$$\text{Profit} = (P - ATC) \times Q$$

Question 1

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

Accepted Answer

Significant barriers to entry

Question 2

In monopolistic competition, why is the demand curve for an individual firm downward sloping?

Accepted Answer

Because products are differentiated and firms have some pricing power

Question 3

A monopolistically competitive firm maximizes profit by producing the quantity where:

Accepted Answer

$$MR = MC$$

Question 4

Refer to the table of Caffè Lattes. At what quantity is the firm maximizing profit?

Accepted Answer

Where $$MR = MC$$, which is at 6 lattes per week

Question 5

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

Accepted Answer

New firms will enter, shifting the demand curve left and making it more elastic

Question 6

Which formula correctly calculates a firm's profit in monopolistic competition?

Accepted Answer

$$	ext{Profit} = (P - ATC) 	imes Q$$

Question 7

Why do monopolistically competitive firms have excess capacity?

Accepted Answer

Because they do not produce at the minimum $$ATC$$

Question 8

In monopolistic competition, what happens to the demand curve for an individual firm as more firms enter the market?

Accepted Answer

It shifts to the left and becomes more elastic

Question 9

Which of the following best explains why consumers are willing to pay a higher price in monopolistic competition?

Accepted Answer

They value product differentiation and variety

Question 10

If a monopolistically competitive firm wants to maintain economic profits in the long run, it must:

Accepted Answer

Continuously differentiate its product or reduce costs

Question 11

Which equation represents the relationship between price and marginal cost in monopolistic competition?

Accepted Answer

$$P \u003e MC$$

Question 12

What is the main trade-off for consumers in monopolistic competition?

Accepted Answer

Higher prices for more differentiated products

Question 13

Which curve is always below the demand curve for a monopolistically competitive firm?

Accepted Answer

Marginal Revenue (MR) curve

Question 14

If a firm in monopolistic competition decreases its price, what happens to total revenue when demand is elastic?

Accepted Answer

Total revenue increases

Question 15

Which of the following is a real-world example of monopolistic competition?

Accepted Answer

Restaurants in a city

Question 16

In the long run, what happens to economic profits in monopolistic competition if firms do not continuously differentiate their products?

Accepted Answer

Economic profits are eliminated

Question 17

Which of the following best describes the market power of a monopolistically competitive firm?

Accepted Answer

Limited, because there are many substitutes

Question 18

If a monopolistically competitive firm is producing at a quantity where $$P \u003c ATC$$, what should it do in the short run?

Accepted Answer

Continue operating if $$P \u003e AVC$$

Question 19

Which of the following is NOT a way for a monopolistically competitive firm to add value for consumers?

Accepted Answer

Making products identical to competitors

Question 20

Why does society accept the loss in economic efficiency in monopolistic competition?

Accepted Answer

Because consumers benefit from product differentiation and variety

Chapter 13

Study Guide - Practice Questions