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Monopolistic Competition 4081
182. When a monopolistically competitive firm is in long-run equilibrium,
a. price is equal to average total cost.
b. price is equal to marginal cost.
c. price is equal to marginal revenue.
d. the firm operates at its efficient scale.
183. Which of these types of firms can earn a positive economic profit in the long run?
a. monopolies, but not competitive firms or monopolistically competitive firms
b. monopolies and monopolistically competitive firms, but not competitive firms
c. monopolies, monopolistically competitive firms, and competitive firms
d. No firms earn positive economic profit in the long run. Entry will reduce all firms’ economic
profit to zero in the long run.
4082 Monopolistic Competition
184. "In a long-run equilibrium, price is equal to average total cost." This statement applies to
a. competitive markets, but not to monopolistically competitive markets or monopolies.
b. competitive and monopolistically competitive markets, but not to monopolies.
c. competitive markets, monopolistically competitive markets, and monopolies.
d. None of the above is correct.
185. Entry and exit drive each firm in a monopolistically competitive market to a point of tangency
between its
a. marginal revenue curve and its total cost curve.
b. marginal revenue curve and its average total cost curve.
c. demand curve and its total cost curve.
d. demand curve and its average total cost curve.
Monopolistic Competition 4083
186. Suppose the point of tangency that characterizes long-run equilibrium for a monopolistically
competitive firm occurs at Q1 units of output. This level of output, Q1,
a. exceeds the level of output at which marginal revenue equals marginal cost.
b. exceeds the level of output at which marginal cost equals average total cost.
c. falls short of the level of output at which price equals marginal cost.
d. exceeds the firm’s efficient scale of output.
187. Suppose for some firm that average total cost is minimized at Q1 units of output. For a
monopolistically competitive firm in long-run equilibrium, Q1
a. is also the level of output at which marginal cost equals average total cost.
b. exceeds the level of output at which there is a point of tangency between the demand curve
and the average total cost curve.
c. exceeds the level of output at which marginal revenue equals marginal cost.
d. All of the above are correct.
4084 Monopolistic Competition
188. In a long-run equilibrium,
a. only a perfectly competitive firm operates at its efficient scale.
b. only a monopolistically competitive firm operates at its efficient scale.
c. neither a competitive firm nor a monopolistically competitive firm charges a markup over
marginal cost.
d. both a perfectly competitive firm and a monopolistically competitive firm operate at their
efficient scale of production.
189. A monopolistically competitive firm faces the following demand curve for its product:
Price ($)
20
18
16
14
12
10
8
6
4
2
Quantity
10
20
30
40
50
60
70
80
90
100
The firm has total fixed costs of $120 and a constant marginal cost of $12 per unit. We can
conclude that
a. firms will exit this market.
b. firms will enter this market.
c. this market is in long-run equilibrium.
d. this firm is operating at its efficient scale.
Monopolistic Competition 4085
190. A firm has the following cost structure:
Output
2
4
6
8
10
12
14
Total Cost($)
60
64
72
84
100
126
154
If this firm is in a typical perfectly competitive market, in the long run it will likely produce
a. 8 or fewer units of output.
b. 10 units of output.
c. more than 10 units of output.
d. None of the above are necessarily correct because there is not enough information to tell.
191. A firm has the following cost structure:
Output
2
4
6
8
10
12
14
Total Cost($)
60
64
72
84
100
126
154
If this firm is in a typical monopolistically competitive market, in the long run it will likely produce
a. 8 or fewer units of output.
b. 10 units of output.
c. more than 10 units of output.
d. None of the above are necessarily correct because there is not enough information to tell.
4086 Monopolistic Competition
192. A monopolistically competitive firm is currently earning a positive economic profit. If other firms
enter the market, we would expect that the added competition will cause this firm to adjust its
output such that it
a. will operate closer to its efficient scale.
b. will operate further from its efficient scale.
c. will no longer be at its efficient scale.
d. might move either closer to or further from its efficient scale.
193. In the long run,
a. monopolistically competitive firms earn a higher profit than perfectly competitive firms
because monopolistically competitive firms have some monopoly power.
b. monopolistically competitive firms produce a higher output than perfectly competitive firms
because competition drives the perfectly competitive firms’ output down.
c. both monopolistically competitive and perfectly competitive firms produce where P = MC.
d. both monopolistically competitive and perfectly competitive firms produce where P = ATC.
