Question 1

Advertising by firms in monopolistic competition

Accepted Answer

A) does not provide consumers with useful information. 
B) increases the marginal cost of production. 
C) is inefficient. 
D) is a waste of valuable resources because firms are forced by the entry of rival firms to be price takers. 
E) generates the perception among consumers that product differentiation exists. 
A) does not provide consumers with useful information. 
B) increases the marginal cost of production. 
C) is inefficient. 
D) is a waste of valuable resources because firms are forced by the entry of rival firms to be price takers. 
E) generates the perception among consumers that product differentiation exists.

Question 2

Markup

Accepted Answer

A) does not exist in monopoly. 
B) does not exist in monopolistic competition. 
C) exists in perfect competition. 
D) is the difference between price and average total cost. 
E) exists in both monopoly and monopolistic competition. 
A) does not exist in monopoly. 
B) does not exist in monopolistic competition. 
C) exists in perfect competition. 
D) is the difference between price and average total cost. 
E) exists in both monopoly and monopolistic competition.

Question 3

Use the figure below to answer the following questions.
   
Figure 14.2.6
-Refer to Figure 14.2.6, which shows the demand curve, marginal revenue curve and cost curves faced by Gap. Gap maximizes its profit if it charges ________ per jacket.

Accepted Answer

A) $100 
B) $95 
C) $75 
D) $120 
E) $90 
A) $100 
B) $95 
C) $75 
D) $120 
E) $90

Question 4

Use the figure below to answer the following questions.
   
Figure 14.2.3
-Refer to Figure 14.2.3. Assume this firm faces demand curve D₂. When the firm produces the efficient quantity, it produces

Accepted Answer

A) 100 units. 
B) 140 units. 
C) 200 units. 
D) 220 units. 
E) 250 units. 
A) 100 units. 
B) 140 units. 
C) 200 units. 
D) 220 units. 
E) 250 units.

Question 5

Use the figure below to answer the following questions.
   
Figure 14.2.2
-Refer to Figure 14.2.2. To maximize economic profit, this firm in monopolistic competition will charge a price of

Accepted Answer

A) $15 a unit. 
B) $25 a unit. 
C) $20 a unit. 
D) $32 a unit. 
E) $35 a unit. 
A) $15 a unit. 
B) $25 a unit. 
C) $20 a unit. 
D) $32 a unit. 
E) $35 a unit.

Question 6

Choose the correct statement about firms in monopolistic competition.

Accepted Answer

A) A firm must lower its price to sell a greater quantity. 
B) A firm can never incur an economic loss. 
C) Price is never more than marginal cost. 
D) Firms offer identical products. 
E) The most a firm can make is zero economic profit. 
A) A firm must lower its price to sell a greater quantity. 
B) A firm can never incur an economic loss. 
C) Price is never more than marginal cost. 
D) Firms offer identical products. 
E) The most a firm can make is zero economic profit.

Question 7

In the long run, all firms in an industry that is monopolistically competitive

Accepted Answer

A) produce at their efficient scale. 
B) set price equal to marginal cost. 
C) incur an economic profit. 
D) make an economic profit. 
E) make zero economic profit. 
A) produce at their efficient scale. 
B) set price equal to marginal cost. 
C) incur an economic profit. 
D) make an economic profit. 
E) make zero economic profit.

Question 8

Consider a monopolistically competitive industry in long-run equilibrium. Suppose there is a large increase in wages that raises the costs for all firms. What happens within each firm in the short run?

Accepted Answer

A) They will be forced to close down due to the excess costs. 
B) They will continue producing as before, cushioned by their previous excess profits. 
C) They will expand output and try to make up for lost profits. 
D) They will lower prices and try to steal customers away from their rivals. 
E) They will decrease production and produce the quantity at which marginal revenue equals the new (higher)marginal cost curve; this means a rise in price. 
A) They will be forced to close down due to the excess costs. 
B) They will continue producing as before, cushioned by their previous excess profits. 
C) They will expand output and try to make up for lost profits. 
D) They will lower prices and try to steal customers away from their rivals. 
E) They will decrease production and produce the quantity at which marginal revenue equals the new (higher)marginal cost curve; this means a rise in price.

Question 9

Use the figure below to answer the following questions.
   
Figure 14.2.3
-Refer to Figure 14.2.3. Assume this firm faces demand curve D₂. At the profit-maximizing output level, the firm

Accepted Answer

A) incurs an economic loss. 
B) makes zero economic profit. 
C) makes an economic profit. 
D) is not in a long-run equilibrium. 
E) is producing at its efficient scale. 
A) incurs an economic loss. 
B) makes zero economic profit. 
C) makes an economic profit. 
D) is not in a long-run equilibrium. 
E) is producing at its efficient scale.

