Chapter 16 /Monopolistic Competition ❖ 21
24. A profit-maximizing firm in a monopolistically competitive market is characterized by which of the follow-
ing?
a.
marginal cost exceeds marginal revenue
b.
average revenue equals marginal cost
c.
price exceeds marginal cost
d.
All of the above are correct.
25. To maximize its profit, a monopolistically competitive firm chooses its level of output by looking for the level
of output at which
a.
price equals marginal cost.
b.
marginal revenue equals marginal cost.
c.
average total cost is minimized.
d.
All of the above are correct.
26. A monopolistically competitive firm faces the following demand schedule for its product:
Price ($)
10
9
8
7
6
5
4
3
2
1
Quantity
2
4
6
9
11
13
15
17
19
21
The firm has total fixed costs of $20 and a constant marginal cost of $2 per unit. The firm will maximize profit
with
a.
6 units of output.
b.
9 units of output.
c.
11 units of output.
d.
13 units of output.
27. A monopolistically competitive firm faces the following demand curve for its product:
Price ($)
10
9
8
7
6
5
4
3
2
1
Quantity
2
4
6
8
10
12
14
16
18
20
The firm has total fixed costs of $20 and a constant marginal cost of $5 per unit. The firm will maximize profit
with the production of
a.
6 units of output.
b.
8 units of output.
c.
10 units of output.
d.
12 units of output.
22 ❖ Chapter 16 /Monopolistic Competition
28. A monopolistically competitive firm has the following cost structure:
Output
1
2
3
4
5
6
7
Total Cost($)
30
32
36
42
50
63
77
The firm faces the following demand curve:
Price ($)
20
18
15
12
9
7
4
Quantity
1
2
3
4
5
6
7
To maximize profit (or minimize losses), the firm will produce
a.
2 units.
b.
3 units.
c.
4 units.
d.
5 units.
29. A monopolistically competitive firm is currently producing 10 units of output. At this level of output the firm
is charging a price equal to $10, has marginal revenue equal to $6, has marginal cost equal to $6, and has av-
erage total cost equal to $12. From this information we can infer that
a.
the firm is currently maximizing its profit.
b.
the profits of the firm are negative.
c.
firms are likely to leave this market in the long run.
d.
All of the above are correct.
30. If “too much choice” is a problem for consumers, it would occur in which market structure(s)?
a.
perfect competition
b.
monopoly
c.
monopolistic competition
d.
perfect competition and monopolistic competition
31. In the short run, a firm operating in a monopolistically competitive market can earn
a.
positive economic profits.
b.
economic losses.
c.
zero economic profits.
d.
All of the above are possible.
32. In the short run, a firm operating in a monopolistically competitive market
a.
produces an output level where marginal revenue equals average total cost.
b.
maximizes revenues as well as profits.
c.
can earn zero economic profits.
d.
sets price equal to marginal cost.
Chapter 16 /Monopolistic Competition ❖ 23
33. In the short run, a firm operating in a monopolistically competitive market
a.
produces an output level where marginal revenue equals average total cost.
b.
sets price equal to demand where marginal revenue equals marginal cost.
c.
must earn zero economic profits.
d.
maximizes revenues as well as profits.
34. When a profit-maximizing firm in a monopolistically competitive market charges a price higher than marginal
cost,
a.
the firm must be earning a positive economic profit.
b.
the firm may be incurring economic losses
c.
there is a deadweight loss to society, but it is exactly offset by the benefit of excess capacity.
d.
new firms will enter the market in the long run.
35. Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilib-
rium?
a.
P = AR
b.
MR = MC
c.
P > MC
d.
All of the above are correct.
36. Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilib-
rium?
a.
P > AR
b.
MR > MC
c.
P > MC
d.
All of the above are correct.
37. Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilib-
rium?
a.
P > ATC
b.
P = ATC
c.
P < ATC
d.
Any of the above could be correct.
24 ❖ Chapter 16 /Monopolistic Competition
38. Which of the following conditions is characteristic of a monopolistically competitive firm in both the short-run
and the long run?
a.
