Question 1

A markup of price over marginal cost is inconsistent with free entry and zero profit.

Accepted Answer

A) True 
 B)False

Question 2

The profit-maximizing rule for a firm in a monopolistically competitive market is to always select the quantity at which

Accepted Answer

A) marginal revenue is equal to marginal cost. 
B) average total cost is equal to marginal revenue. 
C) average total cost is equal to price. 
D) average revenue exceeds average total cost. 
A) marginal revenue is equal to marginal cost. 
B) average total cost is equal to marginal revenue. 
C) average total cost is equal to price. 
D) average revenue exceeds average total cost.

Question 3

Ignoring oligopoly and focusing on the other three market structures,in which of those market structures does a profit-maximizing firm charge a price that exceeds marginal cost?

Accepted Answer

A) Monopoly only 
B) Monopoly and monopolistic competition only 
C) Monopoly, monopolistic competition, and perfect competition 
D) The answer cannot be determined without knowing whether the market is in the long run or short run. 
A) Monopoly only 
B) Monopoly and monopolistic competition only 
C) Monopoly, monopolistic competition, and perfect competition 
D) The answer cannot be determined without knowing whether the market is in the long run or short run.

Question 4

If firms in a monopolistically competitive market are incurring economic losses,which of the following scenarios would best describe the change existing firms (who are able to stay in the market)would face as the market adjusts to the long-run equilibrium?

Accepted Answer

A) A downward shift in the marginal cost curve for each firm 
B) An upward shift in the marginal cost curve for each firm 
C) A decrease in demand for each firm 
D) An increase in demand for each firm 
A) A downward shift in the marginal cost curve for each firm 
B) An upward shift in the marginal cost curve for each firm 
C) A decrease in demand for each firm 
D) An increase in demand for each firm

Question 5

An important difference between the situation faced by a profit-maximizing monopolistically competitive firm in the short run and the situation faced by that same firm in the long run is that in the short run,

Accepted Answer

A) price may exceed marginal revenue, but in the long run, price equals marginal revenue. 
B) price may exceed marginal cost, but in the long run, price equals marginal cost. 
C) price may exceed average total cost, but in the long run, price equals average total cost. 
D) there are many firms in the market, but in the long run, there are only a few firms in the market. 
A) price may exceed marginal revenue, but in the long run, price equals marginal revenue. 
B) price may exceed marginal cost, but in the long run, price equals marginal cost. 
C) price may exceed average total cost, but in the long run, price equals average total cost. 
D) there are many firms in the market, but in the long run, there are only a few firms in the market.

Question 6

In some countries,brand name fast-food restaurants are not allowed to operate.Such restrictions are likely to

Accepted Answer

A) enhance the social welfare of society. 
B) increase the number of local fast-food restaurants. 
C) reduce barriers to entry in imperfect markets. 
D) reduce the competitive nature of local fast-food markets. 
A) enhance the social welfare of society. 
B) increase the number of local fast-food restaurants. 
C) reduce barriers to entry in imperfect markets. 
D) reduce the competitive nature of local fast-food markets.

Question 7

Table 17-1
  
-Refer to Table 17-1.This table shows the demand schedule,marginal cost,and average total cost for a monopolistically competitive market.Which of the following is likely to happen in the long run in this market?

Accepted Answer

A) The market is currently in a long-run equilibrium. 
B) The market price is likely to fall. 
C) Firms are likely to enter the market since firms are earning a positive economic profit. 
D) Firms are likely to leave the market since firms are earning a negative economic profit. 
A) The market is currently in a long-run equilibrium. 
B) The market price is likely to fall. 
C) Firms are likely to enter the market since firms are earning a positive economic profit. 
D) Firms are likely to leave the market since firms are earning a negative economic profit.

Question 8

When monopolistically competitive firms advertise,in the long run

Accepted Answer

A) they will still earn zero economic profit. 
B) they can earn positive economic profit by increasing market share. 
C) the market price must fall. 
D) the market price must rise. 
A) they will still earn zero economic profit. 
B) they can earn positive economic profit by increasing market share. 
C) the market price must fall. 
D) the market price must rise.

Question 9

Firm A produces and sells in a market that is characterized by highly differentiated consumer goods.Firm B produces and sells industrial products.Firm C produces and sells an agricultural commodity.Which firm is likely to spend the greatest portion of its total revenue on advertising?

Accepted Answer

A) Firm A 
B) Firm B 
C) Firm C 
D) There is no reason to believe that any one of the three firms would spend a greater portion of its total revenue on advertising than the other two firms. 
A) Firm A 
B) Firm B 
C) Firm C 
D) There is no reason to believe that any one of the three firms would spend a greater portion of its total revenue on advertising than the other two firms.

