Ch.

11 Monopolistiic Competition
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)

Consider the following statements about monopolistically competitive markets.

I. Differentiated products have no close substitutes.

II. There are only a few firms in most monopolistically competitive markets.
III. The automobile market is a good example of a monopolistically
competitive industry.

1)

_______
A)

I and II are true; III is false.

B)

All three statements are false.

C)

I is false; II and III are true.

D)

All three statements are true.

E)

I and III are true; II is false.

2)

For a monopolistically competitive firm, the firm's demand curve is ________ and is relatively ________.

2)

_______
A)

the same as the market demand curve; inelastic.

B)

less than the market demand curve; inelastic.

C)

the same as the market demand curve; unit elastic.

D)

less than the market demand curve; elastic.

E)
the same as the market demand curve; elastic.

3)

The profit-maximizing point for a monopolistically competitive firm is where

3)

_______
A)

MR = min ATC.
B)

MR = MC.
C)

MR = ATC.
D)

MR = TC.
E)

MR = P.

4)

For a monopolistically competitive firm, demand is relatively elastic because an increase in price will

4)

_______
A)

cause a relatively large number of customers to switch to a close substitute good.

B)

cause a relatively small number of customers to switch to a close substitute good.

C)

cause more consumers to buy the product.

D)

not change the quantity of the product demanded.

E)

cause the firm to lose all customers.

5)

In the short run, firms in monopolistically competitive markets

5)

_______
A)

will make profits equal to zero.

B)

will see entry of new firms.

C)

will make profits greater than zero.

D)

will make profits less than zero.

E)

could make negative, zero, or positive profits.

Use the figure for the question(s) below.

6)

The figure above shows a monopolistically competitive firm. If the firm is currently selling 100 units at a price of $25,
which of the following is a TRUE statement?

6)

_______
A)

This firm is currently losing money.

 B)

This firm should shut down in the short run.

C)

This firm is maximizing profit.

D)

This firm will exit the industry in the long run.

E)

This firm could make a greater profit by producing more.

7)

The figure above shows a monopolistically competitive firm. If the firm is currently selling 100 units at a price of $25,
which of the following is NOT a true statement?

7)

_______
A)

This firm cannot make a greater profit by producing more.

B)

This firm will exit the industry in the long run.

C)

This firm is making an economic profit of zero.

D)

This firm is doing just as well as it would in its next-best opportunity.

E)

This firm is maximizing profit.

8)

In the short run, a monopolistically competitive firm will shut down when

8)

_______
A)

it is not making a positive profit.

B)

there are too many firms in the industry.

C)
revenue is less than fixed costs.
D)

revenue is less than variable costs.

E)

revenue is less than total costs.

Use the figure for the question(s) below.

9)

The figure above shows a monopolistically competitive firm. Given the demand curve, what is the lowest price at which
this firm will produce in the short run?

9)

_______
A)

$75

B)

$100

C)

$140

D)
$80

E)

$130

10)

The figure above shows a monopolistically competitive firm. What is the profit-maximizing output and price for this
firm?

10)

______
A)

90, $130
B)

50, $75
C)

50, $140
D)

75, $75
E)

50, $100

11)

The figure above shows a monopolistically competitive firm. What are the fixed costs of this firm?

11)

______
A)

$7,000
B)

$2,000
C)

$75
D)

$5,000
E)

Fixed costs cannot be determined from the graph.

 12)

The figure above shows a monopolistically competitive firm. At the profit-maximizing point, what is the profit of this
firm?

12)

______
A)

-$2,000
B)

$7,000
C)

$5,000
D)

-$1,500
E)

$0

13)

The figure above shows a monopolistically competitive firm. In the short run, this firm should

13)

______
A)

shut down.
B)

raise price.
C)

produce an output of 100.

D)

produce an output of 50.

E)

exit the industry.

14)

The figure above shows a monopolistically competitive firm. In the short run, this firm should
14)

______
A)

produce an output of 100.

B)

exit the industry.

