Chapter17 MonopolisticCompetition

MULTIPLECHOICE 1. Monopolisticcompetitionischaracterizedbywhichofthefollowingattributes? (i) freeentry (ii) productdifferentiation (iii) manysellers a. (i)and(iii)only b. (i)and(ii)only c. (ii)and(iii)only d. (i),(ii),and(iii) ANSWER:d. (i),(ii),and(iii) TYPE:MDIFFICULTY:1SECTION:17.1 2. Thephenomenonofproductdifferentiationcontrastssharplywiththephenomenonof a. homogeneousproducts. b. industrialproducts. c. monopolisticcompetition. d. productintegration. ANSWER:a. homogeneousproducts. TYPE:MDIFFICULTY:1SECTION:17.1 3. Inamonopolisticallycompetitiveindustry,priceis a. equaltomarginalcostsinceeachfirmisapricetaker. b. belowmarginalcostsinceeachfirmisapricetaker. c. abovemarginalcostsinceeachfirmisapricesetter. d. alwaysafractionofmarginalcostsinceeachfirmisapricesetter. ANSWER:c. abovemarginalcostsinceeachfirmisapricesetter. TYPE:MDIFFICULTY:2SECTION:17.1 4. Inwhichofthefollowingmarketstructuresisthenumberofsellerslessthanmany? (i) monopolisticcompetition (ii) monopoly (iii) oligopoly a. (i)and(ii)only b. (ii)and(iii)only c. (ii)only d. Alloftheabovearecorrect. ANSWER:b. (ii)and(iii)only TYPE:MDIFFICULTY:1SECTION:17.1 5. Whichofthefollowingmarketstructuresfeaturesfreeentryandexit? (i) perfectcompetition (ii) monopolisticcompetition (iii) monopoly a. (i)only b. (i)and(ii)only c. (ii)and(iii)only d. Alloftheabovearecorrect. ANSWER:b. (i)and(ii)only TYPE:MDIFFICULTY:2SECTION:17.1

8 Chapter 17/Monopolistic Competition

6. Monopolisticcompetitiondiffersfromperfectcompetitionbecauseinmonopolisticallycompetitivemarkets a. therearebarrierstoentry. b. allfirmscaneventuallyearneconomicprofits. c. eachofthesellersoffersasomewhatdifferentproduct. d. strategicinteractionsbetweenfirmsisvitallyimportant. ANSWER:c. eachofthesellersoffersasomewhatdifferentproduct. TYPE:MDIFFICULTY:2SECTION:17.1 7. Onewayinwhichmonopolisticcompetitiondiffersfromoligopolyis a. therearenobarrierstoentryinoligopolies. b. inoligopolymarketsthereareonlyafewsellers. c. alloligopolyfirmseventuallyearnzeroeconomicprofits. d. strategicinteractionsbetweenfirmsarerarelyevidentinoligopolies. ANSWER:b. inoligopolymarketsthereareonlyafewsellers. TYPE:MDIFFICULTY:2SECTION:17.1 8. Asimilaritybetweenmonopolyandmonopolisticcompetitionisthat,inbothmarketstructures, a. strategicinteractionsamongsellersareimportant. b. therearefewerthanmanysellers. c. sellersarepricemakersratherthanpricetakers. d. productdifferentiationisimportant. ANSWER:c. sellersarepricemakersratherthanpricetakers. TYPE:MDIFFICULTY:2SECTION:17.1 9. Aprofitmaximizingfirminamonopolisticallycompetitivemarketdiffersfromafirminaperfectlycompetitive marketbecausethefirminthemonopolisticallycompetitivemarket a. ischaracterizedbymarketsharemaximization. b. hasnobarrierstoentry. c. facesadownwardslopingdemandcurveforitsproduct. d. facesahorizontaldemandcurveatthemarketclearingprice. ANSWER:c. facesadownwardslopingdemandcurveforitsproduct. TYPE:MDIFFICULTY:2SECTION:17.1 10. Theprofitmaximizingruleforafirminamonopolisticallycompetitivemarketistoselectthequantityatwhich a. marginalrevenueisequaltomarginalcost. b. averagetotalcostisequaltomarginalrevenue. c. averagetotalcostisatitsminimumvalue. d. averagerevenueexceedsaveragetotalcost. ANSWER:a. marginalrevenueisequaltomarginalcost. TYPE:MDIFFICULTY:2SECTION:17.1 11. Aprofitmaximizingfirminamonopolisticallycompetitivemarketischaracterizedbywhichofthefollowing? a. Averagerevenueexceedsmarginalrevenue. b. Marginalrevenueexceedsaveragerevenue. c. Averagerevenueisequaltomarginalrevenue. d. Revenueisalwaysmaximizedalongwithprofit. ANSWER:a. Averagerevenueexceedsmarginalrevenue. TYPE:MDIFFICULTY:2SECTION:17.1

Chapter 17/Monopolistic Competition 9

Usethefiguresbelowtoanswerquestions12through14.

12.

Whichofthegraphswouldmostlikelyrepresentaprofitmaximizingfirminamonopolisticallycompetitive market? a. panela b. panelb c. panelc d. paneld ANSWER:a. panela TYPE:MDIFFICULTY:2SECTION:17.1 13. IfafirminamonopolisticallycompetitivemarketwasproducingthelevelofoutputdepictedasQ dinpaneld,it

would a. notbemaximizingitsprofit. b. beminimizingitslosses. c. belosingmarketsharetootherfirmsinthemarket. d. beoperatingatexcesscapacity. ANSWER:a. notbemaximizingitsprofit. TYPE:MDIFFICULTY:2SECTION:17.1 14. Thefirmdepictedinpanelbfacesahorizontaldemandcurve.Ifpanelbdepictsaprofitmaximizingfirm, a. itcouldbeoperatingineitheraperfectlycompetitivemarketorinamonopolisticallycompetitivemarket. b. itwouldnothaveexcesscapacityinitsproductionaslongasitisearningzeroeconomicprofit. c. itisabletochoosethepriceatwhichitsellsitsproduct. d. Alloftheabovearecorrect. ANSWER:b. itwouldnothaveexcesscapacityinitsproductionaslongasitisearningzeroeconomicprofit. TYPE:MDIFFICULTY:2SECTION:17.1 15. Productdifferentiationcausesthesellerofagoodtofacewhattypeofdemandcurve? a. downwardsloping b. upwardsloping c. horizontal d. vertical ANSWER:a. downwardsloping TYPE:MDIFFICULTY:2SECTION:17.1

10 Chapter 17/Monopolistic Competition

Usethefigurebelowtoanswerquestions16through18.

16.

Whichofthegraphsshownwouldbeconsistentwithafirminamonopolisticallycompetitivemarketthatisearning apositiveprofit? a. panela b. panelb c. panelc d. paneld ANSWER:c. panelc TYPE:MDIFFICULTY:2SECTION:17.1 17. Whichofthegraphsshownwouldbeconsistentwithafirminamonopolisticallycompetitivemarketthatisdoing itsbestbutstilllosingmoney? a. panela b. panelb c. panelc d. paneld ANSWER:b. panelb TYPE:MDIFFICULTY:2SECTION:17.1 18. Whichofthegraphsdepictsamonopolisticallycompetitivefirminlongrunequilibrium? a. panela b. panelb c. panelc d. Noneoftheabovearecorrect. ANSWER:d. Noneoftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:17.1 19. Intheshortrun,afirminamonopolisticallycompetitivemarketoperatesmuchlikea(n) a. perfectlycompetitivefirm. b. oligopolyfirm. c. monopoly. d. Alloftheabovearecorrect. ANSWER:c. monopoly. TYPE:MDIFFICULTY:2SECTION:17.1

Chapter 17/Monopolistic Competition 11

20. Amonopolisticallycompetitivefirmchooses a. thequantityofoutputtoproduce,butthemarketdeterminesprice. b. theprice,butcompetitioninthemarketdeterminesthequantity. c. price,butoutputisdeterminedbyacartelproductionquota. d. thequantityofoutputtoproduceandthepriceatwhichitwillsellitsoutput. ANSWER:d. thequantityofoutputtoproduceandthepriceatwhichitwillsellitsoutput. TYPE:MDIFFICULTY:2SECTION:17.1 21. Iffirmsinamonopolisticallycompetitivemarketareearningpositiveprofits, a. firmswilllikelybesubjecttoregulation. b. barrierstoentrywillbestrengthened. c. somefirmsmustexitthemarket. d. newfirmswillenterthemarket. ANSWER:d. newfirmswillenterthemarket. TYPE:MDIFFICULTY:2SECTION:17.1 22. Iffirmsinamonopolisticallycompetitivemarketareearningeconomicprofits,whichofthefollowingscenarios wouldbestreflectthechangefacingincumbentfirmsasthemarketadjuststoitsnewequilibrium? a. anincreaseindemand b. adecreaseindemand c. adownwardshiftintheirmarginalcostcurve d. anupwardshiftintheirmarginalcostcurve ANSWER:b. adecreaseindemand TYPE:MDIFFICULTY:2SECTION:17.1 23. Iffirmsinamonopolisticallycompetitivemarketareincurringeconomiclosses,whichofthefollowingscenarios wouldbestreflectthechangefacingincumbentfirms(whoareabletostayinthemarket)asthemarketadjuststoits newequilibrium? a. adownwardshiftintheirmarginalcostcurve b. anupwardshiftintheirmarginalcostcurve c. adecreaseindemand d. anincreaseindemand ANSWER:d. anincreaseindemand TYPE:MDIFFICULTY:2SECTION:17.1

12 Chapter 17/Monopolistic Competition

Linesinthefiguresbelowreflectthepotentialeffectofentryandexitinamonopolisticallycompetitivemarketonthe demandand/ormarginalcostcurvesofincumbentfirms.Usethesefigurestoanswerquestions24and25.

24.

Paneldinthesetoffiguresshowndepictstheeffectonincumbentfirmsof a. longruneconomiclosses. b. adecreaseinthediversityofproductsofferedinthemarket. c. newentrantsinthemarket. d. existingfirmsexitingthemarket. ANSWER:c. newentrantsinthemarket. TYPE:MDIFFICULTY:2SECTION:17.1 25. Whichofthediagramsdepictstheeffectonincumbentfirmsofsomeexistingfirmsleavingthemarket? a. panela b. panelb c. panelc d. paneld ANSWER:c. panelc TYPE:MDIFFICULTY:2SECTION:17.1 26. Inmonopolisticallycompetitivemarkets,economicprofits a. signalsomeincumbentfirmstoexitthemarket. b. signalnewfirmstoenterthemarket. c. aremaintainedthroughgovernmentimposedbarrierstoentry. d. areneverpossible. ANSWER:b. signalnewfirmstoenterthemarket. TYPE:MDIFFICULTY:1SECTION:17.1 27. Inmonopolisticallycompetitivemarkets,economiclosses a. signalsomeincumbentfirmstoexitthemarket. b. signalnewfirmstoenterthemarket. c. aremaintainedthroughgovernmentimposedbarrierstoexit. d. areneverpossible. ANSWER:a. signalsomeincumbentfirmstoexitthemarket. TYPE:MDIFFICULTY:1SECTION:17.1

Chapter 17/Monopolistic Competition 13

28. Asnewfirmsenteramonopolisticallycompetitivemarket,profitsofexistingfirms a. riseandproductdiversityinthemarketincreases. b. riseandproductdiversityinthemarketdecreases. c. declineandproductdiversityinthemarketincreases. d. declineandproductdiversityinthemarketdecreases. ANSWER:c. declineandproductdiversityinthemarketincreases. TYPE:MDIFFICULTY:2SECTION:17.1 29. Assomeincumbentfirmsexitamonopolisticallycompetitivemarket,profitsofexistingfirms a. declineandproductdiversityinthemarketdecreases. b. declineandproductdiversityinthemarketincreases. c. riseandproductdiversityinthemarketdecreases. d. riseandproductdiversityinthemarketincreases. ANSWER:c. riseandproductdiversityinthemarketdecreases. TYPE:MDIFFICULTY:2SECTION:17.1 30. Thefreeentryandexitoffirmsinamonopolisticallycompetitivemarketguaranteesthat a. botheconomicprofitsandeconomiclossescanpersistintothelongrun. b. botheconomicprofitsandeconomiclossesdisappearinthelongrun. c. economicprofitscanpersistintothelongrun,butnoteconomiclosses. d. economiclossescanpersistintothelongrun,butnoteconomicprofits. ANSWER:b. botheconomicprofitsandeconomiclossesdisappearinthelongrun. TYPE:MDIFFICULTY:2SECTION:17.1 31. Inmonopolisticallycompetitivemarkets,thepropertyoffreeentryandexitsuggeststhat a. themarketstructurewilleventuallybecharacterizedbyperfectcompetitioninthelongrun. b. allfirmsearnzeroeconomicprofitsinthelongrun. c. somefirmswillbeabletoearneconomicprofitsinthelongrun. d. somefirmswillbeforcedtoincureconomiclossesinthelongrun. ANSWER:b. allfirmsearnzeroeconomicprofitsinthelongrun. TYPE:MDIFFICULTY:2SECTION:17.1 32. Whenaprofitmaximizingfirminamonopolisticallycompetitivemarketisproducingthelongrunequilibrium quantity, a. itsaveragerevenuewillequalitsmarginalcost. b. itsmarginalrevenuewillexceeditsmarginalcost. c. itwillbeearningpositiveeconomicprofits. d. itsdemandcurvewillbetangenttoitsaveragetotalcostcurve. ANSWER:d. itsdemandcurvewillbetangenttoitsaveragetotalcostcurve. TYPE:MDIFFICULTY:2SECTION:17.1 33. Whenafirm'sdemand(averagerevenue)curveistangenttoitsaveragetotalcostcurve,the a. firmseconomicprofitiszero. b. firmmustbeearningeconomicprofits. c. firmmustbeincurringeconomiclosses. d. firmmustbeoperatinginamonopolisticallycompetitivemarket. ANSWER:a. firmseconomicprofitiszero. TYPE:MDIFFICULTY:2SECTION:17.1

14 Chapter 17/Monopolistic Competition

Usethefiguresbelowtoanswerquestions34through37

34.

