Chapter 16

Chapter 16 Monopolistic Competition
TRUE/FALSE 1. The "competition" in monopolistically competitive markets is most likely a result of having many sellers in the market. ANS: T DIF: 1 !F: 1"#1 NAT: Analytic $%&: 'onopolistic competition T%(: 'onopolistic competition 'S&: Interpretive ). The "monopoly" in monopolistically competitive markets is most likely a result of firms having some pricing po*er +ue to pro+uct +ifferentiation. ANS: T DIF: 1 !F: 1"#1 NAT: Analytic $%&: 'onopolistic competition T%(: 'onopolistic competition 'S&: Interpretive ,. 'onopolistic competition is characteri-e+ .y many .uyers an+ sellers/ pro+uct +ifferentiation/ an+ free entry. ANS: T DIF: 1 !F: 1"#1 NAT: Analytic $%&: 'onopolistic competition T%(: 'onopolistic competition 'S&: Definitional 0. 'onopolistic competition is characteri-e+ .y many .uyers an+ sellers/ pro+uct +ifferentiation/ an+ .arriers to entry. ANS: F DIF: 1 !F: 1"#1 NAT: Analytic $%&: 'onopolistic competition T%(: 'onopolistic competition 'S&: Definitional 1. A monopolistically competitive market is characteri-e+ .y .arriers to entry. ANS: F DIF: 1 !F: 1"#1 NAT: Analytic $%&: 'onopolistic competition T%(: 'onopolistic competition 'S&: Interpretive ". 'onopolistic competition is the only market structure that features many sellers. ANS: F DIF: 1 !F: 1"#1 NAT: Analytic $%&: 'onopolistic competition T%(: 'arkets 'S&: Interpretive 2. (ro+uct +ifferentiation al*ays lea+s to some measure of market po*er. ANS: T DIF: ) !F: 1"#1 NAT: Analytic $%&: 'onopolistic competition T%(: Deman+ curve 'S&: Interpretive 3. %ligopoly is characteri-e+ .y a fe* sellers offering similar pro+ucts/ *hereas monopolistic competition is characteri-e+ .y many sellers offering +ifferentiate+ pro+ucts. ANS: T DIF: ) !F: 1"#1 NAT: Analytic $%&: 'onopolistic competition T%(: 'onopolistic competition 'S&: Definitional 4. 'onopolistic competition is characteri-e+ .y a fe* sellers offering similar pro+ucts/ *hereas oligopoly is characteri-e+ .y many sellers offering +ifferentiate+ pro+ucts. ANS: F DIF: ) !F: 1"#1 NAT: Analytic $%&: 'onopolistic competition T%(: 'onopolistic competition 'S&: Definitional 15. %ligopoly an+ monopolistic competition are e6amples of a market structure calle+ imperfect competition. ANS: T DIF: 1 !F: 1"#1 NAT: Analytic $%&: 'onopolistic competition T%(: 'onopolistic competition 'S&: Definitional
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&hapter 1"7'onopolistic &ompetition
11. 'onopolistic competition an+ monopoly are e6amples of a market structure calle+ imperfect competition. ANS: F DIF: 1 !F: 1"#1 NAT: Analytic $%&: 'onopolistic competition T%(: 'onopolistic competition 'S&: Definitional 1). A markup of price over marginal cost is inconsistent *ith free entry an+ -ero profit. ANS: F DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: (rofit ma6imi-ation 'S&: Interpretive 1,. 'onopolistically competitive firms/ like monopoly firms/ ma6imi-e their profits .y charging a price that e6cee+s marginal cost. ANS: T DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: (rofit ma6imi-ation 'S&: Interpretive 10. A profit#ma6imi-ing firm in a monopolistically competitive market charges a price e8ual to marginal cost. ANS: F DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: (rofit ma6imi-ation 'S&: Interpretive 11. A profit#ma6imi-ing firm in a monopolistically competitive market al*ays operates on the +o*n*ar+#sloping portion of its marginal cost curve. ANS: F DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: (rofit ma6imi-ation 'S&: Analytical 1". For a profit#ma6imi-ing firm in a monopolistically competitive market/ *hen price is e8ual to average total cost/ price must lie a.ove marginal cost. ANS: T DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: (rofit ma6imi-ation 'S&: Analytical 12. A profit#ma6imi-ing firm in a monopolistically competitive market can earn positive/ negative/ or -ero profits in the short run. ANS: T DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: Short#run e8uili.rium 'S&: Interpretive 13. A firm in a monopolistically competitive market can earn .oth short#run an+ long#run profits. ANS: F DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: Short#run e8uili.rium 9 $ong#run e8uili.rium 'S&: Interpretive 14. A firm in a monopolistically competitive market can earn short#run profits .ut not long#run profits. ANS: T DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: Short#run e8uili.rium 9 $ong#run e8uili.rium 'S&: Interpretive )5. In the long run/ monopolistically competitive firms pro+uce *here +eman+ e8uals marginal cost. ANS: F DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: $ong#run e8uili.rium 'S&: Analytical )1. :hen a firm in a monopolistically competitive market earns -ero economic profit/ its pro+uct price must e8ual marginal cost. ANS: F DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: $ong#run e8uili.rium 'S&: Interpretive

