ECO chapter 16 by TaToo

1. Which of the following is a characteristic of monopolistic competition?
a. ownership of a key resource by a single firm
b. free entry
c. identical product
d. patents

b

2. The market for novels is
a. perfectly competitive.
b. a monopoly.
c. monopolistically competitive.
d. an oligopoly.

c

3. Which of the following statements is not correct?
a. Monopolistic competition is similar to monopoly because in each market structure the firm can charge a price above marginal costs.
b. Monopolistic competition is similar to perfect competition because both market structures are characterized by free entry.
c. Monopolistic competition is similar to oligopoly because both market structures are characterized by barriers to entry.
d. Monopolistic competition is similar to perfect competition because both market structures are characterized by many sellers.

c

4. Which of the following statements is not correct?
a. Monopolistic competition is different from monopoly because monopolistic competition is characterized by free entry, whereas monopoly is characterized by barriers to entry.
b. Both monopolistic competition and oligopoly fall in between the more extreme market structures of competition and monopoly.
c. Monopolistic competition is different from oligopoly because each seller in monopolistic competition is small relative to the market, whereas each seller can affect the actions of other sellers in an oligopoly.
d. Both monopolistic competition and perfect competition are characterized by product differentiation.

d

5. Monopolistic competition is a type of
a. oligopoly.
b. market structure.
c. price discrimination.
d. advertising strategy.

b

6. A monopolistically competitive market has characteristics that are similar to
a. a monopoly only.
b. a competitive firm only.
c. both a monopoly and a competitive firm.
d. neither a monopoly nor a competitive firm.

c

1. A typical firm in the U. S. economy would be classified as
a. perfectly competitive.
b. imperfectly competitive.
c. a duopolist.
d. an oligopolist.

b

2. The typical firm in the U. S. economy
a. has some degree of market power.
b. sells its product for a price that is equal to the marginal cost of producing the last unit.
c. is perfectly competitive.
d. is a monopoly.

a

3. Which of the following pairs illustrates the two extreme examples of market structures?
a. competition and oligopoly
b. competition and monopoly
c. monopoly and monopolistic competition
d. oligopoly and monopolistic competition

b

4. The general term for market structures that fall somewhere in-between monopoly and perfect competition is
a. incomplete markets.
b. imperfectly competitive markets.
c. oligopoly markets.
d. monopolistically competitive markets.

b

5. The two types of imperfectly competitive markets are
a. markets with differentiated products and monopoly.
b. markets with differentiated products and oligopoly.
c. oligopoly and monopoly.
d. monopolistic competition and oligopoly.

d

6. The two types of imperfectly competitive markets are
a. monopoly and monopolistic competition.
b. monopoly and oligopoly.
c. monopolistic competition and oligopoly.
d. monopolistic competition and cartels.

c

7. In a market that is characterized by imperfect competition,
a. firms are price takers.
b. there are always a large number of firms.
c. there are at least a few firms that compete with one another.
d. the actions of one firm in the market never have any impact on the other firms' profits.

c

8. Firms in industries that have competitors but do not face so much competition that they are price takers are operating in either a(n)
a. oligopoly or perfectly competitive market.
b. oligopoly or monopoly market.
c. oligopoly or monopolistically competitive market.
d. monopoly or monopolistically competitive market.

c

9. Imperfectly competitive firms are characterized by
a. horizontal demand curves.
b. standardized products.
c. a large number of small firms.
d. price making ability.

d

10. An oligopoly
a. has a concentration ratio of less than 50 percent.
b. is a price taker.
c. is a type of imperfectly competitive market.
d. has many firms rather than just one firm or a few firms.

c

11. An oligopoly is a market in which
a. there are only a few sellers, each offering a product similar or identical to the products offered by other firms in the market.
b. firms are price takers.
c. the actions of one seller in the market have no impact on the other sellers' profits.
d. there are many price-taking firms, each offering a product similar or identical to the products offered by other firms in the market.

a

12. One characteristic of an oligopoly market structure is:
a. firms in the industry are typically characterized by very diverse product lines.
b. firms in the industry have some degree of market power.
c. products typically sell at a price equal to their marginal cost of production.
d. the actions of one seller have no impact on the profitability of other sellers.

b

13. A market structure with only a few sellers, each offering similar or identical products, is known as
a. oligopoly.
b. monopoly.
c. monopolistic competition.
d. perfect competition.

a

14. The commercial jetliner industry consisting of Boeing and Airbus would best be described as a (an)
a. perfectly competitive market.
b. monopolistically competitive market.
c. oligopoly.
d. monopoly.

c

15. Crude oil is primarily supplied to the world market by a few Middle Eastern countries. Such a market is an example of a(n)
(i) imperfectly competitive market.
(ii) monopoly market.
(iii) oligopoly market.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (iii) only

c

16. A concentration ratio
a. measures the percentage of total output supplied by the four largest firms in the industry.
b. reflects the level of competition in an industry.
c. is related to the control that each firm has over price.
d. All of the above are correct.

d

17. A concentration ratio
a. measures the percentage of total sales of the top firm in the industry.
b. reflects the level of competition in an industry.
c. is inversely related to the price charged by the top firm in the industry.
d. All of the above are correct.

b

18. The higher the concentration ratio, the
a. more control an individual firm has to set prices.
b. more competitive the industry.
c. less competitive the industry.
d. Both a and c are correct.

d

19. The lower the concentration ratio, the
a. more control an individual firm has to set prices.
b. more competitive the industry.
c. less competitive the industry.
d. Both a and c are correct.

b

20. Which of the following industries has the highest concentration ratio?
a. wheat
b. novels
c. cigarettes
d. dog food

c

37. One key difference between an oligopoly market and a competitive market is that oligopolistic firms
a. are price takers while competitive firms are not.
b. can affect the profit of other firms in the market by the choices they make while firms in competitive markets do not affect each other by the choices they make.
c. sell completely unrelated products while competitive firms do not.
d. sell their product at a price equal to marginal cost while competitive firms do not.

b

38. One way in which monopolistic competition differs from oligopoly is that
a. there are no barriers to entry in oligopolies.
b. in oligopoly markets there are only a few sellers.
c. all firms in an oligopoly eventually earn zero economic profits.
d. strategic interactions between firms are rare in oligopolies.

b

39. Which of the following is an example of a monopolistically competitive industry?
a. computer operating systems
b. tennis balls
c. movies
d. cable television

c

40. Which of the following is an example of a monopolistically competitive industry?
a. computer operating systems
b. tennis balls
c. restaurants in New York City
d. cable television

c

41. Which of the following goods are likely to be sold in a monopolistically competitive market?
a. compact discs
b. wheat
c. corn
d. postage stamps

a

42. Which of the following goods are not likely to be sold in monopolistically competitive markets?
a. compact discs
b. books
c. cookies
d. wheat

d

43. Examples of monopolistically competitive markets include the markets for
a. restaurants and furniture.
b. wheat and corn.
c. postage stamps and wooden pencils.
d. All of the above are correct.

a

44. Which of the following markets is not likely characterized by a monopolistically competitive market?
a. piano lessons
b. corn
c. cookies
d. clothing

b

45. A monopolistically competitive industry is characterized by
a. many firms selling products that are similar but not identical.
b. many firms selling identical products.
c. a few firms selling products that are similar but not identical.
d. a few firms selling highly different products.

a

46. A monopolistically competitive industry is characterized by
a. many firms, differentiated products, and barriers to entry.
b. many firms, differentiated products, and free entry.
c. a few firms, identical products, and free entry.
d. a few firms, differentiated products, and barriers to entry.

b

47. A market structure in which there are many firms selling products that are similar but not identical is known as
a. oligopoly.
b. monopoly.
c. monopolistic competition.
d. perfect competition.

c

48. What do economists call a market structure in which there are many firms selling products that are similar but not identical?
a. perfect competition
b. monopoly
c. monopolistic competition
d. oligopoly

c

49. Which of the following is not a characteristic of monopolistic competition?
a. a large number of sellers
b. firms are price takers
c. free entry into the market
d. a differentiated product

b

50. Monopolistic competition is characterized by which of the following attributes?
(i) free entry
(ii) product differentiation
(iii) many sellers

a. (i) and (iii) only
b. (i) and (ii) only
c. (ii) and (iii) only
d. (i), (ii), and (iii)

d

51. In a monopolistically competitive market,
a. there are only a few sellers.
b. each firm takes the price of its product as given.
c. firms can enter or exit the market without restrictions.
d. each firm produces a product that is essentially identical to the products of other firms in the market.

c

52. A monopolistically competitive market
a. has some features of monopoly and some features of competition.
b. has one large, dominant firm and many other smaller firms.
c. is difficult to enter.
d. occurs whenever firms earn zero economic profit.

a

53. Select the type of market that is described by the following attributes: many firms, differentiated products, and free entry.
a. natural monopoly
b. perfectly competition
c. monopolistic competition
d. monopoly

c

54. If firms in a particular market sell identical products, then the market is
(i) perfectly competitive.
(ii) monopolistically competitive.
(iii) an oligopoly.

a. (i) or (ii) only
b. (ii) or (iii) only
c. (i) or (iii) only
d. (i) only

d

55. When an industry has many firms, the industry is
a. an oligopoly if the firms sell differentiated products, but it is monopolistically competitive if the firms sell identical products.
b. an oligopoly if the firms sell differentiated products, but it is perfectly competitive if the firms sell identical products.
c. monopolistically competitive if the firms sell differentiated products, but it is perfectly competitive if the firms sell identical products.
d. perfectly competitive if the firms sell differentiated products, but it is monopolistically competitive if the firms sell identical products.

c

56. If there are many firms participating in a market, the market is either
a. an oligopoly or monopolistically competitive.
b. perfectly competitive or monopolistically competitive.
c. an oligopoly or perfectly competitive.
d. an oligopoly or a cartel.

b

57. Which of the following statements is correct?
a. Monopolistic competition is similar to monopoly because both market structures are characterized by patents.
b. Monopolistic competition is similar to perfect competition because both market structures are characterized by each seller being small compared to the market.
c. Monopolistic competition is similar to oligopoly because both market structures are characterized by free entry.
d. Monopolistic competition is similar to perfect competition because both market structures are characterized by excess capacity.

b

58. In which of the following market structures is(are) there a large number of sellers?
(i) monopolistic competition
(ii) perfect competition
(iii) oligopoly

a. (i) and (ii) only
b. (ii) and (iii) only
c. (ii) only
d. (i), (ii), and (iii)

a

59. Monopolistic competition differs from perfect competition because in monopolistically competitive markets
a. there are barriers to entry.
b. all firms can eventually earn economic profits.
c. each of the sellers offers a somewhat different product.
d. strategic interactions between firms are important.

c

60. Monopolistically competitive markets differ from perfectly competitive markets due to
(i) the number of sellers.
(ii) the barriers to entry.
(iii) the product differentiation among the sellers.

a. (i) only
b. (iii) only
c. (i) and (iii) only
d. (ii) and (iii) only

b

61. In both perfect competition and monopolistic competition, each firm
a. has some monopoly power.
b. sells a product that is at least slightly different from those of other firms.
c. faces a downward-sloping demand curve.
d. has many competitors.