Panel(a)showsaprofitmaximizingmonopolisticallycompetitivefirmthatis a. earningazeroprofit. b. inlongrunequilibrium. c. chargingapricethatisequaltoaveragetotalcost. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:17.1 35. Whichofthepanelsshowncouldcharacterizeshortrunequilibriumforafirminamonopolisticallycompetitive market? a. panela b. panelb c. panelc d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:17.1 36. Panelbinthesetoffiguresshownisconsistentwithafirminamonopolisticallycompetitivemarketthatis a. inshortrunequilibrium,butnotlongrunequilibrium. b. inlongrunequilibrium,butnotshortrunequilibrium. c. inbothshortrunandlongrunequilibrium. d. earningapositiveprofit. ANSWER:a. inshortrunequilibrium,butnotlongrunequilibrium. TYPE:MDIFFICULTY:2SECTION:17.1 37. Whichofthepanelsdepictsafirminamonopolisticallycompetitivemarketearningeconomicprofits? a. panelc b. paneld c. bothpanelscandd d. Noneoftheabovearecorrect. ANSWER:a. panelc TYPE:MDIFFICULTY:2SECTION:17.1

Chapter 17/Monopolistic Competition 15

38. Whenaprofitmaximizingfirminamonopolisticallycompetitivemarketisinlongrunequilibrium, a. thedemandcurvewillbeperfectlyelastic. b. priceexceedsmarginalcost. c. marginalcostisfalling. d. marginalrevenueexceedsmarginalcost. ANSWER:b. priceexceedsmarginalcost. TYPE:MDIFFICULTY:2SECTION:17.1 39. Aprofitmaximizingfirminamonopolisticallycompetitivemarketalwaysoperatesatthepointof a. minimumaveragetotalcost. b. unitaryelasticityofdemand. c. efficientscale. d. Noneoftheabovearecorrect. ANSWER:d. Noneoftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:17.1 40. Sinceafirminamonopolisticallycompetitivemarketfacesa a. downwardslopingdemandcurve,itwillalwaysoperatewithexcesscapacity. b. downwardslopingdemandcurve,itwillalwaysoperateatefficientscale. c. perfectlyelasticdemandcurve,itwillalwaysoperatewithexcesscapacity. d. perfectlyinelasticdemandcurve,itwillalwaysoperateatefficientscale. ANSWER:a. downwardslopingdemandcurve,itwillalwaysoperatewithexcesscapacity. TYPE:MDIFFICULTY:2SECTION:17.1 41. Whenafirmoperateswithexcesscapacity, a. additionalproductionwouldlowertheaveragetotalcost. b. additionalproductionwouldincreaseaveragetotalcost. c. itmustbeaperfectlycompetitivefirm. d. itmustbeamonopolisticallycompetitivefirm. ANSWER:a. additionalproductionwouldlowertheaveragetotalcost. TYPE:MDIFFICULTY:2SECTION:17.1 42. Whenafirmoperatesatefficientscale, a. itsaveragerevenuemustexceedtheminimumofaveragetotalcost. b. itsaveragerevenuemustbeequaltotheminimumofaveragetotalcost. c. theaveragetotalcostcurvemustbefalling. d. theaveragetotalcostcurvemustberising. ANSWER:b. itsaveragerevenuemustbeequaltotheminimumofaveragetotalcost. TYPE:MDIFFICULTY:3SECTION:17.1 43. Inthelongrun,afirminaperfectlycompetitivemarketoperatesat a. efficientscaleandamonopolisticallycompetitivefirmoperatesatefficientscale. b. efficientscaleandamonopolisticallycompetitivefirmoperateswithexcesscapacity. c. excesscapacityandamonopolisticallycompetitivefirmoperateswithexcesscapacity. d. excesscapacityandamonopolisticallycompetitivefirmoperatesatefficientscale. ANSWER:b. efficientscaleandamonopolisticallycompetitivefirmoperateswithexcesscapacity. TYPE:MDIFFICULTY:2SECTION:17.1 44. Inthelongrun,aprofitmaximizingfirminamonopolisticallycompetitivemarketoperatesat a. efficientscale. b. alevelofoutputatwhichaveragetotalcostisrising. c. alevelofoutputatwhichaveragetotalcostisfalling. d. thelevelofoutputatwhichtotalrevenueismaximized. ANSWER:c. alevelofoutputatwhichaveragetotalcostisfalling. TYPE:MDIFFICULTY:2SECTION:17.1

16 Chapter 17/Monopolistic Competition

45. Productdifferentiationinmonopolisticallycompetitivemarketsensuresthat,forprofitmaximizingfirms, a. marginalrevenuewillequalaveragetotalcost. b. pricewillexceedmarginalcost. c. marginalcostwillexceedaveragerevenue. d. averagevariablecostwillbedeclining. ANSWER:b. pricewillexceedmarginalcost. TYPE:MDIFFICULTY:2SECTION:17.1 46. Afirminamonopolisticallycompetitivemarketoperates a. wheremarginalrevenueiszero. b. wheremarginalrevenueisnegative. c. ontherisingportionofitsaveragetotalcostcurve. d. onthedecliningportionofitsaveragetotalcostcurve. ANSWER:d. onthedecliningportionofitsaveragetotalcostcurve. TYPE:MDIFFICULTY:2SECTION:17.1 47. HotelsinNewYorkCityfrequentlyexperienceanaveragevacancyrateofabout20percent(i.e.,onanaverage night,80percentoftheirroomsarefull).Thiskindofexcesscapacityisindicativeofwhatkindofmarket? a. monopoly b. perfectcompetition c. monopolisticcompetition d. oligopoly ANSWER:c. monopolisticcompetition TYPE:MDIFFICULTY:2SECTION:17.1 48. Forprofitmaximizingfirmsinamonopolisticallycompetitivemarket,anothercustomermeans a. nochangeinprofit. b. moreprofit. c. potentialeconomiclosses. d. marginalcostcouldpotentiallyexceedprice. ANSWER:b. moreprofit. TYPE:MDIFFICULTY:2SECTION:17.1 49. Aprofitmaximizingfirminamonopolisticallycompetitivemarketiseagerforanothercustomerbecause a. itwantstomaintaintheequalitybetweenpriceandmarginalcost. b. priceexceedsmarginalcost. c. amarkupovermarginalcostisdifficulttomaintain. d. itearnszeroeconomicprofitsinthelongrun. ANSWER:b. priceexceedsmarginalcost. TYPE:MDIFFICULTY:2SECTION:17.1 50. Amonopolisticallycompetitivemarketcouldbeconsideredinefficientbecause a. marginalrevenueexceedsaveragerevenue. b. priceexceedsmarginalcost. c. efficientscaleisrealizedinthelongrun,butnotintheshortrun. d. markuppricingdoesnotoccurinanyothermarketstructure. ANSWER:b. priceexceedsmarginalcost. TYPE:MDIFFICULTY:2SECTION:17.1 51. Whenaprofitmaximizingfirminamonopolisticallycompetitivemarketchargesapricehigherthanmarginalcost, a. itisviolatingtheantitrustlaws. b. itmustbelosingmoney. c. thereisadeadweightloss,butitisexactlyoffsetbythebenefitofexcesscapacity. d. Noneoftheabovearecorrect. ANSWER:d. Noneoftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:17.1

Chapter 17/Monopolistic Competition 17

52. Thedeadweightlossthatisassociatedwithamonopolisticallycompetitivemarketisaresultof a. pricefallingshortofmarginalcostinordertoincreasemarketshare. b. priceexceedingmarginalcost. c. operatinginaregulatedindustry. d. excessiveadvertisingcosts. ANSWER:b. priceexceedingmarginalcost. TYPE:MDIFFICULTY:2SECTION:17.1 53. Regulationofafirminamonopolisticallycompetitivemarket a. usuallyimpliesaverysmalladministrativeburden. b. willlowerthefirmscosts. c. iscommonlyusedtoenhancemarketefficiency. d. isunlikelytoimprovemarketefficiency. ANSWER:d. isunlikelytoimprovemarketefficiency. TYPE:MDIFFICULTY:2SECTION:17.1 54. Theadministrativeburdenofregulatingpriceinamonopolisticallycompetitivemarketis a. smallduetoeconomiesofscale. b. largebecausepriceisusuallybelowmarginalcost. c. largebecauseofthelargenumberoffirmsthatproducedifferentiatedproducts. d. smallbecausefirmsproducewithexcesscapacity. ANSWER:c. largebecauseofthelargenumberoffirmsthatproducedifferentiatedproducts. TYPE:MDIFFICULTY:2SECTION:17.1 55. Ifregulatorsrequiredfirmsinmonopolisticallycompetitivemarketstosetpriceequaltomarginalcost, a. firmswouldmostlikelyexperienceeconomiclosses. b. firmswouldalsooperateatmaximumefficientscale. c. newfirmswouldbelikelytoenterthemarket. d. themostefficientfirmsarenotlikelytobeaffected. ANSWER:a. firmswouldmostlikelyexperienceeconomiclosses. TYPE:MDIFFICULTY:2SECTION:17.1 56. Ifregulatorsrequiredfirmsinmonopolisticallycompetitivemarketstosetpriceequaltomarginalcost, a. firmswouldrespondbyloweringtheircosts. b. firmswouldrequireasubsidytostayinbusiness c. newfirmsthatenterthemarketwouldoperateatefficientscale. d. themostefficientfirmswouldnotbeaffected. ANSWER:b. firmswouldrequireasubsidytostayinbusiness TYPE:MDIFFICULTY:2SECTION:17.1 57. Inefficiencyinmonopolisticallycompetitivemarketscanbeidentifiedwith a. inferiorproductsproducedbymostfirms. b. governmentprogramsthateffectivelyregulateprice. c. theirsimilaritiestoperfectlycompetitivemarkets. d. nothavingthe"ideal"numberoffirmsintheindustry. ANSWER:d. nothavingthe"ideal"numberoffirmsintheindustry. TYPE:MDIFFICULTY:2SECTION:17.1 58. Beforeanewfirmentersamonopolisticallycompetitivemarketwithanewproduct,itconsiders a. theprofitopportunities. b. thebusinessstealingexternality. c. theproductvarietyexternality. d. Alloftheabovearecorrect. ANSWER:a. theprofitopportunities. TYPE:MDIFFICULTY:2SECTION:17.1

