Monopolistic Competition [ch. 16]

31 Questions  I  By Emy_2
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  • 1. 
    Monopolistic competition is a market structure in which few firms sell similar products
    • A. 

      True

    • B. 

      False


  • 2. 
    Similar to firms in perfectly competitive markets, firms in monopolistically competitive markets can enter and exit the market without restriction so profits are driven to zero in the long run
    • A. 

      True

    • B. 

      False


  • 3. 
    In the long run, firms in monopolistically competitive markets produce at the minimum of their average-total-cost curves.
    • A. 

      True

    • B. 

      False


  • 4. 
    Similar to a monopolist, a monopolistically competitive firm faces a downward-sloping demand curve for its product. 
    • A. 

      True

    • B. 

      False


  • 5. 
    Both monopolists and monopolistically competitive firms produce the quantity at which marginal revenue equals marginal cost and then use the demand curve facing the firm to determine the price consistent with that quantity.
    • A. 

      True

    • B. 

      False


  • 6. 
    Because a monopolistically competitive firm charges a price that exceeds marginal cost, the firm fails to produce some units that the buyers value in excess of the cost of production, adn thus, monopolistic competition is inefficient.  
    • A. 

      True

    • B. 

      False


  • 7. 
    In the long run, a monopolistically competitive firm charges a price that exceeds average total cost.
    • A. 

      True

    • B. 

      False


  • 8. 
    Economists generally agree that monopolistically competitive firms should be regulated in order to increase economic efficiency 
    • A. 

      True

    • B. 

      False


  • 9. 
    Firms that sell highly differentiated consumer products are more likely to spend a large percentage of their revenue of advertising. 
    • A. 

      True

    • B. 

      False


  • 10. 
    Advertising must be socially wasteful because advertising simply adds to the cost of producing a product. 
    • A. 

      True

    • B. 

      False


  • 11. 
    Critics of advertising argue that advertising decreases competition while defenders of advertising argue that advertising increases competition and reduces prices to consumers. 
    • A. 

      True

    • B. 

      False


  • 12. 
    Even advertising that appears to contain little information about the product may be useful because it provides a signal about the quality of the product. 
    • A. 

      True

    • B. 

      False


  • 13. 
    Brand names allow firms to make economic profits in the long run because they are able to sell inferior products based on the apparent connection of those products to the firm's unrelated high-quality products. 
    • A. 

      True

    • B. 

      False


  • 14. 
    Policymakers are starting to view restrictions on advertising by professionals such as doctors, lawyers, and pharmacists as anticompetitive. 
    • A. 

      True

    • B. 

      False


  • 15. 
    In the long run, a monopolistically competitive firm produces at the efficient scale while a competitive firm has excess capacity. 
    • A. 

      True

    • B. 

      False


  • 16. 
    Which of the following is not a characteristic of a monopolistically competitive market? 
    • A. 

      Many sellers

    • B. 

      Differenciated products

    • C. 

      Long-run economic profits

    • D. 

      Free entry and exit


  • 17. 
    Which of the following products is least likely to be sold in a monopolistcally competitive market?
    • A. 

      Video games

    • B. 

      Breakfast cereal

    • C. 

      Beer

    • D. 

      Cotton


  • 18. 
    Which of the following is true regarding the similarities and differences in monopolistic competition and monopoly?
    • A. 

      The monopolist faces a downward-sloping demand curve while the monopolistic competitor faces an elastic demand curve

    • B. 

      The monopolist makes economic profits in the long run while the monopolistic competitor makes zero economic profits in the long run

    • C. 

      Both the monopolist and the monopolistic competitor operate at the efficient scale

    • D. 

      The monopolist charges a price above marginal cost while the monopolist competitor charges a price equal to marginal cost


  • 19. 
    In the short run, if the price is above average total cost in a monopolistically competitive market, the firm makes
    • A. 

      Losses and firms enter the market

    • B. 

      Losses and firms exit the market

    • C. 

      Profits and firms enter the market

    • D. 

      Profits and firms exit the market


  • 20. 
    Which of the following is true regarding the production and pricing decisions of monopolistically competitive firms? Monopolistically competitive firms choose the quantity at which marginal cost equals
    • A. 

      Average total cost and then use the demand curve to determine the price consistent with this quantity

    • B. 

      Marginal revenue and then use the demand curve to determine the price consistent with this quantity

    • C. 

      Average total cost and then use the supply curve to determine the price consistent with this quantity

    • D. 

