Question 1

Advocates for advertising argue that the efficiency of markets is enhanced when advertising:

Accepted Answer

A)  is psychological rather than informational 
B)  reduces the elasticity of demand for a product 
C)  provides information that is useful to consumers 
D)  increases brand loyalty 
A)  is psychological rather than informational 
B)  reduces the elasticity of demand for a product 
C)  provides information that is useful to consumers 
D)  increases brand loyalty

Question 2

New firms will necessarily enter a monopolistically competitive market when price exceeds:

Accepted Answer

A)  marginal cost 
B)  marginal revenue 
C)  average total cost 
D)  average revenue 
A)  marginal cost 
B)  marginal revenue 
C)  average total cost 
D)  average revenue

Question 3

Evaluate the following statement in the context of business-stealing and product-variety externalities: 'We have too many student apartments in this town already; statistics show that vacancy rates average 15 per cent during any given semester'.

Accepted Answer

Business-stealing effect:if new entrants

Question 4

Suppose a firm enters a monopolistically competitive market with a new product. Consumers now have more choice. This increase in choice means that:

Accepted Answer

A)  a product-variety externality has occurred 
B)  an advertising externality has occurred 
C)  consumers are now worse off as they must visit more shops 
D)  consumers are likely to experience negative consumption externalities 
A)  a product-variety externality has occurred 
B)  an advertising externality has occurred 
C)  consumers are now worse off as they must visit more shops 
D)  consumers are likely to experience negative consumption externalities

Question 5

A monopolistically competitive firm chooses:

Accepted Answer

A)  price, but output is determined by cartel production quota 
B)  the quantity of output to produce and the price at which it will sell its output 
C)  the quantity of output to produce, but the market determines price 
D)  price, but competition in the market determines the quantity 
A)  price, but output is determined by cartel production quota 
B)  the quantity of output to produce and the price at which it will sell its output 
C)  the quantity of output to produce, but the market determines price 
D)  price, but competition in the market determines the quantity

Question 6

Advertising during the Rugby World Cup is an example of providing information in the advertisement's content.

Accepted Answer

A) True 
 B)False

Question 7

Brand names are likely to ensure product quality:

Accepted Answer

A)  only in pure market-based economies 
B)  only in mixed economies 
C)  only in developed economies 
D)  in a diverse set of economic structures 
A)  only in pure market-based economies 
B)  only in mixed economies 
C)  only in developed economies 
D)  in a diverse set of economic structures

Question 8

The cost for television advertisements aired during the Olympics is very high. A theory asserting that people buy a product simply because it is advertised would suggest that information on the cost of advertising:

Accepted Answer

A)  is leaked to discredit the firms that spend so much on advertising 
B)  reduces people's willingness to purchase advertised products 
C)  enhances the effectiveness of the advertisement 
D)  reduces the effective staying power of a product 
A)  is leaked to discredit the firms that spend so much on advertising 
B)  reduces people's willingness to purchase advertised products 
C)  enhances the effectiveness of the advertisement 
D)  reduces the effective staying power of a product

Question 9

The 'competition' in monopolistically competitive markets is most likely a result of having many sellers in the market.

Accepted Answer

A) True 
 B)False

Question 10

The Pizza Hut in Agra, India has a very similar menu design, layout and content as the Pizza Hut in Bondi Junction, Sydney. This is an example of a brand name enhancing market efficiency for Australian tourists visiting the India.

Accepted Answer

A) True 
 B)False

Question 11

Inefficiency in monopolistically competitive markets can be identified with:

Accepted Answer

A)  their similarities to perfectly competitive markets 
B)  not having the 'ideal' number of firms in the industry 
C)  a first-best equilibrium, where price is equal to marginal cost 
D)  government programs that effectively regulate price 
A)  their similarities to perfectly competitive markets 
B)  not having the 'ideal' number of firms in the industry 
C)  a first-best equilibrium, where price is equal to marginal cost 
D)  government programs that effectively regulate price

Question 12

Graph 17-3
   Lines in these figures reflect the potential effect of entry and exit in a monopolistically competitive market on the demand and/or marginal cost curves of incumbent firms.
-Refer to Graph 17-3. Panel c in the set of graphs shown depicts the effect on incumbent firms of:

Accepted Answer

A)  a few existing firms exiting the market 
B)  new entrants in the market 
C)  long-run economic losses 
D)  an increase in the diversity of products offered in the market 
A)  a few existing firms exiting the market 
B)  new entrants in the market 
C)  long-run economic losses 
D)  an increase in the diversity of products offered in the market

Question 13

A downward-sloping demand curve:

Accepted Answer

A)  is common to all monopolistically competitive firms 
B)  is common to all monopoly firms 
C)  causes price to exceed marginal revenue 
D)  all of the above are true 
A)  is common to all monopolistically competitive firms 
B)  is common to all monopoly firms 
C)  causes price to exceed marginal revenue 
D)  all of the above are true

Question 14

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 B decides to advertise its product it can expect to:

Accepted Answer

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

Question 15

A profit-maximising firm in a monopolistically competitive market always operates at:

Accepted Answer

A)  the minimum of average total cost 
B)  the point of unit elasticity of demand 
C)  excess capacity 
D)  the efficient scale 
A)  the minimum of average total cost 
B)  the point of unit elasticity of demand 
C)  excess capacity 
D)  the efficient scale

Question 16

Graph 17-2
  
-Refer to Graph 17-2. Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is making economic profits?

Accepted Answer

A)  panel a 
B)  panel b 
C)  panel c 
D)  panel d 
A)  panel a 
B)  panel b 
C)  panel c 
D)  panel d

Question 17

Graph 17-4
  
-Refer to Graph 17-4. Which of the panels shown could not characterise a short-run equilibrium for a firm in a monopolistically competitive market?

Accepted Answer

A)  panel a 
B)  panel b 
C)  panel c 
D)  panel d 
A)  panel a 
B)  panel b 
C)  panel c 
D)  panel d

Question 18

As market restrictions begin to be relaxed in China, computer hardware manufacturers have started advertising their products on billboards throughout China. The Premier of China expressed dismay that individual manufacturers had chosen to use advertising, in open disregard of an industry-wide 'gentleman's agreement' not to openly advertise 'technology products'. In the past the Computer Hardware Manufacturers Association informally monitored the agreement.
-Refer to the information provided. Consumer advocacy groups that have encouraged the Premier to restrict advertising of computer hardware on billboards are most likely to do so on the basis that advertising:

Accepted Answer

A)  unnecessarily raises expectations of the proletariat 
B)  manipulates people's tastes 
C)  lends credibility to claims of superior product quality 
D)  does all of the above 
A)  unnecessarily raises expectations of the proletariat 
B)  manipulates people's tastes 
C)  lends credibility to claims of superior product quality 
D)  does all of the above

Question 19

Excess capacity and efficient scale characterise firms in monopolistically competitive markets.

Accepted Answer

A) True 
 B)False

Question 20

The entry and exit of firms in a monopolistically competitive market guarantees that:

Accepted Answer

A)  economic profits and economic losses disappear in the long run 
B)  economic profits can survive in the long run, but not economic losses 
C)  economic losses will exist in the long run, but not economic profits 
D)  both economic profits and economic losses will exist in the long run 
A)  economic profits and economic losses disappear in the long run 
B)  economic profits can survive in the long run, but not economic losses 
C)  economic losses will exist in the long run, but not economic profits 
D)  both economic profits and economic losses will exist in the long run

Exam 18: Monopolistic Competition

Advocates for advertising argue that the efficiency of markets is enhanced when advertising:

New firms will necessarily enter a monopolistically competitive market when price exceeds:

Evaluate the following statement in the context of business-stealing and product-variety externalities: 'We have too many student apartments in this town already; statistics show that vacancy rates average 15 per cent during any given semester'.

Suppose a firm enters a monopolistically competitive market with a new product. Consumers now have more choice. This increase in choice means that:

A monopolistically competitive firm chooses:

Advertising during the Rugby World Cup is an example of providing information in the advertisement's content.

Brand names are likely to ensure product quality:

The cost for television advertisements aired during the Olympics is very high. A theory asserting that people buy a product simply because it is advertised would suggest that information on the cost of advertising:

The 'competition' in monopolistically competitive markets is most likely a result of having many sellers in the market.

The Pizza Hut in Agra, India has a very similar menu design, layout and content as the Pizza Hut in Bondi Junction, Sydney. This is an example of a brand name enhancing market efficiency for Australian tourists visiting the India.

Inefficiency in monopolistically competitive markets can be identified with:

Graph 17-3 Lines in these figures reflect the potential effect of entry and exit in a monopolistically competitive market on the demand and/or marginal cost curves of incumbent firms. -Refer to Graph 17-3. Panel c in the set of graphs shown depicts the effect on incumbent firms of:

A downward-sloping demand curve:

A profit-maximising firm in a monopolistically competitive market always operates at:

Graph 17-2 -Refer to Graph 17-2. Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is making economic profits?

Graph 17-4 -Refer to Graph 17-4. Which of the panels shown could not characterise a short-run equilibrium for a firm in a monopolistically competitive market?

Excess capacity and efficient scale characterise firms in monopolistically competitive markets.

The entry and exit of firms in a monopolistically competitive market guarantees that:

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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