Question 1

Which of the following is the key feature that distinguishes monopolistic competition from perfect competition?

Accepted Answer

Product differentiation

Question 2

In the long run, what happens to economic profits in a monopolistically competitive market?

Accepted Answer

Firms earn zero economic profits as entry and exit eliminate profits and losses.

Question 3

Which of the following is NOT typically an example of a monopolistically competitive market?

Accepted Answer

Corn farming

Question 4

Why do firms in monopolistically competitive markets engage in advertising?

Accepted Answer

To increase demand and make demand less elastic

Question 5

Which equation represents the condition for allocative efficiency in a market?

Accepted Answer

$$P = MC$$

Question 6

In monopolistic competition, why is there excess capacity in the long run?

Accepted Answer

Firms produce at an output level below the minimum average cost

Question 7

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

Accepted Answer

It can provide a barrier to entry for new firms

Question 8

Which market structure is characterized by a perfectly elastic demand curve for individual firms?

Accepted Answer

Perfect competition

Question 9

Suppose a pizza restaurant in a city faces a downward-sloping demand curve. What does this imply about the market structure?

Accepted Answer

The restaurant is in a monopolistically competitive market

Question 10

Which of the following correctly ranks the elasticity of demand curves for representative firms from least elastic to most elastic?

Accepted Answer

Monopoly, monopolistic competition, perfect competition

Question 11

Which of the following is true about the short-run graphical analysis of monopolistically competitive firms?

Accepted Answer

It most closely resembles the graphical analysis of a monopoly

Question 12

In the long run, the profit of a representative firm in a monopolistically competitive industry resembles that of:

Accepted Answer

A firm in a perfectly competitive industry

Question 13

Which of the following is an argument in favor of advertising?

Accepted Answer

It informs consumers and may enhance enjoyment of the product

Question 14

A monopolistically competitive firm faces which type of demand curve?

Accepted Answer

Downward-sloping

Question 15

Which of the following is a welfare effect of monopolistic competition?

Accepted Answer

Not producing at minimum average cost (excess capacity)

Question 16

Which of the following is NOT a goal of advertising in monopolistically competitive markets?

Accepted Answer

Achieve productive efficiency

Question 17

Which of the following statements about monopolistically competitive industries is correct?

Accepted Answer

They are characterized by a greater than economically efficient number of firms, each producing below the cost-minimizing level

Question 18

If a firm in a monopolistically competitive market is earning economic profits in the short run, what will happen in the long run?

Accepted Answer

New firms will enter, shifting the demand curve left until profits are zero

Question 19

Which of the following is a real-world example of a market likely to be monopolistically competitive?

Accepted Answer

Professional services such as lawyers and accountants

Question 20

Which of the following is a possible effect of advertising as a signal of product quality?

Accepted Answer

Consumers may perceive the product as higher quality if the firm spends heavily on advertising

Monopolistic Competition and Advertising: Key Concepts and Analysis

Study Guide - Practice Questions