Question 10

In monopolistically competitive industries,

Accepted Answer

A) firms compete on quality, price and marketing. 
B) the range of choice of products is the same as in perfectly competitive industries. 
C) firms are insensitive to changes in consumer demand. 
D) all firms produce a quantity at which marginal cost is greater than marginal benefit. 
E) all firms make an economic profit. 
A) firms compete on quality, price and marketing. 
B) the range of choice of products is the same as in perfectly competitive industries. 
C) firms are insensitive to changes in consumer demand. 
D) all firms produce a quantity at which marginal cost is greater than marginal benefit. 
E) all firms make an economic profit.

Question 11

Mrs. Smith's bakery shop is a firm in monopolistic competition. She is currently selling a box of bread for $16. The firm's marginal cost is $7 and marginal revenue is $7. To maximize economic profit Mrs. Smith

Accepted Answer

A) shuts down. 
B) decreases output so that marginal revenue exceeds marginal cost. 
C) continues to produce the same level of output. 
D) increases output so that marginal cost exceeds marginal revenue. 
E) decreases output so that marginal cost equals the output price. 
A) shuts down. 
B) decreases output so that marginal revenue exceeds marginal cost. 
C) continues to produce the same level of output. 
D) increases output so that marginal cost exceeds marginal revenue. 
E) decreases output so that marginal cost equals the output price.

Question 12

Use the information below to answer the following questions.
Fact 14.3.2
Suppose that Tommy Hilfiger's marginal cost of a jacket is $100 (a constant marginal cost)and at one of the firm's shops, total fixed cost is $2,000 a day. The profit-maximizing number of jackets sold in this shop is 20 a day. Then the shops nearby start to advertise their jackets. The Tommy Hilfiger shop now spends $2,000 a day advertising its jackets, and its profit-maximizing number of jackets sold jumps to 50 a day.
-Refer to Fact 14.3.2. Tommy Hilfiger uses advertising as a signal because

Accepted Answer

A) when Tommy Hilfiger advertises, it forces its competitors to advertise, which raises the competition's average total cost and increases the possibility of the competition incurring an economic loss and leaving the market. 
B) only firms that can afford advertising have longevity and will be able to honour any future obligations to its customers. 
C) by spending large sums of advertising Tommy Hilfiger is signalling that its jackets are high quality. 
D) advertising encourages people to spend regardless of the quality. 
E) advertising always increases demand and creates a more efficient market. 
A) when Tommy Hilfiger advertises, it forces its competitors to advertise, which raises the competition's average total cost and increases the possibility of the competition incurring an economic loss and leaving the market. 
B) only firms that can afford advertising have longevity and will be able to honour any future obligations to its customers. 
C) by spending large sums of advertising Tommy Hilfiger is signalling that its jackets are high quality. 
D) advertising encourages people to spend regardless of the quality. 
E) advertising always increases demand and creates a more efficient market.

Question 13

Use the information below to answer the following questions.
Fact 14.3.3
Suppose that Roots' marginal cost of a jacket is a constant $125.00 and the total fixed cost at one of its stores is $1,500 a day. This store sells 20 jackets a day, which is its profit-maximizing number of jackets. Then the stores nearby start to advertise their jackets. The Roots store now spends $2,000 a day advertising its jackets, and its profit-maximizing number of jackets sold jumps to 70 a day.
-Refer to Fact 14.3.3. After the advertising begins, the average total cost of a jacket sold in this store is

Accepted Answer

A) $200.00. 
B) $175.00. 
C) $150.00. 
D) $125.00. 
E) $100.00. 
A) $200.00. 
B) $175.00. 
C) $150.00. 
D) $125.00. 
E) $100.00.

Question 14

Use the figure below to answer the following questions.
   
Figure 14.2.3
-Refer to Figure 14.2.3. Assume this firm faces demand curve D₂. If the firm produces the efficient quantity, it

Accepted Answer

A) makes an economic profit. 
B) makes zero economic profit. 
C) incurs an economic loss. 
D) is in a long-run equilibrium. 
E) will face competition from new firms entering the industry. 
A) makes an economic profit. 
B) makes zero economic profit. 
C) incurs an economic loss. 
D) is in a long-run equilibrium. 
E) will face competition from new firms entering the industry.

Question 15

Use the figure below to answer the following questions.
   
Figure 14.2.3
-Refer to Figure 14.2.3. Assume this firm faces demand curve D₁. If this firm in monopolistic competition is maximizing profit,

Accepted Answer

A) there will be entry of rival firms into the industry. 
B) rival firms will exit the industry. 
C) the market is efficient. 
D) this firm will exit the industry in the long run. 
E) its profit will rise over time. 
A) there will be entry of rival firms into the industry. 
B) rival firms will exit the industry. 
C) the market is efficient. 
D) this firm will exit the industry in the long run. 
E) its profit will rise over time.

Question 16

Which of the following best explains why firms in monopolistic competition face a downward-sloping demand curve while perfectly competitive firms do not?