Monopolistic Competition 4087
194. Joe’s Juice Shop operates in a monopolistically competitive market. Joe’s is currently producing
where its average
total cost is minimized. In the long run we would expect Joe’s output to
a. decrease and average total cost to increase.
b. decrease and average total cost to decrease.
c. remain unchanged as Joe's is doing the best it can.
d. increase and average total costs to decrease.
195. Which of the following statements regarding monopolistic competition is not correct?
a. In the long-run equilibrium, price equals average total cost.
b. In the long-run equilibrium, firms earn zero economic profit.
c. In the long-run equilibrium, firms charge a price above marginal cost.
d. In the long-run equilibrium, firms produce a quantity in excess of their efficient scale.
4088 Monopolistic Competition
196. Consider a monopolistically competitive firm in a market in long-run equilibrium. This firm is
likely earning
a. a positive economic profit since it is charging a price above marginal cost.
b. no economic profit since it is charging a price equal to its marginal cost.
c. a positive economic profit since it is charging a price above its average total cost.
d. no economic profit since it is charging a price equal to it average total cost.
197. In which of the following market structures can firms earn economic profits in the long run?
a. perfect competition
b. monopolistic competition
c. monopoly
d. Both b and c are correct.
Monopolistic Competition 4089
198. Consider monopoly, monopolistic competition, and perfect competition. In which of these three
market structures does a profit-maximizing firm charge a price that exceeds marginal cost?
a. monopoly only
b. monopoly and monopolistic competition only
c. monopoly, monopolistic competition, and perfect competition
d. The answer cannot be determined without knowing whether the market is in the long run or
short run.
199. Consider monopoly, monopolistic competition, and perfect competition. In which of these three
market structures does a profit-maximizing firm experience zero economic profit?
a. perfect competition only
b. perfect competition and monopolistic competition only
c. perfect competition, monopolistic competition, and monopoly
d. The answer cannot be determined without knowing whether the market is in the long run or
short run.
4090 Monopolistic Competition
200. Under which of the following market structures would consumers likely pay the highest price for
a product?
a. perfect competition
b. monopolistic competition
c. oligopoly
d. monopoly
201. Under which of the following market structures would the highest output of a particular good be
produced?
a. perfect competition
b. monopolistic competition
c. oligopoly
d. monopoly
Monopolistic Competition 4091
202. Under which of the following market structures would consumers likely receive the most
product variety?
a. perfect competition
b. monopolistic competition
c. oligopoly
d. monopoly
203. In the long run, a monopolistically competitive firm produces a quantity that is
a. equal to the efficient scale.
b. less than the efficient scale.
c. greater than the efficient scale.
d. consistent with diseconomies of scale.
204. In the long run, a firm in a perfectly competitive market operates
a. at its efficient scale, and a monopolistically competitive firm operates at its efficient scale.
b. at its efficient scale, and a monopolistically competitive firm operates with excess capacity.
c. with excess capacity, and a monopolistically competitive firm operates with excess capacity.
d. with excess capacity, and a monopolistically competitive firm operates at its efficient scale.
4092 Monopolistic Competition
205. Which of the following statements is correct?
a. In the long run, both perfectly competitive firms and monopolistically competitive firms
operate with excess capacity.
b. A firm operates with excess capacity when, in the long run, its level of output is below the
efficient scale.
c. For any firm, efficient scale is the level of output at which the average-total-cost curve is
tangent to the demand curve.
d. All of the above are correct.
206. A monopolistically competitive firm
a. has the usual deadweight loss of monopoly pricing.
b. experiences a zero profit in a long-run equilibrium.
c. is said to have excess capacity.
d. All of the above are correct.
Monopolistic Competition 4093
207. In comparison to perfect competition, monopolistic competition is characterized by
a. efficient scale.
b. pricing at marginal cost.
c. excess capacity.
d. All of the above are correct.
208. In a monopolistically competitive market, social welfare would be enhanced if
a. price equaled marginal cost.
b. government regulation eliminated the product-variety externality.
c. the government raised taxes to subsidize firms that price below average total cost.
d. there were fewer firms, making the industry closer to an oligopoly.