18 Chapter 17/Monopolistic Competition

59. Theproductvarietyexternalityisassociatedwith a. theproducersurplusthataccruestoincumbentfirmsinamonopolisticallycompetitiveindustry. b. lossofconsumersurplusfromexposuretoadditionaladvertising. c. theconsumersurplusthatisgeneratedfromtheintroductionofanewproduct. d. theopportunitycostoffirmsexitingamonopolisticallycompetitiveindustry. ANSWER:c. theconsumersurplusthatisgeneratedfromtheintroductionofanewproduct. TYPE:MDIFFICULTY:2SECTION:17.1 60. Whenconsumersareexposedtoadditionalchoicesthatresultfromtheintroductionofanewproduct, a. theirsatisfactionislikelytobeloweredasaresultoftheirhavingtomakeadditionalchoices. b. aproductvarietyexternalityissaidtooccur. c. anadvertisingexternalityissaidtooccur. d. consumersarelikelytoexperiencenegativeconsumptionexternalities. ANSWER:b. aproductvarietyexternalityissaidtooccur. TYPE:MDIFFICULTY:2SECTION:17.1 61. Abusinessstealingexternality a. islikelytobepunishedunderantitrustlaws. b. occurswhenonefirmattemptstoduplicateexactlytheproductofadifferentfirm. c. isconsideredtobeanexplicitcostofbusinessinmonopolisticallycompetitivemarkets. d. isthenegativeexternalityassociatedwithentryofnewfirmsinamonopolisticallycompetitivemarket. ANSWER:d. isthenegativeexternalityassociatedwithentryofnewfirmsinamonopolisticallycompetitivemarket. TYPE:MDIFFICULTY:2SECTION:17.1 62. Whenincumbentfirmslosecustomersandprofitsduetoentryofanewcompetitor,a a. predatorypricingexternalityoccurs. b. consumptionexternalityoccurs. c. businessstealingexternalityoccurs. d. productvarietyexternalityoccurs. ANSWER:c. businessstealingexternalityoccurs. TYPE:MDIFFICULTY:2SECTION:17.1 63. Whenthelossfromabusinessstealingexternalityexceedsthegainfromaproductvarietyexternality, a. firmsaremorelikelytooperateatefficientscale. b. therearelikelytobetoomanyfirmsinamonopolisticallycompetitivemarket. c. marketefficiencyislikelytobeenhancedbytheentryofnewfirms. d. themarketstructureislikelytobeintransition. ANSWER:b. therearelikelytobetoomanyfirmsinamonopolisticallycompetitivemarket. TYPE:MDIFFICULTY:2SECTION:17.1 64. Theentryofnewfirmsintoamonopolisticallycompetitivemarketisaccompaniedby a. bothpositiveandnegativeexternalities. b. onlypositiveexternalities. c. onlynegativeexternalities. d. onlyprivateprofitopportunities(noexternalities). ANSWER:a. bothpositiveandnegativeexternalities. TYPE:MDIFFICULTY:2SECTION:17.1 65. Theproductvarietyexternalityassociatedwithmonopolisticcompetitionarisesbecauseinmonopolistically competitivemarkets, a. firmsproducewithexcesscapacity. b. firmstrytodifferentiatetheirproducts. c. firmswouldliketoproducehomogeneousproducts,butthelargenumberoffirmsprohibitsit. d. entryandexitisnotrestricted. ANSWER:b. firmstrytodifferentiatetheirproducts. TYPE:MDIFFICULTY:2SECTION:17.1

Chapter 17/Monopolistic Competition 19

Usethefollowinginformationforquestions66and67. VacationInnsofAmerica(VIA)hasrecentlyannouncedintentionsofbuildinganewhotel/resortcomplexinMyrtle Beach,SouthCarolina.Assumethatthehotel/resortmarketinMyrtleBeachischaracterizedbymonopolisticcompetition. 66. AsaresultofthenewVIAhotel/resort,touristswhostayinMyrtleBeacharelikelytoexperiencea a. productvarietyexternality,whichharmsconsumers. b. productvarietyexternality,whichbenefitsconsumers. c. businessstealingexternality,whichharmsconsumers. d. businessstealingexternality,whichbenefitsconsumers. ANSWER:b. productvarietyexternality,whichbenefitsconsumers. TYPE:MDIFFICULTY:2SECTION:17.1 67. Existinghotels,motels,andlodgingfacilitiesinMyrtleBeacharelikelytoexperiencewhatkindofexternalityasa resultofthenewVIAhotel/resort? a. productvariety b. businessstealing c. competitive d. advertising ANSWER:b. businessstealing TYPE:MDIFFICULTY:2SECTION:17.1 68. Inamonopolisticallycompetitiveindustry,firmsdemandcurvesalsorepresent a. marginalrevenue. b. marginalcost. c. averagerevenue. d. profit. ANSWER:c. averagerevenue. TYPE:MDIFFICULTY:1SECTION:17.1 69. Whenanewfirmentersamonopolisticallycompetitivemarket,theindividualdemandcurvesfacedbyallexisting firmsinthatmarketwill a. shifttotheleft. b. shifttotheright. c. shiftinadirectionthatisunpredictablewithoutfurtherinformation. d. remainunchanged;onlythesupplycurvewillshift. ANSWER:a. shifttotheleft. TYPE:MDIFFICULTY:2SECTION:17.1 70. Whenafirmexitsamonopolisticallycompetitivemarket,theindividualdemandcurvesfacedbyallexistingfirms inthatmarketwill a. shiftinadirectionthatisunpredictablewithoutfurtherinformation. b. shifttotheright. c. shifttotheleft. d. remainunchanged;onlythesupplycurvewillshift. ANSWER:b. shifttotheright. TYPE:MDIFFICULTY:2SECTION:17.1 71. Longrunprofitearnedbyamonopolisticallycompetitivefirmisdriventothecompetitivelevelduetoa a. changeinthetechnologythatthefirmutilizes. b. shiftofitsdemandcurve. c. shiftofitssupplycurve. d. Noneoftheabovearecorrect. ANSWER:b. shiftofitsdemandcurve. TYPE:MDIFFICULTY:2SECTION:17.1

20 Chapter 17/Monopolistic Competition

72. Inthelongrun,amonopolisticallycompetitivefirmproducesaquantitythatis a. equaltotheefficientscale. b. lessthantheefficientscale. c. greaterthantheefficientscale. d. consistentwithdiseconomiesofscale. ANSWER:b. lessthantheefficientscale. TYPE:MDIFFICULTY:2SECTION:17.1 73. Becauseamonopolisticallycompetitivefirmhassomemarketpower,inthelongrunthepriceofitsgoodexceedsits a. averagerevenue. b. averagetotalcost. c. marginalcost. d. profitperunit. ANSWER:c. marginalcost. TYPE:MDIFFICULTY:2SECTION:17.1 74. Whichofthefollowingmarketsimposedeadweightlossesonsociety? (i)perfectcompetition (ii)monopolisticcompetition (iii)monopoly a. (i)and(ii) b. (ii)and(iii) c. (i)and(iii) d. (i)only ANSWER:b. (ii)and(iii) TYPE:MDIFFICULTY:2SECTION:17.1 75. Whichofthefollowinggoodsaresoldinamonopolisticallycompetitivemarket? a. compactdiscs b. wheat c. corn d. postagestamps ANSWER:a. compactdiscs TYPE:MDIFFICULTY:1SECTION:17.1 76. Whichofthefollowinggoodsarenotsoldinmonopolisticallycompetitivemarkets? a. CDs b. books c. cookies d. wheat ANSWER:d. wheat TYPE:MDIFFICULTY:1SECTION:17.1 77. Monopolisticallycompetitivemarketsdifferfromperfectlycompetitivemarketsbecauseof (i) thenumberofsellers. (ii) barrierstoentry. (iii) productdifferentiationamongthesellers. a. (ii)only b. (iii)only c. (i)and(iii) d. (ii)and(iii) ANSWER:b. (iii)only TYPE:MDIFFICULTY:1SECTION:17.1

Chapter 17/Monopolistic Competition 21

78. Afirminamonopolisticallycompetitivemarketissimilartoamonopolyinthesensethat (i) theybothfacedownwardslopingdemandcurves. (ii) theybothchargeapricethatexceedsmarginalcost. (iii) bothmarketsarecharacterizedbyfreeentryandexit. a. (i)only b. (ii)only c. (i)and(ii) d. (i)and(iii) ANSWER:c. (i)and(ii) TYPE:MDIFFICULTY:2SECTION:17.1 79. Amonopolisticallycompetitivefirmschoiceofoutputlevelisvirtuallyidenticaltothechoicemadebya(n) a. perfectlycompetitivefirm. b. duopolist. c. monopolist. d. oligopolist. ANSWER:c. monopolist. TYPE:MDIFFICULTY:2SECTION:17.1 80. Newfirmswillnecessarilyenteramonopolisticallycompetitivemarketwhenpriceexceeds a. marginalrevenue. b. averagerevenue. c. marginalcost. d. averagetotalcost. ANSWER:d. averagetotalcost. TYPE:MDIFFICULTY:2SECTION:17.1 81. Whichtwocurvesaretangenttooneanotherinamonopolisticallycompetitivemarketwithzeroeconomicprofit? a. demandandaveragevariablecost b. demandandaveragetotalcost c. marginalrevenueandaveragevariablecost d. marginalrevenueandaveragetotalcost ANSWER:b. demandandaveragetotalcost TYPE:MDIFFICULTY:2SECTION:17.1 82. Adownwardslopingdemandcurve a. isafeatureofallmonopolisticallycompetitivefirms. b. meansthatthefirminquestionwillneverexperienceazeroprofit. c. causesmarginalrevenuetoexceedprice. d. Alloftheabovearecorrect. ANSWER:a. isafeatureofallmonopolisticallycompetitivefirms. TYPE:MDIFFICULTY:2SECTION:17.1 83. Excesscapacity a. tellseconomistslittleaboutthedesirabilityofamarketoutcome. b. istheprimarysourceofmarketinefficiencyinmonopolisticallycompetitivemarkets. c. isacharacteristicofrisingaveragetotalcostcurves. d. issolelyacharacteristicofmarkuppricing. ANSWER:a. tellseconomistslittleaboutthedesirabilityofamarketoutcome. TYPE:MDIFFICULTY:2SECTION:17.1

22 Chapter 17/Monopolistic Competition

84. Inamonopolisticallycompetitivemarket, a. thereareonlyafewsellers. b. eachfirmtakesthepriceofitsproductasgiven. c. firmscanenterorexitthemarketwithoutrestriction. d. eachfirmproducesaproductthatisessentiallyidenticaltotheproductsofotherfirmsinthemarket. ANSWER:c. firmscanenterorexitthemarketwithoutrestriction. TYPE:MDIFFICULTY:1SECTION:17.1 85. Amonopolisticallycompetitivemarket a. hassomefeaturesofmonopolyandsomefeaturesofcompetition. b. hasonelarge,dominantfirmandmanyothersmallerfirms. c. isverydifficulttoenter. d. Alloftheabovearecorrect. ANSWER:a. hassomefeaturesofmonopolyandsomefeaturesofcompetition. TYPE:MDIFFICULTY:1SECTION:17.1 86. Inbothperfectcompetitionandmonopolisticcompetition, a. eachfirmis,inmanyways,likeamonopoly. b. eachfirmsellsaproductthatisatleastslightlydifferentfromthoseofotherfirms. c. eachfirmfacesadownwardslopingdemandcurve. d. therearemanysellers. ANSWER:d. therearemanysellers. TYPE:MDIFFICULTY:1SECTION:17.1 87. Examplesofmonopolisticallycompetitivemarketsincludethemarketsfor a. restaurantsandfurniture. b. booksandmovies. c. cookiesandrestaurants. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:1SECTION:17.1 88. Examplesofmonopolisticallycompetitivemarketsdonotincludethemarketfor a. pianolessons. b. soybeans. c. cookies. d. voicelessons. ANSWER:b. soybeans. TYPE:MDIFFICULTY:1SECTION:17.1 89. Forexistingfirmsinamonopolisticallycompetitivemarket, a. strategicinteractionsamongthefirmsareveryimportant. b. thethreatofentrybynewfirmsisnotanimportantconsideration. c. theattainmentofaNashequilibriumisanimportantobjective. d. Noneoftheabovearecorrect. ANSWER:d. Noneoftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:17.1 90. Eachfirminamonopolisticallycompetitivefirmfacesadownwardslopingdemandcurvebecause a. therearemanyothersellersinthemarket. b. thereareveryfewothersellersinthemarket. c. thatfirmsproductisdifferentfromthoseofferedbyotherfirmsinthemarket. d. thatfirmfacesthethreatofentryintothemarketbynewfirms. ANSWER:c. thatfirmsproductisdifferentfromthoseofferedbyotherfirmsinthemarket. TYPE:MDIFFICULTY:2SECTION:17.1