Accepted Answer

A) Monopolistically competitive industries have only a few firms. 
B) Monopolistically competitive firms face barriers to entry. 
C) Only industries with free entry and exit have firms that face horizontal demand curves. 
D) Firms in monopolistic competition are price takers. 
E) Firms in monopolistic competition sell a differentiated good. 
A) Monopolistically competitive industries have only a few firms. 
B) Monopolistically competitive firms face barriers to entry. 
C) Only industries with free entry and exit have firms that face horizontal demand curves. 
D) Firms in monopolistic competition are price takers. 
E) Firms in monopolistic competition sell a differentiated good.

Question 17

Use the figure below to answer the following questions.
   
Figure 14.2.3
-Refer to Figure 14.2.3. Assume this firm faces demand curve D₁. If the firm produced the efficient quantity, it would produce

Accepted Answer

A) 100 units. 
B) 220 units. 
C) 200 units. 
D) 250 units. 
E) 140 units. 
A) 100 units. 
B) 220 units. 
C) 200 units. 
D) 250 units. 
E) 140 units.

Question 18

A monopolistically competitive firm has excess capacity because in the

Accepted Answer

A) long run, average total cost exceeds minimum average total cost. 
B) short run, marginal revenue exceeds marginal cost. 
C) long run, it makes an economic profit. 
D) short run, average total cost is less than average variable cost. 
E) long run, average total cost is less than average variable cost. 
A) long run, average total cost exceeds minimum average total cost. 
B) short run, marginal revenue exceeds marginal cost. 
C) long run, it makes an economic profit. 
D) short run, average total cost is less than average variable cost. 
E) long run, average total cost is less than average variable cost.

Question 19

Consider a monopolistically competitive industry which is in long-run equilibrium. Which of the following is true?

Accepted Answer

A) All firms charge a price equal to average total cost. 
B) All firms charge a price equal to marginal cost. 
C) All firms make an economic profit. 
D) The demand, average total cost, and marginal cost curves all intersect at the same point. 
E) Firms have an incentive to enter the industry. 
A) All firms charge a price equal to average total cost. 
B) All firms charge a price equal to marginal cost. 
C) All firms make an economic profit. 
D) The demand, average total cost, and marginal cost curves all intersect at the same point. 
E) Firms have an incentive to enter the industry.

Question 20

Use the figure below to answer the following questions.
   
Figure 14.2.3
-Refer to Figure 14.2.3. Assume this firm faces demand curve D₂. If this firm in monopolistic competition is maximizing economic profit,

Accepted Answer

A) there will be entry of rival firms into the industry. 
B) rival firms will exit the industry. 
C) it is producing the efficient quantity. 
D) the number of firms in the industry will remain constant. 
E) economic profit will fall over time. 
A) there will be entry of rival firms into the industry. 
B) rival firms will exit the industry. 
C) it is producing the efficient quantity. 
D) the number of firms in the industry will remain constant. 
E) economic profit will fall over time.

Exam 14: Monopolistic Competition

Advertising by firms in monopolistic competition

Markup

Use the figure below to answer the following questions. Figure 14.2.6 -Refer to Figure 14.2.6, which shows the demand curve, marginal revenue curve and cost curves faced by Gap. Gap maximizes its profit if it charges ________ per jacket.

Use the figure below to answer the following questions. Figure 14.2.3 -Refer to Figure 14.2.3. Assume this firm faces demand curve D₂. When the firm produces the efficient quantity, it produces

Use the figure below to answer the following questions. Figure 14.2.2 -Refer to Figure 14.2.2. To maximize economic profit, this firm in monopolistic competition will charge a price of

Choose the correct statement about firms in monopolistic competition.

In the long run, all firms in an industry that is monopolistically competitive

Consider a monopolistically competitive industry in long-run equilibrium. Suppose there is a large increase in wages that raises the costs for all firms. What happens within each firm in the short run?

Use the figure below to answer the following questions. Figure 14.2.3 -Refer to Figure 14.2.3. Assume this firm faces demand curve D₂. At the profit-maximizing output level, the firm

In monopolistically competitive industries,

Mrs. Smith's bakery shop is a firm in monopolistic competition. She is currently selling a box of bread for $16. The firm's marginal cost is $7 and marginal revenue is $7. To maximize economic profit Mrs. Smith

Use the figure below to answer the following questions. Figure 14.2.3 -Refer to Figure 14.2.3. Assume this firm faces demand curve D₂. If the firm produces the efficient quantity, it

Use the figure below to answer the following questions. Figure 14.2.3 -Refer to Figure 14.2.3. Assume this firm faces demand curve D₁. If this firm in monopolistic competition is maximizing profit,

Which of the following best explains why firms in monopolistic competition face a downward-sloping demand curve while perfectly competitive firms do not?

Use the figure below to answer the following questions. Figure 14.2.3 -Refer to Figure 14.2.3. Assume this firm faces demand curve D₁. If the firm produced the efficient quantity, it would produce

A monopolistically competitive firm has excess capacity because in the

Consider a monopolistically competitive industry which is in long-run equilibrium. Which of the following is true?

Use the figure below to answer the following questions. Figure 14.2.3 -Refer to Figure 14.2.3. Assume this firm faces demand curve D₂. If this firm in monopolistic competition is maximizing economic profit,

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