89. Both perfectly competitive and monopolistically competitive industries have many firms, in fact so
many that, in the long run
a. only one firm can survive in the industry, leading to monopoly.
b. costs must increase due to diseconomies of scale.
c. costs must decrease due to economies of scale.
d. economic profit is “competed away.”
e. economic profit can continue.
90. In a monopolistically competitive industry, price
a. will be lower than the competitive price due to cost savings.
b. will exceed the monopoly price due to the destructiveness of competitive forces.
c. cannot be predicted exactly because it is likely to lie between the competitive and monopoly
prices.
d. is contingent on the behavior of other firms because they are mutually interdependent.
e. is most likely a bit higher than the competitive market price because of the cost of variety.
91. Perfect competition and monopolistic competition are similar because, under both market
structures
a. there are zero economic profits in the long run.
b. production takes place at minimum average total cost.
c. there are just a few firms.
d. the concentration ratio is relatively high.
e. differentiated products are produced.
92. A generic product would be best described as one that is
a. perfectly differentiated.
b. completely undifferentiated.
c. heavily advertised.
d. sold in a monopoly market.
e. produced only in a perfectly competitive industry.
93. One thing that makes monopolistic competition similar to perfect competition is that, in the
a. long run, both are guaranteed positive economic profit.
b. short run, both are guaranteed positive economic profit.
c. short run, neither can earn positive economic profit.
d. long run, both will earn zero economic profit.
e. long run, both could earn positive economic profit, but monopolistic competitors will earn
more than perfect competitors.
94. A competitive firm would have
a. more elastic demand than a monopolistically competitive firm.
b. more inelastic demand than a monopolistically competitive firm.
c. an upward-sloping demand curve.
d. a demand curve that becomes horizontal at a certain point.
e. bowed-in or bowed-out demand.
95. Which of the following is evidence of market power?
a. Profit-maximizing output changes is less than the efficient scale.
b. Output is fixed despite cost changes.
c. The demand curve for the firm is horizontal.
d. The firm has no control over price.
e. Optimal output minimizes average total cost.
96. In the long run, monopolistically competitive firms like Hardee’s and Carl’s Jr. operate at a price
that
a. allows them to make a small economic profit.
b. drives economic profit to zero.
c. equals marginal cost.
d. equals average variable cost.
e. equals minimum average total cost.
97. Excess capacity best describes the fact that
a. monopolistically competitive firms produce less than the cost-minimizing level of output.
b. monopolistically competitive firms produce more than the cost-minimizing level of output.
c. monopolistically competitive firms produce exactly the cost-minimizing level of output, but
the monopolistically competitive industry produces more than that amount.
d. monopolistically competitive firms could produce less if they wanted to, so they produce more
than the optimal capacity.
e. perfectly competitive firms produce less than the cost-minimizing level of output so they have
excess capacity, but monopolistically competitive firms do not.
98. Monopolistic competition is inefficient because
a. firms earn positive economic profits.
b. the firms’ marginal costs and marginal revenues are not equal.
c. price is not equal to the minimum average total cost.
d. entry is difficult.
e. the price is equal to the minimum average total cost.
99. A monopolistically competitive firm is inefficient because the firm
a. earns positive economic profit in the long run.
b. is producing at an output amount that corresponds to marginal cost equal to price.
c. is not maximizing its profit.
d. produces an output where average total cost is not minimum.
e. produces where price is equal to minimum average total cost.
100. One source of economic inefficiency from monopolistic competition is
a. markup.
b. less variety for consumers.
c. more variety for consumers.
d. higher costs because firms can enter the industry.
e. lower marginal costs, but higher average costs than with perfect competition.
101. The concept of markup under monopolistic competition would best be described as the
a. attempt of firms to make their products look like those of other firms in the industry, thus
“marking them up” in a similar style.
b. attempt of firms to mark up their prices above those of their rivals.
c. difference between total revenue and total cost of the monopolistic competitor.
d. difference between the average total cost and the price of the monopolistic competitor.
e. difference between the marginal cost and the price of the monopolistic competitor.
102. Markup would not exist in
a. a monopoly. d. monopolistic competition.
b. a cartel. e. a competitive market.
c. an oligopoly.