Question 10

When firms sell highly differentiated consumer goods,it is likely that a significant cost to the firms will be

Accepted Answer

A) associated with advertising. 
B) associated with the product-variety externality. 
C) associated with intermediate materials. 
D) associated with taxes and regulation. 
A) associated with advertising. 
B) associated with the product-variety externality. 
C) associated with intermediate materials. 
D) associated with taxes and regulation.

Question 11

In which of the following market structures are there a large number of sellers? (i)	Monopolistic competition
(ii)	Perfect competition
(iii)	Oligopoly

Accepted Answer

A) (i) and (ii) only 
B) (ii) and (iii) only 
C) (ii) only 
D) (i), (ii), and (iii) 
A) (i) and (ii) only 
B) (ii) and (iii) only 
C) (ii) only 
D) (i), (ii), and (iii)

Question 12

Which of the following is a characteristic of oligopoly or monopolistic competition,but not perfect competition?

Accepted Answer

A) Advertising and sales promotion 
B) Profit maximization according to the MR = MC rule 
C) Firms being price takers rather than price makers 
D) Horizontal demand and marginal revenue curves 
A) Advertising and sales promotion 
B) Profit maximization according to the MR = MC rule 
C) Firms being price takers rather than price makers 
D) Horizontal demand and marginal revenue curves

Question 13

Excess capacity

Accepted Answer

A) tells economists little about the desirability of a market outcome. 
B) is the primary source of market inefficiency in monopolistically competitive markets. 
C) is a characteristic of rising average total cost curves. 
D) implies that the quantity demanded exceeds the quantity produced. 
A) tells economists little about the desirability of a market outcome. 
B) is the primary source of market inefficiency in monopolistically competitive markets. 
C) is a characteristic of rising average total cost curves. 
D) implies that the quantity demanded exceeds the quantity produced.

Question 14

Scenario 17-2
Consider the problem facing two firms, Firm A and Firm B, in the fast-food restaurant market. Each firm has just come up with an idea for a new fast-food menu item which it would sell for $4. Assume that the marginal cost for each new menu item is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 2 million consumers to try its new product. Firm A has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 2 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Firm B's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Firm B estimates that its initial 2 million customers will buy one unit of the product each month in the coming year, for a total of 24 million units.
-Refer to Scenario 17-2.If firm B decides to advertise its product it can expect to

Accepted Answer

A) have a profit of $48 million per year. 
B) have a profit of $36 million per year. 
C) incur a loss of $12 million per year. 
D) exit the industry. 
A) have a profit of $48 million per year. 
B) have a profit of $36 million per year. 
C) incur a loss of $12 million per year. 
D) exit the industry.

Question 15

A recent outbreak of hepatitis was linked to a national fast-food restaurant chain.This is an example of a case in which

Accepted Answer

A) brand name identity increases the effectiveness of markets. 
B) brand name identity can be detrimental to the profitability of a firm. 
C) advertising is ineffective in salvaging perceptions of product quality. 
D) advertising cannot be used to establish brand loyalty. 
A) brand name identity increases the effectiveness of markets. 
B) brand name identity can be detrimental to the profitability of a firm. 
C) advertising is ineffective in salvaging perceptions of product quality. 
D) advertising cannot be used to establish brand loyalty.

Question 16

Table 17-3
Traci's Hairstyling is one salon among many in the market for hairstyling. The following table presents cost and revenue data for Traci's Hairstyling.
  
-Refer to Table 17-3.Given the cost and revenue data,Traci's is

Accepted Answer

A) not in a long-run equilibrium.More businesses will enter the hair treatment market in the long-run. 
B) not in a short-run equilibrium. 
C) not in a long-run equilibrium.Some businesses currently in the hair treatment market will exit the market in the long-run. 
D) in a long-run equilibrium. 
A) not in a long-run equilibrium.More businesses will enter the hair treatment market in the long-run. 
B) not in a short-run equilibrium. 
C) not in a long-run equilibrium.Some businesses currently in the hair treatment market will exit the market in the long-run. 
D) in a long-run equilibrium.

Question 17

A monopolistically competitive firm faces the following demand curve for its product:  
The firm has total fixed costs of $40 and a constant marginal cost of $2 per unit.We can conclude that

Accepted Answer

A) firms will exit this market. 
B) firms will enter this market. 
C) this market is in long-run equilibrium. 
D) this firm is operating at efficient scale. 
A) firms will exit this market. 
B) firms will enter this market. 
C) this market is in long-run equilibrium. 
D) this firm is operating at efficient scale.