      Marginal revenue and then use the supply curve to determine the price consistent with this quantity


  • 21. 
    Which of the following is true with regard to monopolistically competitive firms' scale of production and pricing decisions? Monopolistically competitive firms produce
    • A. 

      At the efficient scale and charge a price equal to marginal cost

    • B. 

      At the efficient scale and charge a price above marginal cost

    • C. 

      With excess capacity and charge a price equal to marginal cost

    • D. 

      With excess capacity and charge a price above marginal cost


  • 22. 
    One source of inefficiency in monopolistic competition is that 
    • A. 

      Because price is above marginal cost, surplus is redistributed from buyers to sellers

    • B. 

      Because price is above marginal cost, some units are not produced that buyers value in excess of the cost of production and this causes a deadweight loss

    • C. 

      Monopolistically competitive firms produce beyond their efficient scale

    • D. 

      Monpolistically competitive firms earn economic profits in the long run


  • 23. 
    The use of the word "competition" in the name of the market structure called "monopolistic competition" refers to the fact that
    • A. 

      Monopolistically competitive firms charge prices equal to the minimum of their average total cost just like competitive firms

    • B. 

      Monopolistically competitive firms face a downward-sloping demand curve just like competitive firms

    • C. 

      The products are differentiated in a monopolistically competitive market just like in a competitive market

    • D. 

      There are many sellers in a monopolistically competitive market and there is free entry and exit in the market just like a competitive market


  • 24. 
    The use of the word "monopoly" in the name of the market structure called "monopolistic competition" refers to the fact that 
    • A. 

      A monopolistically competitive firm faces a downward-sloping demand curve for its differentiated product and so does a monopolist

    • B. 

      Monopolistically competitive markets have free entry and exit just like a monopolistic market

    • C. 

      Monopolistically competitive firms charge prices equal to their marginal costs just like monoplists

    • D. 

      Monopolistically competitive firms produce beyond their efficient scale and so do monopolists


  • 25. 
    Which of the following firms is most likely to spend a large percentage of their revenue on advertising?
    • A. 

      The manufacturer of an undifferentiated commodity

    • B. 

      A perfect competitor

    • C. 

      The manufacturer of an industrial product

    • D. 

      The producer of a highly differentiated consumer product

    • E. 

      the producer of a low-quality product that costs the same to produce as a similar high-quality product


  • 26. 
    For the economy as a whole, what percentage of firm revenue is spend on advertising?
    • A. 

      1 percent

    • B. 

      2 percent

    • C. 

      4 percent

    • D. 

      6 percent

    • E. 

      10 percent


  • 27. 
    Which of following is not put forth as a criticism of advertising and brand names? 
    • A. 

      Advertising manipulates people's tastes to create a desire that otherwise would not exist

    • B. 

      Advertising increases competition, which causes unnecessary bankruptcies and layoffs

    • C. 

      Advertising increases brand loyalty, causes demand to be more inelastic, and thus, increases markup over marginal cost

    • D. 

      Brand names cause consumers to perceive differences between goods that do not exist

    • E. 

      All of the above are criticisms of advertising and brand names


  • 28. 
    Expensive television commercials that appear to provide no specific information about the product being advertised
    • A. 

      Are most likely used by firms that are perfect competitors

    • B. 

      Should be banned by regulators because they add to the cost of the product without providing the consumer with any useful information about the product

    • C. 

      May be useful because they provide a signal to the consumer about the quality of the product

    • D. 

      only affect the buying habits of irrational consumers


  • 29. 
    Which of the following is not an argument put forth by economists in support of the use of advertising?
    • A. 

      Advertising provides information to customers about prices, new products, and location of retail outlets

    • B. 

      Advertising provides a creative outlet for artists and writers

    • C. 

      Advertising increases competition

    • D. 

      Advertising provides new firms with the means to attract customers from existing firms


  • 30. 
    Defenders of the use of brand names argue that brand names
    • A. 

      Provide information about the quality of the product

    • B. 

      Give firms incentive to maintain high quality

    • C. 

      Are useful even in socialist economies such as the former Soviet Union

    • D. 

      Do all of the above


  • 31. 
    Which of the following firms has the least incentive to advertise? 
    • A. 

      A manufacturer of home heating and air conditioning

    • B. 

      A manufacturer of breakfast cereal

    • C. 

      A wholesaler of crude oil

    • D. 

      A restaurant


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