Chapter 17/Monopolistic Competition 23

91. Bothmonopolisticcompetitionandoligopolyaremarketstructures a. thatliebetweentheextremecasesofcompetitionandmonopoly. b. thatfeatureonlyafewfirmsineachmarket. c. towhichtheconceptofNashequilibriumisfrequentlyappliedbyeconomists. d. Alloftheabovearecorrect. ANSWER:a. thatliebetweentheextremecasesofcompetitionandmonopoly. TYPE:MDIFFICULTY:2SECTION:17.1 92. Whenamarketismonopolisticallycompetitive,thetypicalfirminthemarketislikelytoexperiencea a. positiveprofitintheshortrunandinthelongrun. b. positiveornegativeprofitintheshortrunandazeroprofitinthelongrun. c. zeroprofitintheshortrunandapositiveornegativeprofitinthelongrun. d. zeroprofitintheshortrunandinthelongrun. ANSWER:b. positiveornegativeprofitintheshortrunandazeroprofitinthelongrun. TYPE:MDIFFICULTY:2SECTION:17.1 93. Amongthefollowingsituations,theonethatisleastlikelytoapplytoamonopolisticallycompetitivefirmisthatin which a. profitispositiveintheshortrun. b. totalcostexceedstotalrevenueintheshortrun. c. profitispositiveinthelongrun. d. totalrevenueequalstotalcostinthelongrun. ANSWER:c. profitispositiveinthelongrun. TYPE:MDIFFICULTY:2SECTION:17.1 94. Tomaximizeitsprofit,amonopolisticallycompetitivefirm a. takesthepriceasgivenanditchoosesitsquantity,justasacompetitivefirmdoes. b. takesthepriceasgivenandchoosesitsquantity,justasacolludingoligopolistdoes. c. choosesitsquantityandprice,justasacompetitivefirmdoes. d. choosesitsquantityandprice,justasamonopolydoes. ANSWER:d. choosesitsquantityandprice,justasamonopolydoes. TYPE:MDIFFICULTY:2SECTION:17.1 95. Tomaximizeitsprofit,amonopolisticallycompetitivefirmchoosesitslevelofoutputbylookingforthe a. intersectionofthedemandcurveandthemarginalcostcurve. b. intersectionofthemarginalrevenuecurveandthemarginalcostcurve. c. levelofoutputatwhichmarginalrevenueequalszero. d. levelofoutputatwhichaveragetotalcostisminimized. ANSWER:b. intersectionofthemarginalrevenuecurveandthemarginalcostcurve. TYPE:MDIFFICULTY:2SECTION:17.1 96. Whenwecomparediagramsforfirmsindifferentmarketstructures,weseethat a. forcompetitivefirmsandmonopolisticallycompetitivefirms,therevenuecurvesaresimilarbutthecostcurves arequitedifferent. b. forcompetitivefirmsandmonopolisticallycompetitivefirms,thecostcurvesaresimilarbuttherevenuecurves arequitedifferent. c. formonopolyfirmsandmonopolisticallycompetitivefirms,therevenuecurvesaresimilarbutthecostcurves arequitedifferent. d. formonopolyfirmsandmonopolisticallycompetitivefirms,thecostcurvesaresimilarbuttherevenuecurves arequitedifferent. ANSWER:b. forcompetitivefirmsandmonopolisticallycompetitivefirms,thecostcurvesaresimilarbuttherevenue curvesarequitedifferent. TYPE:MDIFFICULTY:1SECTION:17.1

24 Chapter 17/Monopolistic Competition

97. Foramonopolisticallycompetitivefirm, a. marginalrevenueandpricearethesamequantity. b. averagerevenueandpricearethesamequantity. c. attheprofitmaximizingquantityofoutput,priceequalsmarginalcost. d. attheprofitmaximizingquantityofoutput,marginalrevenueexceedsprice. ANSWER:b. averagerevenueandpricearethesamequantity. TYPE:MDIFFICULTY:2SECTION:17.1 98. Foramonopolisticallycompetitivefirm,attheprofitmaximizingquantityofoutput, a. priceexceedsmarginalrevenue. b. marginalrevenueexceedsmarginalcost. c. marginalcostexceedsaveragerevenue. d. Alloftheabovearecorrect. ANSWER:a. priceexceedsmarginalrevenue. TYPE:MDIFFICULTY:2SECTION:17.1 99. Ignoringoligopolyandfocusingontheotherthreetypesofmarketstructure,inwhichofthosemarketstructures doesaprofitmaximizingfirmchargeapricethatexceedsmarginalcost? a. monopolyonly b. monopolyandmonopolisticcompetitiononly c. monopoly,monopolisticcompetition,andperfectcompetition d. Itdependsonwhetherweareintheshortrunorthelongrun. ANSWER:b. monopolyandmonopolisticcompetitiononly TYPE:MDIFFICULTY:2SECTION:17.1 100. Ignoringoligopolyandfocusingontheotherthreetypesofmarketstructure,inwhichofthosemarketstructures doesaprofitmaximizingfirmexperienceazeroeconomicprofit? a. perfectcompetitiononly b. perfectcompetitionandmonopolisticcompetitiononly c. perfectcompetition,monopolisticcompetition,andmonopoly d. Itdependsonwhetherweareintheshortrunorthelongrun. ANSWER:d. Itdependsonwhetherweareintheshortrunorthelongrun. TYPE:MDIFFICULTY:2SECTION:17.1 101. Animportantdifferencebetweenthesituationfacedbyaprofitmaximizingmonopolisticallycompetitivefirmin theshortrunandthesituationfacedbythatsamefirminthelongrunisthatintheshortrun, a. pricemayexceedmarginalrevenue;inthelongrun,priceequalsmarginalrevenue. b. pricemayexceedmarginalcost;inthelongrun,priceequalsmarginalcost. c. pricemayexceedaveragetotalcost;inthelongrun,priceequalsaveragetotalcost. d. therearemanyfirmsinthemarket;inthelongrun,thereareonlyafewfirmsinthemarket. ANSWER:c. pricemayexceedaveragetotalcost;inthelongrun,priceequalsaveragetotalcost. TYPE:MDIFFICULTY:2SECTION:17.1 102. Supposethatmonopolisticallycompetitivefirmsinacertainmarketareearningpositiveprofits.Inthetransition fromthisinitialsituationtoalongrunequilibrium, a. thenumberoffirmsinthemarketdecreases. b. eachincumbentfirmexperiencesadecreaseindemandforitsproduct. c. eachincumbentfirmexperiencesarightwardshiftofitsmarginalrevenuecurve. d. Alloftheabovearecorrect. ANSWER:b. eachincumbentfirmexperiencesadecreaseindemandforitsproduct. TYPE:MDIFFICULTY:2SECTION:17.1

Chapter 17/Monopolistic Competition 25

103. Supposethatmonopolisticallycompetitivefirmsinacertainmarketareexperiencinglosses.Inthetransitionfrom thisinitialsituationtoalongrunequilibrium, a. thenumberoffirmsinthemarketdecreases. b. eachincumbentfirmexperiencesadecreaseindemandforitsproduct. c. eachfirmexperiencesupwardshiftsofitsmarginalcostandaveragetotalcostcurves. d. Alloftheabovearecorrect. ANSWER:a. thenumberoffirmsinthemarketdecreases. TYPE:MDIFFICULTY:2SECTION:17.1 104. Whenamonopolisticallycompetitivefirmisinlongrunequilibrium, a. marginalrevenueisequaltomarginalcost. b. marginalrevenueisequaltoaveragetotalcost. c. marginalrevenueisequaltoprice. d. priceisequaltomarginalcost. ANSWER:a. marginalrevenueisequaltomarginalcost. TYPE:MDIFFICULTY:2SECTION:17.1 105. Whenamonopolisticallycompetitivefirmisinlongrunequilibrium, a. priceisequaltoaveragetotalcost. b. priceexceedsmarginalcost. c. priceexceedsmarginalrevenue. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:17.1 106. Whichofthesetypesoffirmscanearnapositiveeconomicprofitinthelongrun? a. monopolies,butnotcompetitivefirmsormonopolisticallycompetitivefirms b. monopoliesandmonopolisticallycompetitivefirms,butnotcompetitivefirms c. monopolies,monopolisticallycompetitivefirms,andmonopolies d. Noneoftheabovearecorrect. ANSWER:a. monopolies,butnotcompetitivefirmsormonopolisticallycompetitivefirms TYPE:MDIFFICULTY:2SECTION:17.1 107. Inalongrunequilibrium,priceisequaltoaveragetotalcost.Thisstatementappliesto a. competitivemarkets,butnottomonopolisticallycompetitivemarketsormonopolies. b. competitiveandmonopolisticallycompetitivemarkets,butnottomonopolies. c. competitiveandmonopolisticallycompetitivemarketsandtomonopolies. d. Noneoftheabovearecorrect. ANSWER:b. competitiveandmonopolisticallycompetitivemarkets,butnottomonopolies. TYPE:MDIFFICULTY:2SECTION:17.1 108. Foraprofitmaximizingmonopolisticallycompetitivefirm,priceexceedsmarginalcost a. intheshortrunbutnotinthelongrun. b. inthelongrunbutnotintheshortrun. c. inboththeshortrunandthelongrun. d. inneithertheshortrunnorthelongrun. ANSWER:c. inboththeshortrunandthelongrun. TYPE:MDIFFICULTY:2SECTION:17.1 109. Entryandexitdriveeachfirminamonopolisticallycompetitivemarkettoapointoftangencybetweenits a. marginalrevenuecurveanditstotalcostcurve b. marginalrevenuecurveanditsaveragetotalcostcurve. c. demandcurveanditstotalcostcurve. d. demandcurveanditsaveragetotalcostcurve. ANSWER:d. demandcurveanditsaveragetotalcostcurve. TYPE:MDIFFICULTY:2SECTION:17.1

26 Chapter 17/Monopolistic Competition

110. Thepointoftangencywhichcharacterizeslongrunequilibriumforamonopolisticallycompetitivefirmalways occursatacertainlevelofoutput;callthatlevelofoutputQ1.ThenQ1

a. exceedsthelevelofoutputatwhichmarginalrevenueequalsmarginalcost. b. exceedsthelevelofoutputatwhichmarginalcostequalsaveragetotalcost. c. fallsshortofthelevelofoutputatwhichmarginalrevenueequalszero. d. Alloftheabovearecorrect. ANSWER:c. fallsshortofthelevelofoutputatwhichmarginalrevenueequalszero. TYPE:MDIFFICULTY:3SECTION:17.1 111. Foranyfirm,averagetotalcostisminimizedatacertainlevelofoutput;callthatlevelofoutputQ 1.Fora monopolisticallycompetitivefirminlongrunequilibrium,Q1 a. isalsothelevelofoutputatwhichmarginalcostequalsaveragetotalcost. b. exceedsthelevelofoutputatwhichthereisapointoftangencybetweenthedemandcurveandtheaverage totalcostcurve. c. exceedsthelevelofoutputatwhichmarginalrevenueequalsmarginalcost. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:3SECTION:17.1 112. Inasituationoflongrunequilibrium, a. aperfectlycompetitivefirmoperatesatitsefficientscale. b. amonopolisticallycompetitivefirmoperatesatitsefficientscale. c. neitheracompetitivefirmnoramonopolisticallycompetitivefirmchargesamarkupovermarginalcost. d. Alloftheabovearecorrect. ANSWER:a. aperfectlycompetitivefirmoperatesatitsefficientscale. TYPE:MDIFFICULTY:2SECTION:17.1 113. Inasituationoflongrunequilibrium,theterm a. excesscapacityappliestomonopolisticallycompetitivefirms,butnottocompetitivefirms. b. zeroeconomicprofitappliestocompetitivefirms,butnottomonopolisticallycompetitivefirms. c. markupovermarginalcostappliestobothmonopolisticallycompetitiveandcompetitivefirms. d. Alloftheabovearecorrect. ANSWER:a. excesscapacityappliestomonopolisticallycompetitivefirms,butnottocompetitivefirms. TYPE:MDIFFICULTY:2SECTION:17.1 114. FirmAisaperfectlycompetitivefirm.FirmBisamonopolisticallycompetitivefirm.Bothfirmsarecurrently maximizingtheirrespectiveprofits.Whichofthefollowingstatementsiscorrect? a. BothFirmAandFirmBwouldbeeagertomakeanadditionalsale. b. FirmAwouldbeeagertomakeanadditionalsale,butFirmBwouldnotcarewhetheritmadeanadditionalsale ornot. c. FirmBwouldbeeagertomakeanadditionalsale,butFirmAwouldnotcarewhetheritmadeanadditionalsale ornot. d. NeitherFirmAnorFirmBwouldcarewhethertheymadeanadditionalsaleornot. ANSWER:c. FirmBwouldbeeagertomakeanadditionalsale,butFirmAwouldnotcarewhetheritmadean additionalsaleornot. TYPE:MDIFFICULTY:2SECTION:17.1 115. Inamonopolisticallycompetitivemarket, a. theentryofnewfirmscreatesexternalities. b. theabsenceofrestrictionsonentrybynewfirmsensuresthattherewillbenodeadweightloss. c. therearealwaystoomanyfirmsinthemarketrelativetothesociallyoptimalnumberoffirms. d. Noneoftheabovearecorrect. ANSWER:a. theentryofnewfirmscreatesexternalities. TYPE:MDIFFICULTY:2SECTION:17.1

