Chapter 16 /Monopolistic Competition ❖ 61
214. 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.
215. 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
216. 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
217. 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.
218. 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.
62 ❖ Chapter 16 /Monopolistic Competition
219. 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.
220. 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.
221. 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.
222. 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.
223. 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.
224. 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).
Chapter 16 /Monopolistic Competition ❖ 63
225. 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.
226. 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.
227. 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.
Scenario 16-1
Escape Vacations has recently announced intentions to build a new hotel/resort complex in Phoenix, AZ.
Assume that the hotel/resort market in Phoenix is characterized by monopolistic competition.
228. Refer to Scenario 16-1. As a result of the new Escape Vacations hotel/resort, tourists who stay in Phoenix are
likely to experience a
a.
product-variety externality, which harms consumers.
b.
product-variety externality, which benefits consumers.
c.
business-stealing externality, which harms consumers.
d.
business-stealing externality, which benefits consumers.
229. Refer to Scenario 16-1. As a result of the new Escape Vacations hotel/resort, existing hotels, motels, and
lodging facilities in Phoenix are likely to experience a
a.
product-variety externality, which harms producers.
b.
product-variety externality, which benefits producers.
c.
business-stealing externality, which harms producers.
d.
business-stealing externality, which benefits producers.
Scenario 16-2
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.
64 ❖ Chapter 16 /Monopolistic Competition
230. Refer to Scenario 16-2. 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.
231. Refer to Scenario 16-2. 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 16-3
Suppose market demand for a product is given by the equation P = 20 – Q. For this market demand curve,
marginal revenue is MR = 20 – 2Q.
232. Refer to Scenario 16-3. If the marginal cost of producing this good is 0, what quantity would a profit–
maximizing monopolist produce?
a.
Q = 0
b.
Q = 2
c.
Q = 5
d.
Q = 10
233. Refer to Scenario 16-3. If the marginal cost of producing this good is 4, what quantity would a profit–
maximizing monopolist produce?
a.
Q = 2
b.
Q = 4
c.
Q = 6
d.
Q = 8
234. Refer to Scenario 16-3. If the marginal cost of producing this good is 0, what price would a profit–
maximizing monopolist charge for the product?
a.
P = 0
b.
P = 5
c.
P = 10
d.
P = 20
Chapter 16 /Monopolistic Competition ❖ 65
235. Refer to Scenario 16-3. If the marginal cost of producing this good is 4, what price would a profit–
maximizing monopolist charge for the product?
a.
P = 4
b.
P = 10
c.
P = 12
d.
P = 20
236. Refer to Scenario 16-3. If the marginal cost of producing this good is 0, how much total consumer surplus
would consumers receive in this market?
a.
10
b.
20
c.
50
d.
100
237. Refer to Scenario 16-3. If the marginal cost of producing this good is 4, how much total consumer surplus
would consumers receive in this market?
a.
8
b.
12
c.
32
d.
64
238. 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.
239. 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.
66 ❖ Chapter 16 /Monopolistic Competition
ADVERTISING
1. Which of the following is unique to a monopolistically competitive firm when compared to an oligopoly?
a.
The monopolistically competitive firm advertises.
b.
The monopolistically competitive firm produces a quantity of output that falls short of the socially
optimal level.
c.
Monopolistic competition features many buyers.
d.
Monopolistic competition features many sellers.
2. Some firms have an incentive to advertise because they sell a
a.
homogeneous product and charge a price equal to marginal cost.
b.
homogeneous product and charge a price above marginal cost.
c.
differentiated product and charge a price equal to marginal cost.
d.
differentiated product and charge a price above marginal cost.
3. The relationship between advertising and product differentiation is
a.
positive; the more differentiated the product, the more a firm is likely to spend on advertising.
b.
negative; the more differentiated the product, the less a firm is likely to spend on advertising.
c.
zero; there is no relationship between product differentiation and advertising.
d.
irrelevant; firms with differentiated products do not need to advertise.
4. For the economy as a whole, spending on advertising comprises about what percent of total firm revenue?
a.
0.5
b.
2
c.
10
d.
