Monopolistic Competition 4101
225. Monopolistic competition is an inefficient market structure because
a. price exceeds marginal cost.
b. it has a deadweight loss, just as monopoly does.
c. at the equilibrium, some consumers will value the good at more than the marginal cost of
production.
d. All of the above are correct.
226. Monopolistic competition is an inefficient market structure because
a. marginal revenue equals marginal cost.
b. it has a deadweight loss, just as monopoly does.
c. long-run profits are zero due to free entry.
d. All of the above are correct.
4102 Monopolistic Competition
227. Monopolistic competition is an
a. efficient market structure because long-run profits are zero.
b. efficient market structure because each firm produces at its efficient scale.
c. inefficient market structure because there is deadweight loss.
d. Both a and b are correct.
228. Monopolistic competition is an
a. inefficient market structure because there is deadweight loss.
b. inefficient market structure because price exceeds marginal cost.
c. efficient market structure because free entry drives long-run profits to zero.
d. Both a and b are correct.
Monopolistic Competition 4103
229. A monopolistically competitive market
a. usually has too many firms, reducing the economic profit of each firm to zero.
b. usually has too few firms, reducing the product variety for consumers.
c. may have too many or too few firms, and the government can intervene to achieve the optimal
number of firms.
d. may have too many or too few firms, but the government can do little to rectify the situation.
230. Senator Hubris wants to pass a law that would require all monopolistically competitive firms to
operate at their efficient scale. If this law were to pass and be enforced, we would expect that
monopolistically competitive firms would
a. see their profits increase.
b. break even.
c. lose money.
d. not really be affected by the law.
4104 Monopolistic Competition
231. Regulation of a firm in a monopolistically competitive market
a. usually implies a very small administrative burden.
b. will lower the firm’s costs.
c. is commonly used to enhance market efficiency.
d. is unlikely to improve market efficiency.
232. The administrative burden of regulating price in a monopolistically competitive market is
a. small due to economies of scale.
b. large because price is usually below marginal cost.
c. large because of the large number of firms that produce differentiated products.
d. small because firms produce with excess capacity.
Monopolistic Competition 4105
233. If regulators required firms in monopolistically competitive markets to set price equal to marginal
cost,
a. firms would most likely experience economic losses.
b. firms would also operate at their efficient scale.
c. new firms would likely to enter the market.
d. the most efficient firms would not likely to be affected.
234. If regulators required firms in monopolistically competitive markets to set price equal to marginal
cost,
a. firms would respond by lowering their costs.
b. firms would require a subsidy to stay in business
c. new firms that enter the market would operate at efficient scale.
d. the most efficient firms would not be affected.
4106 Monopolistic Competition
235. Which of the following represents the best government policy to reduce the deadweight loss
associated with a monopolistically competitive market?
a. The government should regulate firms in a manner similar to natural monopolies.
b. The government should encourage more firms to enter the industry because without
government intervention, there are likely to be “too few” firms.
c. The government should encourage some firms to exit the industry because without government
intervention, there are likely to be “too many” firms.
d. There is no government policy that can reduce deadweight loss without creating other
problems.
236. Which of the following markets impose deadweight losses on society?
(i) perfect competition
(ii) monopolistic competition
(iii) monopoly
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (i) only
Monopolistic Competition 4107
237. Monopolistic competition is characterized by
i) efficient scale
ii) markup pricing over marginal cost
iii) deadweight loss
iv) excess capacity
a. i) and ii) only
b. ii) and iv) only
c. i), ii), and iii) only
d. ii), iii), and iv) only
238. The product-variety externality is associated with the
a. producer surplus that accrues to incumbent firms in a monopolistically competitive industry.
b. loss of consumer surplus from exposure to additional advertising.
c. consumer surplus that is generated from the introduction of a new product.
d. opportunity cost of firms exiting a monopolistically competitive industry.
4108 Monopolistic Competition
239. With respect to monopolistic competition,
a. both the business-stealing externality and the product-variety externality are positive
externalities.
b. the business–stealing externality is a positive externality, while the product-variety externality is
a negative externality.
c. the business-stealing externality is a negative externality, while the product-variety externality
is a positive externality.
d. both the business-stealing externality and the product-variety externality are negative
externalities.