C)

raise price.
D)

shut down.
E)

produce an output of 50.

15)

Which of the following graphs could represent a monopolistically competitive firm making a short-run profit?

15)

______
A)

B)

C)
 D)

E)

16)

The demand curve for a monopolistically competitive firm is downward sloping because

16)

______
A)

it is the only firm in the market.

B)

products are perfect substitutes.

C)

there are many firms in the market.

D)

it sells a differentiated product

E)

there are barriers to entry.

 17)

If the demand curve is tangent to the average variable cost curve, the firm

17)

______
A)

is making a profit of zero.

B)

is at the shut down point.

C)

should shut down.

D)

is making a positive profit.

E)

should exit the industry in the short run.

18)

In which of the following types of market is profit expected to be zero in the long run?

1. Perfect competition
2. Monopoly
3. Monopolistic competition

18)

______
A)

1, 2, and 3
B)

1 and 3
C)

1 and 2
D)

2 and 3
E)

1 only
 19)

Suppose that in a monopolistically competitive industry, every new firm has costs that are slightly higher than the costs of
previous firms. In the long run

19)

______
A)

every firm in the industry will break even.

B)

every firm in the industry will make a profit.

C)

every firm in the industry will make a loss.

D)

the last firm to enter the industry will break even; all others will make a loss.
E)

the last firm to enter the industry will break even; all others will make a positive profit.

20)

When a monopolistically competitive firm is breaking even price will be

20)

______
A)

greater than minimum average cost.

B)

equal to average variable cost.

C)

equal to minimum average cost.

D)

equal to marginal cost.

E)

equal to marginal revenue.

21)

Consider the following statements about monopolistic competition.

I. There are barriers to entry in monopolistically competitive industries.

 II. The shutdown point for a monopolist is at the minimum point on
the average variable cost curve.
III. Monopolistically competitive firms in the same industry may have
different costs.

21)

______
A)

I and III are true; II is false.

B)

All three statements are false.

C)

All three statements are true.

D)

I and II are false; III is true.

E)

I is false; II and III are true.

22)

As more firms enter a monopolistically competitive industry, demand for each product will ________, and thus profit-
maximizing price will ________.

22)

______
A)

stay the same; rise

B)

rise; fall
C)

fall; fall
D)

fall; rise
E)

rise; rise

23)

As compared to a perfectly competitive industry, a monopolistically competitive industry

23)

______
A)

does not allocate resources efficiently.

B)

has less advertising.

C)

has less market power.

D)

has more firms.

E)

has barriers to entry.

24)

Policymakers are generally not concerned about deadweight losses from monopolistic competition because

24)

______
A)

it would not be possible to regulate the industry.

B)

monopolistically competitive firms are efficient.

C)

the size of the losses is small relative to the costs of preventing them.
D)

there are many firms in the market.

E)

there are significant barriers to entry in the industry.

25)

In the long run, in a monopolistically competitive industry,

25)

______
A)

P > MC.
 B)

P = ATC.
C)

P > min ATC.

D)

MR = MC.
E)

All of the above relationships are true.

26)

Monopolistic competition is considered to be inefficient because there

26)

______
A)

are positive profits.

B)

are too few firms in the market.

C)

is variety.
D)

are barriers to entry.

E)

is excess capacity.

27)

As compared to a perfectly competitive industry, consumers buying from monopolistically competitive firms gain
________, but lose because ________.

27)

______
A)

efficiency; there is limited variety

B)

variety; prices are lower

C)
more firms; there is little variety
D)

variety; prices are higher

E)

low prices; there is little variety

28)

As compared to a monopoly, the markup of price over marginal cost for a monopolistically competitive firm is ________,
and thus deadweight loss is ________.

28)

______
A)

less; greater
B)

greater; greater
C)

less; less
D)

greater; less
E)

greater; equal

29)

Consider the following statements about the efficiency of monopolistically competitive markets.

I. The benefits from variety can offset the deadweight losses

in monopolistically competitive markets.
II. Consumers do not benefit from the existence of low-quality goods.

