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Chapter 16 /Monopolistic Competition ❖ 41
119. "In a long-run equilibrium, price is equal to average total cost." This statement applies to
a.
competitive markets, but not to monopolistically competitive markets or monopolies.
b.
competitive and monopolistically competitive markets, but not to monopolies.
c.
competitive markets, monopolistically competitive markets, and monopolies.
d.
None of the above is correct.
120. Entry and exit drive each firm in a monopolistically competitive market to a point of tangency between its
a.
marginal revenue curve and its total cost curve.
b.
marginal revenue curve and its average total cost curve.
c.
demand curve and its total cost curve.
d.
demand curve and its average total cost curve.
121. Suppose the point of tangency that characterizes long-run equilibrium for a monopolistically competitive firm
occurs at Q1 units of output. This level of output, Q1,
a.
exceeds the level of output at which marginal revenue equals marginal cost.
b.
exceeds the level of output at which marginal cost equals average total cost.
c.
falls short of the level of output at which price equals marginal cost.
d.
exceeds the firm’s efficient scale of output.
122. Suppose for some firm that average total cost is minimized at Q1 units of output. For a monopolistically com-
petitive firm in long-run equilibrium, Q1
a.
is also the level of output at which marginal cost equals average total cost.
b.
exceeds the level of output at which there is a point of tangency between the demand curve and the
average total cost curve.
c.
exceeds the level of output at which marginal revenue equals marginal cost.
d.
All of the above are correct.
123. In a long-run equilibrium,
a.
only a perfectly competitive firm operates at its efficient scale.
b.
only a monopolistically competitive firm operates at its efficient scale.
c.
neither a competitive firm nor a monopolistically competitive firm charges a markup over marginal
cost.
d.
both a perfectly competitive firm and a monopolistically competitive firm operate at their efficient
scale of production.
42 ❖ Chapter 16 /Monopolistic Competition
124. 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 $40 and a constant marginal cost of $2 per unit. We can conclude that
a.
firms will exit this market.
b.
firms will enter this market.
c.
this market is in long-run equilibrium.
d.
this firm is operating at its efficient scale.
125. A firm has the following cost structure:
Output
1
2
3
4
5
6
7
Total Cost($)
30
32
36
42
50
63
77
If this firm is in a typical perfectly competitive market, in the long run it will likely produce
a.
4 or fewer units of output.
b.
5 units of output.
c.
more than 5 units of output.
d.
None of the above are necessarily correct because there is not enough information to tell.
126. A firm has the following cost structure:
Output
1
2
3
4
5
6
7
Total Cost($)
30
32
36
42
50
63
77
If this firm is in a typical monopolistically competitive market, in the long run it will likely produce
a.
4 or fewer units of output.
b.
5 units of output.
c.
more than 5 units of output.
d.
None of the above are necessarily correct because there is not enough information to tell.
127. A monopolistically competitive firm is currently earning a positive economic profit. If other firms enter the
market, we would expect that the added competition will cause this firm to adjust its output such that it
a.
will operate closer to its efficient scale.
b.
will operate further from its efficient scale.
c.
will no longer be at its efficient scale.
d.
might move either closer to or further from its efficient scale.
128. In the long run,
a.
monopolistically competitive firms earn a higher profit than perfectly competitive firms because
monopolistically competitive firms have some monopoly power.
b.
monopolistically competitive firms produce a higher output than perfectly competitive firms
because competition drives the perfectly competitive firms’ output down.
c.
both monopolistically competitive and perfectly competitive firms produce where P = MC.
d.
both monopolistically competitive and perfectly competitive firms produce where P = ATC.
Chapter 16 /Monopolistic Competition ❖ 43
129. Joe’s Juice Shop operates in a monopolistically competitive market. Joe’s is currently producing where its
average total cost is minimized. In the long run we would expect Joe’s output to
a.
decrease and average total cost to increase.
b.
decrease and average total cost to decrease.
c.
remain unchanged as Joe's is doing the best it can.
d.
increase and average total costs to decrease.
130. Which of the following statements regarding monopolistic competition is not correct?
a.
In the long-run equilibrium, price equals average total cost.
b.
In the long-run equilibrium, firms earn zero economic profit.
c.
In the long-run equilibrium, firms charge a price above marginal cost.
d.
In the long-run equilibrium, firms produce a quantity in excess of their efficient scale.