103. Markup would generally be lowest under
a. a monopoly. d. monopolistic competition.
b. a cartel. e. a collusive industry.
c. an oligopoly.
104. Markup would generally be highest under
a. a monopoly. d. monopolistic competition.
b. a cartel. e. a competitive market.
c. an oligopoly.
105. Which of the following is evidence of market power?
a. markup
b. Output is fixed despite cost changes.
c. The demand curve for the firm is horizontal.
d. The firm has perfect control over price.
e. Optimal output is less than industry output.
106. When a perfectly competitive firm or a monopolistically competitive firm is making zero
economic profit
a. the industry is in equilibrium; no firms will want to enter or exit.
b. those firms who don’t differentiate their product sufficiently will want to leave the market.
c. those firms who wish to differentiate their product more will want to enter the market.
d. market demand shifts to the right.
e. the price of the output will rise in the long run.
107. If a monopolistically competitive firm wants to maximize profits, it will increase production until
marginal
a. revenue is greater than average variable cost.
b. revenue equals average total cost.
c. cost is greater than marginal revenue.
d. revenue equals average revenue.
e. revenue equals marginal cost.
108. Product differentiation makes the demand for a monopolistically competitive firm’s product
a. perfectly elastic.
b. less elastic than in a competitive market.
c. more elastic than in a competitive market.
d. perfectly inelastic.
e. less elastic than that of a monopoly.
109. Advertising is designed to
a. increase the price elasticity of demand for the firm and shift the firm’s demand curve
rightward.
b. decrease the price elasticity of demand for the firm and shift the firm’s demand curve
rightward.
c. increase the price elasticity of demand for the industry and shift the firm’s demand curve
rightward.
d. decrease the price elasticity of demand for the industry, but have no effect on the firm’s
demand.
e. cause the income elasticity of consumers to become zero.
110. An industry (such as California cheese) might advertise so that its product (cheese)
a. is no longer viewed as homogeneous.
b. will now be viewed as homogeneous for all producers.
c. may be characterized by a horizontal demand curve.
d. will now have a price elasticity of demand that is more elastic.
e. will be sold in perfectly competitive markets.
111. Anderson watches advertising that makes him want to consume Bugles, a corn snack, after he
hears that, for Bugles, “more is better.” Most people consider that all corn snack foods are not the
same, and that Doritos and other corn snacks are not perfect substitutes for Bugles. Based on this
information, we would most accurately say that this advertising probably caused
a. Anderson’s demand to be more elastic, and the corn snack industry is likely to be a
monopolistically competitive industry.
b. Anderson’s demand to be less elastic, and the corn snack industry is likely to be a monopoly
industry.
c. the corn snack industry demand to be less elastic, and Anderson’s demand was unaffected.
d. the corn snack industry to become a monopoly, whereas prior to advertising, it was probably
perfectly competitive.
e. Anderson’s demand to be less elastic, and the corn snack industry is likely to be a
monopolistically competitive industry.
112. Successful advertising
a. generally causes a firm’s costs to fall.
b. generally causes industry costs to fall.
c. normally causes demand for the firm to shift right.
d. normally causes industry demand to shift left.
e. normally causes consumers to buy things for which they have no use.
113. Because of successful advertising
a. the demand curve facing each firm shifts right, while the cost curves shift downward.
b. the decisions of one seller often influence the prices of products, the output, and the profits of
rival firms.
c. there is only one firm that produces a product for which there are no good substitutes.
d. there are many sellers in the market and each is small relative to the total market.
e. the demand curve facing each firm shifts right, while the cost curves shift upward.
114. Successful advertising under monopolistic competition might
a. make the demand for a firm’s product more elastic.
b. create a high barrier to entry.
c. promote lower-quality products.
d. reduce the price elasticity of demand for that firm’s output.
e. help consumers understand why products in the industry are homogeneous.
115. When would advertising be least effective for an individual firm?
a. in a perfectly competitive industry
b. in a monopolistically competitive industry
c. in an oligopolistic industry
d. in a monopoly industry
e. Never; advertising is equally effective in all industries.