20
5. Firms that sell highly differentiated consumer goods, such as soft drinks, breakfast cereals, and dog food, typi-
cally spend what percent of their revenues on advertising?
a.
0-1
b.
2-4
c.
10–20
d.
over 50
6. Which of the following correctly lists the products in order from most advertised to least advertised?
a.
soft drinks, breakfast cereals, dog food
b.
corn, dog food, communication satellites
c.
dog food, communication satellites, corn
d.
wheat, corn, crude oil
Chapter 16 /Monopolistic Competition ❖ 67
7. Firms that spend the greatest percentage of their revenue on advertising tend to be firms that sell
a.
industrial products.
b.
homogeneous products.
c.
consumer goods for which there are no close substitutes.
d.
highly-differentiated consumer goods.
8. Firms that spend the greatest percentage of their revenue on advertising tend to be firms that sell
a.
highly-differentiated consumer goods.
b.
goods produced by natural monopolies.
c.
agricultural products.
d.
products with a limited shelf life such as milk and lettuce.
9. Compared to other firms, firms that sell highly differentiated products likely incur significant costs associated
with
a.
advertising.
b.
the product-variety externality.
c.
intermediate materials.
d.
taxes and regulation.
10. In which of the following product markets are we likely to observe the largest amount of advertising?
a.
markets with highly differentiated products
b.
perfectly competitive markets
c.
markets in which industrial products are sold
d.
markets in which there is very little difference between different firms’ products
11. If we observe a great deal of advertising of men’s shaving products, we can infer that
a.
the market for those products is perfectly competitive.
b.
it costs firms very little to produce those products.
c.
those products are highly differentiated.
d.
firms are irrational in their decisions to advertise.
12. If we observe a great deal of advertising of dog food, we can infer that
a.
consumers spend very little of their disposable income on dog food.
b.
dog food is cheap to produce.
c.
dog food is a highly-differentiated product.
d.
firms who do not advertise earn higher profits than those who do.
68 ❖ Chapter 16 /Monopolistic Competition
13. Firm A produces and sells in a market that is characterized by highly differentiated consumer goods. Firm B
produces and sells industrial products. Firm C produces and sells an agricultural commodity. Which firm is
likely to spend the greatest portion of its total revenue on advertising?
a.
firm A
b.
firm B
c.
firm C
d.
There is no reason to believe that any one of the three firms would spend a greater portion of its
total revenue on advertising than the other two firms.
14. Advertising
a.
provides information about products, including prices and seller locations.
b.
has been proven to increase competition and reduce prices compared to markets without
advertising.
c.
signals quality to consumers, because advertising is expensive.
d.
All of the above are correct.
15. Which of the following is not an argument made by critics of advertising?
a.
Advertising manipulates people’s tastes.
b.
Advertising impedes competition.
c.
Advertising promotes economies of scale.
d.
Advertising increases the perception of product differentiation.
16. Critics of advertising argue that in some markets advertising may
a.
attract products of lower quality into the market.
b.
attract less informed buyers into the market.
c.
decrease elasticity of demand allowing firms to charge a larger markup over marginal cost.
d.
enhance competition in markets to an unnecessary degree.
17. Critics of advertising argue that advertising
a.
creates desires that otherwise might not exist.
b.
hinders competition.
c.
often fails to convey substantive information.
d.
All of the above are correct.
18. Critics of advertising argue that advertising
a.
creates desires that otherwise might not exist.
b.
enhances competition.
c.
benefits television viewers who enjoy tv commercials.
d.
All of the above are correct.
Chapter 16 /Monopolistic Competition ❖ 69
19. If advertising reduces a consumer’s price sensitivity between identical goods, it is likely to
a.
increase the elasticity of demand for differentiated products.
b.
enhance competition and encourage more product diversity.
c.
reduce competition and reduce social welfare.
d.
encourage the consumption of all homogenous goods.
20. If a firm in a monopolistically competitive market successfully uses advertising to decrease the elasticity of
demand for its product, the firm will
a.
be able to increase its markup over marginal cost.
b.
eventually have to reduce price to remain competitive.
c.
increase the welfare of society.
d.
reduce its average total cost.
