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4198 Monopolistic Competition
20. Refer to Figure 16-12. If this firm profit-maximizes, what price will it charge?
21. Refer to Figure 16-12. When this firm profit-maximizes, what is the amount of the firm’s profit
or loss?
22. Refer to Figure 16-12. If this firm minimized cost, how much output will it produce?
23. Refer to Figure 16-12. How much excess capacity does this firm have?
Monopolistic Competition 4199
24. Refer to Figure 16-12. What, if any, long run adjustment will take place in this industry?
25. Refer to Figure 16-12. Does this monopolistically competitive market produce the welfare-
maximizing level of output?
26. Refer to Figure 16-12. Compare the price and marginal cost in this market with price and
marginal cost if this were a perfectly competitive market.
4200 Monopolistic Competition
Figure 16-13
27. Refer to Figure 16-13. Which letter represents the profit-maximizing quantity?
28. Refer to Figure 16-13. Which letter represents the profit-maximizing price?
Monopolistic Competition 4201
29. Refer to Figure 16-13. Use the letters to identify the area of total revenue for this firm.
30. Refer to Figure 16-13. Use the letters to identify the area of total cost for this firm.
31. Refer to Figure 16-13. Use the letters to identify the area of profit for this firm.
32. Refer to Figure 16-13. What is the first step in this industry’s adjustment to long run
equilibrium?
4202 Monopolistic Competition
33. Refer to Figure 16-13. Use the letters to identify the deadweight loss associated with this firm’s
profit-maximizing production.
Figure 16-14
Monopolistic Competition 4203
34. Refer to Figure 16-14. Which letter identifies the profit-maximizing level of output for this firm?
35. Refer to Figure 16-14. Which letter identifies the efficient level of output for this firm?
36. Refer to Figure 16-14. The difference between the price charged by the monopolistically
competitive firm and the price that would be charged if this firm operated in a perfectly
competitive market is represented by which line segment?
4204 Monopolistic Competition
37. Refer to Figure 16-14. Use the letters to identify the deadweight loss from this firm producing
at its profit- maximizing level of output.
Scenario 16-3
Peter operates an ice cream shop in the center of Fairfield. He sells several unusual flavors of
organic, homemade ice cream so he has a monopoly over his own ice cream, though he competes
with many other firms selling ice cream in Fairfield for the same customers. Peter’s demand and
cost values for sales per day are given in the table below. (Everyone who purchases Peter’s ice
cream buys a double scoop cone because it’s so delicious.)
Quantity
Price
MR
MC
ATC
20
$5.60
$5.20
$2.20
$2.05
40
$5.20
$4.40
$2.40
$2.10
60
$4.80
$3.60
$2.60
$2.15
80
$4.40
$2.80
$2.80
$2.20
100
$4.00
$2.00
$3.00
$2.25
120
$3.60
$1.20
$3.20
$2.30
140
$3.20
$0.40
$3.40
$2.35
160
$2.80
-$0.40
$3.60
$2.40
180
$2.40
-$1.20
$3.80
$2.45
38. Refer to Scenario 16-3. How many ice cream cones should Peter sell in one day to maximize
his profits?
Monopolistic Competition 4205
39. Refer to Scenario 16-3. What price should Peter charge to maximize his profits?
40. Refer to Scenario 16-3. When Peter maximizes his profits, how much revenue does he earn
per day?
41. Refer to Scenario 16-3. When Peter maximizes his profits, what is his total cost per day?
42. Refer to Scenario 16-3. What is the maximum amount of profit that Peter can earn per day?
4206 Monopolistic Competition
43. Due to free entry and exit in monopolistic competition, in the long run price must be equal to
44. Monopolistically competitive firms could reduce the average total cost of producing by increasing
output; therefore, these firms have
45. Entry of new firms in monopolistically competitive industries can convey a positive externality on
consumers because new products result in more consumer surplus. This externality is called the
Monopolistic Competition 4207
46. Entry of new firms in monopolistically competitive industries can convey a negative externality on
producers because firms lose customers and profits from the entry of new competitors. This
externality is called the
47. When a new firm considers entering a market, it takes into account only the profit it would make.
What are the two external effects that occur in the market that the firm does not consider?
48. A new Mexican restaurant opens in the city of Manchester. The residents are happy about this
new restaurant because they are experiencing what externality?
4208 Monopolistic Competition
49. A new Mexican restaurant opens in the city of Manchester. The other restaurant owners are not
happy about this new restaurant because they are experiencing what externality?
50. For the economy as a whole, about what percentage of total firm revenue is spent on advertising?
51. Firms that sell highly differentiated consumer goods, such as over-the-counter drugs, soft drinks,
breakfast cereals, and dog food, typically spend between 10 and 20 percent of revenue for
52. In the debate between the critics and defenders of advertising, what conclusion have policymakers
come to regarding the effect of advertising on competition - advertising makes markets more
competitive or less competitive?
Monopolistic Competition 4209
Scenario 16-8
Burger Bonanza, a major national burger chain, recently decided to spend $4 million on an
advertising campaign featuring a world famous actor to promote its new Bomber Burger.
53. Refer to Scenario 16-8. What can consumers conclude from Burger Bonanza’s willingness to
spend $4 million on an advertising campaign?
54. Refer to Scenario 16-8. What two benefits are conveyed by the brand name Burger Bonanza?
Scenario 16-9
Dean goes to the grocery store to buy chips and soda for a party. He purchases brand name
products even though generic versions are available at lower prices. His friend John says he was
irrational to spend more for a nearly identical product. His friend Martina agreed with Dean’s
decision to spend more for the brand name products.
55. Refer to Scenario 16-9. Which friend is a critic of brand names?
4210 Monopolistic Competition
56. Refer to Scenario 16-9. Martina offers two reasons for agreeing with Dean’s decision. What
are they?
57. Refer to Scenario 16-9. If Dean bought the brand name because of advertising he saw for the
product, a defender of advertising would say
58. Refer to Scenario 16-9. If advertising were banned in these markets, what would likely happen
to the prices of chips and soda?
Monopolistic Competition 4211
59. Considering perfect competition, monopolistic competition, and monopoly, which of the market
structures features entry in the long run?
60. Considering perfect competition, monopolistic competition, and monopoly, which of the market
structures results in production of the welfare-maximizing level of output?
61. Considering perfect competition, monopolistic competition, and monopoly, which of the market
structures can have positive profits in the short run?