)). In the long run/ monopolistically competitive firms pro+uce *here +eman+ e8uals average total cost. ANS: T DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: $ong#run e8uili.rium 'S&: Analytical ),. In a monopolistically competitive market/ the num.er of firms a+;usts until economic profits are +riven to -ero. ANS: T DIF: 1 !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: $ong#run e8uili.rium 'S&: Interpretive )0.
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:hen a profit#ma6imi-ing firm in a monopolistically competitive market is in long#run e8uili.rium/ marginal cost must lie .elo* average total cost. ANS: T DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: $ong#run e8uili.rium 'S&: Analytical )1. In a monopolistically competitive market/ the +eman+ curves face+ .y incum.ent firms are unaffecte+ .y the entry of ne* firms into the market. ANS: F DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: Deman+ curve 9 $ong#run e8uili.rium 'S&: Interpretive )". A firm in a monopolistically competitive market is usually in+ifferent to an a++itional customer *alking through the +oor/ since a sale to that customer *ill not increase the firm<s profit. ANS: F DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: (rofit ma6imi-ation 'S&: Interpretive )2. The term e6cess capacity refers to the fact that a firm operates on the up*ar+#sloping portion of its average# total#cost curve. ANS: F DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: !6cess capacity 'S&: Interpretive )3. The term e6cess capacity refers to the fact that a firm pro+uces a lo*er 8uantity than it *oul+ if it operate+ at the efficient scale. ANS: T DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: !6cess capacity 'S&: Interpretive )4. !6cess capacity characteri-es firms in monopolistically competitive markets/ even in situations of long#run e8uili.rium. ANS: T DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: !6cess capacity 'S&: Interpretive ,5. :hen a firm operates *ith e6cess capacity/ it must .e in a monopolistically competitive market. ANS: F DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: !6cess capacity 'S&: Interpretive ,1. A firm that *oul+ e6perience higher average total cost .y increasing pro+uction is operating *ith e6cess capacity. ANS: F DIF: ) !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: !6cess capacity 'S&: Interpretive
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,). :hen a firm operates at efficient scale/ it is pro+ucing at the minimum point on its average total cost curve. ANS: T DIF: 1 !F: 1"#) NAT: Analytic $%&: 'onopolistic competition T%(: !fficient scale 'S&: Definitional ,,. Defen+ers of a+vertising argue that firms use a+vertising as a signal of 8uality/ even if the a+vertising +elivers little helpful information a.out the pro+uct. ANS: T DIF: 1 !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Applicative ,0. &ritics of a+vertising argue that a+vertising lea+s to less elastic +eman+ for pro+ucts an+ a larger markup of price over marginal cost. ANS: T DIF: ) !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Interpretive ,1. The claim that a+vertising re+uces the elasticity of +eman+ is likely to .e ma+e .y a +efen+er of a+vertising. ANS: F DIF: ) !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Interpretive ,". &ritics of a+vertising argue that firms use a+vertising to manipulate consumers= tastes. ANS: T DIF: 1 !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Applicative ,2. :hen a+vertising is use+ to relay information a.out price/ each firm is a.le to enhance market po*er. ANS: F DIF: ) !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Interpretive ,3. (olicymakers have generally come to accept the vie* that a+vertising enhances the efficiency of markets. ANS: T DIF: ) !