116. Successful advertising would be most effective in the ________ industry.
a. electric power transmission and distribution
b. wheat production
c. corn production
d. wholesale coal
e. restaurant
117. Siyed, an economics student, believes that a beer sold by one particular shack on the beach is
completely different from an identical beer produced by the same factory and sold by the luxury
hotel adjacent to the shack. Siyed most likely thinks that
a. the luxury hotel and the shack are in a perfectly competitive industry.
b. the luxury hotel is a monopoly seller of the beer.
c. the luxury hotel and the shack are in a monopolistically competitive industry.
d. the shack is in a perfectly competitive industry, but the luxury hotel is in an oligopoly industry.
e. while beer is homogeneous, the product is differentiated among the sellers.
118. Why would perfectly competitive industries advertise even though individual firms do not?
a. Even though the output of an individual firm would be considered homogeneous to other
firms, the industry output would be differentiated (for example, Florida orange juice versus
imports).
b. Individual perfectly competitive firms don’t need to advertise because they already have
market power, but the industry would need to advertise.
c. Government price supports exist for most perfectly competitive producers, so they don’t need
to advertise, but industry price supports don’t generally exist.
d. Industries advertise because they pay for commercials and it allows consumers to watch TV
and listen to the radio for “free.”
e. Individual firms produce perfectly differentiated output, but the industry produces
homogeneous output that needs to be differentiated.
119. False advertising is generally regulated by
a. the Securities and Exchange Commission (SEC).
b. the Federal Trade Commission (FTC).
c. the Antitrust Division of the Department of Justice.
d. state and local governments.
e. the Nuclear Regulatory Commission (NRC).
120. According to the discussion in the textbook, Kevin Trudeau
a. is the head of the Securities and Exchange Commission (SEC).
b. was sued by the Federal Trade Commission (FTC) for false advertising in 1998.
c. is the former CEO of Enron.
d. is the former prime minister of Canada.
e. is the former head of the FTC.
121. A franchise might be worth $1 million or more because
a. it guarantees the owner a long-run economic profit.
b. it guarantees the owner positive economic profit.
c. product differentiation results in brand loyalty, which can be very profitable.
d. it gives the owner a pure monopoly.
e. it allows the franchisee to sell a homogeneous product.
122. One drawback to advertising might be that it could easily
a. raise costs but not increase demand.
b. raise revenue but not increase demand.
c. decrease revenue and raise demand.
d. decrease costs and decrease demand.
e. cause a monopolistically competitive firm to become a monopoly.
123. If a firm engages in false advertising, it might be
a. shut down by the Securities and Exchange Commission (SEC).
b. investigated by the Federal Trade Commission (FTC) and have its products removed from the
market.
c. shut down by the Department of Justice.
d. investigated by the Stock Market Investigation Bureau (SMIB).
e. subject to “penalty by collusion.”
124. All of the following are examples of product differentiation, EXCEPT
a. exciting and attractive packaging
b. touting superior quality
c. nationwide availability
d. perfect substitution for another brand
e. catchy and memorable television advertisements
125. A unique feature of monopolistic competition is
a. many sellers
b. free entry and exit
c. differentiated products
d. similar products
e. significant barriers to entry and exit
126. Two gas stations are located near each other and compete for customers. They both offer the same
brand of gasoline. Guzzlin’ Gas is located a couple of blocks from the interstate, down a side
street. Frankie’s Fast Fuel is on the interstate access road, directly following an exit ramp. What
can you assume about market power?
a. The location of Frankie’s Fast Fuel gives it a certain degree of market power.
b. The location of Guzzlin’ Gas gives it a certain degree of market power.
c. Because they offer the same brand of gasoline, differentiation is irrelevant.
d. Frankie’s Fast Fuel charges higher prices, which erodes any market power it possesses.
e. The location of Frankie’s Fast Fuel means that it sells an inferior product.
127. Which of the following represents monopolistic competitors?
a. two farmer’s market stands specializing in heirloom tomatoes
b. a local gas company and electric company, both servicing residential homes
c. four regional plants producing raw steel for manufacturing
d. rock musicians selling albums recorded with the same producer
e. two national home improvement stores selling a large array of similar products
128. Demand elasticity for monopolistically competitive firms is best described as
a. perfectly elastic, because market competition eliminates pricing power.
b. perfectly inelastic, because differentiation is awarded with monopoly pricing.
c. monopolistically elastic, as the forces of competition mitigate the market power created by
significant entry barriers.
d. competitively inelastic, as the forces of competition generate demand that is not sensitive to
changes in price.
e. relatively elastic, because differentiation offsets the perfect elasticity of a perfectly competitive
market.
