Chapter 16 Monopolistic Competition

16-1 Between Monopoly and Perfect Competition

1. In a market that is characterized by imperfect competition,

a. firms are price takers.
b. there are always a large number of firms.
c. there are at least a few firms that compete with one another.
d. the actions of one firm in the market never have any impact on the other firms' profits.

2. A monopolistically competitive industry is characterized by

a. many firms, differentiated products, and barriers to entry.
b. many firms, differentiated products, and free entry.
c. a few firms, identical products, and free entry.
d. a few firms, differentiated products, and barriers to entry.

3. A similarity between monopoly and monopolistic competition is that in both market structures
a. there are a small number of sellers.
b. strategic interactions among sellers are not important.
c. sellers are price makers rather than price takers.
d. there are only a few buyers but many sellers.

4. The two types of imperfectly competitive markets are

a. monopoly and monopolistic competition.
b. monopoly and oligopoly.
c. monopolistic competition and oligopoly.
d. monopolistic competition and cartels.

5. When an industry has many firms, the industry is

a. an oligopoly if the firms sell differentiated products, but it is monopolistically competitive if the
firms sell identical products.
b. an oligopoly if the firms sell differentiated products, but it is perfectly competitive if the firms sell
identical products.
 c. monopolistically competitive if the firms sell differentiated products, but it is perfectly competitive
if the firms sell identical products.
d. perfectly competitive if the firms sell differentiated products, but it is monopolistically competitive
if the firms sell identical products.

6. Which of the following is unique to a monopolistically competitive firm when compared to an oligopoly?
a. The monopolistically competitive firm advertises.
b. The monopolistically competitive firm produces a quantity of output that falls short of the socially
optimal level.
c. Monopolistic competition features many buyers.
d. Monopolistic competition features many sellers.

16-2 Competition with Differentiated Products

7. Which of the following is true about a monopolistically competitive firm?

a. It can earn an economic profit in the short run, but not the long run.
b. It can earn an economic profit in the short run and the long run.
c. It can earn an economic profit in the long run, but not the short run.
d. It cannot earn a economic profit in either the short or long run.

8. Which of the following is not a key feature of monopolistic competition?

a. Price above the minimum average total cost
b. A markup of price over marginal cost
c. Negative economic profits for firms in the long run
d. Differentiated products among firms in the market

9. When the loss from a business-stealing externality exceeds the gain from a product-variety externality,
a. firms are more likely to operate at efficient scale.
b. there are likely to be too many firms in a monopolistically competitive market.
c. market efficiency is likely to be enhanced by the entry of new firms.
d. all firms are earning negative economic profit.

10. When existing firms lose customers and profits due to entry of a new competitor, a
a. predatory-pricing externality occurs.
 b. consumption externality occurs.
c. business-stealing externality occurs.
d. product-variety externality occurs.

11. The product-variety externality is associated with the

a. producer surplus that accrues to incumbent firms in a monopolistically competitive industry.
b. loss of consumer surplus from exposure to additional advertising.
c. consumer surplus that is generated from the introduction of a new product.
d. opportunity cost of firms exiting a monopolistically competitive industry.

Scenario 16-2
Delish, a moderately priced restaurant, has recently announced intentions to open a restaurant in Boston, MA.
Assume that the restaurant market in Boston is characterized by monopolistic competition.
12. Refer to Scenario 16-2. As a result of the new restaurant, existing restaurant owners in Boston are likely to
experience a
a. product-variety externality, which is a negative externality.
b. product-variety externality, which is a positive externality.
c. business-stealing externality, which is a negative externality.
d. business-stealing externality, which is a positive externality.

13. Refer to Scenario 16-2. As a result of the new restaurant, consumers in Boston are likely to experience a
a. product-variety externality, which is a negative externality.
b. product-variety externality, which is a positive externality.
c. business-stealing externality, which is a negative externality.
d. business-stealing externality, which is a positive externality.
Table 16-2
A monopolistically competitive firm has the following cost structure:

Output Total Cost

(Units) (Dollars)
10 800
20 875
30 1,025
40 1,250
50 1,550
60 1,925
70 2,375

14. Refer to Table 16-2. Suppose the monopolistically competitive firm faces the following demand curve:

Quantity Price
(Units) (Dollars per unit)
10 50
20 42
30 34
40 26
50 18
60 10
70 2

To maximize profit (or minimize losses), the firm will produce

a. 20 units.
b. 30 units.
c. 40 units.
d. 50 units.
Figure 16-5
The figure is drawn for a monopolistically competitive firm.