240. The fact that monopolistically competitive firms charge a price that exceeds marginal cost is
responsible for the
a. business-stealing externality that is observed in monopolistically competitive markets.
b. product-variety externality that is observed in monopolistically competitive markets.
c. inefficiencies of the long-term losses earned by monopolistically competitive firms.
d. persistence of positive profits into the long run for monopolistically competitive firms.
Monopolistic Competition 4109
241. When consumers are exposed to additional choices that result from the introduction of a new
product,
a. their satisfaction is likely to be lowered as a result of their having to make additional choices.
b. a product-variety externality is said to occur.
c. an advertising externality is said to occur.
d. consumers are likely to experience negative consumption externalities.
242. A business–stealing externality is
a. an externality that is likely to be punished under antitrust laws.
b. the negative externality that occurs when one firm attempts to duplicate exactly the product of
a different firm.
c. an externality that is considered to be an explicit cost of business in monopolistically
competitive markets.
d. the negative externality associated with entry of new firms in a monopolistically competitive
market.
4110 Monopolistic Competition
243. When existing firms lose customers and profits due to entry of a new competitor, a
a. predatory-pricing externality occurs.
b. consumption externality occurs.
c. business-stealing externality occurs.
d. product-variety externality occurs.
244. When the loss from a business-stealing externality exceeds the gain from a product-variety
externality,
a. firms are more likely to operate at efficient scale.
b. there are likely to be too many firms in a monopolistically competitive market.
c. market efficiency is likely to be enhanced by the entry of new firms.
d. all firms are earning zero economic profit.
Monopolistic Competition 4111
245. The entry of new firms into a monopolistically competitive market is accompanied by
a. both positive and negative externalities.
b. only positive externalities.
c. only negative externalities.
d. only private profit opportunities (no externalities).
246. The product-variety externality arises in monopolistically competitive markets because
a. firms produce with excess capacity.
b. firms try to differentiate their products.
c. firms would like to produce homogeneous products, but the large number of firms prohibits it.
d. entry and exit is restricted.
4112 Monopolistic Competition
Multiple Choice – Section 2a: Competition with Differentiated Products
1. A new Mexican restaurant opened in the town of Manchester. The residents of the town are
a. happy because of the product-variety externality, while other restaurant owners are unhappy
because of the business-stealing externality.
b. happy because of the business-stealing externality, while other restaurant owners are unhappy
because of the product-variety externality.
c. unhappy because of the product-variety externality, while other restaurant owners are happy
because of the business-stealing externality.
d. unhappy because of the business-stealing externality, while other restaurant owners are happy
because of the product-variety externality.
Scenario 16-4
Delish, a moderately priced restaurant, has recently announced intentions to open a restaurant in
Boston, MA. Assume that the restaurant market in Boston is characterized by monopolistic
competition.
2. Refer to Scenario 16-4. As a result of the new restaurant, diners in Boston are likely to
experience a
a. product-variety externality, which is a negative externality.
b. product-variety externality, which is a positive externality.
c. business-stealing externality, which is a negative externality.
d. business-stealing externality, which is a positive externality.
Monopolistic Competition 4113
3. Refer to Scenario 16-4. As a result of the new restaurant, existing restauranteurs in Boston are
likely to experience a
a. product-variety externality, which is a negative externality.
b. product-variety externality, which is a positive externality.
c. business-stealing externality, which is a negative externality.
d. business-stealing externality, which is a positive externality.
NOTES: r
Scenario 16-5
McDonald’s restaurants has recently announced intentions to open a new restaurant in Smalltown,
Indiana. Assume that the fast-food restaurant market in Smalltown is characterized by monopolistic
competition.
4. Refer to Scenario 16-5. As a result of the new McDonald’s, residents of Smalltown are likely to
benefit from
a. a product-variety externality.
b. a business–stealing externality.
c. the fact that McDonald’s will increase its production to achieve the efficient scale.
d. Both b and c are correct.
