Question 1

Which of the following best describes a monopolistically competitive market?

Accepted Answer

A market with many sellers offering similar but not identical products and free entry and exit.

Question 2

Suppose a firm in a monopolistically competitive market finds that at its current output, $$P \u003c ATC$$ and $$MR = MC. $$What should the firm do in the short run?

Accepted Answer

Continue producing at the current output to minimize losses.

Question 3

In the long run, what happens to the demand curve facing a monopolistically competitive firm if firms in the market are earning positive economic profits?

Accepted Answer

It shifts to the left as new firms enter the market.

Question 4

Which of the following equations correctly represents the profit-maximizing condition for a monopolistically competitive firm?

Accepted Answer

$$MR = MC$$

Question 5

In the long-run equilibrium of a monopolistically competitive market, which of the following is true?

Accepted Answer

$$P \u003e MC$$ and $$P = ATC$$

Question 6

Which of the following best explains why monopolistically competitive firms have excess capacity in the long run?

Accepted Answer

They produce at a quantity less than the efficient scale, where average total cost is minimized.

Question 7

A monopolistically competitive firm is currently producing where $$MR = MC$$ and $$P \u003e ATC. $$What does this indicate about the firm's profit situation?

Accepted Answer

The firm is earning a positive economic profit.

Question 8

Which of the following is a critique of advertising in monopolistically competitive markets?

Accepted Answer

Advertising manipulates consumer tastes and can make demand less elastic.

Question 9

Suppose a new brand of breakfast cereal enters a monopolistically competitive market and spends heavily on advertising. According to the signaling theory, what might consumers infer from this behavior?

Accepted Answer

The high advertising expenditure signals that the cereal is likely to be of high quality.

Question 10

Which of the following best describes the business-stealing externality in monopolistic competition?

Accepted Answer

New firms entering the market reduce the demand faced by existing firms, imposing a negative externality.

Question 11

A monopolistically competitive firm faces the following cost and revenue conditions: $$MR = MC = \10$, P$$ = \$$15$$, $$ATC = \15$. What is the firm's economic profit?

Accepted Answer

Zero economic profit

Question 12

Which of the following is NOT a characteristic of monopolistic competition?

Accepted Answer

Barriers to entry

Question 13

In the context of monopolistic competition, what is the product-variety externality?

Accepted Answer

A positive externality on consumers from the introduction of new products.

Question 14

Which of the following statements is true regarding the relationship between price, marginal cost, and average total cost in the long-run equilibrium of a monopolistically competitive firm?

Accepted Answer

$$P \u003e MC$$ and $$P = ATC$$

Question 15

Which of the following best explains why monopolistically competitive firms advertise more than perfectly competitive firms?

Accepted Answer

They have market power due to product differentiation and can increase profits by attracting more buyers.

Question 16

Suppose a monopolistically competitive firm is considering whether to enter a market. Which of the following conditions would make entry most attractive?

Accepted Answer

Existing firms are earning positive economic profit.

Question 17

Which of the following is a defense of advertising in monopolistically competitive markets?

Accepted Answer

Advertising provides information that helps consumers make better choices.

Question 18

A monopolistically competitive firm faces the following: $$MR = MC = \8$, P$$ = \$$10$$, $$ATC = \12$. What should the firm expect in the long run?

Accepted Answer

Firms will exit the market, shifting the demand curve right until $$P = ATC.$$

Question 19

Which of the following best explains why price exceeds marginal cost in monopolistic competition, even in the long run?

Accepted Answer

The downward-sloping demand curve means marginal revenue is less than price, so profit maximization occurs where $$P \u003e MC.$$

Question 20

Which of the following is most likely to have a high four-firm concentration ratio?

Accepted Answer

The market for aircraft manufacturing.

Monopolistic Competition: Structure, Outcomes, and Advertising

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