131. Consider a monopolistically competitive firm in a market in long-run equilibrium. This firm is likely earning
a.
a positive economic profit since it is charging a price above marginal cost.
b.
no economic profit since it is charging a price equal to its marginal cost.
c.
a positive economic profit since it is charging a price above its average total cost.
d.
no economic profit since it is charging a price equal to it average total cost.
44 ❖ Chapter 16 /Monopolistic Competition
Figure 16-7
The lines in the figures below illustrate the potential effect of entry and exit in a monopolistically competitive
market on either the demand curve or the marginal cost curve of existing firms.
132. Refer to Figure 16-7. Panel (d) illustrates the change that would occur if existing firms faced
a.
long-run economic losses.
b.
a decrease in the diversity of products offered in the market.
c.
new entrants in the market.
d.
firms exiting the market.
133. Refer to Figure 16-7. Which of the diagrams illustrates the impact of some existing firms leaving the market?
a.
panel a
b.
panel b
c.
panel c
d.
panel d
Chapter 16 /Monopolistic Competition ❖ 45
Table 16-4
This table shows the demand schedule, marginal cost, and average total cost for a monopolistically
competitive firm.
Quantity
Price
Marginal Cost
Average Total Cost
0
$10
--
--
1
$9
$3
$14
2
$8
$6
$10
3
$7
$9
$9
4
$6
$12
$10
5
$5
$15
$12
6
$4
$18
$14
7
$3
$21
$17
8
$2
$24
$21
9
$1
$27
$25
10
$0
$30
$29
134. Refer to Table 16-4. What price will this firm charge to maximize profit?
a.
$6
b.
$7
c.
$8
d.
$9
135. Refer to Table 16-4. What is this firm’s profit maximizing level of output?
a.
0 units of output
b.
1 unit of output
c.
2 units of output
d.
3 units of output
136. Refer to Table 16-4. At the profit maximizing level of output, what is this firm’s total cost?
a.
$0
b.
$14
c.
$20
d.
$27
137. Refer to Table 16-4. Which of the following is likely to happen in the long run in this market?
a.
The market is currently in a long-run equilibrium.
b.
The market price is likely to fall.
c.
Firms are likely to enter the market since firms are earning a positive economic profit.
d.
Firms are likely to leave the market since firms are earning a negative economic profit.
46 ❖ Chapter 16 /Monopolistic Competition
138. Refer to Table 16-4. How much profit will this firm earn when it chooses its output to maximize profit?
a.
a $4 loss
b.
a $2 loss
c.
a $6 profit
d.
a $16 profit
139. Refer to Table 16-4. If the government forces this firm to produce at its efficient output level, how much out-
put will this firm produce?
a.
0 units of output
b.
1 unit of output
c.
2 units of output
d.
3 units of output
140. Refer to Table 16-4. If the government forces this firm to produce at its efficient output level, how much
profit will this firm earn?
a.
a $4 loss
b.
a $6 loss
c.
a $6 profit
d.
a $12 profit
Table 16-5
This table shows the demand schedule, marginal cost, and average total cost for a monopolistically
competitive firm.
Quantity
Price
Marginal
Cost
Average
Total Cost
0
$30
--
--
1
$24
$2
$32
2
$18
$4
$18
3
$12
$6
$14
4
$6
$8
$10
5
$0
$10
$10
141. Refer to Table 16-5. What price should this firm charge to maximize profit?
a.
$6
b.
$12
c.
$18
d.
$24
Chapter 16 /Monopolistic Competition ❖ 47
142. Refer to Table 16-5. What is this firm’s total cost at the profit-maximizing quantity?
a.
$12
b.
$18
c.
$32
d.
$36
143. Refer to Table 16-5. How much profit will this firm earn at the monopolistically competitive price?
a.
$0
b.
$5
c.
$12
d.
$16
144. Refer to Table 16-5. Which of the following statements regarding this monopolistically competitive firm is
correct?
a.
New firms will enter this market in the long run since firm profits are greater than zero.
b.
Firms will leave this market in the long run since firm profits are less than zero.
c.
This firm is currently in long-run equilibrium.
d.
This firm is currently in long-run equilibrium, and the firm is producing its efficient scale of output.
Table 16-6
Traci’s Hairstyling is one salon among many in the market for hairstyling. The following table presents cost
and revenue data for haircuts at Traci’s Hairstyling.