4114 Monopolistic Competition
5. Refer to Scenario 16-5. As a result of the new McDonald’s, existing fast food restaurants in
Smalltown are likely to
a. suffer from a product-variety externality.
b. suffer from a business-stealing externality.
c. increase their production to achieve the efficient scale.
d. Both b and c are correct.
Scenario 16-6
Ike’s Ice Cream has decided to open a new ice cream parlor in Mayville, MS. The market for ice
cream parlors is monopolistically competitive.
6. Refer to Scenario 16-6. As a result of the new Ike’s Ice Cream parlor, consumers living in and
visiting Mayville are likely to experience a
a. business-stealing externality, which harms producers.
b. business-stealing externality, which benefits producers.
c. product-variety externality, which harms consumers.
d. product-variety externality, which benefits consumers.
Monopolistic Competition 4115
7. Refer to Scenario 16-6. As a result of the new Ike’s Ice Cream parlor, existing ice cream shops
located in Mayville are likely to experience a
a. business-stealing externality, which harms producers.
b. business-stealing externality, which benefits producers.
c. product-variety externality, which harms consumers.
d. product-variety externality, which benefits consumers.
8. Although monopolistically competitive markets offer consumers a wide variety of differentiated
products, there may still be insufficient variety if
a. there are large fixed costs in the market.
b. there are no barriers to entry in the market.
c. the business-stealing externality is present in the market.
d. the government does not impose regulations on the market.
4116 Monopolistic Competition
9. Which of the following is not an example of Joel Waldfogel’s “Tyranny of the Market”?
a. A daily newspaper tailored to appeal to the majority of readers in an area.
b. Nike creating specialized shoes for American Indians’ wider feet.
c. Pharmaceutical companies spending research and development funds on drugs for common
diseases.
d. Airlines offering daily direct flights from one large city to another.
10. Entry by new firms into a monopolistically competitive market
a. creates additional consumer surplus.
b. imposes a positive externality on existing firms.
c. leads to the same externalities that are observed when new firms enter a perfectly competitive
market.
d. increases the demand for existing firms’ products.
Monopolistic Competition 4117
11. In a monopolistically competitive market,
a. the entry of new firms creates externalities.
b. the absence of restrictions on entry by new firms ensures that there will be no deadweight loss.
c. there are always too many firms in the market relative to the socially-optimal number of firms.
d. firms cannot earn positive economic profits in the short run.
12. The product-variety externality arises in monopolistically competitive markets because
a. firms produce with excess capacity.
b. firms try to differentiate their products.
c. firms would like to produce homogeneous products, but the large number of firms prohibits it.
d. entry and exit is restricted.
4118 Monopolistic Competition
Multiple Choice – Section 03: Advertising
1. Some firms have an incentive to advertise because they sell a
a. homogeneous product and charge a price equal to marginal cost.
b. homogeneous product and charge a price above marginal cost.
c. differentiated product and charge a price equal to marginal cost.
d. differentiated product and charge a price above marginal cost.
2. The relationship between advertising and product differentiation is
a. positive; the more differentiated the product, the more a firm is likely to spend on advertising.
b. negative; the more differentiated the product, the less a firm is likely to spend on advertising.
c. zero; there is no relationship between product differentiation and advertising.
d. irrelevant; firms with differentiated products do not need to advertise.
Monopolistic Competition 4119
3. For the economy as a whole, spending on advertising comprises about what percent of total firm
revenue?
a. 0.5
b. 2
c. 10
d. 20
4. Firms that sell highly differentiated consumer goods, such as soft drinks, breakfast cereals, and dog
food, typically spend what percent of their revenues on advertising?
a. 0-1
b. 2–4
c.10–20
d. over 50
4120 Monopolistic Competition
5. Which of the following correctly lists the products in order from most advertised to least
advertised?
a. soft drinks, breakfast cereals, dog food
b. corn, dog food, communication satellites
c. dog food, communication satellites, corn
d. wheat, corn, crude oil
6. Firms that spend the greatest percentage of their revenue on advertising tend to be firms that sell
a. industrial products.
b. homogeneous products.
c. consumer goods for which there are no close substitutes.
d. highly–differentiated consumer goods.