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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.
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.
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.
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.
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
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.
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.
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.
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.
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.
247. 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.
248. 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.
249. 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.
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.
250. 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.
251. 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.
252. 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.
253. 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.
254. 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.
255. 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.
256. 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.
257. 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.
258. 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.
259. In what way is monopolistic competition less beneficial to the welfare of society in the long run?
a.
The firm can earn an economic profit.
b.
The firm does not produce where marginal revenue is equal to marginal cost.
c.
The firm does not produce where average total cost is minimized
d.
The firm does not shut down if the price is less than average variable cost.
260. Deadweight losses are associated with monopolistic competition:
a.
In the short run, but not the long run
b.
In the long run, but not the short run
c.
In both the short and long run
d.
In neither the short run nor the long run
261. A monopolistically competitive firm is currently charging a price of $10 and producing 12,000 units/month. It faces
monthly fixed costs of $15,000 and has an average variable cost of $6/unit. In the long run, we would expect:
a.
The firm to go out of business
b.
The price will rise and output will fall
c.
The price will fall and output will fall
d.
The price will fall and output will rise
262. A monopolistically competitive firm is currently charging a price of $20 and producing 3,000 units/month. It faces
monthly fixed costs of $1,000 and has an average variable cost of $22/unit. We would expect:
a.
The firm to earn an economic profit in the long run
b.
The firm to shut down in the short run
c.
The firm to raise its price to cover its variable costs
d.
The firm to adjust its production to minimum efficient scale