129. Low barriers to entry and exit mean that in the ________ run for monopolistically competitive
firms, it is ________ to generate economic profit.
a. short; possible d. long; impossible
b. short; impossible e. long; likely
c. long; possible
130. Monopolistic competitors do not enjoy the ________ demand of perfect competition. As a result,
firms will never produce at ________ average total cost.
a. relatively elastic; maximum d. relatively elastic; minimum
b. perfectly elastic; minimum e. perfectly inelastic; minimum
c. relatively elastic; maximum
131. Examining the cost, revenue, and demand curves for a monopolistic competitor reveals that, at
optimal output, the demand curve lies above the average total cost curve. Which of the following is
true?
a. There is economic profit in the long run.
b. There is an economic loss in the long run.
c. Firms will enter the industry in the long run.
d. Firms will exit the industry in the long run.
e. There is not enough information because demand is an imperfect benchmark for measuring
profitability.
132. With monopolistic competition, firms have demand curves that are ________ the lowest possible
cost.
a. unrelated to d. above
b. correlated with e. below
c. identical to
133. Entry by firms in the long run means that, for a monopolistic competitor, price
a. increases. d. exceeds marginal revenue.
b. decreases. e. always produces a loss.
c. remains the same.
134. When economists say that monopolistic competition drives long-run profits to zero, it implies that
the demand curve is ________ to the average total cost curve.
a. secant d. perpendicular
b. tangent e. asymmetrical
c. parallel
135. The gap between the actual quantity produced by a monopolistically competitive firm and the
optimal quantity in a competitive market is known as
a. excess capacity. d. inefficient scale.
b. insufficient capacity. e. markup.
c. flux capacity.
136. A markup is only possible when a firm enjoys some degree of
a. profit. d. efficient scale.
b. market power. e. substitutability.
c. excess capacity.
137. Which term best defines the pricing difference between monopolistic competition and competitive
markets?
a. differentiation d. markdown
b. discrimination e. inequity
c. markup
138. Productive ________ is/are considered an indicator of social benefit.
a. allocation d. margins
b. efficiency e. demand
c. capacity
139. The mayor of Stockville is seeking reelection and isn’t buying into the health food hype. He
believes that french fries are necessary for the happiness of his citizens, but the fast-food
restaurants in his city are charging too much for their products. In an effort to shore up election
support, the mayor institutes a price ceiling on french fries. Within two years, half of the fast-food
restaurants close in Stockville. What is the likely cause?
a. The price ceiling generated long-run economic losses.
b. The price ceiling generated long-run economic profits.
c. A neighboring town is subsidizing french fry producers.
d. A french fry price ceiling without a proportional hamburger price floor created an untenable
production balance.
e. A spike in french fry consumption resulted in a long-run decline in health, drastically reducing
demand for fast food.
140. Monopolistically competitive firms are troublesome to regulate for all of the following reasons,
EXCEPT
a. they comprise a large proportion of the economy.
b. their market and political power renders them virtually untouchable.
c. it could result in fewer choices for consumers.
d. regulating prices only magnifies the inefficiency typical of these firms.
e. the government may be forced to subsidize firms to keep them in business.
141. As product differentiation decreases, ________ increases.
a. markup d. demand inelasticity
b. excess capacity e. marginal cost
c. demand elasticity
142. Preston shops frequently at his favorite store, Fully Clothes. He and other like-minded consumers
are willing to pay a much higher price than they would at competing stores because Fully Clothes
best suits their particular preferences. Poor management causes Fully Clothes to go out of
business. What is likely to happen to Fully Clothes’ customers’ demand curves?
a. a movement along the curve to the right
b. a movement along the curve to the left
c. no change due to lack of product differentiation
d. a shift of the curve to the right
e. a shift of the curve to the left
143. Despite ________ prices than can be reached under perfect competition, monopolistic competition
results in ________ variety than can be reached in any other market.
a. higher; less d. lower; greater
b. higher; greater e. more inefficient; more excessive
c. lower; less
144. Why might a purely competitive industry advertise, even if individual firms do not?
a. The industry can selectively promote firms and force some out of business.
b. An industry can advertise to promote its products without shifting the average total cost curve
for individual firms.
c. The industry hopes to boost overall demand for the substitute goods.
d. An industry cannot advertise because it is not an actual business.
e. An industry would never advertise in a purely competitive market.