21. Critics of advertising argue that advertising
a.
creates demand for products that people otherwise do not want or need.
b.
lowers barriers to entry into an industry because new firms can more easily establish themselves as
competitors.
c.
increases competition by providing information about prices.
d.
encourages monopolization of markets by raising entry barriers.
22. Which of the following is a commonly-cited benefit of advertising?
a.
Advertising can be a signal of the quality of a product.
b.
Advertising impedes competition.
c.
Advertising reduces the deadweight loss associated with monopolistic competition.
d.
Advertising encourages free entry, which increases profits.
23. Defenders of advertising
a.
concede that advertising increases firms’ market power.
b.
concede that advertising makes entry by new firms more difficult.
c.
contend that firms use advertising to provide useful information to consumers.
d.
All of the above are correct.
24. When firms in a monopolistically competitive market engage in price-related advertising, defenders of adver-
tising argue that
a.
the quality of products sold in the market always increases.
b.
customers are less likely to be informed about other characteristics of the product.
c.
new firms are discouraged from entering the market.
d.
each firm has less market power.
70 ❖ Chapter 16 /Monopolistic Competition
25. Defenders of advertising argue that it is not rational for profit-maximizing firms to spend money on advertis-
ing for products that have
a.
superior quality.
b.
inferior or mediocre quality.
c.
low prices.
d.
limited availability.
26. The primary claim of defenders of advertising is that it
a.
conveys information about firm profitability.
b.
is psychological rather than informational.
c.
enhances the information available to consumers.
d.
reduces the elasticity of demand for a firm’s product.
27. In his 1958 book, The Affluent Society, John Kenneth Galbraith argued that
a.
brand names give firms an incentive to produce and sell high-quality products.
b.
consumers’ tastes cannot, in any real sense, be “determined” by advertising.
c.
firms use advertising to create demand for products that people otherwise do not want or need.
d.
firms use advertising to send a signal to consumers about the quality of their products.
28. In his 1944 book, The Road to Serfdom, Friedrich Hayek argued that
a.
the market system should not be applauded for satisfying desires that it has itself created.
b.
consumers’ tastes cannot, in any real sense, be “determined” by advertising.
c.
firms use advertising to create demand for products that people otherwise do not want or need.
d.
too much advertising would result in “private opulence and public squalor.”
29. Economists John Kenneth Galbraith and Friedrich Hayek disagreed about the roles of advertising and gov-
ernment. Which of the following is correct?
a.
Galbraith thought advertising artificially enhanced consumers’ desires for private goods, while
Hayek thought no producer could “determine” consumers’ tastes though advertising.
b.
Galbraith believed in enhancing personal freedoms, while Hayek advocated larger government.
c.
Galbraith thought advertising was a waste of resources because it did not influence consumers,
while Hayek thought advertising was powerful enough to “determine” consumers’ tastes.
d.
Galbraith believed that the government should not interfere in markets, while Hayek believed that
there was insufficient government regulation of marketing.
Chapter 16 /Monopolistic Competition ❖ 71
30. Evidence suggests that, in markets with differentiated products but little advertising,
a.
consumers are not confused by conflicting signals.
b.
firms are generally less profitable.
c.
markets are less efficient.
d.
consumers make better choices.
31. In markets where restrictions on advertising have been used to curtail competition, the U.S. courts have gener-
ally
a.
referred the matters of advertising restrictions to executive regulators.
b.
enforced industry-wide agreements to restrict advertising.
c.
been silent on the effect of explicit advertising restrictions.
d.
overturned laws that prohibit advertising.
32. A law that restricts the ability of hotels/motels to advertise on billboards outside of a resort community would
likely lead to
a.
no change in profits for all hotels/motels.
b.
reduced efficiency of local lodging markets.
c.
a request by consumers to increase the number of billboards.
d.
increased price competition among hotels/motels in the community.
33. Among arguments for and against advertising, both sides agree that advertising leads to
a.
higher prices and less competitive markets.
b.
higher prices and more competitive markets.
c.
lower prices and more competitive markets.
d.
None of the above is correct. The debate fails to resolve the question of advertising’s effect on
prices and competition.
