure 16-11. If this firm profit-maximizes, how much profit or loss will it earn?
Monopolistic Competition 4197
18. Refer to Figure 16-11. What, if any, long run adjustment will occur in this industry?
Figure 16-12
19. Refer to Figure 16-12. If this firm profit-maximizes, how much output will it produce?