209. Since a firm in a monopolistically competitive market faces a
a. downward-sloping demand curve, it will always operate with excess capacity.
b. downward-sloping demand curve, it will always operate at its efficient scale.
c. perfectly elastic demand curve, it will always operate with excess capacity.
d. perfectly inelastic demand curve, it will always operate at its efficient scale.
4094 Monopolistic Competition
210. When a firm operates with excess capacity,
a. additional production would lower the average total cost.
b. additional production would increase the average total cost.
c. it must be a perfectly competitive firm.
d. it must be a monopolistically competitive firm.
211. In the long run, a profit-maximizing firm in a monopolistically competitive market operates at
a. efficient scale.
b. a level of output at which average total cost is rising.
c. a level of output at which average total cost is falling.
d. the level of output at which total revenue is maximized.
Monopolistic Competition 4095
212. Hotels in New York City frequently experience an average vacancy rate of about 20 percent
(i.e., on an average night, 80 percent of the hotel rooms are full). This kind of excess capacity is
indicative of what kind of market?
a. monopoly
b. perfect competition
c. monopolistic competition
d. oligopoly
213. Excess capacity is
a. an example of the inefficiencies of monopolistically competitive markets.
b. a short-run problem but not a long-run problem.
c. a characteristic of rising average total cost curves.
d. Both a and b are correct.
4096 Monopolistic Competition
214. In a long-run equilibrium,
a. excess capacity applies to monopolistically competitive firms but not to competitive firms.
b. zero economic profit applies to competitive firms but not to monopolistically competitive firms.
c. markup over marginal cost applies to both monopolistically competitive and competitive firms.
d. product variety externalities apply to both perfectly competitive firms and monopolistically
competitive firms.
215. Monopolistically competitive firms have excess capacity. To maximize profits, firms will
a. increase their output to lower their average total cost of production and eliminate the excess
capacity.
b. produce where price equals marginal cost to eliminate the excess capacity.
c. produce where average revenue equals marginal cost to eliminate the excess capacity.
d. maintain the excess capacity.
Monopolistic Competition 4097
216. Which of the following best describes the idea of excess capacity in monopolistic competition?
a. Firms produce more output than is socially desirable.
b. The output produced by a typical firm is less than what would occur at the minimum point on
its ATC curve.
c. Due to product differentiation, firms choose output levels where price equals average total
cost.
d. Firms keep some surplus output on hand in case there is a shift in the demand for their
product.
217. If a monopolistically competitive firm can increase its level of production and lower its average
total cost of production at the same time then
a. the firm has a product-variety opportunity.
b. the firm has excess capacity.
c. the firm has a business-stealing opportunity.
d. the firm is producing a quantity of output higher than its efficient scale of production.
4098 Monopolistic Competition
218. Both monopolistic competition and oligopoly are market structures
a. that fail to achieve the total surplus achieved by perfect competition.
b. that feature only a few firms in each market.
c. to which the concept of Nash equilibrium is frequently applied by economists.
d. in which firms earn zero economic profit in the long run.
219. A monopolistically competitive market could be considered inefficient because
a. marginal revenue exceeds average revenue.
b. price exceeds marginal cost.
c. the efficient scale of production is only achieved in the long run, not in the short run.
d. markup pricing does not occur in any other market structure.
220. The deadweight loss that is associated with a monopolistically competitive market is a result of
a. price falling short of marginal cost in order to increase market share.
b. price exceeding marginal cost.
c. the firm operating in a regulated industry.
d. excessive advertising costs.
Monopolistic Competition 4099
221. Monopolistically competitive markets may be socially inefficient because
a. most firms produce inferior products.
b. government programs cannot effectively regulate price.
c. firms earn zero economic profit.
d. the market may have too much or too little entry by new firms.
222. In which of the following market structures do firms produce the welfare-maximizing level of
output?
a. perfect competition
b. monopolistic competition
c. monopoly
d. Both a and b are correct.
4100 Monopolistic Competition
223. The traditional view of monopolistic competition holds that this type of industrial structure is
inefficient because
a. there are too few firms to reach an efficient level of production.
b. firms do not operate at the output that minimizes average costs.
c. more advertising is needed to inform customers about product differences.
d. consumers do not have enough choice among the product varieties available.
224. Monopolistic competition is considered inefficient because
a. price exceeds marginal cost.
b. output is excessive.
c. long-run profits are positive.
d. barriers to entry limit the number of firms in the market.