34. Professional organizations and producer groups have an incentive to
a.
restrict advertising in order to enhance competition on the basis of price.
b.
restrict advertising in order to reduce competition on the basis of price.
c.
encourage advertising in order to reduce competition on the basis of price.
d.
encourage advertising in order to enhance competition on the basis of price.
35. Evidence from the market for eyeglasses suggests that advertising leads to
a.
lower-quality products for consumers.
b.
lower prices for consumers.
c.
higher prices for consumers.
d.
less concern on the part of consumers about price differences among similar goods.
72 ❖ Chapter 16 /Monopolistic Competition
36. In the study done by Lee Benham on advertising for eyeglasses,
a.
advertising increased the average price.
b.
advertising decreased the average price.
c.
there was no difference in price, but quality was better in the states that didn’t allow advertising.
d.
advertising appeared to have no effect whatsoever in the states that permitted advertising.
37. Results of the study done by Lee Benham on advertising for eyeglasses would suggest that
a.
brand loyalty and market power in the eyeglass market was likely to be more pervasive in states
that allowed advertising.
b.
eyeglass sales were more profitable in states that allowed advertising.
c.
optometrists would not be supportive of advertising restrictions.
d.
optometrists would enthusiastically endorse advertising restrictions.
38. In Lee Benham’s 1972 article examining the impact of advertising on the average price paid for a pair of eye-
glasses, Benham found that
a.
the average price paid for eyeglasses was nearly 20% higher in the states that did not restrict
advertising.
b.
the average price paid for eyeglasses was nearly 20% lower in the states that did not restrict
advertising.
c.
there was no difference in the average price paid between states that restricted advertising and those
that did not.
d.
the average price paid for eyeglasses was almost 5 times higher in the states that did not restrict
advertising.
39. A study of the market for optometrists’ services in the 1960s showed that
a.
all states in the United States prohibited advertising by optometrists.
b.
almost all professional optometrists opposed legal restrictions on their rights to advertise.
c.
the average price of eyeglasses would decrease if the legal restrictions on advertising by
optometrists were removed.
d.
advertising on eyeglasses limited competition among optometrists.
40. According to one theory, advertising sends a signal to consumers about the quality of the product being of-
fered. An implication of this theory is that
a.
the actual quality of the product is irrelevant.
b.
the content of the advertisement is irrelevant.
c.
advertising is not in the best interest of society.
d.
it is irrational for firms to pay famous people large amounts of money to appear in their
advertisements.
Chapter 16 /Monopolistic Competition ❖ 73
41. Advertising that uses celebrity endorsements is most likely intended to
a.
increase elasticity of demand for the advertised product.
b.
reduce the ability of markets to allocate resources efficiently.
c.
provide a signal of product quality.
d.
be useful only for psychological effects.
42. Firms that spend a large amount of money on advertising a particular product are likely to be providing con-
sumers with
a.
information about the availability of the product.
b.
information about product price.
c.
a signal of product quality.
d.
a good example of wasted resources.
43. One theory of advertising suggests that
a.
information on price is important to make advertising effective.
b.
the content of advertising may be irrelevant to product success in the market.
c.
celebrity advertising is not effective in retail food markets.
d.
Post and Kellogg should not advertise new cereals.
44. Advertisements that appear to convey no information at all
a.
are usually associated with “infomercials.”
b.
are useless to consumers but valuable to firms.
c.
are useless to firms but valuable to consumers for their entertainment quality alone.
d.
may convey information to consumers by providing them with a signal that firms are willing to
spend significant amounts of money to advertise.
45. Television advertisements aired during major sporting events are very expensive. A theory asserting that peo-
ple buy a product simply because it is advertised would suggest that information on the high cost of advertis-
ing
a.
enhances the effectiveness of the advertisement.
b.
reduces people’s willingness to purchase advertised products.
c.
is leaked to discredit the firms that spend so much on advertising.
d.
reduces the effective staying power of a product.