145. Successful advertising can increase demand across a wide spectrum of consumers, but it happens
unevenly. Some consumers respond more dramatically than others to advertising. This explains the
change in ________ of the demand curve that occurs after an advertising campaign.
a. elasticity d. quantity
b. direction e. rigidity
c. price
146. The primary purpose of advertising for a monopolist is to increase
a. demand. d. price.
b. differentiation. e. variety.
c. elasticity.
147. Brand labels and packaging can convey status or quality, even if there is little to no physical
difference in two competing products. If we are to assume that consumers are rational decision
makers, this indicates that brand labels and packaging create additional ________ for a buyer.
a. envy d. value
b. loyalty e. substitutes
c. wealth
148. Advertising causes a(n) ________ shift of the LRATC curve. The goal of successful advertising is
to generate enough increase in demand to produce at a ________ point on the new LRATC curve.
a. downward; lower d. upward; higher
b. downward; higher e. leftward; higher
c. upward; lower
149. Because monopolistic competitors each advertise, potential realized gains often
a. cancel each other out. d. hamper product differentiation.
b. increase in magnitude. e. force some firms out of the industry.
c. decrease in magnitude.
150. In the context of market structures, franchising fees represent which aspect for monopolistic
competition?
a. number of sellers d. product substitutes
b. product differentiation e. marginal cost
c. barriers to entry
SHORT ANSWER
1. Define market power.
2. Cathy’s Organic Milk differentiates itself based on quality. Then Juan’s Organic Milk and different
store brands of organic milk enter the market. How would Cathy’s demand curve, marginal
revenue curves, and output be affected?
3. If people found out that a major manufacturer produced its own brand and the store brand at the
same factory using the same materials, what would likely happen?
4. Compare and contrast the three market models in terms of the profit-maximizing output level for
each, the shutdown rule for each, and the probability of long-run economic profits being earned.
5. Compare and contrast monopolistic competition with monopoly. Be sure to explain what is similar
for the two and what is different.
6. Prove that the marginal revenue curve of a monopolistically competitive firm is twice as steep as
the demand curve. Assume that the demand curve is a straight, downward-sloping line. You may
choose to make up a numerical example.
7. Complete the table below for a monopolistically competitive firm:
Output
Price Total Revenue Marginal Revenue Total Cost Average Total Cost
Marginal Cost
Profits
0 $14 $0 — $2 — — −$2
1 12 $12 6 $6 $4
2 20 8 2
3 8 4 12 4 4
4 24 0 20 5
5 4 −4 34 7 14
8. What would be the likely result of having additional competitors in your industry in the long run?
9. Compare and contrast monopolistically competitive firms with competitive firms. Be sure to
explain what is similar in each industry and what is different. Make sure to address how many
firms are in the industry, whether the product is homogenous or differentiated, conditions of entry
and exit, and both short-run and long-run economic profit.
10. Why would advertising for the firm be effective under monopolistic competition but not under
perfect competition?
11. Explain what is meant by “differentiated” products.
12. Why does excess capacity exist in monopolistic competition?
13. Inefficient output harms social welfare, but why would government price controls backfire?
14. Explain how successful advertising alters the elasticity of the demand curve.
15. In economic terms, what is the ultimate goal of advertising?
16. Discuss the possibility of government intervention into any markets it determined to be less than
competitive in order to enforce competition.
17. List five products that are typically sold in monopolistically competitive markets.
18. Why does the typical monopolistically competitive firm have a downward-sloping demand curve
for its product?
19. How does a business franchise relate to the monopolistic competition market model?
20. Imagine opening a known brand-name company location in a lesser-developed country. Describe
the effects on that market.
21. Would a perfectly competitive firm want to advertise? Why or why not?
22. Show, graphically, how advertising affects demand in a market and describe the effects of
advertising on demand.
23. What is a common factor between perfectly competitive and monopolistically competitive
markets?
24. How might a firm in a perfectly (or near perfectly) competitive market modify its strategy to earn
short-run economic profits?