Chapter 17/Monopolistic Competition 27

116. Entrybynewfirmsintoamonopolisticallycompetitivemarket a. createsnewconsumersurplus. b. imposesapositiveexternalityonexistingfirms. c. leadstothesameexternalitiesthatareobservedwhennewfirmsenteraperfectlycompetitivemarket. d. Alloftheabovearecorrect. ANSWER:a. createsnewconsumersurplus. TYPE:MDIFFICULTY:3SECTION:17.1 117. Amonopolisticallycompetitivefirmfacesthefollowingdemandcurveforitsproduct: Price($) Quantity 10 2 9 4 8 6 7 9 6 10 5 12 4 14 3 16 2 18 1 20

Thefirmhastotalfixedcostsof$20andaconstantmarginalcostof$2perunit.Thefirmwill a. producenineunits;firmswillenterthemarketinthelongrun. b. produce10units;firmswillenterthemarketinthelongrun. c. produce12units;firmswillenterthemarketinthelongrun. d. produce10units;firmswillexitthemarketinthelongrun. ANSWER:a. producenineunits;firmswillenterthemarketinthelongrun. TYPE:MDIFFICULTY:3SECTION:17.1 118. Amonopolisticallycompetitivefirmfacesthefollowingdemandcurveforitsproduct: Price($) Quantity 10 2 9 4 8 6 7 8 6 10 5 12 4 14 3 16 2 18 1 20

Thefirmhastotalfixedcostsof$20andaconstantmarginalcostof$5perunit.Thefirmwill a. producetwounits;firmswillexitthemarketinthelongrun. b. producefourunits;firmswillexitthemarketinthelongrun. c. producesixunits;firmswillexitthemarketinthelongrun. d. produceeightunits;firmswillenterthemarketinthelongrun. ANSWER:c. produce6units;firmswillexitthemarketinthelongrun. TYPE:MDIFFICULTY:3SECTION:17.1 119. Amonopolisticallycompetitivefirmfacesthefollowingdemandcurveforitsproduct: Price($) Quantity 10 2 9 4 8 6 7 8 6 10 5 12 4 14 3 16 2 18 1 20

Thefirmhastotalfixedcostsof$40andaconstantmarginalcostof$2perunit.Wecanconcludethat a. firmswillexitthismarket. b. firmswillenterthismarket. c. thismarketisinlongrunequilibrium. d. thisfirmisoperatingatefficientscale. ANSWER:c. thismarketisinlongrunequilibrium. TYPE:MDIFFICULTY:3SECTION:17.1 120. Afirmhasthefollowingcoststructure: Output TotalCost($) 1 30 2 32 3 36 4 42 5 50 6 63 7 77

28 Chapter 17/Monopolistic Competition

Ifthisfirmisinatypicalmonopolisticallycompetitivemarket,itwilllikelyproduce a. fourorfewerunitsofoutput. b. fiveunitsofoutput. c. morethanfiveunitsofoutput. d. Noneoftheabovearecorrect;thereisnotenoughinformationtotell. ANSWER:a. 4orfewerunitsofoutput. TYPE:MDIFFICULTY:3SECTION:17.1 121. Afirmhasthefollowingcoststructure: Output TotalCost($) 1 30 2 32 3 36 4 42 5 50 6 63 7 77

Ifthisfirmisinatypicalperfectlycompetitivemarket,inthelongrunitwilllikelyproduce a. 4orfewerunitsofoutput. b. 5unitsofoutput. c. morethan5unitsofoutput. d. thereisnotenoughinformationtotell. ANSWER:b. 5unitsofoutput. TYPE:MDIFFICULTY:3SECTION:17.1 122. Amonopolisticallycompetitivefirmhasthefollowingcoststructure: Output TotalCost($) 1 30 2 32 3 36 4 42 5 50 6 63 7 77

Thefirmfacesthefollowingdemandcurve: Price($) Quantity 20 1 18 2 15 3 12 4 9 5 7 6 4 7

Tomaximizeprofit(orminimizelosses),thefirmwillproduce a. 2units. b. 3units. c. 4units. d. 5units. ANSWER:b. 3units. TYPE:MDIFFICULTY:3SECTION:17.1 123. Amonopolisticallycompetitivefirmhasthefollowingcoststructure: Output TotalCost($) 1 30 2 32 3 36 4 42 5 50 6 63 7 77

Thefirmfacesthefollowingdemandcurve: Price($) Quantity 20 1 18 2 15 3 12 4 9 5 7 6 4 7

Chapter 17/Monopolistic Competition 29

Ifthegovernmentforcesthisfirmtoproduceatitsefficientscale,itwill a. produce3unitsandmake$9. b. produce4unitsandmake$6 c. produce5unitsandlose$5. d. produce7unitsandlose$49. ANSWER:c. produce5unitsandlose$5. TYPE:MDIFFICULTY:3SECTION:17.1 124. Amonopolisticallycompetitivefirmiscurrentlymakingaprofit.Ifotherfirmsenterthemarket,wewouldexpect thattheaddedcompetitionwillcausethisfirmtoadjustits a. outputsothatitwilloperateclosertoitsefficientscale. b. outputsothatitwilloperatefurtherfromitsefficientscale. c. outputsothatitwillnolongerbeatitsefficientscale. d. output,butitmightmoveeitherclosertoorfurtherfromitsefficientscale. ANSWER:b. outputsothatitwilloperatefurtherfromitsefficientscale. TYPE:MDIFFICULTY:3SECTION:17.1 125. SenatorHubriswantstopassalawthatwouldrequireallmonopolisticallycompetitivefirmstooperateattheir efficientscale.Ifthislawweretopassandbeenforced,wewouldexpectthatmonopolisticallycompetitivefirms would a. seetheirprofitsincrease. b. breakeven. c. losemoney. d. notreallybeaffectedbythelaw. ANSWER:c. losemoney. TYPE:MDIFFICULTY:3SECTION:17.1 126. Whenfirmssellhighlydifferentiatedconsumergoodsitislikelythatonesignificantcosttoallfirmsis a. advertising. b. fixedcosts. c. intermediatematerials. d. taxesandregulation. ANSWER:a. advertising. TYPE:MDIFFICULTY:2SECTION:17.2 127. Whenadvertisingisdeceptive,criticsclaimthatit a. increasescompetitioninthemarket. b. makesbuyerslesssensitivetopricedifferencesamongsimilarproducts. c. lowersthequalityofgoodsinthemarket. d. altersafirm'ssupplycurve. ANSWER:b. makesbuyerslesssensitivetopricedifferencesamongsimilarproducts. TYPE:MDIFFICULTY:2SECTION:17.2 128. Criticsclaimthatwhenadvertisingdecreasestheelasticityofdemand,firmsareableto a. becomemorecompetitive. b. increasetheiradvertisingbudget. c. lowertheiradvertisingbudget. d. chargealargermarkupovermarginalcost. ANSWER:d. chargealargermarkupovermarginalcost. TYPE:MDIFFICULTY:2SECTION:17.2

30 Chapter 17/Monopolistic Competition

129. Whenadvertisingisusedtostrengthenbrandloyalty, a. demandfortheproductbecomeslesselastic. b. demandforrelatedproductsistypicallyunaffected. c. consumersbecomemoresensitivetopricedifferencesamongsimilargoods. d. firmsshouldlowerpricetoincreaserevenue. ANSWER:a. demandfortheproductbecomeslesselastic. TYPE:MDIFFICULTY:2SECTION:17.2 130. Advocatesforadvertisingarguethattheefficiencyofmarketsisenhancedwhenadvertising a. focusesonissuesotherthanthepricesofproducts. b. ispsychologicalratherthaninformational. c. decreasestheelasticityofdemandforaproduct. d. providesinformationthatisusefultoconsumers. ANSWER:d. providesinformationthatisusefultoconsumers. TYPE:MDIFFICULTY:2SECTION:17.2 131. Advertisingthatconveysinformationabouttheexistenceofnewproducts a. usuallyconfusesconsumersaboutmarketcompetition. b. enhancestheabilityofmarketstoallocateresourcesefficiently. c. revealsinformationthatisoflittlevaluetoconsumers. d. increaseselasticityofdemand. ANSWER:b. enhancestheabilityofmarketstoallocateresourcesefficiently. TYPE:MDIFFICULTY:2SECTION:17.2 132. Whenadvertisingenhancestheabilityofmarketstoallocateresources,itismostlikelytobe a. conveyinginformationaboutprice,theexistenceofnewproductsorlocationsofretailoutlets. b. addressingpsychologicalratherthaninformationalcharacteristicsofthegood. c. manipulatingpeople'stastes. d. increasingelasticityofsupply. ANSWER:a. conveyinginformationaboutprice,theexistenceofnewproductsorlocationsofretailoutlets. TYPE:MDIFFICULTY:2SECTION:17.2 133. Whenadvertisingencouragescustomerstobecomemoreinformedaboutallfirmsinthemarket, a. thedemandforeachparticularbrandinthemarketislikelytobecomelesselastic. b. firmsareabletofosterstrongerbrandloyalty. c. eachfirmislikelytohavelesscontroloverthepriceofitsproduct. d. themarketpowerofindividualfirmsisstrengthened. ANSWER:c. eachfirmislikelytohavelesscontroloverthepriceofitsproduct. TYPE:MDIFFICULTY:2SECTION:17.2 134. Advertisinginmarketsforprofessionalservices(lawyers,doctors,etc.)has a. decreasedinrecentyearsandcompetitioninthesemarketshasbeenenhanced. b. decreasedinrecentyearsandcompetitioninthesemarketshasbeenreduced. c. increasedinrecentyearsandcompetitioninthesemarketshasbeenenhanced. d. increasedinrecentyearsandcompetitioninthesemarketshasbeenreduced. ANSWER:c. increasedinrecentyearsandcompetitioninthesemarketshasbeenenhanced. TYPE:MDIFFICULTY:2SECTION:17.2 135. Professionalorganizationsandproducergroupshaveanincentiveto a. restrictadvertisinginordertoenhancecompetitiononthebasisofprice. b. restrictadvertisinginordertoreducecompetitiononthebasisofprice. c. encourageadvertisinginordertoreducecompetitiononthebasisofprice. d. encourageadvertisinginordertoenhancecompetitiononthebasisofprice. ANSWER:b. restrictadvertisinginordertoreducecompetitiononthebasisofprice. TYPE:MDIFFICULTY:2SECTION:17.2

