Chapter 25
Monopolistic Competition
25.1 Monopolistic Competition
1) Which of the following is NOT a characteristic of monopolistic competition?
A) Product differentiation B) Barriers to entry into the market
C) Advertising D) A significant number of sellers
2) Which of the following is a characteristic of monopolistic competition?
A) Few firms B) Homogeneous products
C) Easy entry and exit D) Strategic dependence
3) All of the following are characteristics of monopolistic competition EXCEPT
A) a few firms dominate the industry. B) product differentiation.
C) many firms in the industry. D) advertising.
4) Which of the following is NOT a characteristic of monopolistic competition?
A) A large number of sellers in a highly competitive market
B) Differentiated products
C) The existence of advertising
D) Marginal cost pricing in the long run
5) Which of the following describes monopolistic competition?
A) Homogenous products B) P MR MC
C) Advertising plays a key role D) There is only one seller in the industry
6) Which of the following is NOT a characteristic of monopolistic competition?
A) Large number of sellers B) Differentiated products
C) Advertising D) Barriers to entry
7) Monopolistic competition is characterized by
A) relative ease of entry into the market.
B) a standard, undifferentiated product.
C) persistent long run economic profits.
D) production at minimum average cost in the long run.
8) A good example of a monopolistic competitive industry is
A) the U.S. auto industry. B) the public utility industry.
C) the computer game industry. D) mining.
9) A good example of a monopolistic competitive industry is
A) the federal highway system. B) oil producing industry.
C) the rap music industry. D) farming.
10) In a monopolistically competitive market, the consumer receives the benefit of
A) production at minimum average cost.
B) production where price equals marginal cost.
C) product diversity.
D) allocative efficiency.
11) In a monopolistically competitive market there are
A) many firms producing an identical product.
B) many firms producing similar but not identical products.
C) many firms producing totally different products.
D) few firms producing identical products.
12) Entry into a monopolistically competitive industry
A) is relatively easy.
B) is very difficult.
C) can be easy or difficult, depending on the type of product.
D) is about the same as entering a monopoly industry.
13) Advertising by monopolistically competitive firms can do all of the following EXCEPT
A) lower the consumer s purchase price.
B) help differentiate a firm s product.
C) act as a signal to consumers that the company is serious about staying in business.
D) result in increased profits for the advertising firm.
14) In a monopolistically competitive market, a firm should advertise to the point at which
A) it is selling the most units it can possibly sell.
B) the extra revenue from an additional dollar spent on advertising just equals the marginal
cost of producing one more unit of the good.
C) the additional revenue generated by one more dollar of advertising just equals the extra
dollar cost of advertising.
D) it can raise price to the highest level possible.
15) In a monopolistically competitive market if the additional revenue generated from advertising
equals the additional cost of advertising, the firm should
A) advertise more to increase sales.
B) advertise more to lower marginal costs.
C) maintain its current amount of advertising.
D) advertise less to decrease costs.
16) The main objective of advertising for a monopolistically competitive firm is
A) to differentiate the product and boost demand.
B) to reduce cost.
C) to earn long run profits.
D) none of the above.
17) In which industry structure is advertising and sales promotion likely to be most important?
A) Perfect competition
B) Monopoly
C) Monopolistic competition
D) All of the above are equally reliant on effective advertising and promotion
18) A market situation in which a large number of firms produce similar but not identical products
is
A) a collusive market structure. B) competitive monopoly.
C) a homogeneous market. D) monopolistic competition.
19) A market situation in which a large number of firms produce similar but not identical products
is
A) a monopoly. B) an oligopoly.
C) monopolistic competition. D) perfect competition.
20) The theory of monopolistic competition was developed in two separate models by
A) Adam Smith and David Ricardo.
B)
J
ohn Kenneth Galbraith and John Maynard Keynes.
C) Edward Chamberlin and Joan Robinson.
D) Roger Leroy Miller and Paul Samuelson.
21) Entry into a monopolistic competitive industry
A) is easy. B) is hard.
C) requires governmental approval. D) requires collusion.
22) All of the following are assumptions of monopolistic competition EXCEPT
A) many buyers and sellers. B) homogeneous product.
C) easy entry of new firms in the long run. D) profit maximizing behavior.
23) Which of the following assumptions is true about monopolistic competition?
A) The firm s products are differentiated.
B) There are few producers of the product.
C) Firms will not advertise.
D) It is difficult for firms to enter this industry.
24) For a monopolistically competitive market, the number of firms in the market implies that
A) each firm faces a perfectly elastic demand.