COSTS
REVENUES
Quantity
Produced
Total
Cost
Marginal
Cost
Quantity
Demanded
Price
Total
Revenue
Marginal
Revenue
0
$10
--
0
$50
--
1
$15
1
$45
2
$21
2
$40
3
$28
3
$35
4
$36
4
$30
5
$45
5
$25
6
$55
6
$20
7
$66
7
$15
8
$78
8
$10
145. Refer to Table 16-6. What is the profit-maximizing output for Traci’s Hairstyling?
a.
3 haircuts
b.
4 haircuts
c.
5 haircuts
d.
6 haircuts
48 ❖ Chapter 16 /Monopolistic Competition
146. Refer to Table 16-6. When maximizing profit, what price does Traci’s charge for a haircut?
a.
$20
b.
$25
c.
$30
d.
$35
147. Refer to Table 16-6. At the profit-maximizing quantity, what is Traci’s total profit?
a.
$30
b.
$59
c.
$77
d.
$84
148. Refer to Table 16-6. Given the cost and revenue data, Traci’s is
a.
not in a long-run equilibrium. More businesses will enter the hair salon market in the long-run.
b.
not in a short-run equilibrium.
c.
not in a long-run equilibrium. Some businesses currently in the hair salon market will exit the
market in the long-run.
d.
in a long-run equilibrium.
149. Refer to Table 16-6. If the government required Traci’s to produce at the efficient scale of output, how many
haircuts would Traci’s sell?
a.
either 3 or 4
b.
either 4 or 5
c.
either 5 or 6
d.
either 6 or 7
150. Refer to Table 16-6. If the government forced Traci’s to produce at the efficient scale of output, what is the
maximum profit Traci’s could earn?
a.
$77
b.
$80
c.
$84
d.
$96
151. Refer to Table 16-6. Suppose the government forced Traci’s to produce at the efficient scale of output. Who
would be better off as a result of this policy? Who would be worse off as a result of this policy?
a.
Traci’s would be better off; consumers would be worse off.
b.
Consumers would be better off; Traci’s would be worse off.
c.
No one would be better off; consumers would be worse off.
d.
No one would be better off; no one would be worse off.
Chapter 16 /Monopolistic Competition ❖ 49
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 $10.
Price
Quantity
$15
1
$13
2
$11
3
$9
4
$7
5
$5
6
$3
7
152. Refer to Table 16-7. If the firm has a constant marginal cost of $5 per unit, how many units
should the firm produce to maximize profit?
a.
3 units
b.
4 units
c.
5 units
d.
6 units
153. Refer to Table 16-7. If the firm has a constant marginal cost of $5 per unit, what price should the firm charge
to maximize profit?
a.
$5
b.
$7
c.
$9
d.
$11
154. Refer to Table 16-7. If the firm has a constant marginal cost of $5 per unit, how much profit will the firm
earn at the profit-maximizing level of output?
a.
$4
b.
$6
c.
$8
d.
$10
155. Refer to Table 16-7. If the firm has a constant marginal cost of $5 per unit, which of the following would
you expect to occur in the long run in this market?
a.
New firms will enter the market and profits for firms in the market will fall.
b.
New firms will enter the market and profits for firms in the market will rise.
c.
Firms will leave the market and profits for firms that remain in the market will rise.
d.
Firms will leave the market and profits for firms that remain in the market will fall.
50 ❖ Chapter 16 /Monopolistic Competition
Figure 16-8
The figure is drawn for a monopolistically-competitive firm.
100 133.33
90
140
123.33
MR
Demand
ATC
MC
56.67
Quantity
Price
156. Refer to Figure 16-8. As the figure is drawn, the firm is in
a.
a short-run equilibrium but it is not in a long-run equilibrium.
b.
a long-run equilibrium but it is not in a short-run equilibrium.
c.
a short-run equilibrium as well as a long-run equilibrium.
d.
neither a short-run equilibrium nor a long-run equilibrium.
157. Refer to Figure 16-8. In order to maximize its profit, the firm will choose to produce
a.
less than 100 units of output.
b.
100 units of output.
c.
between 100 and 133.33 units of output.
d.
more than 133.33 units of output.
158. Refer to Figure 16-8. In order to maximize its profit, the firm will choose to produce
a.
100 units of output, and its profit will be positive.
b.
100 units of output, and its profit will be zero.
c.
133.33 units of output, and its profit will be negative.
d.
133.33 units of output, and its profit will be zero.