74 ❖ Chapter 16 /Monopolistic Competition
46. A firm can signal the high quality of its product by
a.
spending nothing on advertising to convey that the product is so good that the firm does not even
need to advertise.
b.
spending a large amount of money on advertising.
c.
getting a patent for the product.
d.
not worrying about getting a patent for the product.
47. According to the signaling theory of advertising, consumers
a.
pay little or no attention to which firms advertise and which firms do not advertise.
b.
are often more impressed by a firm’s willingness to spend money on advertising than they are by
the content of the advertisement.
c.
are often more impressed by low-cost advertisements than they are by high-cost advertisements.
d.
gain little or no information about product quality from advertisements.
48. Keebleco knows that it produces and sells very tasty crackers. Nabiscer knows that it produces and sell dull
crackers. According to the signaling theory of advertising,
a.
both Keebleco and Nabiscer have incentives to spend large amounts of money on advertising their
crackers.
b.
Keebleco has an incentive to spend a large amount of money on advertising its crackers, but
Nabiscer does not.
c.
Nabiscer has an incentive to spend a large amount of money on advertising its crackers, but
Keebleco does not.
d.
neither Keebleco nor Nabiscer has an incentive to spend a large amount of money on advertising
their crackers.
49. How does advertising signal to consumers that the product is a good one?
a.
By seeing famous people using the product, consumers infer that they too can be famous.
b.
By being willing to spend money on advertising, firms let consumers know the product is likely a
good one since firms would not likely advertise a poor product.
c.
By making consumers laugh during commercials, firms are associating positive experiences with
the product.
d.
Without allowing consumers to actually use the product, it is not possible for firms to signal to
consumers the product’s quality.
Chapter 16 /Monopolistic Competition ❖ 75
50. Most businesses advertise their products and services. Some business use SPAM emails to advertise because
the cost of a mass e-mail is close to zero. Other business spend millions of dollars to advertise in a 30-second
spot during the Super Bowl. Having observed this real world data, economists argue that the amount of money
that a business spends on advertising is a proxy for a good or service’s
a.
size.
b.
quality.
c.
newness.
d.
cost of production.
51. Critics of markets that are characterized by firms that sell brand name products argue that brand names en-
courage consumers to pay more for branded products that
a.
have elastic demand curves.
b.
are very different from generic products.
c.
are indistinguishable from generic products.
d.
consumer-advocate groups have found to be inferior.
52. Edward Chamberlin argued that brand names
a.
hampered market efficiency.
b.
were instrumental in enhancing market efficiency.
c.
were useful in enhancing market efficiency when the government enforced the use of exclusive
trademarks.
d.
were likely to be more socially efficient when used in conjunction with advertising.
53. Edward Chamberlin argued that governments should
a.
ban the use of brand names.
b.
not enforce the trademarks that companies use to identify their products.
c.
vigorously enforce the trademarks that companies use to identify their products.
d.
tax companies whose products have brand names in proportion to how much consumers recognize
their products.
54. The debate over the efficiency of markets in which products with brand names are sold
a.
is framed by the role of regulation in advertising.
b.
is likely to be resolved by reference to anecdotal evidence.
c.
hinges on whether consumers are rational in their choices.
d.
hinges on the effectiveness of advertising that identifies price differences.
76 ❖ Chapter 16 /Monopolistic Competition
55. A recent outbreak of hepatitis was linked to a national fast-food restaurant chain. This is an example of a case
in which
a.
brand name identity increases the effectiveness of markets.
b.
brand name identity can be detrimental to the profitability of a firm.
c.
advertising is ineffective in salvaging perceptions of product quality.
d.
advertising cannot be used to establish brand loyalty.
56. In some countries, brand name fast-food restaurants are not allowed to operate. Such restrictions are likely to
a.
enhance the social welfare of society.
b.
increase the number of fast-food restaurants.
c.
reduce barriers to entry in imperfect markets.
d.
reduce the competitive nature of local fast-food markets.
57. Olivia consumes Pepsi exclusively. She claims that there is a clear taste difference and that competing brands
of cola leave an unsavory taste in her mouth. However, in a blind taste test, Olivia is found to prefer generic
store-brand cola to Pepsi eight out of ten times. The results of Olivia’s taste test would reinforce claims by crit-
ics of brand names that
a.
consumers are always willing to pay more for brand names.
b.
brand names cause consumers to perceive differences that do not really exist.
c.
brand names cause consumers to be more sensitive to product differences.
d.
brand names are a form of socially efficient advertising.