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Interpretive ,4. !conomists are unanimous in their .elief that a+vertising is socially inefficient. ANS: F DIF: 1 !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Definitional 05. :hen 'cDonal+=s opens a store in Dhaka/ >angla+esh/ it has a strong incentive to enforce pro+uct 8uality consistent *ith stores in the ?nite+ States. ANS: T DIF: ) !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Interpretive 01. The 'ikati (hilippines @ar+ ock &afe has the e6act same menu as the @ar+ ock &afe in Ne* Aork. This is an e6ample of a .ran+ name enhancing market efficiency for ?.S. tourists visiting the (hilippines. ANS: T DIF: ) !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Interpretive 0). !mpirical evi+ence suggests that a+vertising usually lea+s to an increase in the price for a+vertise+ pro+ucts. ANS: F DIF: ) !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Interpretive 0,. !conomists *ho argue that a+vertising enhances market efficiency suggest that cele.rity a+vertising signals inferior pro+uct 8uality. ANS: F DIF: ) !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Interpretive 00. A+vertising +uring the Super >o*l is an e6ample of information a.out 8uality containe+ primarily in the e6istence an+ e6pense of the a+vertising. ANS: T DIF: ) !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Interpretive

01. >ran+ names are rarely use+ to convey information a.out pro+uct 8uality. ANS: F DIF: ) !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Interpretive 0". The government of Italy *ill not allo* any @ar+ ock &afe restaurants to open in Italy. Defen+ers of the efficiency of .ran+#name markets *oul+ argue that this has hin+ere+ restaurant market efficiency in Italy. ANS: T DIF: ) !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Interpretive 02. The +e.ate over *hether a+vertising serves a valua.le purpose in society is +efinitively ans*ere+ .y economists *ho stu+y the tastes an+ preferences of in+ivi+uals. ANS: F DIF: ) !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Interpretive 03. If a+vertising +ecreases the elasticity of +eman+ for specific .ran+ names of har+ li8uor/ *e *oul+ e6pect firms to .e a.le to charge a larger markup over marginal cost. ANS: T DIF: ) !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Interpretive 04. There is general +isagreement among economists a.out the role of a+vertising/ .ut there is *i+esprea+ agreement a.out the role of .ran+ names on market efficiency. ANS: F DIF: ) !F: 1"#, NAT: Analytic $%&: 'onopolistic competition T%(: A+vertising 'S&: Interpretive 15. The government may not .e a.le to improve the inefficiencies of a monopolistically competitive market. ANS: T DIF: ) !F: 1"#0 NAT: Analytic $%&: 'onopolistic competition T%(: 'onopolistic competition 'S&: Interpretive 11. Firms in monopolistically competitive markets an+ monopolies can earn long#run profits +ue to .arriers to entry. ANS: F DIF: ) !F: 1"#0 NAT: Analytic $%&: 'onopolistic competition T%(: 'onopolistic competition 'S&: Interpretive 1). Free entry eliminates long#run profits for firms in competitive an+ monopolistic in+ustries. ANS: T DIF: ) !F: 1"#0 NAT: Analytic $%&: 'onopolistic competition T%(: 'onopolistic competition 'S&: Interpretive SHORT ANSWER 1. $ist five goo+s that are likely sol+ in a monopolistically competitive market. ANS: >ooks/ &Ds/ movies/ computer games/ an+ piano lessons are some e6amples. DIF: T%(: 1 !F: 1"#1 'onopolistic competition NAT: Analytic 'S&: Interpretive $%&: 'onopolistic competition
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). :hy +oes a typical monopolistically competitive firm face a +o*n*ar+#sloping +eman+ curveB ANS: >ecause its pro+uct is +ifferent from those offere+ .y other firms. DIF: T%(: 1 Deman+ curve !F: 1"#1 NAT: Analytic 'S&: Interpretive $%&: 'onopolistic competition
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In many college to*ns/ private in+epen+ent .ookstores typically locate on the periphery of the college campus. @o*ever/ in some college to*ns/ the university has use+ political po*er to restrict private .ookstores near campus through community -oning la*s. ?se your kno*le+ge of markets to pre+ict the price an+ 8uality of service +ifferences in the market for college te6t.ooks un+er the t*o +ifferent market regimes.