d

62. Which of the following conditions distinguishes monopolistic competition from perfect competition?
a. the number of sellers in the market
b. the freedom of entry and exit by firms in the market
c. the size of firms in the market
d. product differentiation

d

63. A similarity between monopoly and monopolistic competition is that in both market structures
a. strategic interactions among sellers are important.
b. there are a small number of sellers.
c. sellers are price makers rather than price takers.
d. there are only a few buyers but many sellers.

c

64. Which of the following statements is correct?
a. Cigarettes are likely to be produced in a monopolistically competitive industry.
b. Novels are likely to be produced in a monopoly industry.
c. Movies are likely to be produced in a monopolistically competitive industry.
d. Milk is likely to be produced in an oligopoly industry.

c

65. Which of the following statements is not correct?
a. Novels are likely to be produced in a monopolistically competitive industry.
b. Cable television is likely to be produced in a monopoly industry.
c. Milk is likely to be produced in a monopolistically competitive industry.
d. Cigarettes are likely to be produced in an oligopoly industry.

c

1. A downward-sloping demand curve
a. is a feature of all monopolistically competitive firms.
b. means that the firm in question will never experience a zero profit.
c. causes marginal revenue to exceed price.
d. prohibits firms from earning positive economic profits in the long run.

a

2. Each firm in a monopolistically competitive firm faces a downward-sloping demand curve because
a. there are many other sellers in the market.
b. there are very few other sellers in the market.
c. the firm's product is different from those offered by other firms in the market.
d. that firm faces the threat of entry into the market by new firms.

c

3. For a monopolistically competitive firm,
a. marginal revenue and price are the same.
b. average revenue and price are the same.
c. at the profit-maximizing quantity of output, price equals marginal cost.
d. at the profit-maximizing quantity of output, price equals the minimum of average total cost.

b

4. For a monopolistically competitive firm, at the profit-maximizing quantity of output,
a. price exceeds marginal cost.
b. marginal revenue exceeds marginal cost.
c. marginal cost exceeds average revenue.
d. price equals marginal revenue.

a

5. Product differentiation causes the seller of a good to face what type of demand curve?
a. downward sloping
b. vertical
c. horizontal
d. Any of the above could be correct since product differentiation does not affect the shape of the demand curve.

a

6. A firm in a monopolistically competitive market faces a
a. downward-sloping demand curve because the firm's product is different from those offered by other firms.
b. downward-sloping demand curve because there are only a few firms in the market.
c. horizontal demand curve because there are many firms in the market.
d. horizontal demand curve because firms can enter the market without restriction.

a

7. In the short run, a firm in a monopolistically competitive market operates much like a
a. firm in a perfectly competitive market.
b. firm in an oligopoly.
c. monopolist.
d. monopsonist.

c

8. Each firm in a monopolistically competitive market
a. earns both short-run and long-run profits.
b. faces a downward-sloping demand curve.
c. cannot earn economic profit in the short run.
d. sets price equal to marginal cost.

b

9. In a monopolistically competitive industry, firms set price
a. equal to marginal cost since each firm is a price taker.
b. below marginal cost since each firm is a price taker.
c. above marginal cost since each firm is a price setter.
d. always a fraction of marginal cost since each firm is a price setter.

c

10. A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly competitive market because the firm in the monopolistically competitive market
a. is characterized by market-share maximization.
b. has no barriers to entry.
c. faces a downward-sloping demand curve for its product.
d. faces a horizontal demand curve at the market clearing price.

c

11. A monopolistically competitive firm chooses
a. the quantity of output to produce, but the market determines price.
b. the price, but competition in the market determines the quantity.
c. price, but output is determined by a cartel production quota.
d. the quantity of output to produce and the price at which it will sell its output.

d

12. Product differentiation in monopolistically competitive markets ensures that, for profit-maximizing firms,
a. marginal revenue will equal average total cost.
b. price will exceed marginal cost.
c. marginal cost will exceed average revenue.
d. average variable cost will be declining.

b

13. In a monopolistically competitive industry, a firm's demand curve also represent its
a. marginal revenue.
b. marginal cost.
c. average revenue.
d. profit.

c

14. A firm in a monopolistically competitive market is similar to a monopoly in the sense that
(i) they both face downward-sloping demand curves.
(ii) they both charge a price that exceeds marginal cost.
(iii) free entry and exit determines the long-run equilibrium.

a. (i) only
b. (ii) only
c. (i) and (ii) only
d. (i), (ii), and (iii) only

c

15. A monopolistically competitive firm's choice of output level is virtually identical to the choice made by
a. a perfectly competitive firm.
b. a duopolist.
c. a monopolist.
d. an oligopolist.

c

16. To maximize its profit, a monopolistically competitive firm
a. takes the price as given and chooses its quantity, just as a competitive firm does.
b. takes the price as given and chooses its quantity, just as a colluding oligopolist does.
c. chooses its quantity and price, just as a competitive firm does.
d. chooses its quantity and price, just as a monopoly does.

d

17. Because monopolistically competitive firms produce differentiated products, each firm
a. faces a demand curve that is horizontal.
b. faces a demand curve that is vertical.
c. has no control over product price.
d. has some control over product price.

d

18. A monopolistically competitive firm chooses its
a. price and quantity just as a monopoly does.
b. quantity but faces a horizontal demand curve just as a competitive firm does.
c. price but can sell any quantity at the market price just as an oligopoly does.
d. price and quantity based on the decisions of the other firms in the industry just as an oligopoly does.

a

19. When a monopolistically competitive firm raises its price,
a. quantity demanded falls to zero.
b. quantity demanded declines but not to zero.
c. the market supply curve shifts outward.
d. quantity demanded remains constant.

b

20. A monopolistically competitive firm chooses the quantity to produce where
a. price equals marginal cost.
b. demand equals marginal cost.
c. marginal revenue equals marginal cost.
d. Both a and c are correct.

c

21. The profit-maximizing rule for a firm in a monopolistically competitive market is to always select the quantity at which
a. marginal revenue is equal to marginal cost.
b. average total cost is equal to marginal revenue.
c. average total cost is equal to price.
d. average revenue exceeds average total cost.

a

22. A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following?
a. average revenue exceeds marginal revenue
b. marginal revenue exceeds average revenue
c. average revenue is equal to marginal revenue
d. revenue is always maximized along with profit

a

23. A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following?
a. average revenue exceeds marginal revenue
b. marginal revenue equals marginal cost
c. price exceeds marginal cost
d. All of the above are correct.

d

24. A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following?
a. marginal cost exceeds marginal revenue
b. average revenue equals marginal cost
c. price exceeds marginal cost
d. All of the above are correct.

c

25. To maximize its profit, a monopolistically competitive firm chooses its level of output by looking for the level of output at which
a. price equals marginal cost.
b. marginal revenue equals marginal cost.
c. average total cost is minimized.
d. All of the above are correct.

b

26. A monopolistically competitive firm faces the following demand schedule for its product:

Price ($) 10 9 8 7 6 5 4 3 2 1
Quantity 2 4 6 9 11 13 15 17 19 21
The firm has total fixed costs of $20 and a constant marginal cost of $2 per unit. The firm will maximize profit with
a. 6 units of output.
b. 9 units of output.
c. 11 units of output.
d. 13 units of output.

b

27. 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 $20 and a constant marginal cost of $5 per unit. The firm will maximize profit with the production of
a. 6 units of output.
b. 8 units of output.
c. 10 units of output.
d. 12 units of output.

a

28. 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

To maximize profit (or minimize losses), the firm will produce
a. 2 units.
b. 3 units.
c. 4 units.
d. 5 units.

b

29. A monopolistically competitive firm is currently producing 10 units of output. At this level of output the firm is charging a price equal to $10, has marginal revenue equal to $6, has marginal cost equal to $6, and has average total cost equal to $12. From this information we can infer that
a. the firm is currently maximizing its profit.
b. the profits of the firm are negative.
c. firms are likely to leave this market in the long run.
d. All of the above are correct.

d

30. If "too much choice" is a problem for consumers, it would occur in which market structure(s)?
a. perfect competition
b. monopoly
c. monopolistic competition
d. perfect competition and monopolistic competition

c

31. In the short run, a firm operating in a monopolistically competitive market can earn
a. positive economic profits.
b. economic losses.
c. zero economic profits.
d. All of the above are possible.

d

32. In the short run, a firm operating in a monopolistically competitive market
a. produces an output level where marginal revenue equals average total cost.
b. maximizes revenues as well as profits.
c. can earn zero economic profits.
d. sets price equal to marginal cost.

c

33. In the short run, a firm operating in a monopolistically competitive market
a. produces an output level where marginal revenue equals average total cost.
b. sets price equal to demand where marginal revenue equals marginal cost.
c. must earn zero economic profits.
d. maximizes revenues as well as profits.

b

34. When a profit-maximizing firm in a monopolistically competitive market charges a price higher than marginal cost,
a. the firm must be earning a positive economic profit.
b. the firm may be incurring economic losses
c. there is a deadweight loss to society, but it is exactly offset by the benefit of excess capacity.
d. new firms will enter the market in the long run.

b

35. Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilibrium?
a. P = AR
b. MR = MC
c. P > MC
d. All of the above are correct.

d

36. Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilibrium?
a. P > AR
b. MR > MC
c. P > MC
d. All of the above are correct.

c

37. Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilibrium?
a. P > ATC
b. P = ATC
c. P < ATC
d. Any of the above could be correct.

d

38. Which of the following conditions is characteristic of a monopolistically competitive firm in both the short-run and the long run?
a. P > MC
b. MC = ATC
c. P < MR
d. All of the above are correct.

a

39. For a profit-maximizing monopolistically competitive firm, price exceeds marginal cost in
a. the short run but not in the long run.
b. the long run but not in the short run.
c. both the short run and the long run.
d. neither the short run nor the long run.

c

40. For a profit-maximizing monopolistically competitive firm, marginal revenue equals marginal cost in
a. the short run but not in the long run.
b. the long run but not in the short run.
c. both the short run and the long run.
d. neither the short run nor the long run.

c

41. A firm operating in a monopolistically competitive market can earn economic profits in
a. the short run but not in the long run.
b. the long run but not in the short run.
c. both the short run and the long run.
d. neither the short run nor the long run.

a

42. When a market is monopolistically competitive, the typical firm in the market is likely to experience a
a. positive profit in the short run and in the long run.
b. positive or negative profit in the short run and a zero profit in the long run.
c. zero profit in the short run and a positive or negative profit in the long run.
d. zero profit in the short run and in the long run.

b

43. When a market is monopolistically competitive, the typical firm in the market can earn
a. losses in the short run and profits in the long run.
b. profits in the short run and the long run.
c. losses in the short run and zero profit in the long run.
d. zero profit in the short run and losses in the long run.

c

44. An important difference between the situation faced by a profit-maximizing monopolistically competitive firm in the short run and the situation faced by that same firm in the long run is that in the short run,
a. price may exceed marginal revenue, but in the long run, price equals marginal revenue.
b. price may exceed marginal cost, but in the long run, price equals marginal cost.
c. price may exceed average total cost, but in the long run, price equals average total cost.
d. there are many firms in the market, but in the long run, there are only a few firms in the market.