29)

______
A)

II is true; I is false.
B)

Both statements are true.

C)

I is true; II is false.
 D)

Both statements are false.

E)

There is insufficient information to tell whether one or both statements are correct.

30)

Which of the following is a true statement about advertising and efficiency?

30)

______
A)

Advertising is beneficial to consumers and firms, and thus efficiency usually increases.
B)

Advertising cannot increase market efficiency.

C)

Advertising has no effect on market efficiency.

D)

Advertising that contains meaningful information increases market efficiency.

E)

Advertising is beneficial to firms but not consumers, so efficiency decreases.

31)

Successful advertising makes the firm's demand curve shift

31)

______
A)

leftward and become more elastic.

B)

rightward and become more elastic.

C)

leftward and become less elastic.

D)

rightward and become less elastic.

E)

rightward and become unit elastic.

 32)

Perfectly competitive firms

32)

______
A)

are not permitted to advertise.

B)

do not advertise because there are many firms in the market.

C)

often advertise in order to increase their demand.

D)

often advertise to distinguish their product from others.

E)

do not advertise because their products have no distinct characteristics.

33)

A good which you must try out to decide whether you like it is called a(n) ________ good.

33)

______
A)

information
B)

persuasive
C)

spurious
D)

experience
E)

search

SHORT ANSWER. Briefly explain your answer, providing a clearly labeled graph if it will help clarify your
explanation
34)
How are monopolistically competitive firms like monopolies?

34)

_____________

35)

What is the difference between search and experience goods?

35)

_____________

36)

How are monopolistically competitive markets like perfectly competitive markets?

36)

_____________

37)

How does the demand curve for a monopolistically competitive firm compare with the demand curve for a monopoly?

37)

_____________

38)

How does the extent of product differentiation affect the elasticity of demand?

38)

_____________

39)

What will happen in a monopolistically competitive industry if firms are making short-run profits? Carefully explain.

39)

_____________

40)

Carefully explain, with use of graphs, the difference between a monopolistically competitive industry in the short run
versus the long run. Will all firms make zero profit in long-run equilibrium?
40)

_____________

1)

B
2)

D
3)

B
4)

A
5)

E
6)

C
7)

B
8)

D
9)

B
10)

E
11)

B
12)

D
13)

D
14)

B
15)

D
16)

D
 17)

B
18)

B
19)

E
20)

A
21)

D
22)

C
23)

A
24)

C
25)

E
26)

E
27)

D
28)

C
29)

C
30)

D
31)

D
32)

E
33)

D
 34)

Since products are differentiated, they are not perfect substitutes, and thus each firm faces a downward-sloping demand
for its "unique" product.
35)

Search goods have characteristics that can easily be verified by the consumer prior to purchase. Experience goods must be
purchased (or tested) to verify their quality.
36)

There are no barriers to entry in monopolistically competitive markets, and thus firms will continue to enter as long as
profits exceed zero. In long run equilibrium, there will be many firms and zero profits, as in competitive industries.
37)

A monopolist is the only firm in the market, and thus faces the (downward-sloping) market demand curve. A firm in a
monopolistically competitive industry faces the demand for its own product, which is a small part of the overall market
demand for close substitute products and is likely to be more elastic.
38)

The more differentiated and unique products are, the fewer substitutes there will be (or the fewer good substitutes) and
thus the more inelastic demand will be. Products that are only slightly differentiated will tend to have fairly elastic
demand as consumers will be quick to switch if prices differ.
39)

The existence of short-run profits will attract new firms into the market. As more firms enter, demand for each variety
shrinks (and becomes more elastic) and prices fall, until the last firm just breaks even.
40)

Students should explain and show graphically that firms can earn profits or losses in the short run, and that will attract
entry or cause exist until profits of the marginal firm are equal to zero. If costs are not the same (or demand is not the
same) for each firm, some firms may still make a profit, but in equilibrium, the last firm must just break even.