15. Refer to Figure 16-5. In order to maximize its profit, the firm will choose to produce
a. less than 100 units of output.
b. 100 units of output.
c. between 100 and 133.33 units of output.
d. more than 133.33 units of output.

16. Refer to Figure 16-5. The firm's maximum profit is

a. −$5,000.00.
b. $0.
c. $5,000.00.
d. $8,887.78.

17. Refer to Figure 16-5. When the firm is maximizing its profit, the markup over marginal cost amounts to
a. $16.67.
b. $33.33.
c. $50.00.
d. $66.66.
18. Refer to Figure 16-5. As the figure is drawn, the firm is in
a. a short-run equilibrium but it is not in a long-run equilibrium.
b. a long-run equilibrium but it is not in a short-run equilibrium.
c. a short-run equilibrium as well as a long-run equilibrium.
d. neither a short-run equilibrium nor a long-run equilibrium.

19. Refer to Figure 16-5. Efficient scale is reached

a. at 100 units.
b. between 100 and 133.33 units.
c. at 133.33 units.
d. beyond 133.33 units.

20. Refer to Figure 16-5. Given this firm's cost curves, if the firm were perfectly competitive rather than
monopolistically competitive, then in a long-run equilibrium it would produce
a. less than 100 units of output.
b. between 100 and 133.33 units of output.
c. 133.33 units of output.
d. more than 133.33 units of output.

21. Refer to Figure 16-5. The quantity of output at which the MC and ATC curves cross is the
a. efficient scale of the firm.
b. short-run equilibrium quantity of output for the firm.
c. long-run equilibrium quantity of output for the firm.
d. profit-maximizing quantity.

22. In a long-run equilibrium,

a. only a perfectly competitive firm operates at its efficient scale.
b. only a monopolistically competitive firm operates at its efficient scale.
c. neither a competitive firm nor a monopolistically competitive firm charges a markup over marginal
cost.
d. both a perfectly competitive firm and a monopolistically competitive firm operate at their efficient
scale of production.
16-3 Advertising

23. If a firm in a monopolistically competitive market successfully uses advertising to decrease the elasticity of
demand for its product, the firm will
a. be able to increase its markup over marginal cost.
b. eventually have to reduce price to remain competitive.
c. increase the welfare of society.
d. reduce its average total cost.

24. Defenders of advertising argue that in some markets advertising may

a. manipulate people's tastes.
b. increase the perception of product differentiation.
c. provide information to customers about products, including prices and seller locations.
d. attract products of lower quality into the market.

25. Critics of markets that are characterized by firms that sell brand-name products argue that brand names
encourage consumers to pay more for branded products that
a. have elastic demand curves.
b. are very different from generic products.
c. are indistinguishable from generic products.
d. consumer-advocate groups have found to be inferior.

16-4 Conclusion

26. In which of the following market structures can firms earn economic profits in the long run?
a. Perfect competition only
b. Monopolistic competition only
c. Monopoly only
d. Monopolistic competition and monopoly

27. Which of the following statements is not correct?

a. Monopolistic competition is different from monopoly because monopolistic competition is
characterized by free entry, whereas monopoly is characterized by barriers to entry.
b. Both monopolistic competition and oligopoly fall in between the more extreme market structures of
competition and monopoly.
 c. Monopolistic competition is different from oligopoly because each seller in monopolistic
competition is small relative to the market, whereas each seller can affect the actions of other sellers
in an oligopoly.
d. Both monopolistic competition and perfect competition are characterized by product differentiation.

28. A market structure with only a few sellers, each offering similar or identical products, is known as
a. oligopoly.
b. monopoly.
c. monopolistic competition.
d. perfect competition.