c

76. In which of the following markets is economic profit driven to zero in the long run?
a. oligopoly
b. monopoly
c. monopolistic competition
d. cartels

c

77. Which of the following conditions is characteristic of a monopolistically competitive firm in long-run equilibrium?
a. P > demand and P = MR
b. ATC > demand and MR = MC
c. P > MC and demand = ATC
d. P < ATC and demand > MR

c

78. Which of the following conditions is characteristic of a monopolistically competitive firm in long-run equilibrium?
a. P > MR and P = MC
b. ATC = demand and MR = MC
c. P < MC and demand = ATC
d. P > ATC and demand > MR

b

79. A monopolistically competitive firm
a. charges a price that is equal to marginal cost.
b. experiences a zero profit in the long run.
c. produces at the efficient scale in the long run.
d. All of the above are correct.

b

80. In a monopolistically competitive market,
a. entry by new firms is impeded by barriers to entry; thus, the number of firms in the market is never ideal.
b. entry by new firms is impeded by barriers to entry, but the number of firms in the market is nevertheless always ideal.
c. free entry ensures that the number of firms in the market is ideal.
d. there may be too few or too many firms in the market, despite free entry.

d

81. In which of the following market structures does free entry and exit play an important role in the long-run equilibrium outcome?
(i) perfect competition
(ii) monopolistic competition
(iii) monopoly

a. (i) only
b. (i) and (ii) only
c. (ii) and (iii) only
d. (i), (ii), and (iii)

b

82. If firms in a monopolistically competitive market are earning positive profits, then
a. firms will likely be subject to regulation.
b. barriers to entry will be strengthened.
c. some firms will exit the market.
d. new firms will enter the market.

d

83. If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios would best describe the change existing firms would face as the market adjusts to the long-run equilibrium?
a. an increase in demand for each firm
b. a decrease in demand for each firm
c. a downward shift in the marginal cost curve for each firm
d. an upward shift in the marginal cost curve for each firm

b

84. If firms in a monopolistically competitive market are incurring economic losses, which of the following scenarios would best describe the change existing firms (who are able to stay in the market) would face as the market adjusts to the long-run equilibrium?
a. a downward shift in the marginal cost curve for each firm
b. an upward shift in the marginal cost curve for each firm
c. a decrease in demand for each firm
d. an increase in demand for each firm

d

85. In monopolistically competitive markets, positive economic profits
a. suggest that some existing firms will exit the market.
b. suggest that new firms will enter the market.
c. are sustained through government-imposed barriers to entry.
d. are never possible.

b

86. In monopolistically competitive markets, economic losses
a. suggest that some existing firms will exit the market.
b. suggest that new firms will enter the market.
c. are minimized through government-imposed barriers to entry.
d. are never possible.

a

87. As new firms enter a monopolistically competitive market, profits of existing firms
a. rise, and product diversity in the market increases.
b. rise, and product diversity in the market decreases.
c. decline, and product diversity in the market increases.
d. decline, and product diversity in the market decreases.

c

88. As firms exit a monopolistically competitive market, profits of remaining firms
a. decline, and product diversity in the market decreases.
b. decline, and product diversity in the market increases.
c. rise, and product diversity in the market decreases.
d. rise, and product diversity in the market increases.

c

89. The free entry and exit of firms in a monopolistically competitive market guarantees that
a. both economic profits and economic losses can persist in the long run.
b. both economic profits and economic losses disappear in the long run.
c. economic profits, but not economic losses, can persist in the long run.
d. economic losses, but not economic profits, can persist in the long run.

b

90. In monopolistically competitive markets, free entry and exit suggests that
a. the market structure will eventually be characterized by perfect competition in the long run.
b. all firms earn zero economic profits in the long run.
c. some firms will be able to earn economic profits in the long run.
d. some firms will be forced to incur economic losses in the long run.

b

91. When a profit-maximizing firm in a monopolistically competitive market is producing the long-run equilibrium quantity,
a. its average revenue will equal its marginal cost.
b. its marginal revenue will exceed its marginal cost.
c. it will be earning positive economic profits.
d. its demand curve will be tangent to its average-total-cost curve.

d

92. When a firm's demand curve is tangent to its average total cost curve, the
a. firm's economic profit is zero.
b. firm must be earning economic profits.
c. firm must be incurring economic losses.
d. firm must be operating at its efficient scale.

a

93. When a firm's demand curve is tangent to its average total cost curve, the
a. firm's economic profit is zero.
b. firm may be earning economic profits.
c. firm must be operating at its efficient scale.
d. Both a and c are correct.

a

94. When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium,
a. the demand curve will be perfectly elastic.
b. price exceeds marginal cost.
c. marginal cost must be falling.
d. marginal revenue exceeds marginal cost.

b

95. A profit-maximizing firm operating in a monopolistically competitive market that is in a long-run equilibrium has
a. minimized average total cost.
b. chosen to produce where demand is unitary elastic.
c. produced the efficient scale of output.
d. chosen a quantity of output where average revenue equals average total cost.

d

96. In a long-run equilibrium, a firm in a monopolistically competitive market operates
a. where marginal revenue is zero.
b. where marginal revenue is negative.
c. on the rising portion of its average total cost curve.
d. on the declining portion of its average total cost curve.

d

97. When a new firm enters a monopolistically competitive market, the individual demand curves faced by all existing firms in that market will
a. shift to the left.
b. shift to the right.
c. shift in a direction that is unpredictable without further information.
d. remain unchanged. It is the supply curve that will shift.

a

98. When a firm exits a monopolistically competitive market, the individual demand curves faced by all remaining firms in that market will
a. shift in a direction that is unpredictable without further information.
b. shift to the right.
c. shift to the left.
d. remain unchanged. It is the supply curve that will shift.

b

99. Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to a(n)
a. change in the technology that the firm utilizes.
b. shift of its demand curve.
c. shift of its supply curve.
d. increase in the firm's average cost of production.

b

100. Because a monopolistically competitive firm has some market power, in the long-run the price of its product exceeds its
a. average revenue.
b. average total cost.
c. marginal cost.
d. profit per unit.

c

101. New firms will likely enter a monopolistically competitive market when price exceeds
a. marginal revenue.
b. average revenue.
c. marginal cost.
d. average total cost.

d

102. Which two curves are tangent to each other in a monopolistically competitive market with zero economic profit?
a. demand and average variable cost
b. demand and average total cost
c. marginal revenue and average variable cost
d. marginal revenue and average total cost

b

103. In a monopolistically competitive market,
a. strategic interactions among the firms are very important.
b. the threat of entry by new firms is not an important consideration.
c. the attainment of a Nash equilibrium is an important objective.
d. firms may enter even though they will earn zero economic profit in the long run.

d

104. Among the following situations, which one is least likely to apply to a monopolistically competitive firm?
a. profit is positive in the short run
b. total cost exceeds total revenue in the short run
c. profit is positive in the long run
d. total revenue equals total cost in the long run

d

105. Suppose that monopolistically competitive firms in a certain market are earning positive profits. In the transition from this initial situation to a long-run equilibrium,
a. the number of firms in the market decreases.
b. each existing firm experiences a decrease in demand for its product.
c. each existing firm experiences a rightward shift of its marginal revenue curve.
d. each existing firm experiences an upward shift in its average total cost curve.

b

106. Suppose that monopolistically competitive firms in a certain market are experiencing losses. In the transition from this initial situation to a long-run equilibrium,
a. the number of firms in the market decreases.
b. each existing firm experiences a decrease in demand for its product.
c. each firm experiences an upward shift of its marginal cost and average total cost curves.
d. each existing firm's average total cost falls to bring economic profit back to zero.

a

107. When a monopolistically competitive firm is in long-run equilibrium,
a. marginal revenue is equal to marginal cost.
b. price is equal to average total cost.
c. demand is equal to average total cost.
d. All of the above are correct.

d

108. When a monopolistically competitive firm is in long-run equilibrium,
a. price is equal to average total cost.
b. price is equal to marginal cost.
c. price is equal to marginal revenue.
d. the firm operates at its efficient scale.

a

109. Which of these types of firms can earn a positive economic profit in the long run?
a. monopolies, but not competitive firms or monopolistically competitive firms
b. monopolies and monopolistically competitive firms, but not competitive firms
c. monopolies, monopolistically competitive firms, and monopolies
d. No firms earn positive economic profit in the long run. Entry will reduce all firms' economic profit to zero in the long run.

a

110. "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.

b

111. 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.

d

112. 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.

c

113. Suppose for some firm that average total cost is minimized at Q1 units of output. For a monopolistically competitive 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.

d

114. 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.

a

115. 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.

c

116. 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.

b

117. 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.

a

118. 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.

b

119. 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 firm's 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.

d

120. Cecilia's Café operates in a monopolistically competitive market. Cecilia's is currently producing where its average total cost is minimized. In the long run we would expect Cecilia's output to
a. decrease and average total cost to increase.
b. decrease and average total cost to decrease.
c. remain unchanged as Cecilia's is doing the best it can.
d. increase and average total costs to decrease.

a

121. 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.

d

122. 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.

d

138. 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.

c

139. Consider monopoly, monopolistic competition, and perfect competition. In which of these three market structures 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.

b

140. Consider monopoly, monopolistic competition, and perfect competition. In which of these three market structures 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.

d

141. Firm A is a perfectly competitive firm. Firm B is a monopolistically competitive firm. Both firms are currently maximizing their respective profits. Which of the following statements is correct?
a. Both Firm A and Firm B would be eager to make an additional sale.
b. Firm A would be eager to make an additional sale, but Firm B would not care whether it made an additional sale or not.
c. Firm B would be eager to make an additional sale, but Firm A would not care whether it made an additional sale or not.
d. Neither Firm A nor Firm B would care whether it made an additional sale or not.

c

142. 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

d

143. 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

a

144. 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

b

145. 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.

b

146. 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.

c

147. In the long run, a firm in a perfectly competitive market operates
a. at its efficient scale, and a monopolistically competitive firm operates at 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.

b

148. 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.

b

149. 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.

d

150. 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.

c

151. 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.

a

152. 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 efficient scale.

a

153. 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.

a

154. 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.

c

155. Hotels in New York City frequently experience an average vacancy rate of about 20 percent (i.e., on an average 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

c

156. 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.

a

157. 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.

a

158. 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.

d

159. 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.

b

160. 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.

a

161. 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.

b

162. 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.

b

163. 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.

d

164. 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.

a

165. The traditional view of monopolistic competition holds that this type of industrial structure is inefficient because
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.

b

166. Monopolistic competition is considered by some to be 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.

a

167. 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.

d

168. 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.

b

169. 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.

c

170. 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.

d

171. 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.

d

172. 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.

c

173. 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.

d

174. 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.

c

175. 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.

a

176. 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.

b

177. 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.

d

178. 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

b

179. 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

d

180. 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.

c

181. 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.

c

182. 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.

a

183. 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.

b

184. 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.

d

185. 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.

c

186. 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 economic losses.

b

187. 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).

a

188. 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 not restricted.

b

189. 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.

a

190. 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.

a

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.

d

2. Which of the following is a characteristic of oligopoly or monopolistic competition, but not perfect competition?
a. advertising and sales promotion
b. profit maximization according to the MR = MC rule
c. firms being price takers rather than price makers
d. horizontal demand and marginal revenue curves

a

3. Some firms have an incentive to advertise because they sell a
a. similar product and charge a price equal to marginal cost.
b. similar 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.

d

4. 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.