B) all firms will make losses.
C) each firm acts independently of other firms.
D) firms will collude to set monopoly price and output.
25) The number of firms in a monopolistically competitive market means that
A) all firms will have substantial monopoly power since there are so few firms in the
industry.
B) each firm has a relatively small share of the total market since there are many firms in the
industry.
C) the firms will be likely to collude since there are only a few firms in the industry.
D) firms will have a hard time earning non negative profits since there are many firms in the
industry.
26) The number of firms in a monopolistically competitive industry means that
A) firms will collude.
B) existing firms in the industry will make sure new firms do not enter.
C) firms will not cooperate to set a pure monopoly price.
D) firms will try to set a common price.
27) In a monopolistically competitive market, having a large number of firms in the market means
that
A) no firm attempts to take into account the reaction of rival firms.
B) individual firms will have a large portion of the market giving them monopoly power.
C) firms will get together and collude because this will be the only way to earn monopoly
profits.
D) firms will cooperate with each other to drive competitors out of the market.
28) The meaning of interdependence in a monopolistically competitive market is
A) that it is difficult for firms to get together to collude.
B) that products produced by firms will be good substitutes.
C) that firms will not take into account the reaction of rival firms.
D) that price rigging commonly occurs.
29) The distinguishing of products by brand name, color, and other attributes
A) is known as interdependence. B) is known as product differentiation.
C) leads to many firms in the market. D) leads to collusion.
30) Products can be differentiated
A) if the buyers are homogeneous and their number increases.
B)
b
y location and by brand name.
C) only by brand name.
D) none of the above
31) The model of perfect competition and the model of monopolistic competition differ in that
A) perfect competition assumes many buyers and sellers while monopolistic competition
assumes many buyers but few sellers.
B) perfect competition assumes easy entry of new firms while there are more significant
barriers to entry in monopolistic competition.
C) perfect competition assumes firms make zero profits in the long run and monopolistic
competition assumes firms make positive profits.
D) perfect competition assumes the product is homogeneous and monopolistic competition
assumes the product is differentiated.
32) The demand curve for the product of a monopolistic competitor is
A) downward sloping. B) horizontal.
C) vertical. D) unitary elastic.
33) Because of product differentiation in a monopolistically competitive market, the demand curve
for an individual firm will be
A) horizontal. B) vertical.
C) downward sloping. D) upward sloping.
34) The demand curve for a monopolistically competitive firm is
A) more elastic than for a perfectly competitive firm.
B) more elastic than for a monopoly firm.
C) more inelastic than for a monopoly firm.
D) the same elasticity as a perfectly competitive firm.
35) The demand curve for a monopolistically competitive firm is
A) elastic because the products produced are homogeneous.
B) inelastic because of barriers to entry.
C) inelastic because of the profit maximizing behavior of the firm.
D) elastic because of product differentiation.
36) The major similarity between monopolistic competition and perfect competition is
A) the shape of the demand curve.
B) that both assume many buyers and sellers.
C) price equals marginal revenue in each.
D)
b
oth assume products are differentiated.
37) In general, the demand for the product of a monopolistic competitor is
A) unitary elastic. B) relatively inelastic.
C) relatively elastic. D) perfectly elastic.
38) An implication of the downward slope of the demand curve for a monopolistic competitive firm
is that
A) its marginal revenue curve slopes upward.
B) its marginal revenue curve and its demand curve are identical (same) line.
C) its marginal revenue curve slopes downward but lies above the demand curve.
D) its marginal revenue curve slopes downward but lies below the demand curve.
39) The demand for the product of a monopolistically competitive firm is highly elastic when
A) firms collude. B) there are fewer firms in the industry.
C) there is a lot of product differentiation. D) there are a lot of close substitutes.
40) The key feature of monopolistic competition is
A) interdependence of the firms.
B) lack of advertisement.
C) product differentiation.
D) the small number of firms in the industry.
41) Monopolistic competitors advertise because
A) they have downward sloping demand curves.
B) the demand curves they face are very elastic.
C) they produce goods that can be differentiated from the goods of other firms in the
industry.
D) they can earn long run profits if they advertise.
42) A monopolistic competitor behaving in a profit maximizing way will
A) not advertise.
B) advertise as much as it can in order to increase its sales.
C) advertise to the point where the additional sales from advertising equal the additional
marginal costs of the product.
D) advertise to the point where the additional revenue from one more dollar of advertising
just equals the extra dollar cost of advertising.