ANS: In monopoly markets/ price *ill .e higher an+ the 8uality of service *ill .e lo*er than in monopolistically competitive markets. DIF: T%(: 0. ANS: ) !F: 1"#1 'onopolistic competition NAT: Analytic 'S&: Analytical $%&: 'onopolistic competition
?se a graph to +emonstrate *hy a profit#ma6imi-ing monopolistically competitive firm must operate at e6cess capacity. !6plain *hy a perfectly competitive firm is not su.;ect to the same constraint.
&ompetitive firms +o not face +o*n*ar+#sloping +eman+. The graph sho*s the firm choosing a level of pro+uction in *hich the intersection of marginal revenue an+ marginal cost occurs at an output level *here average total cost is +ecreasing. This profit#ma6imi-ing output level is less than the efficient scale Cminimum of average total costD/ an+ therefore the firm is sai+ to .e operating *ith e6cess capacity. DIF: T%(: ) !F: !6cess capacity 1"#) 'S&: NAT: Analytic Analytical $%&: 'onopolistic competition

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In a small college to*n/ four micro.re*eries have opene+ in the last t*o years. Demonstrate the effect of ne* market entrants on +eman+ for e6isting firms Cmicro.re*eriesD that alrea+y serve+ this market. Assume that the local community no* places a moratorium on ne* li8uor licenses for micro.re*eries. @o* *ill this moratorium affect the long#run profita.ility of incum.ent firmsB
ANS:
The arrival of a ne* entrant shoul+ .e graphically +epicte+ .y a left*ar+ shift in the +eman+ curves face+ .y all incum.ent firms. If firms are a.le to make economic profits/ these *ill .e a.le to .e maintaine+ in the long run if ne* entrants are not allo*e+ C*hich *oul+ essentially .e a .arrier to entry/ meaning the market *oul+ no longer .e characteri-e+ as monopolistically competitiveD. DIF: T%(: ) !F: $ong#run e8uili.rium 1"#) NAT: Analytic 'S&: Analytical $%&: 'onopolistic competition
". :hat is meant .y the term "e6cess capacity" as it relates to monopolistically competitive firmsB ANS: 'onopolistically competitive firms pro+uce a level of output lo*er than the efficient scale of output an+ are therefore sai+ to have e6cess capacity. DIF: T%(: 2. ) !F: !6cess capacity 1"#) 'S&: NAT: Analytic Interpretive $%&: 'onopolistic competition
!ntry of firms in a monopolistically competitive in+ustry is characteri-e+ .y t*o e6ternalities. $ist them an+ .riefly +escri.e ho* consumers an+ e6isting firms are influence+ .y them.
ANS: !siness"stealin# e$$ect: incum.ent firms are affecte+ through the loss of salesE consumers are affecte+ .y lo*er price. %ro&!ct"'ariet( e$$ect: incum.ent firms face a market *ith more su.stitutesE consumers have more pro+uct variety from *hich to choose. DIF: T%(: ) !6ternalities !F: 1"#) 'S&: Interpretive NAT: Analytic $%&: 'onopolistic competition
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!valuate the follo*ing statement in the conte6t of .usiness#stealing an+ pro+uct#variety e6ternalities: ":e have too many stu+ent apartments in this to*n alrea+y. Statistics sho* that vacancy rates average 11 percent +uring any given semester."