a

5. 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

b

6. Firms that sell highly differentiated consumer goods, such as soft drinks, breakfast cereals, and dog food, typically spend what percent of their revenues on advertising?
a. 0-1
b. 2-4
c. 10-20
d. over 50

c

7. 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

c

8. 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.

d

9. 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.

a

10. 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.

a

11. 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

a

12. 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.

c

13. 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.

c

14. 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.

a

15. 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.

d

16. 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.

c

17. 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.

c

18. 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.

d

19. 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.

a

20. 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.

c

21. 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 lower price to remain competitive.
c. increase the welfare of society.
d. reduce its average total cost.

a

22. 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.

a

23. 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.

a

24. 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.

c

25. When firms in a monopolistically competitive market engage in price-related advertising, defenders of advertising 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.

d

26. Defenders of advertising argue that it is not rational for profit-maximizing firms to spend money on advertising for products that have
a. superior quality.
b. inferior or mediocre quality.
c. low prices.
d. limited availability.

b

27. 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.

c

28. 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.

c

29. 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.

c

30. In markets where restrictions on advertising have been used to curtail competition, the U.S. courts have generally
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.

d

31. A law that restricts the ability of hotels/motels to advertise on billboards outside of a resort community would likely lead to
a. a decrease 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.

b

32. 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.

d

33. 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.

b

34. 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.

b

35. 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.

b

36. 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.

d

37. 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.

c

38. According to one theory, advertising sends a signal to consumers about the quality of the product being offered. 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.

b

39. 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.

c

40. Firms that spend a large amount of money on advertising a particular product are likely to be providing consumers 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.

c

41. 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.

b

42. 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.

d

43. Television advertisements aired during major sporting events are very expensive. A theory asserting that people buy a product simply because it is advertised would suggest that information on the high cost of advertising
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.

a

44. 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.

b

45. ABC Company knows that it produces and sells a very good mouse trap. XYZ Company knows that it produces and sells a lousy mouse trap. According to the signaling theory of advertising,
a. both ABC and XYZ have incentives to spend large amounts of money on advertising their mouse traps.
b. ABC has an incentive to spend a large amount of money on advertising its mouse trap, but XYZ does not.
c. XYZ has an incentive to spend a large amount of money on advertising its mouse trap, but ABC does not.
d. neither ABC nor XYZ has an incentive to spend a large amount of money on advertising their mouse traps.

b

46. 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.

b

47. 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.

b

48. Critics of markets that are characterized by firms that sell brand name products argue that brand names encourage 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.

c

49. 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.

a

50. 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.

b

51. 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.

c

52. 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.

b

53. 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.

d

54. Eunice consumes Coke 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, Eunice is found to prefer generic store-brand cola to Coke eight out of ten times. The results of Eunice's taste test would reinforce 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. brand names cause consumers to be more sensitive to product differences.
d. brand names are a form of socially efficient advertising.

b

55. Kirk consumes Pepsi 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, Kirk is found to prefer Pepsi to store-brand cola eight out of ten times. The results of Kirk'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.

b

56. 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.

b

57. On a vacation to Cancun, Mexico, you find yourself eating every meal at the local McDonald's rather than having a hamburger from one of the street vendors. Your traveling companion claims that you are irrational, since you never eat McDonald's hamburgers when you are home, and McDonald's hamburgers cost more than those prepared and sold by Cancun's street vendors. An economist would most likely explain your behavior by suggesting 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 McDonald's brand name suggests consistent quality.
d. the advertising by McDonald's in Cancun is more persuasive than the advertising by McDonald's in your home town.

c

58. Two college students, Josh and John, are spending spring break in Boston to visit Harvard University's law school. Josh buys a cup of coffee each morning at the local Dunkin' Donuts rather than from one of the local coffee shops. John claims that Josh is irrational because he never purchased Dunkin' Donuts' coffee at home, and Dunkin' Donuts' coffee costs more than the coffee sold by local shops. An economist would most likely explain Josh's behavior by suggesting that
a. Josh's behavior is rational, but John's behavior is clearly irrational.
b. Josh's behavior is clearly irrational, but John's behavior is rational.
c. the Dunkin' Donuts brand name suggests consistent quality.
d. the advertising by Dunkin' Donuts in Boston is more persuasive than the advertising by Dunkin' Donuts in Josh and John's home town.

c

59. Two soft drinks sit side-by-side in a grocery store: A six-pack of Coca-Cola (a brand name) sells for $3.00, while a six-pack of Uncle Don's cola (not a brand name) sells for $1.50. Even defenders of brand names would have to admit that
a. no rational consumer would spend twice as much for Coca-Cola as he would for Uncle Don's cola.
b. the side-by-side presence of these two colas conveys no useful information to consumers.
c. Coca-Cola has no incentive to maintain the quality of its product just because of the Coca-Cola brand name.
d. None of the above is correct.

d

60. Two soft drinks sit side-by-side in a grocery store: A six-pack of Coca-Cola (a brand name) sells for $3.00, while a six-pack of Uncle Don's cola (not a brand name) sells for $1.50. In a typical day the store sells some of each type of cola, which suggests that
a. no rational consumer would spend twice as much for Coca-Cola as he would for Uncle Don's cola.
b. some consumers must perceive that Coca-Cola is a higher quality product.
c. Coca-Cola has no incentive to maintain the quality of its product just because of the Coca-Cola brand name.
d. None of the above is correct.

b

61. Which of the following statements regarding brand names in advertising is not correct?
a. Brand names provide consumers with information about quality when quality cannot be easily judged in advance of purchase.
b. Brand names give firms an incentive to maintain high quality to maintain the reputation of the firm.
c. Brand names allow firms to produce and sell inferior products in the long run since people will continue to purchase the brand-name product.
d. Brand names can cause consumers to perceive differences in products that do not actually exist.

c

62. When quality cannot be easily judged in advance, what provides consumers with information about the quality of a product?
a. a brand name
b. a tie-in
c. the quantity available for sale
d. the amount of deadweight loss

a

63. When monopolistically competitive firms advertise, in the long run
a. they will still earn zero economic profit.
b. they can earn positive economic profit by increasing market share.
c. the market price must fall.
d. the market price must rise.

a

64. Which of the following statements is not correct?
a. The typical monopolistically competitive firm could reduce its average total cost if it produced more output.
b. Monopolistically competitive firms advertise in order to increase the elasticity of the demand curve they face.
c. Expensive advertising might help consumers if it is a signal that the product is good.
d. Brand names acquired at great cost might help consumers by assuring quality.

b

65. Which of the following statements is correct?
a. The more similar Firm A's product is to Firm B's product, the more likely Firm A is to advertise.
b. Monopolistically competitive firms advertise in order to increase the elasticity of the demand curve they face.
c. According to the signaling theory, the more product information an advertisement contains, the more effective it is.
d. Brand names may help consumers if they provide information about the quality of a product when acquiring such information is difficult.

d

66. Which of the following statements is not correct?
a. Critics of advertising argue that firms advertise to manipulate consumers' tastes.
b. Defenders of advertising argue that advertising provides valuable product information to consumers.
c. An industry with many brand name products will be more competitive than one with many generic products.
d. The willingness of a firm to spend a large amount of money on advertising can signal the quality of the product.

c

1. Firms in a monopolistically competitive market
a. are price takers.
b. produce an output level that minimizes average total cost in the long run.
c. maximize profits by producing where price equals marginal cost.
d. cannot earn economic profits in the long run.

d

2. Which of the following statements is correct?
a. Firms in monopolistic competition and monopoly can earn economic profits in both the short run and the long run.
b. Both perfectly competitive and monopolistically competitive firms charge a price equal to marginal cost.
c. Firms in perfect competition, monopolistic competition, and monopoly maximize profits by producing where marginal revenue equals marginal cost.
d. Both perfectly competitive and monopolistically competitive firms produce the welfare-maximizing level of output.

c

3. Which of the following statements is correct?
a. Firms in monopolistic competition and monopoly can earn economic profits in both the short run and the long run.
b. Both perfectly competitive and monopolistically competitive firms are price takers.
c. Both a monopolistically competitive industry and a monopoly are characterized by a very small number (or one) firm.
d. Firms can easily enter a perfectly competitive or monopolistically competitive industry.

d

4. Which of the following statements is not correct?
a. Both monopolistically competitive and perfectly competitive firms can earn economic profits in the short run.
b. Both monopolies and monopolistically competitive firms can earn economic profits in the long run.
c. Firms in perfect competition, monopolistic competition, and monopoly maximize profits by producing where marginal revenue equals marginal cost.
d. Only competitive firms produce the welfare-maximizing level of output.

b

5. Which of the following statements is not correct?
a. Firms in monopolistic competition and monopoly can earn economic profits in the short run.
b. Firms in monopolistic competition and perfect competition produce the welfare-maximizing level of output.
c. Monopolistically competitive firms price above marginal cost, whereas competitive firms price at marginal cost.
d. Firms wishing to enter a monopolistically competitive market can do so freely, whereas firms wishing to enter a monopoly market will face barriers.

b

6. A market is comprised of many firms as opposed to just one firm or a few firms
a. only when it is perfectly competitive.
b. only when it is perfectly competitive or oligopolistic.
c. only when it is perfectly competitive or monopolistically competitive.
d. when it is perfectly competitive, monopolistically competitive, or oligopolistic.

c

7. A firm is a price taker
a. only when the market is perfectly competitive.
b. only when the market is perfectly competitive or monopolistic.
c. only when the market is perfectly competitive or monopolistically competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.

a

8. A firm maximizes its profit by producing output up to the point where marginal revenue equals marginal cost
a. only when the market is a monopoly.
b. only when the market is a monopoly or monopolistically competitive.
c. only when the market is monopolistically competitive or perfectly competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.

d

9. A firm produces the welfare-maximizing level of output
a. only when the market is perfectly competitive.
b. only when the market is a monopoly or monopolistically competitive.
c. only when the market is monopolistically competitive or perfectly competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.

a

10. A monopolistically competitive market is like a monopoly in that
a. both market structures feature easy entry by new firms in the long run.
b. the main objective of firms in both market structures is something other than profit maximization.
c. firms in both market structures produce the welfare-maximizing level of output.
d. firms in both market structures set price above marginal cost.

d

11. A monopolistically competitive market is like a competitive market in that
a. both market structures feature easy entry by new firms in the long run.
b. the main objective of firms in both market structures is something other than profit maximization.
c. firms in both market structures produce the welfare-maximizing level of output.
d. firms in both market structures set price above marginal cost.

a

12. A monopolistically competitive market is like both a competitive market and a monopoly in that
a. all three market structures feature easy entry by new firms in the long run.
b. firms in all three market structures maximize profit by producing an output level where marginal revenue equals marginal cost.
c. firms in all three market structures produce the welfare-maximizing level of output.
d. All of the above are correct.

b

13. A monopolistically competitive market is like both a competitive market and a monopoly in that firms in all three market structures
a. can earn economic profits in the short run.
b. can earn economic profits in the long run.
c. charge a price above marginal cost.
d. All of the above are correct.