Chapter 16 /Monopolistic Competition ❖ 51
159. Refer to Figure 16-8. When the firm is maximizing its profit, the markup over marginal cost amounts to
a.
$16.67.
b.
$33.33.
c.
$50.00.
d.
$66.66.
160. Refer to Figure 16-8. The firm’s maximum profit is
a.
$-5,000.00.
b.
$0.
c.
$5,000.00.
d.
$8,887.78.
161. Refer to Figure 16-8. Efficient scale is reached
a.
at 100 units.
b.
between 100 and 133.33 units.
c.
at 133.33 units.
d.
beyond 133.33 units.
162. Refer to Figure 16-8. The quantity of output at which the MC and ATC curves cross is the
a.
efficient scale of the firm.
b.
short-run equilibrium quantity of output for the firm.
c.
long-run equilibrium quantity of output for the firm.
d.
All of the above are correct.
163. Refer to Figure 16-8. For this firm, the long-run equilibrium quantity of output is
a.
100 and the long-run equilibrium price is $90.
b.
100 and the long-run equilibrium price is $140.
c.
133.33 and the long-run equilibrium price is $56.67.
d.
133.33 and the long-run equilibrium price is $123.33.
164. Refer to Figure 16-8. Given this firm’s cost curves, if the firm were perfectly competitive rather than mo-
nopolistically competitive, then in a long-run equilibrium it would produce
a.
less than 100 units of output.
b.
between 100 and 133.33 units of output.
c.
133.33 units of output.
d.
more than 133.33 units of output.
52 ❖ Chapter 16 /Monopolistic Competition
165. Refer to Figure 16-8. In response to the situation represented by the figure, we would expect
a.
new firms to enter the market.
b.
some of the firms that are currently in the market to exit.
c.
this firm’s profit to move from its current value toward a positive value.
d.
None of the above are correct.
Figure 16-9
The figure is drawn for a monopolistically-competitive firm.
100
140
90
133.33
MR
Demand
ATC
MC
56.67
160
123.33
154.92
Quantity
Price
166. Refer to Figure 16-9. As the figure is drawn, the firm is in
a.
a short-run equilibrium but it is not in a long-run equilibrium.
b.
a long-run equilibrium but it is not in a short-run equilibrium.
c.
a short-run equilibrium as well as a long-run equilibrium.
d.
neither a short-run equilibrium nor a long-run equilibrium.
167. Refer to Figure 16-9. In response to the situation represented by the figure, we would expect
a.
some of the firms that are currently in the market to exit.
b.
the demand for this firm’s product to increase, assuming this firm does not exit.
c.
this firm’s profit to move from its current value toward zero.
d.
All of the above are correct.
Chapter 16 /Monopolistic Competition ❖ 53
168. Refer to Figure 16-9. In order to maximize its profit, the firm will choose to produce
a.
100 units of output.
b.
between 100 and 133.33 units of output.
c.
133.33 units of output.
d.
154.92 units of output.
169. Refer to Figure 16-9. In order to maximize its profit, the firm will choose to produce
a.
100 units of output, and its profit will be negative.
b.
100 units of output, and its profit will be zero.
c.
133.33 units of output, and its profit will be negative.
d.
133.33 units of output, and its profit will be zero.
170. Refer to Figure 16-9. The firm’s maximum profit is
a.
$-7,000.
b.
$-5,000.
c.
$-2,000.
d.
The firm’s maximum profit cannot be determined from the figure.
171. Refer to Figure 16-9. When the firm is maximizing its profit,
a.
TR = $9,000 and TC =$16,000.
b.
TR = $14,000 and TC =$16,000.
c.
TR = $16,000 and TC =$16,000.
d.
MC exceeds MR by $66.66 on the last unit of output produced.
172. Refer to Figure 16-9. At what quantity of output does average revenue exceed marginal revenue by $66.66?
a.
at 100 units of output
b.
somewhere between 100 and 133.33 units of output
c.
at 133.33 units of output
d.
at 154.92 units of output
173. Refer to Figure 16-9. Efficient scale is reached
a.
at 100 units.
b.
at 133.33 units.
c.
between 133.33 units and 154.92 units.
d.
at 154.92 units.
54 ❖ Chapter 16 /Monopolistic Competition
174. Refer to Figure 16-9. If the firm were to produce 154.92 units of output,
a.
efficient scale would be realized.
b.
ATC would be at its minimum value.
c.
the firm would sustain a loss of more than $2,000.
d.