43) Firms in a monopolistically competitive market will advertise because
A) they want to differentiate their products.
B) they want to increase the elasticity of the demand curve.
C) of the significant differences in their product over their competitors.
D) the elasticity for their product is inelastic.
44) Which of the following is NOT a feature of a monopolistically competitive market?
A) numerous buyers and sellers B) differentiated products
C) advertising D) a homogeneous product
45) The products sold by monopolistically competitive firms
A) are differentiated.
B) are homogeneous.
C) can be either homogeneous or differentiated.
D) are close substitutes of each other.
46) Which of the following is NOT a characteristic of monopolistic competition?
A) large number of sellers B) sales promotion and advertising
C) homogeneous product D) easy entry of new firms in the long run
47) The demand curve for the product of a monopolistically competitive firm
A) is perfectly elastic. B) is unitary elastic.
C) is downward sloping. D) is perfectly inelastic.
48) Which of the following products is most likely to be sold in a monopolistically competitive
market?
A) fast food B) coal C) wheat D) electricity
49) Which of the following is most likely to be a monopolistically competitive firm?
A) Smart phone producer B) Cell phone service provider
C) College textbook publisher D) Computer software maker
50) Monopolistic competition means
A) monopolies from several countries compete in the global market.
B) a large number of firms producing homogeneous products.
C) a large number of firms producing differentiated products.
D) few firms producing differentiated products.
51) In a monopolistically competitive market, entry into the industry
A) is relatively easy.
B) is blocked.
C) is difficult due to extensive government regulation.
D) is as difficult as entry into a monopoly.
52) Which of the following is NOT a characteristic of firms in a monopolistically competitive
market?
A) advertising
B) differentiated products
C) ease of entry and exit
D) existence of significant economies of scale
53) Which of the following products would most likely be produced in a monopolistically
competitive market?
A) corn B) oil C) electricity D) pizza
54) All of the following are characteristics of a monopolistically competitive industry EXCEPT
A) homogeneous products. B) many firms.
C) low barriers to entry and exit. D) sales promotion and advertising.
55) Which of the following is most likely to be a monopolistically competitive firm?
A) a soybean farmer B) a lettuce farmer
C) a municipal water district D) a fast food restaurant
56) Monopolistically competitive firms advertise to attempt to
A) lower their average variable costs. B)
b
uild brand loyalty.
C) lower barriers to entry. D) increase barriers to entry.
57) The greater the product differentiation between monopolistically competitive firms,
A) the lower the barriers to entry.
B) the greater the price elasticity of demand.
C) the higher the average variable costs.
D) the lower the price elasticity of demand.
58) The greater the the number and closeness of substitutes availablebetween monopolistically
competitive firms,
A) the greater the ability of a firm to raise its price above the price of close substitutes .
B) the smaller the ability of a firm to raise its price above the price of close substitutes.
C) the more inelastic the demand curve.
D) the greater the positive economic profits for a single firm.
59) Because the products of firms in a monopolistically competitive market are not homogeneous,
the
A) demand curve for the industry is the same for the firm.
B) demand curve for the firm s product is horizontal.
C) demand curve for the firm s product is downward sloping.
D) demand curve for the firm s product is upward sloping.
60) A market situation in which a large number of firms produce similar but not identical products
is called
A) pure monopoly. B) monopolistically competitive.
C) oligopolistic behavior. D) perfectly competitive.
61) In the 1920s and 1930s, economists became increasingly aware that there were industries that
did not fit the model of perfect competition or pure monopoly. Two separate theories of
monopolistic competition resulted. Edward Chamberlin of Harvard published the Theory of
Monopolistic Competition in 1933. Chamberlin defined monopolistic competition as
A) a relatively large number of producers offering similar but differentiated products.
B) a relatively small number of producers offering similar but differentiated products.
C) a market situation in which a large number of firms produce identical products.
D) a market situation in which a small number of firms produce similar products.
62) Which of the following is NOT a feature of monopolistic competition?
A) significant numbers of sellers in a highly competitive market
B) differentiated products
C) sales promotion and advertising
D) inability of firms to enter or exit the market
63) Considering the relevant market structures, which is an INCORRECT statement?
A) In a perfectly competitive situation, there is an extremely large number of firms.
B) In pure monopoly, there is only one firm.
C) In monopolistic competition, there is a large number of firms.
D) In any market situation, the number of firms is not very important.
64) Which is NOT a characteristic of monopolistic competition?
A) small share of market to each firm B) lack of collusion among firms
C) few firms in the industry D) independence of each firm s decisions
65) The two economists associated with the development of the theory of monopolistic competition
were
A)
J
oan Robinson and Edward Chamberlin.
B) David Hume and Adam Smith.
C)
J
ohn Neville Keynes and John Maynard Keynes.
D) Carl Menger and Eugen Von Bohm Bawerk.
66) A monopolistic competitor would face a demand curve with a
A) positive slope. B) negative slope.
C) constant slope. D) slope equal to 0.
67) When Crest claims that its toothpaste product whitens teeth more than the products of its
competitors, Crest is practicing
A) product differentiation. B) libel.
C) marginal revenue pricing. D) marginal cost pricing.
68) Advertising is used by firms in a monopolistic competitive industry to
A) differentiate their product from those of competitors.
B) increase brand loyalty.
C) increase demands for their individual products.
D) all of the above
69) Because there are low barriers to entry in a monopolistically competitive market,
A) there are many firms in the industry. B) they produce a homogeneous product.
C) the firms are price takers. D) there is no non price competition.
70) The demand curve for the product of a monopolistically competitive firm slopes downward
because
A) products are perceived by consumers as different.
B) products are homogeneous.
C) people only care about price when they buy a good.
D) the firm s goal is to maximize profits.
71) The demand curve for the product of a monopolistic competitor
A) is the same as the market demand curve.
B) is horizontal.
C) is vertical.
D) slopes downward.
72) Compared with a monopolist, the demand curve faced by a monopolistically competitive firm is
A) more elastic. B) more inelastic.
C) perfectly elastic. D) perfectly inelastic.
73) What is the most important characteristic of monopolistic competition? How do firms behave
differently from perfect competitors?
74) What are the implications of there being a large number of firms in a monopolistically
competitive market?
75) Why do firms in a monopolistically competitive industry advertise?
25.2 Price and Output for the Monopolistic Competitor
1) In the short run, a monopolistically competitive firm can earn
A) positive profits only. B) zero profits only.
C) zero or positive profits only. D) zero, positive or negative profits.
2) In the above figure, the profit maximizing output and price for this monopolistically
competitive firm are
A) 10,000 units at a price of $10 per unit. B) 10,000 units at a price of $5 per unit.
C) 13,000 units at a price of $7 per unit. D) 12,000 units at a price of $8 per unit.
3) In the above figure, total revenue for this profit maximizing monopolistically competitive firm
is
A) $50,000. B) $91,000. C) $96,000. D) $100,000.
4) In the above figure, total cost for this profit maximizing monopolistically competitive firm is
A) $91,000. B) $50,000. C) $70,000. D) $72,000.
5) In the above figure, the profit maximizing monopolistically competitive firm will
A) make a profit of $24,000. B) make a profit of $30,000.
C) make a profit of $0. D) incur a loss of $20,000.
6) The above figure shows the situation of a monopolistic competitor in the short run. The
maximum economic profits of the firm equal
A) $50,000. B) $30,000. C) 15,000. D) zero.
7) The above figure shows the situations of a monopolistic competitor in the short run. To
maximize profits, the firm should produce
A) 10,000 units.
B) 12,000 units.
C) 13,000 unit.
D) somewhere between 10,000 and 12,000 units.
8) In the short run, the profit maximizing monopolistically competitive firm will produce the rate
of output at which
A) P MC. B) MR MC. C) P ATC. D) MR ATC.
9) The demand curve faced by a monopolistically competitive firm is
A) horizontal. B) vertical.
C) downward sloping. D) upward sloping.
10) For a monopolistic competitive firm, which of the following is true in the long run?
A) ATC is minimized. B) Economic profit is zero.
C) P MC. D) All of the above.
11) Which of the following is TRUE for a monopolistically competitive firm?
A) MR P B) MR P C) MR P D) MR AFC
12) Which of the following statements about a monopolistically competitive firm is FALSE?
A) It tries to differentiate its product from that of competitors.
B) It may earn short run economic profits.
C) It produces the quantity at which MC MR.
D) It sets price like a perfectly competitive firm.
13) Graphically, how does a monopolistically competitive firm determine its profit maximizing
price?
A) It accepts the price set by the industry wide forces of supply and demand.
B) Graphically, it finds the place where MR MC and charges the price directly to the left of
that point.
C) The firm s pricing structure is set by government regulators.
D) The firm determines its profit maximizing output and then charges the price associated
with the point on its demand curve directly above that quantity.