a

ECO chapter 16 by TaToo - Subjecto.com

ECO chapter 16 by TaToo

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1. Which of the following is a characteristic of monopolistic competition?
a. ownership of a key resource by a single firm
b. free entry
c. identical product
d. patents

b

2. The market for novels is
a. perfectly competitive.
b. a monopoly.
c. monopolistically competitive.
d. an oligopoly.

c

3. Which of the following statements is not correct?
a. Monopolistic competition is similar to monopoly because in each market structure the firm can charge a price above marginal costs.
b. Monopolistic competition is similar to perfect competition because both market structures are characterized by free entry.
c. Monopolistic competition is similar to oligopoly because both market structures are characterized by barriers to entry.
d. Monopolistic competition is similar to perfect competition because both market structures are characterized by many sellers.

c

4. Which of the following statements is not correct?
a. Monopolistic competition is different from monopoly because monopolistic competition is characterized by free entry, whereas monopoly is characterized by barriers to entry.
b. Both monopolistic competition and oligopoly fall in between the more extreme market structures of competition and monopoly.
c. Monopolistic competition is different from oligopoly because each seller in monopolistic competition is small relative to the market, whereas each seller can affect the actions of other sellers in an oligopoly.
d. Both monopolistic competition and perfect competition are characterized by product differentiation.

d

5. Monopolistic competition is a type of
a. oligopoly.
b. market structure.
c. price discrimination.
d. advertising strategy.

b

6. A monopolistically competitive market has characteristics that are similar to
a. a monopoly only.
b. a competitive firm only.
c. both a monopoly and a competitive firm.
d. neither a monopoly nor a competitive firm.

c

1. A typical firm in the U. S. economy would be classified as
a. perfectly competitive.
b. imperfectly competitive.
c. a duopolist.
d. an oligopolist.

b

2. The typical firm in the U. S. economy
a. has some degree of market power.
b. sells its product for a price that is equal to the marginal cost of producing the last unit.
c. is perfectly competitive.
d. is a monopoly.

a

3. Which of the following pairs illustrates the two extreme examples of market structures?
a. competition and oligopoly
b. competition and monopoly
c. monopoly and monopolistic competition
d. oligopoly and monopolistic competition

b

4. The general term for market structures that fall somewhere in-between monopoly and perfect competition is
a. incomplete markets.
b. imperfectly competitive markets.
c. oligopoly markets.
d. monopolistically competitive markets.

b

5. The two types of imperfectly competitive markets are
a. markets with differentiated products and monopoly.
b. markets with differentiated products and oligopoly.
c. oligopoly and monopoly.
d. monopolistic competition and oligopoly.

d

6. The two types of imperfectly competitive markets are
a. monopoly and monopolistic competition.
b. monopoly and oligopoly.
c. monopolistic competition and oligopoly.
d. monopolistic competition and cartels.

c

7. In a market that is characterized by imperfect competition,
a. firms are price takers.
b. there are always a large number of firms.
c. there are at least a few firms that compete with one another.
d. the actions of one firm in the market never have any impact on the other firms’ profits.

c

8. Firms in industries that have competitors but do not face so much competition that they are price takers are operating in either a(n)
a. oligopoly or perfectly competitive market.
b. oligopoly or monopoly market.
c. oligopoly or monopolistically competitive market.
d. monopoly or monopolistically competitive market.

c

9. Imperfectly competitive firms are characterized by
a. horizontal demand curves.
b. standardized products.
c. a large number of small firms.
d. price making ability.

d

10. An oligopoly
a. has a concentration ratio of less than 50 percent.
b. is a price taker.
c. is a type of imperfectly competitive market.
d. has many firms rather than just one firm or a few firms.

c

11. An oligopoly is a market in which
a. there are only a few sellers, each offering a product similar or identical to the products offered by other firms in the market.
b. firms are price takers.
c. the actions of one seller in the market have no impact on the other sellers’ profits.
d. there are many price-taking firms, each offering a product similar or identical to the products offered by other firms in the market.

a

12. One characteristic of an oligopoly market structure is:
a. firms in the industry are typically characterized by very diverse product lines.
b. firms in the industry have some degree of market power.
c. products typically sell at a price equal to their marginal cost of production.
d. the actions of one seller have no impact on the profitability of other sellers.

b

13. A market structure with only a few sellers, each offering similar or identical products, is known as
a. oligopoly.
b. monopoly.
c. monopolistic competition.
d. perfect competition.

a

14. The commercial jetliner industry consisting of Boeing and Airbus would best be described as a (an)
a. perfectly competitive market.
b. monopolistically competitive market.
c. oligopoly.
d. monopoly.

c

15. Crude oil is primarily supplied to the world market by a few Middle Eastern countries. Such a market is an example of a(n)
(i) imperfectly competitive market.
(ii) monopoly market.
(iii) oligopoly market.
a. (i) and (ii) only
b. (ii) and (iii) only
c. (i) and (iii) only
d. (iii) only

c

16. A concentration ratio
a. measures the percentage of total output supplied by the four largest firms in the industry.
b. reflects the level of competition in an industry.
c. is related to the control that each firm has over price.
d. All of the above are correct.

d

17. A concentration ratio
a. measures the percentage of total sales of the top firm in the industry.
b. reflects the level of competition in an industry.
c. is inversely related to the price charged by the top firm in the industry.
d. All of the above are correct.

b

18. The higher the concentration ratio, the
a. more control an individual firm has to set prices.
b. more competitive the industry.
c. less competitive the industry.
d. Both a and c are correct.

d

19. The lower the concentration ratio, the
a. more control an individual firm has to set prices.
b. more competitive the industry.
c. less competitive the industry.
d. Both a and c are correct.

b

20. Which of the following industries has the highest concentration ratio?
a. wheat
b. novels
c. cigarettes
d. dog food

c

37. One key difference between an oligopoly market and a competitive market is that oligopolistic firms
a. are price takers while competitive firms are not.
b. can affect the profit of other firms in the market by the choices they make while firms in competitive markets do not affect each other by the choices they make.
c. sell completely unrelated products while competitive firms do not.
d. sell their product at a price equal to marginal cost while competitive firms do not.

b

38. One way in which monopolistic competition differs from oligopoly is that
a. there are no barriers to entry in oligopolies.
b. in oligopoly markets there are only a few sellers.
c. all firms in an oligopoly eventually earn zero economic profits.
d. strategic interactions between firms are rare in oligopolies.

b

39. Which of the following is an example of a monopolistically competitive industry?
a. computer operating systems
b. tennis balls
c. movies
d. cable television

c

40. Which of the following is an example of a monopolistically competitive industry?
a. computer operating systems
b. tennis balls
c. restaurants in New York City
d. cable television

c

41. Which of the following goods are likely to be sold in a monopolistically competitive market?
a. compact discs
b. wheat
c. corn
d. postage stamps

a

42. Which of the following goods are not likely to be sold in monopolistically competitive markets?
a. compact discs
b. books
c. cookies
d. wheat

d

43. Examples of monopolistically competitive markets include the markets for
a. restaurants and furniture.
b. wheat and corn.
c. postage stamps and wooden pencils.
d. All of the above are correct.

a

44. Which of the following markets is not likely characterized by a monopolistically competitive market?
a. piano lessons
b. corn
c. cookies
d. clothing

b

45. A monopolistically competitive industry is characterized by
a. many firms selling products that are similar but not identical.
b. many firms selling identical products.
c. a few firms selling products that are similar but not identical.
d. a few firms selling highly different products.

a

46. A monopolistically competitive industry is characterized by
a. many firms, differentiated products, and barriers to entry.
b. many firms, differentiated products, and free entry.
c. a few firms, identical products, and free entry.
d. a few firms, differentiated products, and barriers to entry.

b

47. A market structure in which there are many firms selling products that are similar but not identical is known as
a. oligopoly.
b. monopoly.
c. monopolistic competition.
d. perfect competition.

c

48. What do economists call a market structure in which there are many firms selling products that are similar but not identical?
a. perfect competition
b. monopoly
c. monopolistic competition
d. oligopoly

c

49. Which of the following is not a characteristic of monopolistic competition?
a. a large number of sellers
b. firms are price takers
c. free entry into the market
d. a differentiated product

b

50. Monopolistic competition is characterized by which of the following attributes?
(i) free entry
(ii) product differentiation
(iii) many sellers

a. (i) and (iii) only
b. (i) and (ii) only
c. (ii) and (iii) only
d. (i), (ii), and (iii)

d

51. In a monopolistically competitive market,
a. there are only a few sellers.
b. each firm takes the price of its product as given.
c. firms can enter or exit the market without restrictions.
d. each firm produces a product that is essentially identical to the products of other firms in the market.

c

52. A monopolistically competitive market
a. has some features of monopoly and some features of competition.
b. has one large, dominant firm and many other smaller firms.
c. is difficult to enter.
d. occurs whenever firms earn zero economic profit.

a

53. Select the type of market that is described by the following attributes: many firms, differentiated products, and free entry.
a. natural monopoly
b. perfectly competition
c. monopolistic competition
d. monopoly

c

54. If firms in a particular market sell identical products, then the market is
(i) perfectly competitive.
(ii) monopolistically competitive.
(iii) an oligopoly.

a. (i) or (ii) only
b. (ii) or (iii) only
c. (i) or (iii) only
d. (i) only

d

55. When an industry has many firms, the industry is
a. an oligopoly if the firms sell differentiated products, but it is monopolistically competitive if the firms sell identical products.
b. an oligopoly if the firms sell differentiated products, but it is perfectly competitive if the firms sell identical products.
c. monopolistically competitive if the firms sell differentiated products, but it is perfectly competitive if the firms sell identical products.
d. perfectly competitive if the firms sell differentiated products, but it is monopolistically competitive if the firms sell identical products.

c

56. If there are many firms participating in a market, the market is either
a. an oligopoly or monopolistically competitive.
b. perfectly competitive or monopolistically competitive.
c. an oligopoly or perfectly competitive.
d. an oligopoly or a cartel.

b

57. Which of the following statements is correct?
a. Monopolistic competition is similar to monopoly because both market structures are characterized by patents.
b. Monopolistic competition is similar to perfect competition because both market structures are characterized by each seller being small compared to the market.
c. Monopolistic competition is similar to oligopoly because both market structures are characterized by free entry.
d. Monopolistic competition is similar to perfect competition because both market structures are characterized by excess capacity.

b

58. In which of the following market structures is(are) there a large number of sellers?
(i) monopolistic competition
(ii) perfect competition
(iii) oligopoly

a. (i) and (ii) only
b. (ii) and (iii) only
c. (ii) only
d. (i), (ii), and (iii)

a

59. Monopolistic competition differs from perfect competition because in monopolistically competitive markets
a. there are barriers to entry.
b. all firms can eventually earn economic profits.
c. each of the sellers offers a somewhat different product.
d. strategic interactions between firms are important.

c

60. Monopolistically competitive markets differ from perfectly competitive markets due to
(i) the number of sellers.
(ii) the barriers to entry.
(iii) the product differentiation among the sellers.

a. (i) only
b. (iii) only
c. (i) and (iii) only
d. (ii) and (iii) only

b

61. In both perfect competition and monopolistic competition, each firm
a. has some monopoly power.
b. sells a product that is at least slightly different from those of other firms.
c. faces a downward-sloping demand curve.
d. has many competitors.

d

62. Which of the following conditions distinguishes monopolistic competition from perfect competition?
a. the number of sellers in the market
b. the freedom of entry and exit by firms in the market
c. the size of firms in the market
d. product differentiation

d

63. A similarity between monopoly and monopolistic competition is that in both market structures
a. strategic interactions among sellers are important.
b. there are a small number of sellers.
c. sellers are price makers rather than price takers.
d. there are only a few buyers but many sellers.