All of the above are correct.
175. In which of the following market structures can firms earn economic profits in the long run?
a.
perfect competition
b.
monopolistic competition
c.
monopoly
d.
Both b and c are correct.
176. Consider monopoly, monopolistic competition, and perfect competition. In which of these three market struc-
tures does a profit-maximizing firm charge a price that exceeds marginal cost?
a.
monopoly only
b.
monopoly and monopolistic competition only
c.
monopoly, monopolistic competition, and perfect competition
d.
The answer cannot be determined without knowing whether the market is in the long run or short
run.
177. Consider monopoly, monopolistic competition, and perfect competition. In which of these three market struc-
tures does a profit-maximizing firm experience zero economic profit?
a.
perfect competition only
b.
perfect competition and monopolistic competition only
c.
perfect competition, monopolistic competition, and monopoly
d.
The answer cannot be determined without knowing whether the market is in the long run or short
run.
178. Under which of the following market structures would consumers likely pay the highest price for a product?
a.
perfect competition
b.
monopolistic competition
c.
oligopoly
d.
monopoly
179. Under which of the following market structures would the highest output of a particular good be produced?
a.
perfect competition
b.
monopolistic competition
c.
oligopoly
d.
monopoly
Chapter 16 /Monopolistic Competition ❖ 55
180. Under which of the following market structures would consumers likely receive the most product variety?
a.
perfect competition
b.
monopolistic competition
c.
oligopoly
d.
monopoly
181. In the long run, a monopolistically competitive firm produces a quantity that is
a.
equal to the efficient scale.
b.
less than the efficient scale.
c.
greater than the efficient scale.
d.
consistent with diseconomies of scale.
182. 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
If the government forces this firm to produce at its efficient scale, it will
a.
produce 3 units and make $9.
b.
produce 4 units and make $6.
c.
produce 5 units and lose $5.
d.
produce 7 units and lose $49.
183. In the long run, a firm in a perfectly competitive market operates
a.
at its efficient scale, and a monopolistically competitive firm operates at its efficient scale.
b.
at its efficient scale, and a monopolistically competitive firm operates with excess capacity.
c.
with excess capacity, and a monopolistically competitive firm operates with excess capacity.
d.
with excess capacity, and a monopolistically competitive firm operates at its efficient scale.
184. Which of the following statements is correct?
a.
In the long run, both perfectly competitive firms and monopolistically competitive firms operate
with excess capacity.
b.
A firm operates with excess capacity when, in the long run, its level of output is below the efficient
scale.
c.
For any firm, efficient scale is the level of output at which the average-total-cost curve is tangent to
the demand curve.
d.
All of the above are correct.
56 ❖ Chapter 16 /Monopolistic Competition
185. A monopolistically competitive firm
a.
has the usual deadweight loss of monopoly pricing.
b.
experiences a zero profit in a long-run equilibrium.
c.
is said to have excess capacity.
d.
All of the above are correct.
186. In comparison to perfect competition, monopolistic competition is characterized by
a.
efficient scale.
b.
pricing at marginal cost.
c.
excess capacity.
d.
All of the above are correct.
187. In a monopolistically competitive market, social welfare would be enhanced if
a.
price equaled marginal cost.
b.
government regulation eliminated the product-variety externality.
c.
the government raised taxes to subsidize firms that price below average total cost.
d.
there were fewer firms, making the industry closer to an oligopoly.
188. Since a firm in a monopolistically competitive market faces a
a.
downward-sloping demand curve, it will always operate with excess capacity.
b.
downward-sloping demand curve, it will always operate at its efficient scale.
c.
perfectly elastic demand curve, it will always operate with excess capacity.
d.
perfectly inelastic demand curve, it will always operate at its efficient scale.
189. When a firm operates with excess capacity,
a.
additional production would lower the average total cost.
b.
additional production would increase the average total cost.
c.
it must be a perfectly competitive firm.
d.
it must be a monopolistically competitive firm.
190. In the long run, a profit-maximizing firm in a monopolistically competitive market operates at
a.
efficient scale.
b.
a level of output at which average total cost is rising.
c.
a level of output at which average total cost is falling.
d.
the level of output at which total revenue is maximized.
Chapter 16 /Monopolistic Competition ❖ 57
191. Hotels in New York City frequently experience an average vacancy rate of about 20 percent (i.e., on an aver-
age night, 80 percent of the hotel rooms are full). This kind of excess capacity is indicative of what kind of
market?
a.
monopoly
b.
perfect competition
c.
monopolistic competition
d.
oligopoly
192. Excess capacity is
a.
an example of the inefficiencies of monopolistically competitive markets.
b.
a short-run problem but not a long-run problem.
c.
a characteristic of rising average total cost curves.
d.
Both a and b are correct.
193. In a long-run equilibrium,
a.
excess capacity applies to monopolistically competitive firms but not to competitive firms.
b.
zero economic profit applies to competitive firms but not to monopolistically competitive firms.
c.
markup over marginal cost applies to both monopolistically competitive and competitive firms.
d.
product variety externalities apply to both perfectly competitive firms and monopolistically
competitive firms.
194. Monopolistically competitive firms have excess capacity. To maximize profits, firms will
a.
increase their output to lower their average total cost of production and eliminate the excess
capacity.
b.
produce where price equals marginal cost to eliminate the excess capacity.
c.
produce where average revenue equals marginal cost to eliminate the excess capacity.
d.
maintain the excess capacity.
195. Which of the following best describes the idea of excess capacity in monopolistic competition?
a.
Firms produce more output than is socially desirable.
b.
The output produced by a typical firm is less than what would occur at the minimum point on its
ATC curve.
c.
Due to product differentiation, firms choose output levels where price equals average total cost.
d.
Firms keep some surplus output on hand in case there is a shift in the demand for their product.
58 ❖ Chapter 16 /Monopolistic Competition
196. If a monopolistically competitive firm can increase its level of production and lower its average total cost of
production at the same time then
a.
the firm has a product-variety opportunity.
b.
the firm has excess capacity.
c.
the firm has a business-stealing opportunity.
d.
the firm is producing a quantity of output higher than its efficient scale of production.
197. Both monopolistic competition and oligopoly are market structures
a.
that fail to achieve the total surplus achieved by perfect competition.
b.
that feature only a few firms in each market.
c.
to which the concept of Nash equilibrium is frequently applied by economists.
d.
in which firms earn zero economic profit in the long run.
198. A monopolistically competitive market could be considered inefficient because
a.
marginal revenue exceeds average revenue.
b.
price exceeds marginal cost.
c.
the efficient scale of production is only achieved in the long run, not in the short run.
d.
markup pricing does not occur in any other market structure.
199. The deadweight loss that is associated with a monopolistically competitive market is a result of
a.
price falling short of marginal cost in order to increase market share.
b.
price exceeding marginal cost.
c.
the firm operating in a regulated industry.
d.
excessive advertising costs.
200. Monopolistically competitive markets may be socially inefficient because
a.
most firms produce inferior products.
b.
government programs cannot effectively regulate price.
c.
firms earn zero economic profit.
d.
the market may have too much or too little entry by new firms.
201. In which of the following market structures do firms produce the welfare-maximizing level of output?
a.
perfect competition
b.
monopolistic competition
c.
monopoly
d.
Both a and b are correct.
Chapter 16 /Monopolistic Competition ❖ 59
202. The traditional view of monopolistic competition holds that this type of industrial structure is inefficient be-
cause
a.
there are too few firms to reach an efficient level of production.
b.
firms do not operate at the output that minimizes average costs.
c.
more advertising is needed to inform customers about product differences.
d.
consumers do not have enough choice among the product varieties available.
203. Monopolistic competition is considered inefficient because
a.
price exceeds marginal cost.
b.
output is excessive.
c.
long-run profits are positive.
d.
barriers to entry limit the number of firms in the market.
204. Monopolistic competition is an inefficient market structure because
a.
price exceeds marginal cost.
b.
it has a deadweight loss, just as monopoly does.
c.
at the equilibrium, some consumers will value the good at more than the marginal cost of
production.
d.
All of the above are correct.
205. Monopolistic competition is an inefficient market structure because
a.
marginal revenue equals marginal cost.
b.
it has a deadweight loss, just as monopoly does.
c.
long-run profits are zero due to free entry.
d.
All of the above are correct.
206. Monopolistic competition is an
a.
efficient market structure because long-run profits are zero.
b.
efficient market structure because each firm produces at its efficient scale.
c.
inefficient market structure because there is deadweight loss.
d.
Both a and b are correct.
207. 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.
60 ❖ Chapter 16 /Monopolistic Competition
208. 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.
209. 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.
210. 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.
211. 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.
212. 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.
213. 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.