ANS: !siness"stealin# e$$ect: if ne* entrants into the market can .e profita.le/ then average vacancy rates are likely to rise a.ove 11 percent. %ro&!ct"'ariet( e$$ect) if ne* entrants to the market are a.le to i+entify niche markets *hich are profita.le Ci.e./ offer clu. rooms/ pools/ athletic facilities/ etc.D/ then pro+uct variety *ill increase/ an+ average vacancy rates are likely to rise a.ove 11 percent. DIF: T%(: 4. ) !6ternalities !F: 1"#) 'S&: Interpretive NAT: Analytic $%&: 'onopolistic competition
Assume the role of a critic of a+vertising. Descri.e the characteristics of a+vertising that re+uce the effectiveness of markets an+ +ecrease the social *elfare of society.
ANS: A+vertising manipulates people<s tastes an+ is psychological rather than informational. As a result/ a+vertising creates a +esire for a pro+uct that might not other*ise e6ist. A+vertising may also impe+e competition .y convincing consumers that pro+ucts that are i+entical have significant +ifferences. DIF: T%(: 15. ) A+vertising !F: 1"#, 'S&: Interpretive NAT: Analytic $%&: 'onopolistic competition
Assume the role of a +efen+er of a+vertising. Descri.e the characteristics of a+vertising that enhance the effectiveness of markets an+ increase the social *elfare of society.
ANS: A+vertising provi+es information to consumers an+ thus allo*s consumers to make more informe+ Can+ therefore .etterD choices. A+vertising fosters competition .y making consumers more a*are of prices an+ pro+uct characteristics in a market. DIF: T%(: 11. ) A+vertising !F: 1"#, 'S&: Interpretive NAT: Analytic $%&: 'onopolistic competition
!valuate the follo*ing statement: "A+vertisements that use cele.rity en+orsements are +evoi+ of any value an+ +o not enhance the efficient functioning of markets."
ANS: Some people argue that cele.rity en+orsements are a signal of 8uality +ue to the high cost of the a+vertisement. If so/ then these a+vertisements relay information a.out pro+uct 8uality an+ enhance the effective functioning of markets. DIF: T%(: 1). ) A+vertising !F: 1"#, 'S&: Interpretive NAT: Analytic $%&: 'onopolistic competition
(rofessional organi-ations Cfor e6ample/ the American 'e+ical Association an+ the American >ar AssociationD have .een active a+vocates for regulation to restrict the right of professionals to a+vertise. Descri.e *hat economic incentives might e6ist for e6isting professionals to restrict a+vertising.
ANS: If a+vertising increases information a.out prices an+ services/ then provi+ers of professional services *ill .e re8uire+ to compete *ith each other on the .asis of price an+ service. As such/ e6isting professionals *ill .e su.;ect to more competitive pressure in the markets they service/ an+ in+ivi+ual profits are likely to fall. DIF: T%(: ) A+vertising !F: 1"#, 'S&: Analytical NAT: Analytic $%&: 'onopolistic competition
1,. Discuss ho* .ran+ names may enhance the efficiency of markets in a less +evelope+ country. ANS: ecogni-a.le .ran+ names signal 8uality pro+ucts. In the tourist# an+ .usiness#services market/ this signal can .e critical at the early stages of +evelopment to ensure visitors have a 8uality e6perience *hen other information is unavaila.le or unrelia.le. DIF: T%(: ) A+vertising !F: 1"#, 'S&: Interpretive NAT: Analytic $%&: 'onopolistic competition

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As +eveloping countries make a transition to market#.ase+ economies/ one of the first ma;or capital investments is in ":estern#8uality" hotels. !6plain *hy .ran+#name hotel accommo+ations are a critical step in attracting foreign investment.