c

64. Which of the following statements is correct?
a. Cigarettes are likely to be produced in a monopolistically competitive industry.
b. Novels are likely to be produced in a monopoly industry.
c. Movies are likely to be produced in a monopolistically competitive industry.
d. Milk is likely to be produced in an oligopoly industry.

c

65. Which of the following statements is not correct?
a. Novels are likely to be produced in a monopolistically competitive industry.
b. Cable television is likely to be produced in a monopoly industry.
c. Milk is likely to be produced in a monopolistically competitive industry.
d. Cigarettes are likely to be produced in an oligopoly industry.

c

1. A downward-sloping demand curve
a. is a feature of all monopolistically competitive firms.
b. means that the firm in question will never experience a zero profit.
c. causes marginal revenue to exceed price.
d. prohibits firms from earning positive economic profits in the long run.

a

2. Each firm in a monopolistically competitive firm faces a downward-sloping demand curve because
a. there are many other sellers in the market.
b. there are very few other sellers in the market.
c. the firm’s product is different from those offered by other firms in the market.
d. that firm faces the threat of entry into the market by new firms.

c

3. For a monopolistically competitive firm,
a. marginal revenue and price are the same.
b. average revenue and price are the same.
c. at the profit-maximizing quantity of output, price equals marginal cost.
d. at the profit-maximizing quantity of output, price equals the minimum of average total cost.

b

4. For a monopolistically competitive firm, at the profit-maximizing quantity of output,
a. price exceeds marginal cost.
b. marginal revenue exceeds marginal cost.
c. marginal cost exceeds average revenue.
d. price equals marginal revenue.

a

5. Product differentiation causes the seller of a good to face what type of demand curve?
a. downward sloping
b. vertical
c. horizontal
d. Any of the above could be correct since product differentiation does not affect the shape of the demand curve.

a

6. A firm in a monopolistically competitive market faces a
a. downward-sloping demand curve because the firm’s product is different from those offered by other firms.
b. downward-sloping demand curve because there are only a few firms in the market.
c. horizontal demand curve because there are many firms in the market.
d. horizontal demand curve because firms can enter the market without restriction.

a

7. In the short run, a firm in a monopolistically competitive market operates much like a
a. firm in a perfectly competitive market.
b. firm in an oligopoly.
c. monopolist.
d. monopsonist.

c

8. Each firm in a monopolistically competitive market
a. earns both short-run and long-run profits.
b. faces a downward-sloping demand curve.
c. cannot earn economic profit in the short run.
d. sets price equal to marginal cost.

b

9. In a monopolistically competitive industry, firms set price
a. equal to marginal cost since each firm is a price taker.
b. below marginal cost since each firm is a price taker.
c. above marginal cost since each firm is a price setter.
d. always a fraction of marginal cost since each firm is a price setter.

c

10. A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly competitive market because the firm in the monopolistically competitive market
a. is characterized by market-share maximization.
b. has no barriers to entry.
c. faces a downward-sloping demand curve for its product.
d. faces a horizontal demand curve at the market clearing price.

c

11. A monopolistically competitive firm chooses
a. the quantity of output to produce, but the market determines price.
b. the price, but competition in the market determines the quantity.
c. price, but output is determined by a cartel production quota.
d. the quantity of output to produce and the price at which it will sell its output.

d

12. Product differentiation in monopolistically competitive markets ensures that, for profit-maximizing firms,
a. marginal revenue will equal average total cost.
b. price will exceed marginal cost.
c. marginal cost will exceed average revenue.
d. average variable cost will be declining.

b

13. In a monopolistically competitive industry, a firm’s demand curve also represent its
a. marginal revenue.
b. marginal cost.
c. average revenue.
d. profit.

c

14. A firm in a monopolistically competitive market is similar to a monopoly in the sense that
(i) they both face downward-sloping demand curves.
(ii) they both charge a price that exceeds marginal cost.
(iii) free entry and exit determines the long-run equilibrium.

a. (i) only
b. (ii) only
c. (i) and (ii) only
d. (i), (ii), and (iii) only

c

15. A monopolistically competitive firm’s choice of output level is virtually identical to the choice made by
a. a perfectly competitive firm.
b. a duopolist.
c. a monopolist.
d. an oligopolist.

c

16. To maximize its profit, a monopolistically competitive firm
a. takes the price as given and chooses its quantity, just as a competitive firm does.
b. takes the price as given and chooses its quantity, just as a colluding oligopolist does.
c. chooses its quantity and price, just as a competitive firm does.
d. chooses its quantity and price, just as a monopoly does.

d

17. Because monopolistically competitive firms produce differentiated products, each firm
a. faces a demand curve that is horizontal.
b. faces a demand curve that is vertical.
c. has no control over product price.
d. has some control over product price.

d

18. A monopolistically competitive firm chooses its
a. price and quantity just as a monopoly does.
b. quantity but faces a horizontal demand curve just as a competitive firm does.
c. price but can sell any quantity at the market price just as an oligopoly does.
d. price and quantity based on the decisions of the other firms in the industry just as an oligopoly does.

a

19. When a monopolistically competitive firm raises its price,
a. quantity demanded falls to zero.
b. quantity demanded declines but not to zero.
c. the market supply curve shifts outward.
d. quantity demanded remains constant.

b

20. A monopolistically competitive firm chooses the quantity to produce where
a. price equals marginal cost.
b. demand equals marginal cost.
c. marginal revenue equals marginal cost.
d. Both a and c are correct.

c

21. The profit-maximizing rule for a firm in a monopolistically competitive market is to always select the quantity at which
a. marginal revenue is equal to marginal cost.
b. average total cost is equal to marginal revenue.
c. average total cost is equal to price.
d. average revenue exceeds average total cost.

a

22. A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following?
a. average revenue exceeds marginal revenue
b. marginal revenue exceeds average revenue
c. average revenue is equal to marginal revenue
d. revenue is always maximized along with profit

a

23. A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following?
a. average revenue exceeds marginal revenue
b. marginal revenue equals marginal cost
c. price exceeds marginal cost
d. All of the above are correct.

d

24. A profit-maximizing firm in a monopolistically competitive market is characterized by which of the following?
a. marginal cost exceeds marginal revenue
b. average revenue equals marginal cost
c. price exceeds marginal cost
d. All of the above are correct.

c

25. To maximize its profit, a monopolistically competitive firm chooses its level of output by looking for the level of output at which
a. price equals marginal cost.
b. marginal revenue equals marginal cost.
c. average total cost is minimized.
d. All of the above are correct.

b

26. A monopolistically competitive firm faces the following demand schedule for its product:

Price ($) 10 9 8 7 6 5 4 3 2 1
Quantity 2 4 6 9 11 13 15 17 19 21
The firm has total fixed costs of $20 and a constant marginal cost of $2 per unit. The firm will maximize profit with
a. 6 units of output.
b. 9 units of output.
c. 11 units of output.
d. 13 units of output.

b

27. 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 $20 and a constant marginal cost of $5 per unit. The firm will maximize profit with the production of
a. 6 units of output.
b. 8 units of output.
c. 10 units of output.
d. 12 units of output.

a

28. 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

To maximize profit (or minimize losses), the firm will produce
a. 2 units.
b. 3 units.
c. 4 units.
d. 5 units.

b

29. A monopolistically competitive firm is currently producing 10 units of output. At this level of output the firm is charging a price equal to $10, has marginal revenue equal to $6, has marginal cost equal to $6, and has average total cost equal to $12. From this information we can infer that
a. the firm is currently maximizing its profit.
b. the profits of the firm are negative.
c. firms are likely to leave this market in the long run.
d. All of the above are correct.

d

30. If "too much choice" is a problem for consumers, it would occur in which market structure(s)?
a. perfect competition
b. monopoly
c. monopolistic competition
d. perfect competition and monopolistic competition

c

31. In the short run, a firm operating in a monopolistically competitive market can earn
a. positive economic profits.
b. economic losses.
c. zero economic profits.
d. All of the above are possible.

d

32. In the short run, a firm operating in a monopolistically competitive market
a. produces an output level where marginal revenue equals average total cost.
b. maximizes revenues as well as profits.
c. can earn zero economic profits.
d. sets price equal to marginal cost.

c

33. In the short run, a firm operating in a monopolistically competitive market
a. produces an output level where marginal revenue equals average total cost.
b. sets price equal to demand where marginal revenue equals marginal cost.
c. must earn zero economic profits.
d. maximizes revenues as well as profits.

b

34. When a profit-maximizing firm in a monopolistically competitive market charges a price higher than marginal cost,
a. the firm must be earning a positive economic profit.
b. the firm may be incurring economic losses
c. there is a deadweight loss to society, but it is exactly offset by the benefit of excess capacity.
d. new firms will enter the market in the long run.

b

35. Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilibrium?
a. P = AR
b. MR = MC
c. P > MC
d. All of the above are correct.

d

36. Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilibrium?
a. P > AR
b. MR > MC
c. P > MC
d. All of the above are correct.

c

37. Which of the following conditions is characteristic of a monopolistically competitive firm in short-run equilibrium?
a. P > ATC
b. P = ATC
c. P < ATC
d. Any of the above could be correct.

d

38. Which of the following conditions is characteristic of a monopolistically competitive firm in both the short-run and the long run?
a. P > MC
b. MC = ATC
c. P < MR
d. All of the above are correct.

a

39. For a profit-maximizing monopolistically competitive firm, price exceeds marginal cost in
a. the short run but not in the long run.
b. the long run but not in the short run.
c. both the short run and the long run.
d. neither the short run nor the long run.

c

40. For a profit-maximizing monopolistically competitive firm, marginal revenue equals marginal cost in
a. the short run but not in the long run.
b. the long run but not in the short run.
c. both the short run and the long run.
d. neither the short run nor the long run.

c

41. A firm operating in a monopolistically competitive market can earn economic profits in
a. the short run but not in the long run.
b. the long run but not in the short run.
c. both the short run and the long run.
d. neither the short run nor the long run.

a

42. When a market is monopolistically competitive, the typical firm in the market is likely to experience a
a. positive profit in the short run and in the long run.
b. positive or negative profit in the short run and a zero profit in the long run.
c. zero profit in the short run and a positive or negative profit in the long run.
d. zero profit in the short run and in the long run.

b

43. When a market is monopolistically competitive, the typical firm in the market can earn
a. losses in the short run and profits in the long run.
b. profits in the short run and the long run.
c. losses in the short run and zero profit in the long run.
d. zero profit in the short run and losses in the long run.

c

44. An important difference between the situation faced by a profit-maximizing monopolistically competitive firm in the short run and the situation faced by that same firm in the long run is that in the short run,
a. price may exceed marginal revenue, but in the long run, price equals marginal revenue.
b. price may exceed marginal cost, but in the long run, price equals marginal cost.
c. price may exceed average total cost, but in the long run, price equals average total cost.
d. there are many firms in the market, but in the long run, there are only a few firms in the market.

