Question 1

Which of the following best describes a key characteristic of monopolistic competition?

Accepted Answer

Many firms produce differentiated products and there are no barriers to entry or exit.

Question 2

Suppose a toothpaste company in a monopolistically competitive market is earning economic profit in the short run. What will happen in the long run?

Accepted Answer

New firms will enter the market, decreasing demand for the existing firm's product until economic profit is zero.

Question 3

A firm in monopolistic competition maximizes profit by producing the quantity where:

Accepted Answer

$MR = MC$

Question 4

Which of the following is a limitation of using only concentration measures (like the four-firm concentration ratio or HHI) to determine market structure?

Accepted Answer

They do not account for the geographical scope of the market.

Question 5

If the four largest firms in an industry have market shares of 30%, 25%, 20%, and 15%, what is the Herfindahl-Hirschman Index (HHI) for this industry?

Accepted Answer

$HHI = 30^2 + 25^2 + 20^2 + 15^2 = 900 + 625 + 400 + 225 = 2,150$

Question 6

In monopolistic competition, why do firms engage in advertising and develop brand names?

Accepted Answer

To signal product quality and differentiate their products from competitors.

Question 7

Which of the following best explains why firms in monopolistic competition operate with excess capacity in the long run?

Accepted Answer

The downward-sloping demand curve for their differentiated products means they produce less than the efficient scale.

Question 8

Suppose a firm in monopolistic competition is considering a new advertising campaign. Which of the following is most likely to occur if the campaign is successful?

Accepted Answer

The firm's average total cost will increase, but if demand increases enough, the firm may produce more and lower average total cost per unit.

Question 9

In the long-run equilibrium of monopolistic competition, what is the relationship between price ($P$), average total cost ($ATC$), and marginal cost ($MC$)?

Accepted Answer

$P = ATC > MC$

Question 10

Which of the following statements about product variety in monopolistic competition is correct?

Accepted Answer

The efficient degree of product variety is where the marginal social benefit equals the marginal social cost.

Question 11

A firm in monopolistic competition is currently producing where $MR = MC$ and $P > ATC$. What does this indicate?

Accepted Answer

The firm is earning an economic profit.

Question 12

Why is collusion or conspiring to fix prices virtually impossible in monopolistic competition?

Accepted Answer

Each firm has a small market share and does not pay attention to the actions of others.

Question 13

Which of the following best describes the effect of advertising on the elasticity of demand for a firm's product in monopolistic competition?

Accepted Answer

If all firms advertise, the demand for each firm's product becomes more elastic.

Question 14

In monopolistic competition, what is the main reason that firms cannot earn economic profit in the long run?

Accepted Answer

Free entry and exit ensure that any economic profit is competed away.

Question 15

Suppose a firm in monopolistic competition is considering a costly innovation. According to economic theory, how much innovation should the firm undertake?

Accepted Answer

Until the marginal revenue from innovation equals the marginal cost of innovation.

Question 16

Which of the following is true about the markup in monopolistic competition compared to perfect competition?

Accepted Answer

Markup is positive in monopolistic competition due to product differentiation.

Question 17

A hotel chain spends millions to establish a brand name. What economic purpose does this serve in monopolistic competition?

Accepted Answer

It signals consistent quality to consumers, reducing uncertainty.

Question 18

If a firm in monopolistic competition produces less than the quantity at which $ATC$ is minimized, what is this called?

Accepted Answer

Excess capacity

Question 19

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

Accepted Answer

Firms have market power due to product differentiation, resulting in a downward-sloping demand curve.

Question 20

A firm in monopolistic competition is considering whether to increase its selling costs (e.g., advertising). Which of the following is true?

Accepted Answer

Selling costs are fixed costs and increase average total cost but not marginal cost.

Monopolistic Competition: Structure, Pricing, and Marketing in Microeconomics

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