Chapter 17/Monopolistic Competition 31

136. Whenfirmsinamonopolisticallycompetitivemarketengageinpricerelatedadvertising,defendersofadvertising arguethat a. thequalityofproductssoldinthemarketalwaysincreases. b. customersarelesslikelytobeinformedaboutothercharacteristicsoftheproduct. c. newfirmsarediscouragedfromenteringthemarket. d. eachfirmhaslessmarketpower. ANSWER:d. eachfirmhaslessmarketpower. TYPE:MDIFFICULTY:2SECTION:17.2 137. Criticsofadvertisingarguethatinsomemarketsadvertisingmay a. attractproductsoflowerqualityintothemarket. b. attractlessinformedbuyersintothemarket. c. decreaseelasticityofdemand. d. enhancecompetitioninmarketstoanunnecessarydegree. ANSWER:c. decreaseelasticityofdemand. TYPE:MDIFFICULTY:2SECTION:17.2 138. InthestudydonebyLeeBenhamonadvertisingforeyeglasses, a. advertisingincreasedtheaverageprice. b. advertisingdecreasedtheaverageprice. c. therewasnodifferenceinprice,butqualitywasbetterinthestatesthatdidn'tallowadvertising. d. advertisingappearedtohavenoeffectwhatsoeverinthestatesthatpermittedadvertising. ANSWER:b. advertisingdecreasedtheaverageprice. TYPE:MDIFFICULTY:1SECTION:17.2 139. ResultsofthestudydonebyLeeBenhamonadvertisingforeyeglasseswouldsuggestthat a. brandloyaltyandmarketpowerintheeyeglassmarketwaslikelytobemorepervasiveinstatesthatallowed advertising. b. eyeglasssalesweremoreprofitableinstatesthatallowedadvertising. c. optometristswouldnotbesupportiveofadvertisingrestrictions. d. optometristswouldenthusiasticallyendorseadvertisingrestrictions. ANSWER:d. optometristswouldenthusiasticallyendorseadvertisingrestrictions. TYPE:MDIFFICULTY:2SECTION:17.2 140. Advertisingthatusescelebrityendorsementsismostlikelyintendedto a. increaseelasticityofdemandfortheadvertisedproduct. b. reducetheabilityofmarketstoallocateresourcesefficiently. c. provideasignalofproductquality. d. beusefulonlyforpsychologicaleffects. ANSWER:c. provideasignalofproductquality. TYPE:MDIFFICULTY:2SECTION:17.2 141. Firmsthatspendalargeamountofmoneyonadvertisingaparticularproductarelikelytobeprovidingconsumers with a. informationabouttheavailabilityoftheproduct. b. informationaboutproductprice. c. asignalofproductquality. d. agoodexampleofwastedresources. ANSWER:c. asignalofproductquality. TYPE:MDIFFICULTY:2SECTION:17.2

32 Chapter 17/Monopolistic Competition

142. Defendersofadvertisingarguethatitisnotrationalforprofitmaximizingfirmstospendmoneyonadvertisingfor productsthathave a. superiorquality. b. inferiorormediocrequality. c. lowprices. d. limitedavailability. ANSWER:b. inferiorormediocrequality. TYPE:MDIFFICULTY:2SECTION:17.2 143. Onetheoryofadvertisingsuggeststhat a. informationonpriceisalwaysanecessaryingredientofeffectiveadvertising. b. thecontentofadvertisingmaybeirrelevanttoproductsuccessinthemarket. c. celebrityadvertisingisnoteffectiveinretailfoodmarkets. d. PostandKelloggshouldnotadvertisenewcereals. ANSWER:b. thecontentofadvertisingmaybeirrelevanttoproductsuccessinthemarket. TYPE:MDIFFICULTY:2SECTION:17.2 144. Advertisementsthatappeartoconveynoinformationatall a. areusuallyassociatedwith"infomercials." b. aremostlyuselesstoconsumers,butvaluabletofirms. c. aremostlyuselesstofirms,butvaluabletoconsumersfortheirentertainmentqualityalone. d. mayconveyinformationtoconsumersbyprovidingthemwithasignalthatfirmsarewillingtospend significantamountsofmoneytoadvertise. ANSWER:d. mayconveyinformationtoconsumersbyprovidingthemwithasignalthatfirmsarewillingtospend significantamountsofmoneytoadvertise. TYPE:MDIFFICULTY:2SECTION:17.2 145. Criticsofmarketsthatarecharacterizedbyfirmsthatsell"brand"nameproductsarguethatbrandnamesencourage consumerstopaymoreforbrandedproductsthat a. haveelasticdemandcurves. b. areverydifferentfromgenericproducts. c. areindistinguishablefromgenericproducts. d. consumeradvocategroupshavefoundtobeinferior. ANSWER:c. areindistinguishablefromgenericproducts. TYPE:MDIFFICULTY:1SECTION:17.2 146. EdwardChamberlinarguedthatbrandnames a. hamperedmarketefficiency. b. wereinstrumentalinenhancingmarketefficiency. c. wereusefulinenhancingmarketefficiencywhenthegovernmentenforcedtheuseofexclusivetrademarks. d. werelikelytobemoresociallyefficientwhenusedinconjunctionwithadvertising. ANSWER:a. hamperedmarketefficiency. TYPE:MDIFFICULTY:1SECTION:17.2 147. Thedebateovertheefficiencyofmarketsinwhichproductswithbrandnamesaresold a. isframedbytheroleofregulationinadvertising. b. islikelytoberesolvedbyreferencetoanecdotalevidence. c. hingesonwhetherconsumersarerationalintheirchoices. d. hingesontheeffectivenessofadvertisingwhichidentifiespricedifferences. ANSWER:c. hingesonwhetherconsumersarerationalintheirchoices. TYPE:MDIFFICULTY:2SECTION:17.2

Chapter 17/Monopolistic Competition 33

148. Arecentoutbreakofhepatitiswaslinkedtoanationalfastfoodrestaurantchain.Thisisanexampleofacasein which a. brandnameidentityincreasestheeffectivenessofmarkets. b. brandnameidentitycanbedetrimentaltotheprofitabilityofafirm. c. advertisingisineffectiveinsalvagingperceptionsofproductquality. d. advertisingcannotbeusedtoestablishbrandloyalty. ANSWER:b. brandnameidentitycanbedetrimentaltotheprofitabilityofafirm. TYPE:MDIFFICULTY:1SECTION:17.2 149. Criticsofvacationadvertisementsthatdepict"beautiful"humanbodiesonsundrenchedbeachesastheprimary focusofthemessagearelikelytoclaimthatthepurposeoftheadvertisementisto a. providehelpfulinformationaboutatouristdestination. b. manipulatepeople'stastesthroughpsychologicalmessages. c. inflamecarnaldesire. d. encouragesunbathingingeneral. ANSWER:b. manipulatepeople'stastesthroughpsychologicalmessages. TYPE:MDIFFICULTY:1SECTION:17.2 150. Ifadvertisingreducesaconsumer'spricesensitivitybetweenidenticalgoods,itislikelyto a. increasetheelasticityofdemandfordifferentiatedproducts. b. enhancecompetition,andencouragemoreproductdiversity. c. impedecompetitionandreducesocialwellbeing. d. encouragetheconsumptionofallhomogenousgoods. ANSWER:c. impedecompetitionandreducesocialwellbeing. TYPE:MDIFFICULTY:2SECTION:17.2 151. Ifafirminamonopolisticallycompetitivemarketsuccessfullyusesadvertisingtodecreaseelasticityofdemandfor itsproduct, a. thefirmwillbeabletoincreaseitsmarkupovermarginalcost. b. thefirmwilleventuallyhavetolowerpricetoremaincompetitive. c. itwillincreasethewellbeingofsociety. d. itwillreduceaveragetotalcost. ANSWER:a. thefirmwillbeabletoincreaseitsmarkupovermarginalcost. TYPE:MDIFFICULTY:2SECTION:17.2 152. Theprimaryclaimofdefendersofadvertisingisthatit a. conveysinformationaboutfirmprofitability. b. ispsychologicalratherthaninformational. c. enhancestheinformationavailabletoconsumers. d. Alloftheabovearecorrect. ANSWER:c. enhancestheinformationavailabletoconsumers. TYPE:MDIFFICULTY:1SECTION:17.2 153. Evidencesuggeststhat,inmarketswithdifferentiatedproductsbutwithoutalotofadvertising, a. consumersarenotconfusedbyconflictingsignals. b. ingeneral,firmsarelessprofitable. c. marketsarelessefficient. d. consumersmakebetterchoices. ANSWER:c. marketsarelessefficient. TYPE:MDIFFICULTY:2SECTION:17.2

34 Chapter 17/Monopolistic Competition

154. Evidencesuggeststhat,inmarketswithdifferentiatedproductsandwithalotofadvertising, (i) consumersmakebetterchoices. (ii) marketsarelessefficient. (iii) ingeneral,firmsarelessprofitable. a. (i)only b. (iii)only c. (ii)and(iii)only d. Alloftheabovearetrue. ANSWER:a. (i)only TYPE:MDIFFICULTY:2SECTION:17.2 155. Inmarketswhererestrictionsonadvertisinghavebeenusedtocurtailcompetition,theU.S.courtshavegenerally a. referredthemattersofadvertisingrestrictionstoexecutiveregulators. b. enforcedindustrywideagreementstorestrictadvertising. c. beensilentontheeffectofexplicitadvertisingrestrictions. d. overturnedlawsthatprohibitadvertising. ANSWER:d. overturnedlawsthatprohibitadvertising. TYPE:MDIFFICULTY:1SECTION:17.2 156. Alawthatrestrictstheabilityofhotels/motelstoadvertiseonbillboardsoutsideofaresortcommunitywould likelyleadto a. adecreaseinprofitsforallhotels/motels. b. reducedefficiencyoflocallodgingmarkets. c. arequestbyconsumerstoincreasethenumberofbillboards. d. Alloftheabovearecorrect. ANSWER:b. reducedefficiencyoflocallodgingmarkets. TYPE:MDIFFICULTY:2SECTION:17.2 Usethefollowinginformationtoanswerquestions157through160. Considertheproblemfacingtwofirmsinthefastfoodrestaurantmarket,FirmAandFirmB.Eachcompanyhasjustcome upwithanideaforanewfastfoodmenuitem,whichitwouldsellfor$4.Assumethatthemarginalcostforeachnew menuitemisaconstant$2andtheonlyfixedcostisforadvertising.Eachcompanyknowsthatifitspends$12millionon advertising,itwillget2millionconsumerstotryitsnewproduct.FirmAhasdonemarketresearchwhichsuggeststhatits productdoesnothaveany"staying"powerinthemarket.Eventhoughitcouldget2millionconsumerstobuytheproduct once,itisunlikelythattheywillcontinuetobuytheproductinthefuture.FirmB'smarketresearchsuggeststhatits productisverygood,andconsumerswhotrytheproductwillcontinuetobeconsumersovertheensuingyear.Onthe basisofitsmarketresearch,FirmBestimatesthatitsinitial2millioncustomerswillbuyoneunitoftheproducteach monthinthecomingyear,foratotalof24millionunits. 157. IfFirmAdecidestoadvertiseitsproductitcanexpectto a. getrepeatsalesaboveandbeyondtheinitial2millionconsumers. b. increaseitsmarketpower. c. incuralossof$8million. d. haveaprofitof$4million. ANSWER:c. incuralossof$8million. TYPE:MDIFFICULTY:2SECTION:17.2 158. IffirmBdecidestoadvertiseitsproductitcanexpectto a. haveaprofitof$48millionperyear. b. haveaprofitof$36millionperyear. c. incuralossof$12millionperyear. d. exittheindustry. ANSWER:b. haveaprofitof$36millionperyear. TYPE:MDIFFICULTY:2SECTION:17.2