P > MC
b.
MC = ATC
c.
P < MR
d.
All of the above are correct.
39. For a profit-maximizing monopolistically competitive firm, price exceeds marginal cost in
a.
the short run but not in the long run.
b.
the long run but not in the short run.
c.
both the short run and the long run.
d.
neither the short run nor the long run.
40. For a profit-maximizing monopolistically competitive firm, marginal revenue equals marginal cost in
a.
the short run but not in the long run.
b.
the long run but not in the short run.
c.
both the short run and the long run.
d.
neither the short run nor the long run.
41. For a profit-maximizing monopolistically competitive firm, marginal revenue exceeds marginal cost in
a.
the short run but not in the long run.
b.
the long run but not in the short run.
c.
both the short run and the long run.
d.
neither the short run nor the long run.
42. A firm operating in a monopolistically competitive market can earn economic profits in
a.
the short run but not in the long run.
b.
the long run but not in the short run.
c.
both the short run and the long run.
d.
neither the short run nor the long run.
43. When a market is monopolistically competitive, the typical firm in the market is likely to experience a
a.
positive profit in the short run and in the long run.
b.
positive or negative profit in the short run and a zero profit in the long run.
c.
zero profit in the short run and a positive or negative profit in the long run.
d.
zero profit in the short run and in the long run.
Chapter 16 /Monopolistic Competition ❖ 25
44. When a market is monopolistically competitive, the typical firm in the market can earn
a.
losses in the short run and profits in the long run.
b.
profits in the short run and the long run.
c.
losses in the short run and zero profit in the long run.
d.
zero profit in the short run and losses in the long run.
45. An important difference between the situation faced by a profit-maximizing monopolistically competitive firm
in the short run and the situation faced by that same firm in the long run is that in the short run,
a.
price may exceed marginal revenue, but in the long run, price equals marginal revenue.
b.
price may exceed marginal cost, but in the long run, price equals marginal cost.
c.
price may exceed average total cost, but in the long run, price equals average total cost.
d.
there are many firms in the market, but in the long run, there are only a few firms in the market.
46. Which of the following is not a key feature of monopolistic competition?
a.
Excess capacity
b.
A markup of price over marginal cost
c.
Positive economic profits for firms in the long run
d.
Differentiated products among firms in the market
47. Refer to Figure 16-1. The firm’s profit-maximizing level of output is
a.
8 units.
b.
12 units.
c.
16 units.
d.
24 units.
26 ❖ Chapter 16 /Monopolistic Competition
48. Refer to Figure 16-1. In order to maximize profit, the firm will charge a price of
a.
$8.
b.
$12.
c.
$16.
d.
$18.
49. Refer to Figure 16-1. Suppose that average total cost is $18 when Q=12. What is the profit-maximizing
price and resulting profit?
a.
P=$12, profit=$0
b.
P=$18, profit=$72
c.
P=$18, profit=$24
d.
P=$18, profit=$0
50. Refer to Figure 16-1. If the average total cost is $15 at the profit–maximizing quantity, then the firm’s maxi-
mum profit is
a.
$18.
b.
$24.
c.
$36.
d.
$45.
51. Refer to Figure 16-1. If the average variable cost is $12 at the profit-maximizing quantity, and if the firm’s
fixed costs amount to $30, then the firm’s maximum profit is
a.
$-30.
b.
$22.
c.
$36.
d.
$42.
52. Refer to Figure 16-1. If the average variable cost is $13 at the profit-maximizing quantity, and if the firm’s
profit is $20 at that quantity, then its fixed costs amount to
a.
$12.
b.
$22.
c.
$40.
d.
$60.
53. Refer to Figure 16-1. Suppose ATC = $18 when Q = 12. Then the
a.
firm is in a long-run equilibrium when it produces 12 units of output.
b.
firm is in a long-run equilibrium when it produces 16 units of output.
c.
best the firm can do is sustain a loss of $24.
d.
best the firm can do is earn a profit of $48.