Question 18

When a monopolistically competitive firm is in long-run equilibrium,

Accepted Answer

A) price is equal to average total cost. 
B) price is equal to marginal cost. 
C) price is equal to marginal revenue. 
D) the firm operates at its efficient scale. 
A) price is equal to average total cost. 
B) price is equal to marginal cost. 
C) price is equal to marginal revenue. 
D) the firm operates at its efficient scale.

Question 19

Scenario 17-2
Consider the problem facing two firms, Firm A and Firm B, in the fast-food restaurant market. Each firm has just come up with an idea for a new fast-food menu item which it would sell for $4. Assume that the marginal cost for each new menu item is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 2 million consumers to try its new product. Firm A has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 2 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Firm B's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Firm B estimates that its initial 2 million customers will buy one unit of the product each month in the coming year, for a total of 24 million units.
-Refer to Scenario 17-2.By its willingness to spend money on advertising,Firm B

Accepted Answer

A) signals the quality of its new product to consumers. 
B) signals that it is not a profit maximizer. 
C) is detracting from the efficiency of markets. 
D) will drive Firm A out of the market. 
A) signals the quality of its new product to consumers. 
B) signals that it is not a profit maximizer. 
C) is detracting from the efficiency of markets. 
D) will drive Firm A out of the market.

Question 20

In the long run,a profit-maximizing firm in a monopolistically competitive market operates at

Accepted Answer

A) efficient scale. 
B) a level of output at which average total cost is rising. 
C) a level of output at which average total cost is falling. 
D) the level of output at which total revenue is maximized. 
A) efficient scale. 
B) a level of output at which average total cost is rising. 
C) a level of output at which average total cost is falling. 
D) the level of output at which total revenue is maximized.

Exam 17: Monopolistic Competition

A markup of price over marginal cost is inconsistent with free entry and zero profit.

The profit-maximizing rule for a firm in a monopolistically competitive market is to always select the quantity at which

Ignoring oligopoly and focusing on the other three market structures,in which of those market structures does a profit-maximizing firm charge a price that exceeds marginal cost?

If firms in a monopolistically competitive market are incurring economic losses,which of the following scenarios would best describe the change existing firms (who are able to stay in the market)would face as the market adjusts to the long-run equilibrium?

An important difference between the situation faced by a profit-maximizing monopolistically competitive firm in the short run and the situation faced by that same firm in the long run is that in the short run,

In some countries,brand name fast-food restaurants are not allowed to operate.Such restrictions are likely to

Table 17-1 -Refer to Table 17-1.This table shows the demand schedule,marginal cost,and average total cost for a monopolistically competitive market.Which of the following is likely to happen in the long run in this market?

When monopolistically competitive firms advertise,in the long run

Firm A produces and sells in a market that is characterized by highly differentiated consumer goods.Firm B produces and sells industrial products.Firm C produces and sells an agricultural commodity.Which firm is likely to spend the greatest portion of its total revenue on advertising?

When firms sell highly differentiated consumer goods,it is likely that a significant cost to the firms will be

In which of the following market structures are there a large number of sellers? (i) Monopolistic competition (ii) Perfect competition (iii) Oligopoly

Which of the following is a characteristic of oligopoly or monopolistic competition,but not perfect competition?

Excess capacity

A recent outbreak of hepatitis was linked to a national fast-food restaurant chain.This is an example of a case in which

Table 17-3 Traci's Hairstyling is one salon among many in the market for hairstyling. The following table presents cost and revenue data for Traci's Hairstyling. -Refer to Table 17-3.Given the cost and revenue data,Traci's is

A monopolistically competitive firm faces the following demand curve for its product: The firm has total fixed costs of $40 and a constant marginal cost of $2 per unit.We can conclude that

When a monopolistically competitive firm is in long-run equilibrium,

In the long run,a profit-maximizing firm in a monopolistically competitive market operates at

Ten Principles of Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Applications

Supply, demand, and Government Policies

Consumers, producers, and the Efficiency of Markets

Application: the Costs of Taxation

Application: International Trade

Externalities

Public Goods and Common Resources

The Design of the Tax System

The Costs of Production

Firms in Competitive Markets

Monopoly

Oligopoly

The Markets for the Factors of Production

Earnings and Discrimination

Income Inequality and Poverty

The Theory of Consumer Choice

Frontiers of Microeconomics

Measuring a Nations Income

Measuring the Cost of Living

Production and Growth

Saving, investment, and the Financial System

The Basic Tools of Finance

Unemployment

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Aggregate Demand and Aggregate Supply

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short Run Trade Off Between Inflation and Unemployment

Five Debates Over Macroeconomic Policy

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