Exam 18: Monopolistic Competition

On a holiday to Cancun, Mexico, you find yourself eating every meal at the local McDonald's, rather than having a hamburger from one of the street vendors. Your traveling companion claims that you are irrational, since you never eat McDonald's hamburgers when you are at home and McDonald's hamburgers cost more than those prepared and sold by Cancun's street vendors. An economist would most likely explain your behaviour by suggesting that:

Advertising can have an important benefit to consumers by providing them with information about new products and prices.

The most likely effect of regulators requiring firms in monopolistically competitive markets to set price equal to marginal cost is that:

The use of celebrity endorsements in advertising has enabled firms to differentiate their products.

Celebrities who endorse a product quality should ensure that the product meets its specifications, as a risk may exist of a fall in reputation. They should not leave this to the firm

For profit-maximising firms in a monopolistically competitive market, another customer means:

Consider the problem facing two firms in the fast-food restaurant market, Firm A and Firm B. Each company 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 two million consumers to try its new product. Firm A has done market research that suggests that its product does not have any 'staying' power in the market. Even though it could get two 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 the information provided. On the basis of a theory that people buy a product because it is advertised, the content of advertisements for Firm B's product:

Free entry into a market drives economic profit to:

In equilibrium, product differentiation in monopolistically competitive markets ensures that:

If an economic justification for advertising is that it enhances the ability of a market to allocate resources, then advertising is probably:

Hotels in Sydney observe that on most nights, about 80 per cent of their rooms are occupied, with the remainder being empty. This kind of excess capacity is indicative of what kind of market?

In centrally planned economies the usefulness of brand names is demonstrated when brand names allow consumers to identify producers.

If the principal effect of advertising is to convey information about the existence of new products, then this:

When advertising encourages customers to become more informed about all firms in the market:

Empirical evidence suggests that advertising usually leads to an increase in the price of advertised products.

Counterfeiting of goods is a rational market outcome of the success of a brand

Edward consumes Arnott's Tim Tams exclusively. He claims that there is a clear taste difference and that competing brands of chocolate biscuits leave an unsavoury residual taste in his mouth. However, in a blind taste test, Edward is found to prefer generic store brand chocolate biscuits to Tim Tams eight out of ten times. The results of Edward's taste test would be consistent with which of the following statements?

When a profit-maximising firm in a monopolistically competitive market is producing the short-run equilibrium quantity:

When firms in a monopolistically competitive market engage in price-related advertising, defenders of advertising argue that:

The debate over the efficiency of markets in which products with brand names are sold: