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Subjective Short Answer
1. Which market structure(s) is(are) imperfectly competitive?
2. Which market structure(s) is(are) considered highly concentrated?
3. The market structure in which each firm has a monopoly over the product it makes, but many other firms make similar
products that compete for the same customers is called
4. Which type of market structure has the fewest number of firms?
5. Which market structure(s) include(s) many firms with differentiated products who can enter and exit the market freely?
6. Describe the shape of the monopolistically competitive firm’s demand curve.
7. Economists measure a market’s domination by a small number of firms with a statistic called the
8. Suppose there is a market in which the firms hold the following market shares: 25%, 20%, 18%, 15%, 8%, 7%, 4%,
2%, 1%. What is the concentration ratio for this market?
9. Consider two industries in which firms hold the following market shares:
Industry A: 25%, 20%, 18%, 15%, 8%, 7%, 4%, 2%, 1%
Industry B: 30%, 10%, 9%, 8%, 8%, 8%, 8%, 6%, 6%, 5%, 2%
What are the concentration ratios for each industry? Which is more competitive?
Table 16-7
A monopolistically competitive firm faces the following demand schedule for its product. In addition, the firm has total
fixed costs equal to 20.
Price
Quantity
$30
1
$26
2
$22
3
$18
4
10. Refer to Table 16-7. If this firm has a constant marginal cost of $7, what is the profit-maximizing level of output?
11. Refer to Table 16-7. When this firm profit maximizes and faces a constant marginal cost of $7, what is the amount of
its markup over marginal cost?
12. Refer to Table 16-7. If this firm profit maximizes and faces a constant marginal cost of $7, does it have excess
capacity? How do you know?
Figure 16-11
13. Refer to Figure 16-11. If this firm profit-maximizes, how much output will it produce?
14. Refer to Figure 16-11. If this firm profit-maximizes, what price will it charge?
15. Refer to Figure 16-11. If this firm profit-maximizes, how much revenue will it earn?
16. Refer to Figure 16-11. If this firm profit-maximizes, how much cost will it incur?
17. Refer to Figure 16-11. If this firm profit-maximizes, how much profit or loss will it earn?
18. Refer to Figure 16-11. What, if any, long run adjustment will occur in this industry?
Figure 16-12
19. Refer to Figure 16-12. If this firm profit-maximizes, how much output will it produce?
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?
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.
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?
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?
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
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?
37. Refer to Figure 16-14. Use the letters to identify the deadweight loss from this firm producing at its profit-
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?
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?
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
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?
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?
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?
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?
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?
62. List five goods that are likely sold in a monopolistically competitive market.
63. Why does a typical monopolistically competitive firm face a downward-sloping demand curve?
64. In many college towns, private independent bookstores typically locate on the periphery of the college campus.
However, in some college towns, the university has used political power to restrict private bookstores near campus
through community zoning laws. Use your knowledge of markets to predict the price and quality of service differences in
the market for college textbooks under the two different market regimes.
65. Use a graph to demonstrate why a profit-maximizing monopolistically competitive firm must operate at excess
capacity. Explain why a perfectly competitive firm is not subject to the same constraint.
66. In a small college town, four microbreweries have opened in the last two years. Demonstrate the effect of new market
entrants on demand for existing firms (microbreweries) that already served this market. Assume that the local community
now places a moratorium on new liquor licenses for microbreweries. How will this moratorium affect the long-run
profitability of incumbent firms?
67. What is meant by the term "excess capacity" as it relates to monopolistically competitive firms?
68. Entry of firms in a monopolistically competitive industry is characterized by two externalities. List them and briefly
describe how consumers and existing firms are influenced by them.
69. Evaluate the following statement in the context of business-stealing and product-variety externalities: "We have too
many student apartments in this town already. Statistics show that vacancy rates average 15 percent during any given
semester."
70. Assume the role of a critic of advertising. Describe the characteristics of advertising that reduce the effectiveness of
markets and decrease the social welfare of society.
71. Assume the role of a defender of advertising. Describe the characteristics of advertising that enhance the effectiveness
of markets and increase the social welfare of society.
72. Evaluate the following statement: "Advertisements that use celebrity endorsements are devoid of any value and do not
enhance the efficient functioning of markets."
73. Professional organizations (for example, the American Medical Association and the American Bar Association) have
been active advocates for regulation to restrict the right of professionals to advertise. Describe what economic incentives
might exist for existing professionals to restrict advertising.
74. Discuss how brand names may enhance the efficiency of markets in a less developed country.
75. As developing countries make a transition to market-based economies, one of the first major capital investments is in
"Western-quality" hotels. Explain why brand-name hotel accommodations are a critical step in attracting foreign
investment.
76. In markets where the government imposes an excise tax on unit sales, it also has a tendency to dabble with restrictions
on advertising (for example, cigarettes and hard liquor). Do potential (or actual) restrictions on advertising in these
markets serve the interest of a government that is interested in maximizing its tax revenue from the sale of these products?
Explain your answer.