Chapter 16 /Monopolistic Competition ❖ 27
54. Refer to Figure 16-1. Suppose you were to add the ATC curve to the diagram to show the firm in a situation
of long-run equilibrium. You would draw the ATC curve
a.
with its minimum at the point (Q = 12, P = $18).
b.
with its minimum at the point (Q = 12, P = $12).
c.
tangent to the demand curve at the point (Q = 12, P = $18).
d.
tangent to the demand curve at the point (Q = 16, P = $16).
55. Refer to Figure 16-1. If the ATC=20 at the profit-maximizing level of output, which of the following will
occur in the long run in this industry?
a.
Firms will exit this industry.
b.
Firms will enter this industry.
c.
This firm will continue to earn positive economic profits.
d.
This firm will incur losses.
Figure 16-2
This figure depicts a situation in a monopolistically competitive market.
56. Refer to Figure 16-2. What price will the monopolistically competitive firm charge in this market?
a.
$60
b.
$70
c.
$75
d.
$80
28 ❖ Chapter 16 /Monopolistic Competition
57. Refer to Figure 16-2. At the profit-maximizing level of output, what is this firm’s total cost of production?
a.
$1,200
b.
$1,400
c.
$1,600
d.
$1,875
58. Refer to Figure 16-2. What is the profit-maximizing price, quantity, and resulting profit?
a.
P=$60, Q=20 units, profit=$200
b.
P=$80, Q=20 units, profit=$200
c.
P=$75, Q=25 units, profit=$100
d.
P=$60, Q=40 units, profit=$0
59. Refer to Figure 16-2. How much consumer surplus will be derived from the purchase of this product at the
monopolistically competitive price?
a.
$200
b.
$312.50
c.
$400
d.
$800
60. Refer to Figure 16-2. How much profit will the monopolistically competitive firm earn in this situation?
a.
$0
b.
$80
c.
$200
d.
$400
61. Refer to Figure 16-2. How much output will the monopolistically competitive firm produce in this situation?
a.
20 units
b.
25 units
c.
40 units
d.
80 units
62. Refer to Figure 16-2. This firm is operating
a.
in the short run and earning a positive economic profit.
b.
in the short run and breaking even.
c.
in the long run and earning a positive economic profit.
d.
in the long run and incurring and economic loss.
Chapter 16 /Monopolistic Competition ❖ 29
63. Refer to Figure 16-2. Which of the following will occur in the long run in this industry?
a.
Firms will exit this industry.
b.
Firms will enter this industry.
c.
This firm will continue to earn positive economic profits.
d.
This firm will incur losses.
Figure 16-3
MR D
MC
ATC
510 15 20 25 30 35 40 Quantity
100
200
300
400
500
600
700
800
900
1000 $
64. Refer to Figure 16-3. The firm in this figure is monopolistically competitive. It illustrates
a.
the shut-down case.
b.
a long-run economic profit.
c.
a short-run economic profit.
d.
a short-run loss.
65. Refer to Figure 16-3. At the profit-maximizing, or loss-minimizing, output level, the firm in this figure has
total costs of approximately
a.
$600.
b.
$6,000.
c.
$9,000.
d.
$12,500.
66. Refer to Figure 16-3. At the profit-maximizing, or loss-minimizing, output level, how many units of output
will the firm in this figure produce?
a.
15
b.
20
c.
25
d.
This firm will choose not to produce.
30 ❖ Chapter 16 /Monopolistic Competition
67. Refer to Figure 16-3. What price will the monopolistically competitive firm charge in this market?
a.
$15
b.
$400
c.
$500
d.
$700
68. Refer to Figure 16-3. At the profit-maximizing, or loss-minimizing, output level, the firm in this figure has
total revenue of approximately
a.
$6,000.
b.
$9,000.
c.
$10,500.
d.
$12,500.
69. Refer to Figure 16-3. Assume the firm in the figure is currently producing 10 units of output and charging
$600. The firm
a.
will increase its profits if it raises its price and reduces its production level.
b.
will increase its profits if it lowers its price and expands its production level.
c.
is maximizing profits.
d.
will increase its profits if it raises its prices and expands its production level.
