Question 1

What is meant by the term 'excess capacity' as it relates to monopolistically competitive firms?

Accepted Answer

In the long run, monopolistica

Question 2

When a firm exits a monopolistically competitive market, the individual demand curves faced by all existing firms in that market will:

Accepted Answer

A)  shift in an unpredictable direction 
B)  shift to the right 
C)  shift to the left 
D)  remain unchanged; only the supply curve will shift 
A)  shift in an unpredictable direction 
B)  shift to the right 
C)  shift to the left 
D)  remain unchanged; only the supply curve will shift

Question 3

When McDonald's opens a store in Dhaka, Bangladesh, it has a strong incentive to enforce product quality consistent with that in stores in the US.

Accepted Answer

A) True 
 B)False

Question 4

Critics of advertisements that depict 'beautiful' human bodies as the primary focus of the message are likely to claim that the purpose of the advertisement is to create desires that do not already exist.

Accepted Answer

A) True 
 B)False

Question 5

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. By its willingness to spend money on advertising, Firm B:

Accepted Answer

A)  signals that it is not a profit maximiser 
B)  is detracting from the efficiency of markets 
C)  signals the value of its new product to consumers 
D)  does none of the above 
A)  signals that it is not a profit maximiser 
B)  is detracting from the efficiency of markets 
C)  signals the value of its new product to consumers 
D)  does none of the above

Question 6

Summarise the main differences between monopolistic competition and perfect competition.

Accepted Answer

The main differences are that in monopol

Question 7

Summarise the main similarities and differences between monopolistic competition and perfect competition.

Accepted Answer

The main similarities are that

Question 8

A firm in a monopolistically competitive market operates on the:

Accepted Answer

A)  rising portion of its average total cost curve 
B)  declining portion of its average total cost curve 
C)  rising portion of its demand curve 
D)  rising portion of its supply curve 
A)  rising portion of its average total cost curve 
B)  declining portion of its average total cost curve 
C)  rising portion of its demand curve 
D)  rising portion of its supply curve

Question 9

If advertising is prohibited in a differentiated product market, evidence suggests that:

Accepted Answer

A)  consumers make better choices 
B)  these markets are less efficient 
C)  consumers are not confused by conflicting signals 
D)  in general, firms are less profitable 
A)  consumers make better choices 
B)  these markets are less efficient 
C)  consumers are not confused by conflicting signals 
D)  in general, firms are less profitable

Question 10

The 'monopoly' in monopolistically competitive markets is most likely a result of strategic interactions among sellers.

Accepted Answer

A) True 
 B)False

Question 11

For many years, Pepsi operated a 'taste-test' booth across the US. Visitors to the booth would be encouraged to take a blind 'taste-test' between Pepsi and its primary market competitor, Coke.
Pepsi then used the taste-test results in advertising Pepsi. What advertising theory does such an approach support? Pepsi no longer uses this as an advertising strategy, instead relying on celebrity endorsements and other forms of advertising. What advertising theory do you think now dominates the market between Pepsi and Coke? Explain.

Accepted Answer

The taste-test used the 'adver

Question 12

Economic profits are in a monopolistically competitive market:

Accepted Answer

A)  a signal to some incumbent firms to exit the market 
B)  never possible in the short run 
C)  a signal to new firms to enter the market 
D)  only possible if the producer has exclusive rights to a natural resource 
A)  a signal to some incumbent firms to exit the market 
B)  never possible in the short run 
C)  a signal to new firms to enter the market 
D)  only possible if the producer has exclusive rights to a natural resource

Question 13

Use a graph to demonstrate why a profit-maximising monopolistically competitive firm must operate at excess capacity. Explain why a perfectly competitive firm is not subject to the same constraint.

Accepted Answer

Competitive firms do not face downward-s

Question 14

Firms in monopolistic competition sell products that are identical to those produced by other firms.