c

76. In which of the following markets is economic profit driven to zero in the long run?
a. oligopoly
b. monopoly
c. monopolistic competition
d. cartels

c

77. Which of the following conditions is characteristic of a monopolistically competitive firm in long-run equilibrium?
a. P > demand and P = MR
b. ATC > demand and MR = MC
c. P > MC and demand = ATC
d. P < ATC and demand > MR

c

78. Which of the following conditions is characteristic of a monopolistically competitive firm in long-run equilibrium?
a. P > MR and P = MC
b. ATC = demand and MR = MC
c. P < MC and demand = ATC
d. P > ATC and demand > MR

b

79. A monopolistically competitive firm
a. charges a price that is equal to marginal cost.
b. experiences a zero profit in the long run.
c. produces at the efficient scale in the long run.
d. All of the above are correct.

b

80. In a monopolistically competitive market,
a. entry by new firms is impeded by barriers to entry; thus, the number of firms in the market is never ideal.
b. entry by new firms is impeded by barriers to entry, but the number of firms in the market is nevertheless always ideal.
c. free entry ensures that the number of firms in the market is ideal.
d. there may be too few or too many firms in the market, despite free entry.

d

81. In which of the following market structures does free entry and exit play an important role in the long-run equilibrium outcome?
(i) perfect competition
(ii) monopolistic competition
(iii) monopoly

a. (i) only
b. (i) and (ii) only
c. (ii) and (iii) only
d. (i), (ii), and (iii)

b

82. If firms in a monopolistically competitive market are earning positive profits, then
a. firms will likely be subject to regulation.
b. barriers to entry will be strengthened.
c. some firms will exit the market.
d. new firms will enter the market.

d

83. If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios would best describe the change existing firms would face as the market adjusts to the long-run equilibrium?
a. an increase in demand for each firm
b. a decrease in demand for each firm
c. a downward shift in the marginal cost curve for each firm
d. an upward shift in the marginal cost curve for each firm

b

84. If firms in a monopolistically competitive market are incurring economic losses, which of the following scenarios would best describe the change existing firms (who are able to stay in the market) would face as the market adjusts to the long-run equilibrium?
a. a downward shift in the marginal cost curve for each firm
b. an upward shift in the marginal cost curve for each firm
c. a decrease in demand for each firm
d. an increase in demand for each firm

d

85. In monopolistically competitive markets, positive economic profits
a. suggest that some existing firms will exit the market.
b. suggest that new firms will enter the market.
c. are sustained through government-imposed barriers to entry.
d. are never possible.

b

86. In monopolistically competitive markets, economic losses
a. suggest that some existing firms will exit the market.
b. suggest that new firms will enter the market.
c. are minimized through government-imposed barriers to entry.
d. are never possible.

a

87. As new firms enter a monopolistically competitive market, profits of existing firms
a. rise, and product diversity in the market increases.
b. rise, and product diversity in the market decreases.
c. decline, and product diversity in the market increases.
d. decline, and product diversity in the market decreases.

c

88. As firms exit a monopolistically competitive market, profits of remaining firms
a. decline, and product diversity in the market decreases.
b. decline, and product diversity in the market increases.
c. rise, and product diversity in the market decreases.
d. rise, and product diversity in the market increases.

c

89. The free entry and exit of firms in a monopolistically competitive market guarantees that
a. both economic profits and economic losses can persist in the long run.
b. both economic profits and economic losses disappear in the long run.
c. economic profits, but not economic losses, can persist in the long run.
d. economic losses, but not economic profits, can persist in the long run.

b

90. In monopolistically competitive markets, free entry and exit suggests that
a. the market structure will eventually be characterized by perfect competition in the long run.
b. all firms earn zero economic profits in the long run.
c. some firms will be able to earn economic profits in the long run.
d. some firms will be forced to incur economic losses in the long run.

b

91. When a profit-maximizing firm in a monopolistically competitive market is producing the long-run equilibrium quantity,
a. its average revenue will equal its marginal cost.
b. its marginal revenue will exceed its marginal cost.
c. it will be earning positive economic profits.
d. its demand curve will be tangent to its average-total-cost curve.

d

92. When a firm’s demand curve is tangent to its average total cost curve, the
a. firm’s economic profit is zero.
b. firm must be earning economic profits.
c. firm must be incurring economic losses.
d. firm must be operating at its efficient scale.

a

93. When a firm’s demand curve is tangent to its average total cost curve, the
a. firm’s economic profit is zero.
b. firm may be earning economic profits.
c. firm must be operating at its efficient scale.
d. Both a and c are correct.

a

94. When a profit-maximizing firm in a monopolistically competitive market is in long-run equilibrium,
a. the demand curve will be perfectly elastic.
b. price exceeds marginal cost.
c. marginal cost must be falling.
d. marginal revenue exceeds marginal cost.

b

95. A profit-maximizing firm operating in a monopolistically competitive market that is in a long-run equilibrium has
a. minimized average total cost.
b. chosen to produce where demand is unitary elastic.
c. produced the efficient scale of output.
d. chosen a quantity of output where average revenue equals average total cost.

d

96. In a long-run equilibrium, a firm in a monopolistically competitive market operates
a. where marginal revenue is zero.
b. where marginal revenue is negative.
c. on the rising portion of its average total cost curve.
d. on the declining portion of its average total cost curve.

d

97. When a new firm enters a monopolistically competitive market, the individual demand curves faced by all existing firms in that market will
a. shift to the left.
b. shift to the right.
c. shift in a direction that is unpredictable without further information.
d. remain unchanged. It is the supply curve that will shift.

a

98. When a firm exits a monopolistically competitive market, the individual demand curves faced by all remaining firms in that market will
a. shift in a direction that is unpredictable without further information.
b. shift to the right.
c. shift to the left.
d. remain unchanged. It is the supply curve that will shift.

b

99. Long-run profit earned by a monopolistically competitive firm is driven to the competitive level due to a(n)
a. change in the technology that the firm utilizes.
b. shift of its demand curve.
c. shift of its supply curve.
d. increase in the firm’s average cost of production.

b

100. Because a monopolistically competitive firm has some market power, in the long-run the price of its product exceeds its
a. average revenue.
b. average total cost.
c. marginal cost.
d. profit per unit.

c

101. New firms will likely enter a monopolistically competitive market when price exceeds
a. marginal revenue.
b. average revenue.
c. marginal cost.
d. average total cost.

d

102. Which two curves are tangent to each other in a monopolistically competitive market with zero economic profit?
a. demand and average variable cost
b. demand and average total cost
c. marginal revenue and average variable cost
d. marginal revenue and average total cost

b

103. In a monopolistically competitive market,
a. strategic interactions among the firms are very important.
b. the threat of entry by new firms is not an important consideration.
c. the attainment of a Nash equilibrium is an important objective.
d. firms may enter even though they will earn zero economic profit in the long run.

d

104. Among the following situations, which one is least likely to apply to a monopolistically competitive firm?
a. profit is positive in the short run
b. total cost exceeds total revenue in the short run
c. profit is positive in the long run
d. total revenue equals total cost in the long run

d

105. Suppose that monopolistically competitive firms in a certain market are earning positive profits. In the transition from this initial situation to a long-run equilibrium,
a. the number of firms in the market decreases.
b. each existing firm experiences a decrease in demand for its product.
c. each existing firm experiences a rightward shift of its marginal revenue curve.
d. each existing firm experiences an upward shift in its average total cost curve.

b

106. Suppose that monopolistically competitive firms in a certain market are experiencing losses. In the transition from this initial situation to a long-run equilibrium,
a. the number of firms in the market decreases.
b. each existing firm experiences a decrease in demand for its product.
c. each firm experiences an upward shift of its marginal cost and average total cost curves.
d. each existing firm’s average total cost falls to bring economic profit back to zero.

a

107. When a monopolistically competitive firm is in long-run equilibrium,
a. marginal revenue is equal to marginal cost.
b. price is equal to average total cost.
c. demand is equal to average total cost.
d. All of the above are correct.

d

108. When a monopolistically competitive firm is in long-run equilibrium,
a. price is equal to average total cost.
b. price is equal to marginal cost.
c. price is equal to marginal revenue.
d. the firm operates at its efficient scale.

a

109. Which of these types of firms can earn a positive economic profit in the long run?
a. monopolies, but not competitive firms or monopolistically competitive firms
b. monopolies and monopolistically competitive firms, but not competitive firms
c. monopolies, monopolistically competitive firms, and monopolies
d. No firms earn positive economic profit in the long run. Entry will reduce all firms’ economic profit to zero in the long run.

a

110. "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.

b

111. 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.

d

112. 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.

c

113. Suppose for some firm that average total cost is minimized at Q1 units of output. For a monopolistically competitive 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.

d

114. 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.

a

115. 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.

c

116. 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.

b

117. 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.

a

118. 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.

b

119. 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 firm’s 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.

d

120. Cecilia’s Café operates in a monopolistically competitive market. Cecilia’s is currently producing where its average total cost is minimized. In the long run we would expect Cecilia’s output to
a. decrease and average total cost to increase.
b. decrease and average total cost to decrease.
c. remain unchanged as Cecilia’s is doing the best it can.
d. increase and average total costs to decrease.

a

121. 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.

d

122. 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.

d

138. 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.

c

139. Consider monopoly, monopolistic competition, and perfect competition. In which of these three market structures 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.

b

140. Consider monopoly, monopolistic competition, and perfect competition. In which of these three market structures 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.

d

141. Firm A is a perfectly competitive firm. Firm B is a monopolistically competitive firm. Both firms are currently maximizing their respective profits. Which of the following statements is correct?
a. Both Firm A and Firm B would be eager to make an additional sale.
b. Firm A would be eager to make an additional sale, but Firm B would not care whether it made an additional sale or not.
c. Firm B would be eager to make an additional sale, but Firm A would not care whether it made an additional sale or not.
d. Neither Firm A nor Firm B would care whether it made an additional sale or not.

c

142. 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

d

143. 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

a

144. 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

b

145. 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.

b

146. 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.

c

147. In the long run, a firm in a perfectly competitive market operates
a. at its efficient scale, and a monopolistically competitive firm operates at 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.

b

148. 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.

b

149. 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.

d

150. 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.

c

151. 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.

a

152. 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 efficient scale.

a

153. 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.

a

154. 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.

c

155. Hotels in New York City frequently experience an average vacancy rate of about 20 percent (i.e., on an average 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

c

156. 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.

a

157. 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.

a

158. 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.

d

159. 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.

b

160. 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.

a

161. 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.

b

162. 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.

b

163. 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.

d

164. 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.

a

165. The traditional view of monopolistic competition holds that this type of industrial structure is inefficient because
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.

b

166. Monopolistic competition is considered by some to be 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.

a

167. 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.

d

168. 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.

b

169. 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.

c

170. 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.

d

171. 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.

d

172. 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.

c

173. 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.

d

174. 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.

c

175. 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.

a

176. 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.

b

177. 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.

d

178. 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

b

179. 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

d

180. 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.

c

181. 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.

c

182. 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.

a

183. 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.

b

184. 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.

d

185. 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.

c

186. 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 economic losses.

b

187. 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).

a

188. 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 not restricted.

b

189. 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.

a

190. 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.

a

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.

d

2. Which of the following is a characteristic of oligopoly or monopolistic competition, but not perfect competition?
a. advertising and sales promotion
b. profit maximization according to the MR = MC rule
c. firms being price takers rather than price makers
d. horizontal demand and marginal revenue curves

a

3. Some firms have an incentive to advertise because they sell a
a. similar product and charge a price equal to marginal cost.
b. similar 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.

d

4. 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.

a

5. 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

b

6. Firms that sell highly differentiated consumer goods, such as soft drinks, breakfast cereals, and dog food, typically spend what percent of their revenues on advertising?
a. 0-1
b. 2-4
c. 10-20
d. over 50

c

7. 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

c

8. 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.

d

9. 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.

a

10. 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.

a

11. 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

a

12. 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.

c

13. 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.

c

14. 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.

a

15. 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.

d

16. 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.

c

17. 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.

c

18. 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.

d

19. 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.

a

20. 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.

c

21. 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 lower price to remain competitive.
c. increase the welfare of society.
d. reduce its average total cost.

a

22. 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.

a

23. 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.

a

24. 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.

c

25. When firms in a monopolistically competitive market engage in price-related advertising, defenders of advertising 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.

d

26. Defenders of advertising argue that it is not rational for profit-maximizing firms to spend money on advertising for products that have
a. superior quality.
b. inferior or mediocre quality.
c. low prices.
d. limited availability.

b

27. 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.

c

28. 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.

c

29. 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.

c

30. In markets where restrictions on advertising have been used to curtail competition, the U.S. courts have generally
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.

d

31. A law that restricts the ability of hotels/motels to advertise on billboards outside of a resort community would likely lead to
a. a decrease 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.

b

32. 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.

d

33. 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.

b

34. 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.

b

35. 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.

b

36. 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.

d

37. 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.

c

38. According to one theory, advertising sends a signal to consumers about the quality of the product being offered. 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.

b

39. 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.

c

40. Firms that spend a large amount of money on advertising a particular product are likely to be providing consumers 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.

c

41. 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.

b

42. 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.

d

43. Television advertisements aired during major sporting events are very expensive. A theory asserting that people buy a product simply because it is advertised would suggest that information on the high cost of advertising
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.

a

44. 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.

b

45. ABC Company knows that it produces and sells a very good mouse trap. XYZ Company knows that it produces and sells a lousy mouse trap. According to the signaling theory of advertising,
a. both ABC and XYZ have incentives to spend large amounts of money on advertising their mouse traps.
b. ABC has an incentive to spend a large amount of money on advertising its mouse trap, but XYZ does not.
c. XYZ has an incentive to spend a large amount of money on advertising its mouse trap, but ABC does not.
d. neither ABC nor XYZ has an incentive to spend a large amount of money on advertising their mouse traps.

b

46. 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.

b

47. 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.

b

48. Critics of markets that are characterized by firms that sell brand name products argue that brand names encourage 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.

c

49. 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.

a

50. 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.

b

51. 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.

c

52. 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.

b

53. 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.

d

54. Eunice consumes Coke 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, Eunice is found to prefer generic store-brand cola to Coke eight out of ten times. The results of Eunice’s taste test would reinforce 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. brand names cause consumers to be more sensitive to product differences.
d. brand names are a form of socially efficient advertising.

b

55. Kirk consumes Pepsi 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, Kirk is found to prefer Pepsi to store-brand cola eight out of ten times. The results of Kirk’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.

b

56. 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.

b

57. On a vacation to Cancun, Mexico, you find yourself eating every meal at the local McDonald’s rather than having a hamburger from one of the street vendors. Your traveling companion claims that you are irrational, since you never eat McDonald’s hamburgers when you are home, and McDonald’s hamburgers cost more than those prepared and sold by Cancun’s street vendors. An economist would most likely explain your behavior by suggesting 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 McDonald’s brand name suggests consistent quality.
d. the advertising by McDonald’s in Cancun is more persuasive than the advertising by McDonald’s in your home town.

c

58. Two college students, Josh and John, are spending spring break in Boston to visit Harvard University’s law school. Josh buys a cup of coffee each morning at the local Dunkin’ Donuts rather than from one of the local coffee shops. John claims that Josh is irrational because he never purchased Dunkin’ Donuts’ coffee at home, and Dunkin’ Donuts’ coffee costs more than the coffee sold by local shops. An economist would most likely explain Josh’s behavior by suggesting that
a. Josh’s behavior is rational, but John’s behavior is clearly irrational.
b. Josh’s behavior is clearly irrational, but John’s behavior is rational.
c. the Dunkin’ Donuts brand name suggests consistent quality.
d. the advertising by Dunkin’ Donuts in Boston is more persuasive than the advertising by Dunkin’ Donuts in Josh and John’s home town.

c

59. Two soft drinks sit side-by-side in a grocery store: A six-pack of Coca-Cola (a brand name) sells for $3.00, while a six-pack of Uncle Don’s cola (not a brand name) sells for $1.50. Even defenders of brand names would have to admit that
a. no rational consumer would spend twice as much for Coca-Cola as he would for Uncle Don’s cola.
b. the side-by-side presence of these two colas conveys no useful information to consumers.
c. Coca-Cola has no incentive to maintain the quality of its product just because of the Coca-Cola brand name.
d. None of the above is correct.

d

60. Two soft drinks sit side-by-side in a grocery store: A six-pack of Coca-Cola (a brand name) sells for $3.00, while a six-pack of Uncle Don’s cola (not a brand name) sells for $1.50. In a typical day the store sells some of each type of cola, which suggests that
a. no rational consumer would spend twice as much for Coca-Cola as he would for Uncle Don’s cola.
b. some consumers must perceive that Coca-Cola is a higher quality product.
c. Coca-Cola has no incentive to maintain the quality of its product just because of the Coca-Cola brand name.
d. None of the above is correct.

b

61. Which of the following statements regarding brand names in advertising is not correct?
a. Brand names provide consumers with information about quality when quality cannot be easily judged in advance of purchase.
b. Brand names give firms an incentive to maintain high quality to maintain the reputation of the firm.
c. Brand names allow firms to produce and sell inferior products in the long run since people will continue to purchase the brand-name product.
d. Brand names can cause consumers to perceive differences in products that do not actually exist.

c

62. When quality cannot be easily judged in advance, what provides consumers with information about the quality of a product?
a. a brand name
b. a tie-in
c. the quantity available for sale
d. the amount of deadweight loss

a

63. When monopolistically competitive firms advertise, in the long run
a. they will still earn zero economic profit.
b. they can earn positive economic profit by increasing market share.
c. the market price must fall.
d. the market price must rise.

a

64. Which of the following statements is not correct?
a. The typical monopolistically competitive firm could reduce its average total cost if it produced more output.
b. Monopolistically competitive firms advertise in order to increase the elasticity of the demand curve they face.
c. Expensive advertising might help consumers if it is a signal that the product is good.
d. Brand names acquired at great cost might help consumers by assuring quality.

b

65. Which of the following statements is correct?
a. The more similar Firm A’s product is to Firm B’s product, the more likely Firm A is to advertise.
b. Monopolistically competitive firms advertise in order to increase the elasticity of the demand curve they face.
c. According to the signaling theory, the more product information an advertisement contains, the more effective it is.
d. Brand names may help consumers if they provide information about the quality of a product when acquiring such information is difficult.

d

66. Which of the following statements is not correct?
a. Critics of advertising argue that firms advertise to manipulate consumers’ tastes.
b. Defenders of advertising argue that advertising provides valuable product information to consumers.
c. An industry with many brand name products will be more competitive than one with many generic products.
d. The willingness of a firm to spend a large amount of money on advertising can signal the quality of the product.

c

1. Firms in a monopolistically competitive market
a. are price takers.
b. produce an output level that minimizes average total cost in the long run.
c. maximize profits by producing where price equals marginal cost.
d. cannot earn economic profits in the long run.

d

2. Which of the following statements is correct?
a. Firms in monopolistic competition and monopoly can earn economic profits in both the short run and the long run.
b. Both perfectly competitive and monopolistically competitive firms charge a price equal to marginal cost.
c. Firms in perfect competition, monopolistic competition, and monopoly maximize profits by producing where marginal revenue equals marginal cost.
d. Both perfectly competitive and monopolistically competitive firms produce the welfare-maximizing level of output.

c

3. Which of the following statements is correct?
a. Firms in monopolistic competition and monopoly can earn economic profits in both the short run and the long run.
b. Both perfectly competitive and monopolistically competitive firms are price takers.
c. Both a monopolistically competitive industry and a monopoly are characterized by a very small number (or one) firm.
d. Firms can easily enter a perfectly competitive or monopolistically competitive industry.

d

4. Which of the following statements is not correct?
a. Both monopolistically competitive and perfectly competitive firms can earn economic profits in the short run.
b. Both monopolies and monopolistically competitive firms can earn economic profits in the long run.
c. Firms in perfect competition, monopolistic competition, and monopoly maximize profits by producing where marginal revenue equals marginal cost.
d. Only competitive firms produce the welfare-maximizing level of output.

b

5. Which of the following statements is not correct?
a. Firms in monopolistic competition and monopoly can earn economic profits in the short run.
b. Firms in monopolistic competition and perfect competition produce the welfare-maximizing level of output.
c. Monopolistically competitive firms price above marginal cost, whereas competitive firms price at marginal cost.
d. Firms wishing to enter a monopolistically competitive market can do so freely, whereas firms wishing to enter a monopoly market will face barriers.

b

6. A market is comprised of many firms as opposed to just one firm or a few firms
a. only when it is perfectly competitive.
b. only when it is perfectly competitive or oligopolistic.
c. only when it is perfectly competitive or monopolistically competitive.
d. when it is perfectly competitive, monopolistically competitive, or oligopolistic.

c

7. A firm is a price taker
a. only when the market is perfectly competitive.
b. only when the market is perfectly competitive or monopolistic.
c. only when the market is perfectly competitive or monopolistically competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.

a

8. A firm maximizes its profit by producing output up to the point where marginal revenue equals marginal cost
a. only when the market is a monopoly.
b. only when the market is a monopoly or monopolistically competitive.
c. only when the market is monopolistically competitive or perfectly competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.

d

9. A firm produces the welfare-maximizing level of output
a. only when the market is perfectly competitive.
b. only when the market is a monopoly or monopolistically competitive.
c. only when the market is monopolistically competitive or perfectly competitive.
d. when the market is perfectly competitive, monopolistically competitive, or monopolistic.

a

10. A monopolistically competitive market is like a monopoly in that
a. both market structures feature easy entry by new firms in the long run.
b. the main objective of firms in both market structures is something other than profit maximization.
c. firms in both market structures produce the welfare-maximizing level of output.
d. firms in both market structures set price above marginal cost.

d

11. A monopolistically competitive market is like a competitive market in that
a. both market structures feature easy entry by new firms in the long run.
b. the main objective of firms in both market structures is something other than profit maximization.
c. firms in both market structures produce the welfare-maximizing level of output.
d. firms in both market structures set price above marginal cost.

a

12. A monopolistically competitive market is like both a competitive market and a monopoly in that
a. all three market structures feature easy entry by new firms in the long run.
b. firms in all three market structures maximize profit by producing an output level where marginal revenue equals marginal cost.
c. firms in all three market structures produce the welfare-maximizing level of output.
d. All of the above are correct.

b

13. A monopolistically competitive market is like both a competitive market and a monopoly in that firms in all three market structures
a. can earn economic profits in the short run.
b. can earn economic profits in the long run.
c. charge a price above marginal cost.
d. All of the above are correct.

a

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