58. Roberto consumes Coke exclusively. He claims that there is a clear taste difference and that competing brands
of cola leave an unsavory taste in his mouth. In a blind taste test, Roberto is found to prefer Coke to store–
brand cola eight out of ten times. The results of Roberto’s taste test would refute claims by critics of brand
names that
a.
consumers are always willing to pay more for brand names.
b.
brand names cause consumers to perceive differences that do not really exist.
c.
consumers with the lowest levels of income are the most likely to be influenced by brand name
advertising.
d.
brand names are a form of socially efficient advertising.
59. Your company has recently requested that you travel to Dhaka, Bangladesh, to work on negotiations for a new
factory to be located in one of the port cities. Your travel agent provides a list of several hundred local hotels
and a Sheraton. In this case, the Sheraton brand-name is likely to be used as a signal of
a.
perceived differences that are not likely to exist among your various options.
b.
quality when quality cannot be easily judged.
c.
inefficiency in markets characterized by recognizable brand names.
d.
the quality of general lodging accommodations in Dhaka.
60. On a vacation to China, you find yourself eating every meal at the local Burger King rather than buying a meal
from one of the street vendors. Your traveling companion claims that you are irrational, since you never eat
Chapter 16 /Monopolistic Competition ❖ 77
Burger King hamburgers when you are home, and Burger King’s hamburgers cost more than the meals pre-
pared and sold by China’s street vendors. An economist would most likely explain your behavior by suggest-
ing that
a.
your behavior is rational, but your friend‘s behavior is clearly irrational.
b.
you are clearly irrational, but your friend’s behavior is rational.
c.
the Burger King brand name suggests consistent quality.
d.
the advertising by Burger King in China is more persuasive than the advertising by Burger King in
your home town.
61. Two college students, Mary and Maggie, are spending spring break in Florida. Mary buys a cup of coffee
each morning at the local Starbucks rather than from one of the local coffee shops. Maggie claims that Mary is
irrational because she never purchases Starbucks coffee at home, and Starbucks coffee costs more than the
coffee sold by local shops. An economist would most likely explain Mary’s behavior by suggesting that
a.
Mary’s behavior is rational, but Maggie’s behavior is clearly irrational.
b.
Mary’s behavior is clearly irrational, but Maggie’s behavior is rational.
c.
the Starbucks brand name suggests consistent quality.
d.
the advertising by Starbucks in Florida is more persuasive than the advertising by Starbucks in
Mary and Maggie’s home town.
62. It has been said that many of the patrons in McDonald’s restaurants in foreign locations are American tourists.
A likely reason why many Americans dine at McDonald’s while vacationing abroad is
a.
they can’t get enough McDonald’s food when they are at home.
b.
they know and trust the quality associated with the McDonald’s brand name.
c.
the food at local restaurants is of inferior quality.
d.
that Americans, by their nature, are not very adventurous.
63. Two bottles of body wash sit side–by-side in a grocery store: Olay (a brand name) sells for $6.00, while Up
and Up (not a brand name) sells for $3.00. Even defenders of brand names would have to admit that
a.
no rational consumer would spend twice as much for Olay as she would for Up and Up.
b.
the side-by-side presence of these two body washes conveys no useful information to consumers.
c.
Olay has no incentive to maintain the quality of its product just because of the Olay brand name.
d.
None of the above is correct.
64. Two bags of chips sit side-by-side in a grocery store: Ruffles (a brand name) sells for $3.00, while Crunchy
Chips (not a brand name) sells for $1.50. In a typical day the store sells some of each type of chips, which
suggests that
a.
no rational consumer would spend twice as much for Ruffles as he would for Crunchy Chips.
b.
some consumers must perceive that Ruffles is a higher quality product.
c.
Ruffles has no incentive to maintain the quality of its product just because of the Ruffles brand
name.
d.
None of the above is correct.