70. Refer to Figure 16-3. The maximum total short-run economic profit for the monopolistically competitive firm
in this figure is
a.
$1,500.
b.
$6,000.
c.
$10,500.
d.
$12,500.
71. Refer to Figure 16-3. Which of the following will occur in the long run in this industry?
a.
Firms will exit this industry.
b.
Firms will enter this industry.
c.
This firm will continue to earn positive economic profits.
d.
This firm will incur losses.
Chapter 16 /Monopolistic Competition ❖ 31
Figure 16-4
72. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will encourage the entry of
other firms into a monopolistically competitive industry?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
73. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will encourage the exit of
some firms from a monopolistically competitive industry?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
74. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will not encourage either the
entry or exit of firms in a monopolistically competitive industry?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
32 ❖ Chapter 16 /Monopolistic Competition
75. Refer to Figure 16-4. Panel a shows a profit-maximizing monopolistically competitive firm that is
a.
earning zero economic profit.
b.
likely to exit the market in the long run.
c.
producing its efficient scale of output.
d.
not maximizing its profit.
76. Refer to Figure 16-4. Which of the panels depicts a firm in a monopolistically competitive market earning
positive economic profits?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
77. Refer to Figure 16-4. Panel b is consistent with a firm in a monopolistically competitive market that is
a.
not in long-run equilibrium.
b.
in long-run equilibrium.
c.
producing its efficient scale of output.
d.
earning a positive economic profit.
78. Refer to Figure 16-4. Which of the panels shown could illustrate the short-run situation for a monopolistically
competitive firm?
a.
panel a
b.
panel b
c.
panel c
d.
All of the above are correct.
Chapter 16 /Monopolistic Competition ❖ 33
Figure 16-5
79. Refer to Figure 16-5. Which of the graphs shown would be consistent with a profit maximizing firm in a mo-
nopolistically competitive market that is earning a positive profit?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
80. Refer to Figure 16-5. Which of the graphs shown would be consistent with a firm in a monopolistically com-
petitive market that is doing its best but still losing money?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
81. Refer to Figure 16-5. Which of the graphs depicts a monopolistically competitive firm in long-run equilibri-
um?
a.
panel a
b.
panel b
c.
panel c
d.
None of the above is correct.
34 ❖ Chapter 16 /Monopolistic Competition
Figure 16-6
82. Refer to Figure 16-6. Which of the graphs depicts the situation for a profit-maximizing firm in a monopolisti-
cally competitive market?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
83. Refer to Figure 16-6. Suppose a firm is operating in the situation depicted in panel a. Which of the following
statements is correct?
a.
The firm is earning positive short-run profits.
b.
The firm is earning negative short-run profits.
c.
The firm is earning zero short-run profits.
d.
We cannot determine profits because we do not know the firm’s average total costs.
84. Refer to Figure 16-6. If a firm in a monopolistically competitive market was producing the level of output
depicted as Qd in panel (d), it would
a.
not be maximizing its profit.
b.
be minimizing its losses.
c.
be losing market share to other firms in the market.
d.
be operating at excess capacity.
Chapter 16 /Monopolistic Competition ❖ 35
85. Refer to Figure 16-6. The firm depicted in panel b faces a horizontal demand curve. If panel b depicts a prof-
it-maximizing firm,
a.
it could be operating in either a perfectly competitive market or in a monopolistically competitive
market.
b.
it would not have excess capacity in its production as long as it is earning zero economic profit.
c.
it is able to choose the price at which it sells its product.
d.
the firm can always raise its profit by increasing production since consumers will buy as much as
the firm can produce.
86. In which of the following markets is economic profit driven to zero in the long run?
a.
oligopoly
b.
monopoly
c.
monopolistic competition
d.
cartels
87. Which of the following conditions is characteristic of a monopolistically competitive firm in long-run equilib-
rium?
a.
P > demand and P = MR
b.
ATC > demand and MR = MC
c.