Accepted Answer

A) True 
 B)False

Question 15

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.
-According to the information provided, if Firm A decides to advertise its product, it can expect to:

Accepted Answer

A)  incur a loss of $8 million 
B)  have a profit of $4 million 
C)  get repeat sales above and beyond the initial two million consumers 
D)  increase its market power 
A)  incur a loss of $8 million 
B)  have a profit of $4 million 
C)  get repeat sales above and beyond the initial two million consumers 
D)  increase its market power

Question 16

Brand names that existed in communist countries were typically associated with:

Accepted Answer

A)  the name of the firm that manufactured the product 
B)  very isolated products 
C)  products that were largely homogeneous 
D)  private manufacturers only 
A)  the name of the firm that manufactured the product 
B)  very isolated products 
C)  products that were largely homogeneous 
D)  private manufacturers only

Question 17

A new brewing company announces that it is releasing a new organic ale into the beer market. You can assume that the market for beer is characterised by monopolistic competition. As a result of the new organic ale, product-variety externalities would be manifest in the new product:

Accepted Answer

A)  duplicating the flavours of the most expensive products in the beer market 
B)  duplicating the flavours of the least expensive products in the beer market 
C)  if its flavours were no different to the alternatives in the beer market 
D)  generating flavours that are different to other products in the beer market 
A)  duplicating the flavours of the most expensive products in the beer market 
B)  duplicating the flavours of the least expensive products in the beer market 
C)  if its flavours were no different to the alternatives in the beer market 
D)  generating flavours that are different to other products in the beer market

Question 18

When the gain from a product-variety externality exceeds the loss from a business stealing externality in a monopolistically competitive market:

Accepted Answer

A)  market efficiency is likely to be enhanced by the entrance of new firms in the market 
B)  the market structure is likely to be in transition 
C)  firms are more likely to operate at efficient scale 
D)  there are likely to be too many firms in the market 
A)  market efficiency is likely to be enhanced by the entrance of new firms in the market 
B)  the market structure is likely to be in transition 
C)  firms are more likely to operate at efficient scale 
D)  there are likely to be too many firms in the market

Question 19

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

Accepted Answer

A)  some point above its average total cost curve 
B)  the minimum point on its average total cost curve 
C)  some point along the upward-sloping portion of its average total cost curve 
D)  some point along the downward-sloping portion of its average total cost curve 
A)  some point above its average total cost curve 
B)  the minimum point on its average total cost curve 
C)  some point along the upward-sloping portion of its average total cost curve 
D)  some point along the downward-sloping portion of its average total cost curve

Question 20

The entry of new firms into a monopolistically competitive market is characterised by:

Accepted Answer

A)  only private profit opportunities (no externalities) 
B)  both positive and negative externalities 
C)  only positive externalities 
D)  only negative externalities 
A)  only private profit opportunities (no externalities) 
B)  both positive and negative externalities 
C)  only positive externalities 
D)  only negative externalities

Exam 18: Monopolistic Competition

What is meant by the term 'excess capacity' as it relates to monopolistically competitive firms?

When a firm exits a monopolistically competitive market, the individual demand curves faced by all existing firms in that market will:

When McDonald's opens a store in Dhaka, Bangladesh, it has a strong incentive to enforce product quality consistent with that in stores in the US.

Critics of advertisements that depict 'beautiful' human bodies as the primary focus of the message are likely to claim that the purpose of the advertisement is to create desires that do not already exist.

Summarise the main differences between monopolistic competition and perfect competition.

Summarise the main similarities and differences between monopolistic competition and perfect competition.

A firm in a monopolistically competitive market operates on the:

If advertising is prohibited in a differentiated product market, evidence suggests that:

The 'monopoly' in monopolistically competitive markets is most likely a result of strategic interactions among sellers.

Economic profits are in a monopolistically competitive market:

Use a graph to demonstrate why a profit-maximising monopolistically competitive firm must operate at excess capacity. Explain why a perfectly competitive firm is not subject to the same constraint.

Firms in monopolistic competition sell products that are identical to those produced by other firms.

Brand names that existed in communist countries were typically associated with:

A new brewing company announces that it is releasing a new organic ale into the beer market. You can assume that the market for beer is characterised by monopolistic competition. As a result of the new organic ale, product-variety externalities would be manifest in the new product:

When the gain from a product-variety externality exceeds the loss from a business stealing externality in a monopolistically competitive market:

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

The entry of new firms into a monopolistically competitive market is characterised by:

Ten Lessons From Economics

Thinking Like an Economist

Interdependence and the Gains From Trade

The Market Forces of Supply and Demand

Elasticity and Its Application

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

Business Strategy

Competition Policy

The Markets for the Factors of Production

Earnings, Unions and Discrimination

Income Inequity 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 Natural Rate of Unemployment

The Monetary System

Inflation: Its Causes and Costs

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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