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159. Byitswillingnesstospendmoneyonadvertising,FirmB a. signalsthevalueofitsnewproducttoconsumers. b. signalsthatitisnotaprofitmaximizer. c. isdetractingfromtheefficiencyofmarkets. d. Noneoftheabovearecorrect. ANSWER:a. signalsthevalueofitsnewproducttoconsumers. TYPE:MDIFFICULTY:2SECTION:17.2 160. Onthebasisofatheorythatpeoplebuyaproductbecauseitisadvertised,thecontentofadvertisementsforFirm B'sproduct a. shouldfocusonqualitycomparisonsinordertobesuccessful. b shoulddefinitelyincludecelebrityendorsementsinordertobesuccessful. c. iscriticaltothesuccessoftheproductinthemarket. d. isirrelevanttothesuccessoftheadvertisement. ANSWER:d. isirrelevanttothesuccessoftheadvertisement. TYPE:MDIFFICULTY:2SECTION:17.2 161. Itisawellpublicizedfactthattelevisionadvertisementsairedduringmajorsportingeventsareveryexpensive.A theoryassertingthatpeoplebuyaproductsimplybecauseitisadvertisedwouldsuggestthatinformationonthe costofadvertising a. enhancestheeffectivenessoftheadvertisement. b. reducespeople'swillingnesstopurchaseadvertisedproducts. c. isleakedtodiscreditthefirmsthatspendsomuchonadvertising. d. reducestheeffectivestayingpowerofaproduct. ANSWER:a. enhancestheeffectivenessoftheadvertisement. TYPE:MDIFFICULTY:2SECTION:17.2 162. Insomecountries,brandnamefastfoodrestaurantsarenotallowedtooperate.Suchrestrictionsarelikelyto a. enhancethesocialwellbeingofsociety. b. enhancethechoicesetofconsumersamonglocalrestaurants. c. reducebarrierstoentryinimperfectmarkets. d. reducethecompetitivenatureoflocalfastfoodmarkets. ANSWER:d. reducethecompetitivenatureoflocalfastfoodmarkets. TYPE:MDIFFICULTY:2SECTION:17.2 163. EuniceconsumesCokeexclusively.Sheclaimsthatthereisacleartastedifferenceandthatcompetingbrandsofcola leaveanunsavoryresidualtasteinhermouth.However,inablindtastetest,Euniceisfoundtoprefergenericstore brandcolatoCokeeightoutoftentimes.TheresultsofEunice'stastetestwouldreinforceclaimsbycriticsofbrand namesthat a. consumersarealwayswillingtopaymoreforbrandnames. b. brandnamescauseconsumerstoperceivedifferencesthatdonotreallyexist. c. brandnamescauseconsumerstobemoresensitivetoproductdifferences. d. brandnamesareaformofsociallyefficientadvertising. ANSWER:b. brandnamescauseconsumerstoperceivedifferencesthatdonotreallyexist. TYPE:MDIFFICULTY:1SECTION:17.2 164. YourcompanyhasrecentlyrequestedthatyoutraveltoDhaka,Bangladesh,toworkonnegotiationsforanew factorytobelocatedinoneoftheportcities.Yourtravelagentprovidesalistofseveralhundredlocalhotels,anda Sheraton.Inthiscase,theSheratonbrandnameislikelytobeusedasasignalof a. perceiveddifferencesthatarenotlikelytoexistamongyourvariousoptions. b. qualitywhenqualitycannotbeeasilyjudged. c. inefficiencyinmarketscharacterizedbyrecognizablebrandnames. d. thequalityofgenerallodgingaccommodationsinDhaka. ANSWER:b. qualitywhenqualitycannotbeeasilyjudged. TYPE:MDIFFICULTY:1SECTION:17.2

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165. DuringarecentvisittoMiami,Florida,youstayinabrandnamehotellocatedinadeterioratingsectionofthe innercity.Youfeelthreatenedbythelocationandarehesitantaboutleavingyourhotelroomduringyourstay.Asa resultofyourexperience,youvownevertostaywiththatparticularhotelchainagain.Thisexamplewould reinforcetheclaimthat a. firmshaveafinancialstakeinmaintainingthereputationoftheirbrandnames. b. brandnamesareasignalofquality. c. advertisingisawasteofmoneyforbrandnameproducts. d. Noneoftheabovearecorrect. ANSWER:a. firmshaveafinancialstakeinmaintainingthereputationoftheirbrandnames. TYPE:MDIFFICULTY:2SECTION:17.2 166. OnavacationtoCancun,Mexico,youfindyourselfeatingeverymealatthelocalMcDonald'sratherthanhavinga hamburgerfromoneofthestreetvendors.Yourtravelingcompanionclaimsthatyouareirrational,sinceyounever eatMcDonald'shamburgerswhenyouarehomeandMcDonald'shamburgerscostmorethanthosepreparedand soldbyCancun'sstreetvendors.Aneconomistwouldmostlikelyexplainyourbehaviorbysuggestingthat a. yourbehaviorisrational,butyourfriendsbehaviorisclearlyirrational. b. youareclearlyirrational. c. theMcDonald'sbrandnameguaranteesconsistentquality. d. theadvertisingbyMcDonaldsinCancunismorepersuasivethantheadvertisingbyMcDonaldsinyourhome town. ANSWER:c. theMcDonald'sbrandnameguaranteesconsistentquality. TYPE:MDIFFICULTY:2SECTION:17.2 167. Whichofthefollowingisuniquetoamonopolisticallycompetitivefirmwhencomparedtoanoligopoly? a. Themonopolisticallycompetitivefirmadvertises. b. Themonopolisticallycompetitivefirmproducesaquantityofoutputthatfallsshortofthesociallyoptimallevel. c. Monopolisticcompetitionfeaturesmanybuyers. d. Monopolisticcompetitionfeaturesmanysellers. ANSWER:d. Monopolisticcompetitionfeaturesmanysellers. TYPE:MDIFFICULTY:2SECTION:17.2 168. Indollarterms,thelargestformofadvertisingintheUnitedStatesis(are) a. billboards. b. newspaperandmagazineads. c. radioads. d. televisionads. ANSWER:b. newspaperandmagazineads. TYPE:MDIFFICULTY:1SECTION:17.2 169. FirmAproducesandsellsinamarketthatischaracterizedbyhighlydifferentiatedconsumergoods.FirmB producesandsellsindustrialproducts.FirmCproducesandsellsanagriculturalcommodity.Whichfirmislikelyto spendthegreatestportionofitstotalrevenueonadvertising? a. FirmA b. FirmB c. FirmC d. Thereisnoreasontobelievethatanyoneofthethreefirmswouldspendagreaterportionofitstotalrevenueon advertisingthantheothertwofirms. ANSWER:a. FirmA TYPE:MDIFFICULTY:1SECTION:17.2 170. Thefactthatthereisagreatdealofadvertisingofmensshavingproductsindicatesthat a. themarketforthoseproductsisperfectlycompetitive. b. itcostsfirmsverylittletoproducethoseproducts. c. thoseproductsarehighlydifferentiated. d. Alloftheabovearecorrect. ANSWER:c. thoseproductsarehighlydifferentiated. TYPE:MDIFFICULTY:2SECTION:17.2

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171. Inwhichofthefollowingproductmarketsarewelikelytoobservethelargestamountofadvertising? a. marketsinwhichpriceexceedsmarginalcost b. perfectlycompetitivemarkets c. marketsinwhichindustrialproductsaresold d. marketsinwhichthereisverylittledifferencebetweendifferentfirmsproducts ANSWER:a. marketsinwhichpriceexceedsmarginalcost TYPE:MDIFFICULTY:2SECTION:17.2 172. Criticsofadvertisingarguethatadvertising a. createsdesiresthatotherwisemightnotexist. b. hinderscompetition. c. oftenfailstoconveysubstantiveinformation. d. Alloftheabovearecorrect. ANSWER:d. Alloftheabovearecorrect. TYPE:MDIFFICULTY:1SECTION:17.2 173. Relativetootheradvertisingexpenditures,thelargestnumberofdollarsisspenton a. televisionandradiocommercials. b. billboardsandothersigns. c. spaceinmagazinesandnewspapers. d. directmail. ANSWER:c. spaceinmagazinesandnewspapers. TYPE:MDIFFICULTY:1SECTION:17.2 174. Astudyofthemarketforoptometristsservicesinthe1960sshowedthat a. allstatesintheUnitedStatesprohibitedadvertisingbyoptometrists. b. almostallprofessionaloptometristsopposedlegalrestrictionsontheirrightstoadvertise. c. theaveragepriceofeyeglasseswouldbereducedbytheremovaloflegalrestrictionsonadvertisingby optometrists. d. Alloftheabovearecorrect. ANSWER:c. theaveragepriceofeyeglasseswouldbereducedbytheremovaloflegalrestrictionsonadvertisingby optometrists. TYPE:MDIFFICULTY:2SECTION:17.2 175. Whichofthefollowingstatementsiscorrect?Alltheoreticalargumentspointtothefactthatadvertisingleadsto a. higherpricesandlesscompetitivemarkets. b. higherpricesandmorecompetitivemarkets. c. lowerpricesandlesscompetitivemarkets. d. Noneoftheabovearecorrect;theoreticalargumentsfailtoresolvethequestionofadvertisingseffectonprices andcompetition. ANSWER:d. Noneoftheabovearecorrect;theoreticalargumentsfailtoresolvethequestionofadvertisingseffecton pricesandcompetition. TYPE:MDIFFICULTY:2SECTION:17.2 176. Accordingtothesignalingtheoryofadvertising,consumers a. paylittleornoattentiontowhichfirmsadvertiseandwhichfirmsdonotadvertise. b. areoftenmoreimpressedbyafirmswillingnesstospendmoneyonadvertisingthantheyarebythecontentof theadvertisement. c. areoftenmoreimpressedbylowcostadvertisementsthantheyarebyhighcostadvertisements. d. gainlittleornoinformationaboutproductqualityfromadvertisements. ANSWER:b. areoftenmoreimpressedbyafirmswillingnesstospendmoneyonadvertisingthantheyarebythe contentoftheadvertisement. TYPE:MDIFFICULTY:2SECTION:17.2

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177. ABCCompanyknowsthatitproducesandsellsaverygoodmousetrap.XYZCompanyknowsthatitproducesand sellsalousymousetrap.Accordingtothesignalingtheoryofadvertising,thequalitydifferencelikelyproduces theresultthat a. bothABCandXYZhaveincentivestospendlargeamountsofmoneyonadvertisingtheirmousetraps. b. ABChasanincentivetospendalargeamountofmoneyonadvertisingitsmousetrap,butXYZdoesnot. c. XYZhasanincentivetospendalargeamountofmoneyonadvertisingitsmousetrap,butABCdoesnot. d. neitherABCnorXYZhasanincentivetospendalargeamountofmoneyonadvertisingtheirmousetraps. ANSWER:c. XYZhasanincentivetospendalargeamountofmoneyonadvertisingitsmousetrap,butABCdoes not. TYPE:MDIFFICULTY:2SECTION:17.2 178. Twosoftdrinkssitsidebysideinagrocerystore:AsixpackofCocaCola(abrandname)sellsfor$3.00,whilea sixpackofUncleDonscola(notabrandname)sellsfor$1.50.Evendefendersofbrandnameswouldhavetoadmit that a. norationalconsumerwouldspendtwiceasmuchforCocaColaashewouldforUncleDonscola. b. thesidebysidepresenceofthesetwocolasconveysnousefulinformationtoconsumers. c. CocaColahasnoincentivetomaintainthequalityofitsproductjustbecauseoftheCocaColabrandname. d. Noneoftheabovearecorrect. ANSWER:d. Noneoftheabovearecorrect. TYPE:MDIFFICULTY:2SECTION:17.2 179. Whichofthefollowingstatementsisfalse? a. Thetypicalmonopolisticallycompetitivefirmcouldreduceitsaveragetotalcostifitproducedmoreoutput. b. Monopolisticallycompetitivefirmsadvertiseinordertoincreasetheelasticityofthedemandcurvetheyface. c. Expensiveadvertisingmighthelpconsumersifitisasignalthattheproductisgood. d. Brandnamesacquiredatgreatcostmighthelpconsumersbyassuringquality. ANSWER:b. Monopolisticallycompetitivefirmsadvertiseinordertoincreasetheelasticityofthedemandcurvethey face. TYPE:MDIFFICULTY:2SECTION:17.2 TRUE/FALSE 1. Foraprofitmaximizingfirminamonopolisticallycompetitivemarket,whenpriceisequaltoaveragetotalcost, pricemustlieabovemarginalcost. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:17.1 2. Productdifferentiationalwaysleadstosomemeasureofmarketpower. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:17.1 3. Amonopolisticallycompetitivemarketischaracterizedbybarrierstoentry. ANSWER:FTYPE:TFDIFFICULTY:1SECTION:17.1 4. Aprofitmaximizingfirminamonopolisticallycompetitivemarketalwayspricesitsproductatsomemarkupover marginalcost. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:17.1 5. Monopolisticcompetitionistheonlymarketstructurethatfeaturesmanysellers. ANSWER:FTYPE:TFDIFFICULTY:1SECTION:17.1 6. Excesscapacitycharacterizesfirmsinmonopolisticallycompetitivemarkets,eveninsituationsoflongrun equilibrium. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:17.1 7. Whenafirmoperatesatexcesscapacity,itmustbeinamonopolisticallycompetitivemarket. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:17.1

Chapter 17/Monopolistic Competition 39

8. Whenafirmoperatesatefficientscale,itisproducingattheminimumpointonitsaveragetotalcostcurve. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:17.1 9. Afirmthatwouldexperiencehigheraveragetotalcostbyincreasingproductionisoperatingwithexcesscapacity. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:17.1 10. Aprofitmaximizingfirminamonopolisticallycompetitivemarketalwaysoperatesonthedownwardsloping portionofitsmarginalcostcurve. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:17.1 11. Apricemarkupovermarginalcostisinconsistentwithmarketattributesoffreeentryandzeroprofit. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:17.1 12. Whenafirminamonopolisticallycompetitivemarketearnszeroeconomicprofit,itsproductpricemustequal marginalcost. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:17.1 13. Whenaprofitmaximizingfirminamonopolisticallycompetitivemarketisinlongrunequilibrium,marginalcost mustliebelowaveragetotalcost. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:17.1 14. Afirminamonopolisticallycompetitivemarketisusuallyindifferenttoanadditionalcustomerwalkingthrough thedoor,sinceasaletothatcustomerwillnotincreasethefirmsprofit. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:17.1 15. Whenadvertisingisusedtorelayinformationaboutprice,eachfirmisabletoenhancemarketpower. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:17.2 16. Policymakershavegenerallycometoaccepttheviewthatadvertisingenhancestheefficiencyofmarkets. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:17.2 17. Criticsofadvertisingthatfocusesonproductcharacteristicsarguethatitleadstolesselasticdemandforproducts. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:17.2 18. Economistswhoarguethatadvertisingenhancesmarketefficiencysuggestthatcelebrityadvertisingsignalsinferior productquality. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:17.2 19. WhenMcDonaldsopensastoreinDhaka,Bangladesh,ithasastrongincentivetoenforceproductqualityconsistent withstoresintheUnitedStates. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:17.2 20. TheMikatiPhilippinesHardRockCafehastheexactsamemenuastheHardRockCafeinNewYork.Thisisan exampleofabrandnameenhancingmarketefficiencyforU.S.touristsvisitingthePhilippines. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:17.2 21. Empiricalevidencesuggeststhatadvertisingusuallyleadstoanincreaseinthepriceforadvertisedproducts. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:17.2 22. AdvertisingduringtheSuperBowlisanexampleofinformationaboutqualitycontainedprimarilyintheexistence andexpenseoftheadvertising. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:17.2 23. Brandnamesarerarelyusedtoconveyinformationaboutproductquality. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:17.2 24. The"competition"inmonopolisticallycompetitivemarketsismostlikelyaresultofhavingmanysellersinthe market. ANSWER:TTYPE:TFDIFFICULTY:1SECTION:17.1

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25. Thereisgeneraldisagreementamongeconomistsabouttheroleofadvertisingbutthereiswidespreadagreement abouttheroleofbrandnamesonmarketefficiency. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:17.2 26. ThegovernmentofItalywillnotallowanyHardRockCaferestaurantstoopeninItaly.Defendersoftheefficiency ofbrandnamemarketswouldarguethatthishashamperedrestaurantmarketefficiencyinItaly. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:17.2 27. Thedebateoverwhetheradvertisingservesavaluablepurposeinsocietyisdefinitivelyansweredbyeconomists whostudythetastesandpreferencesofindividuals. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:17.2 28. Theclaimthatadvertisingreducestheelasticityofdemandislikelytobemadebyadefenderofadvertising. ANSWER:FTYPE:TFDIFFICULTY:2SECTION:17.2 29. Ifadvertisingdecreasestheelasticityofdemandforspecificbrandnamesofhardliquor,wewouldexpectfirmsto bemoreabletoexercisemarketpowerasaresult. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:17.2 30. Whenpoorqualityproductsareadvertisedusingcheapadvertisingconsumerslearntoignoresuchcheap advertising. ANSWER:TTYPE:TFDIFFICULTY:2SECTION:17.2 SHORTANSWER 1. Entryoffirmsinamonopolisticallycompetitiveindustryischaracterizedbytwo"external"effects.Listtheseeffects andbrieflydescribehowconsumersandincumbentfirmsareinfluencedbytheseexternalities. ANSWER:Businessstealingeffectincumbentfirmsareaffectedthroughthelossofsales,consumersareaffectedby lowerprice. Productvarietyeffectincumbentfirmsfaceamarketwithmoresubstitutes,consumershavemoreproductvariety fromwhichtochoose. TYPE:SDIFFICULTY:2SECTION:17.1 2. Evaluatethefollowingstatementinthecontextofbusinessstealingandproductvarietyexternalities:"Wehavetoo manystudentapartmentsinthistownalready;statisticsshowthatvacancyratesaverage15percentduringany givensemester." ANSWER:businessstealingeffectifnewentrantsintothemarketcanbeprofitablethenaveragevacancyratesarelikely toriseabove15percent. Productvarietyeffectifnewentrantstothemarketareabletoidentifynichemarketswhichareprofitable(i.e., offerclubrooms,pools,athleticfacilities,etc.)thenproductvarietywillincrease,andaveragevacancyratesare likelytoriseabove15percent. TYPE:SDIFFICULTY:2SECTION:17.1

Chapter 17/Monopolistic Competition 41

3. Useagraphtodemonstratewhyaprofitmaximizingmonopolisticallycompetitivefirmmustoperateatexcess capacity.Explainwhyaperfectlycompetitivefirmisnotsubjecttothesameconstraint. ANSWER:

Competitivefirmsdonotfacedownwardslopingdemand.Thegraphshowsthefirmchoosingalevelofproduction inwhichtheintersectionofmarginalrevenueandmarginalcostoccursatanoutputlevelwhereaveragetotalcostis decreasing.Thisprofitmaximizingoutputlevelislessthantheefficientscale(minimumofaveragetotalcost)and thereforethefirmissaidtobeoperatingatexcesscapacity. TYPE:SDIFFICULTY:2SECTION:17.1 4. Inasmallcollegetown,fourmicrobrewerieshaveopenedinthelasttwoyears.Demonstratetheeffectofthesenew marketentrantsondemandforincumbentfirms(microbreweries)thatalreadyservedthismarket.Assumethatthe localcommunitynowplacesamoratoriumonnewliquorlicensesformicrobreweries.Howwillthismoratorium affectthelongrunprofitabilityofincumbentfirms? ANSWER:

Thearrivalofanewentrantshouldbegraphicallydepictedbyaleftwardshiftinthedemandcurvesfacedbyall incumbentfirms.Iffirmsareabletomakeeconomicprofits,thesewillbeabletobemaintainedinthelongrunif newentrantsarenotallowed. TYPE:SDIFFICULTY:2SECTION:17.1

42 Chapter 17/Monopolistic Competition

5. Inmanycollegetowns,privateindependentbookstorestypicallylocateontheperipheryofthecollegecampus. However,insomecollegetowns,theUniversityhasusedpoliticalpowertorestrictprivatebookstoresnearcampus throughcommunityzoninglaws.Useyourknowledgeofmarketstopredictthepriceandqualityofservice differenceinthemarketforcollegetextbooksunderthesetwodifferentmarketregimes. ANSWER:Inmonopolymarkets,pricewillbehigherandthequalityofservicewillbelowerthaninmonopolistically competitivemarkets. TYPE:SDIFFICULTY:2SECTION:17.1 6. Listfivegoodsthataresoldinamonopolisticallycompetitivemarket. ANSWER:books,CDs,movies,computergames,andpianolessonsaresomeexamples. TYPE:SDIFFICULTY:1SECTION:17.1 7. Whydoesatypicalmonopolisticallycompetitivefirmfaceadownwardslopingdemandcurve? ANSWER:Becauseitsproductisdifferentfromthoseofferedbyotherfirms. TYPE:SDIFFICULTY:1SECTION:17.1 8. Whatismeantbythetermexcesscapacityasitrelatestomonopolisticallycompetitivefirms? ANSWER:Inthelongrun,monopolisticallycompetitivefirmsproducealevelofoutputlowerthantheefficientscaleand arethereforesaidtohaveexcesscapacity. TYPE:SDIFFICULTY:2SECTION:17.1 9. Assumetheroleofacriticofadvertising.Describethecharacteristicsofadvertisingthatreducetheeffectivenessof marketsanddecreasethesocialwellbeingofsociety. ANSWER:Advertisingmanipulatespeople'stastesandispsychologicalratherthaninformational;asaresultitcreatesa desirethatmightnototherwiseexist.Advertisingmayalsoimpedecompetitionbyconvincingconsumersthat productsthatareidenticalhavesignificantdifferences. TYPE:SDIFFICULTY:2SECTION:17.2 10. Assumetheroleofadefenderofadvertising.Describethecharacteristicsofadvertisingthatenhancethe effectivenessofmarketsandincreasethesocialwellbeingofsociety. ANSWER:advertisingprovidesinformationtoconsumersandthusallowsconsumerstomakemoreinformed(andthus better)choices.Advertisingfosterscompetitionbymakingconsumersmoreawareofpricesandproduct characteristicsinamarket. TYPE:SDIFFICULTY:2SECTION:17.2 11. Evaluatethefollowingstatement:"Advertisementsthatusecelebrityendorsementsaredevoidofanyvalueanddo notenhancetheefficientfunctioningofmarkets." ANSWER:Somepeoplearguethatcelebrityendorsementsareasignalofquality.Ifso,thentheyrelayinformationand enhancetheeffectivefunctioningofmarkets. TYPE:SDIFFICULTY:2SECTION:17.2 12. Discusshow"brandnames"mayenhancetheefficiencyofmarketsinalessdevelopedcountry. ANSWER:Recognizablebrandnamessignalqualityproducts.Inthetouristandbusinessservicesmarketthissignalcan becriticalattheearlystagesofdevelopmenttoensurevisitorshaveaqualityexperiencewhenotherinformationis unavailableorunreliable. TYPE:SDIFFICULTY:2SECTION:17.2 13. Formanyyears,Pepsioperateda"tastetest"boothatlocalfairsacrosstheUnitedStates.Visitorstotheboothwould beencouragedtotakeablind"tastetest"betweenPepsianditsprimarymarketcompetitor,Coke.Pepsithenused thetastetestresultsinadvertisingPepsi.Whatadvertisingtheorydoessuchanapproachsupport?Pepsinolonger usesthisasanadvertisingstrategy,butrather,reliesoncelebrityendorsementsandotherformsofadvertising. WhatadvertisingtheorydoyouthinknowdominatesthemarketbetweenPepsiandCoke?Explain. ANSWER:Thetastetestusedthe"advertisingasinformation"theoryofadvertising.Celebrityendorsementisthe "advertisingasasignalofquality"theoryofadvertising. TYPE:SDIFFICULTY:2SECTION:17.2

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14. Professionalorganizations(e.g.,AmericanMedicalAssociationandAmericanBarAssociation)havebeenactive advocatesforregulationtorestricttherightofprofessionalstoadvertise.Describewhateconomicincentivesmight existforincumbentprofessionalstorestrictadvertising. ANSWER:Ifadvertisingincreasesinformationaboutpricesandservices,thenprovidersofprofessionalserviceswillbe requiredtocompetewitheachotheronthebasisofpriceandservice.Assuch,incumbentprofessionalswillbe subjecttomorecompetitivepressureinthemarketstheyservice,andindividualprofitsarelikelytofall. TYPE:SDIFFICULTY:2SECTION:17.2 15. Inmarketswherethegovernmentimposesanexcisetaxonunitsales,italsohasatendencytodabblewith restrictionsonadvertising(i.e.,cigarettes,hardliquor).Dopotential(oractual)restrictionsonadvertisinginthese marketsservetheinterestofagovernmentthatisinterestedinmaximizingitstaxrevenuefromthesaleofthese products?Explainyouranswer. ANSWER:Inthecaseoftheexamplesgiven,demandisquiteinelastic,sorestrictionsonadvertisingarenotlikelytohave alargeimpactontotalsales,butmayhaveanimpactonthedistributionofsalesacrossbrandnames.Assuch, governmentrevenueislargelyunaffectedifthetaxisonunitsales. TYPE:SDIFFICULTY:3SECTION:17.2 16. Asdevelopingcountriesmakeatransitiontomarketbasedeconomies,oneofthefirstmajorcapitalinvestmentsis in"Westernquality"hotels.Explainwhy"brandname"hotelaccommodationsareacriticalstepinattractingforeign investment. ANSWER:Brandnamehotelsareacriticalfirststeptoeconomicdevelopmentbecausetheirrecognizedsignalofquality reducesthebarriersoffacilitatingforeignvisitors(andtheirmoney). TYPE:SDIFFICULTY:2SECTION:17.2