P > MC and demand = ATC
d.
P < ATC and demand > MR
88. Which of the following conditions is characteristic of a monopolistically competitive firm in long-run equilib-
rium?
a.
P > MR and P = MC
b.
ATC = demand and MR = MC
c.
P < MC and demand = ATC
d.
P > ATC and demand > MR
89. A monopolistically competitive firm
a.
charges a price that is equal to marginal cost.
b.
experiences a zero profit in the long run.
c.
produces at the efficient scale in the long run.
d.
All of the above are correct.
36 ❖ Chapter 16 /Monopolistic Competition
90. In a monopolistically competitive market,
a.
entry by new firms is impeded by barriers to entry; thus, the number of firms in the market is never
ideal.
b.
entry by new firms is impeded by barriers to entry, but the number of firms in the market is
nevertheless always ideal.
c.
free entry ensures that the number of firms in the market is ideal.
d.
there may be too few or too many firms in the market, despite free entry.
91. In which of the following market structures does free entry and exit play an important role in the long-run
equilibrium outcome?
(i)
perfect competition
(ii)
monopolistic competition
(iii)
monopoly
a.
(i) only
b.
(i) and (ii) only
c.
(ii) and (iii) only
d.
(i), (ii), and (iii)
92. If firms in a monopolistically competitive market are earning positive profits, then
a.
firms will likely be subject to regulation.
b.
barriers to entry will be strengthened.
c.
some firms will exit the market.
d.
new firms will enter the market.
93. If firms in a monopolistically competitive market are earning economic profits, which of the following scenar-
ios would best describe the change existing firms would face as the market adjusts to the long-run equilibri-
um?
a.
an increase in demand for each firm
b.
a decrease in demand for each firm
c.
a downward shift in the marginal cost curve for each firm
d.
an upward shift in the marginal cost curve for each firm
94. If firms in a monopolistically competitive market are incurring economic losses, which of the following sce-
narios would best describe the change remaining firms would face as the market adjusts to the long-run equi-
librium?
a.
a downward shift in the marginal cost curve for each firm
b.
an upward shift in the marginal cost curve for each firm
c.
a decrease in demand for each firm
d.
an increase in demand for each firm
Chapter 16 /Monopolistic Competition ❖ 37
95. In monopolistically competitive markets, positive economic profits
a.
suggest that some existing firms will exit the market.
b.
suggest that new firms will enter the market.
c.
are sustained through government-imposed barriers to entry.
d.
are never possible.
96. In monopolistically competitive markets, economic losses
a.
suggest that some existing firms will exit the market.
b.
suggest that new firms will enter the market.
c.
are minimized through government-imposed barriers to entry.
d.
are never possible.
97. As new firms enter a monopolistically competitive market, profits of existing firms
a.
rise, and product diversity in the market increases.
b.
rise, and product diversity in the market decreases.
c.
decline, and product diversity in the market increases.
d.
decline, and product diversity in the market decreases.
98. As firms exit a monopolistically competitive market, profits of remaining firms
a.
decline, and product diversity in the market decreases.
b.
decline, and product diversity in the market increases.
c.
rise, and product diversity in the market decreases.
d.
rise, and product diversity in the market increases.
99. The free entry and exit of firms in a monopolistically competitive market guarantees that
a.
both economic profits and economic losses can persist in the long run.
b.
both economic profits and economic losses disappear in the long run.
c.
economic profits, but not economic losses, can persist in the long run.
d.
economic losses, but not economic profits, can persist in the long run.
100. In monopolistically competitive markets, free entry and exit suggests that
a.
the market structure will eventually be characterized by perfect competition in the long run.
b.
all firms earn zero economic profits in the long run.
c.
some firms will be able to earn economic profits in the long run.
d.
some firms will be forced to incur economic losses in the long run.
38 ❖ Chapter 16 /Monopolistic Competition
101. When a profit-maximizing firm in a monopolistically competitive market is producing the long-run equilibri-
um quantity,
a.
its average revenue will equal its marginal cost.
b.
its marginal revenue will exceed its marginal cost.
c.
it will be earning positive economic profits.
d.
its demand curve will be tangent to its average total cost curve.
102. When a firm’s demand curve is tangent to its average total cost curve, the
a.
firm’s economic profit is zero.
b.
firm must be earning economic profits.
c.
firm must be incurring economic losses.
d.
firm must be operating at its efficient scale.
103. When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium,
a.
the demand curve will be perfectly elastic.
b.
price exceeds marginal cost.
c.
marginal cost must be falling.
d.
marginal revenue exceeds marginal cost.
104. A profit-maximizing firm operating in a monopolistically competitive market that is in a long-run equilibrium
has
a.
minimized average total cost.
b.
chosen to produce where demand is unitary elastic.
c.
produced the efficient scale of output.
d.
chosen a quantity of output where average revenue equals average total cost.
105. In a long-run equilibrium, a firm in a monopolistically competitive market operates
a.
where marginal revenue is zero.
b.
where marginal revenue is negative.
c.
on the rising portion of its average total cost curve.
d.
on the declining portion of its average total cost curve.
106. When a new firm enters a monopolistically competitive market, the individual demand curves faced by all
existing firms in that market will
a.
shift to the left.
b.
shift to the right.
c.
shift in a direction that is unpredictable without further information.
d.
remain unchanged. It is the supply curve that will shift.
Chapter 16 /Monopolistic Competition ❖ 39
107. When a firm exits a monopolistically competitive market, the individual demand curves faced by all remaining
firms in that market will
a.
shift in a direction that is unpredictable without further information.
b.
shift to the right.
c.
shift to the left.
d.
remain unchanged. It is the supply curve that will shift.
108. Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to a(n)
a.
change in the technology that the firm utilizes.
b.
shift of its demand curve.
c.
shift of its supply curve.
d.
increase in the firm’s average cost of production.
109. Because a monopolistically competitive firm has some market power, in the long-run the price of its product
exceeds its
a.
average revenue.
b.
average total cost.
c.
marginal cost.
d.
None of the above is correct.
110. New firms will likely enter a monopolistically competitive market when price exceeds
a.
marginal revenue.
b.
average revenue.
c.
marginal cost.
d.
average total cost.
111. Which two curves are tangent to each other in a monopolistically competitive market with zero economic
profit?
a.
demand and average variable cost
b.
demand and average total cost
c.
marginal revenue and average variable cost
d.
marginal revenue and average total cost
112. In a monopolistically competitive market,
a.
strategic interactions among the firms are very important.
b.
the threat of entry by new firms is not an important consideration.
c.
the attainment of a Nash equilibrium is an important objective.
d.
firms may enter even though they will earn zero economic profit in the long run.
40 ❖ Chapter 16 /Monopolistic Competition
113. Among the following situations, which one is least likely to apply to a monopolistically competitive firm?
a.
profit is positive in the short run
b.
total cost exceeds total revenue in the short run
c.
profit is positive in the long run
d.
total revenue equals total cost in the long run
114. Suppose that monopolistically competitive firms in a certain market are earning positive profits. In the transi-
tion from this initial situation to a long-run equilibrium,
a.
the number of firms in the market decreases.
b.
each existing firm experiences a decrease in demand for its product.
c.
each existing firm experiences a rightward shift of its marginal revenue curve.
d.
each existing firm experiences an upward shift in its average total cost curve.
115. Suppose that monopolistically competitive firms in a certain market are experiencing losses. In the transition
from this initial situation to a long-run equilibrium,
a.
the number of firms in the market decreases.
b.
each existing firm experiences a decrease in demand for its product.
c.
each firm experiences an upward shift of its marginal cost and average total cost curves.
d.
each existing firm’s average total cost falls to bring economic profit back to zero.
116. When a monopolistically competitive firm is in long-run equilibrium,
a.
marginal revenue is equal to marginal cost.
b.
price is equal to average total cost.
c.
demand is equal to average total cost.
d.
All of the above are correct.
117. 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.
118. 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.