ANS: >ran+#name hotels are a critical first step to economic +evelopment .ecause their recogni-e+ signal of 8uality re+uces the .arriers of facilitating foreign visitors Can+ their moneyD. DIF: T%(: 11. ) A+vertising !F: 1"#, 'S&: Analytical NAT: Analytic $%&: 'onopolistic competition
In markets *here the government imposes an e6cise ta6 on unit sales/ it also has a ten+ency to +a..le *ith restrictions on a+vertising Cfor e6ample/ cigarettes an+ har+ li8uorD. Do potential Cor actualD restrictions on a+vertising in these markets serve the interest of a government that is intereste+ in ma6imi-ing its ta6 revenue from the sale of these pro+uctsB !6plain your ans*er.
ANS: In the case of the e6amples given/ +eman+ is 8uite inelastic/ so restrictions on a+vertising are not likely to have a large impact on total sales .ut may have an impact on the +istri.ution of sales across .ran+ names. As such/ government revenue is largely unaffecte+ if the ta6 is on unit sales. DIF: T%(: , A+vertising !F: 1"#, 'S&: Analytical NAT: Analytic $%&: 'onopolistic competition
Sec ** " Monopolistic Competition

MULT+%LE CHO+CE 1. :hich of the follo*ing is a characteristic of monopolistic competitionB a. o*nership of a key resource .y a single firm .. free entry c. i+entical pro+uct +. patents !F: T%(: 1"#5 NAT: Analytic 'onopolistic competition
ANS: > DIF: 1 $%&: 'onopolistic competition 'S&: Definitional ). The market for novels is a. perfectly competitive. .. a monopoly. c. monopolistically competitive. +. an oligopoly.
ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Applicative ,.
!F: T%(:
1"#5 NAT: Analytic 'onopolistic competition
:hich of the follo*ing statements is not correctB a. 'onopolistic competition is similar to monopoly .ecause in each market structure the firm can charge a price a.ove marginal costs. .. 'onopolistic competition is similar to perfect competition .ecause .oth market structures are characteri-e+ .y free entry. c. 'onopolistic competition is similar to oligopoly .ecause .oth market structures are characteri-e+ .y .arriers to entry. +. 'onopolistic competition is similar to perfect competition .ecause .oth market structures are characteri-e+ .y many sellers. !F: T%(: 1"#5 NAT: Analytic 'onopolistic competition
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Analytical
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:hich of the follo*ing statements is not correctB a. 'onopolistic competition is +ifferent from monopoly .ecause monopolistic competition is characteri-e+ .y free entry/ *hereas monopoly is characteri-e+ .y .arriers to entry. .. >oth monopolistic competition an+ oligopoly fall in .et*een the more e6treme market structures of competition an+ monopoly. c. 'onopolistic competition is +ifferent from oligopoly .ecause each seller in monopolistic competition is small relative to the market/ *hereas each seller can affect the actions of other sellers in an oligopoly. +. >oth monopolistic competition an+ perfect competition are characteri-e+ .y pro+uct +ifferentiation. !F: T%(: 1"#5 NAT: Analytic 'onopolistic competition
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Analytical 1. 'onopolistic competition is a type of a. oligopoly. .. market structure. c. price +iscrimination. +. a+vertising strategy.
ANS: > DIF: 1 $%&: 'onopolistic competition 'S&: Definitional ".
!F: T%(:
1"#5 NAT: Analytic 'onopolistic competition
A monopolistically competitive market has characteristics that are similar to a. a monopoly only. .. a competitive firm only. c. .oth a monopoly an+ a competitive firm. +. neither a monopoly nor a competitive firm. !F: T%(: 1"#5 NAT: Analytic 'onopolistic competition
ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Applicative
Sec*1 " Monopolistic Competition " et,een Monopol( an& %er$ect Competition
MULT+%LE CHO+CE 1. A typical firm in the ?. S. economy *oul+ .e classifie+ as a. perfectly competitive. .. imperfectly competitive. c. a +uopolist. +. an oligopolist. !F: T%(: 1"#1 NAT: Analytic Imperfect competition
ANS: > DIF: 1 $%&: 'onopolistic competition 'S&: Interpretive ).
The typical firm in the ?. S. economy a. has some +egree of market po*er. .. sells its pro+uct for a price that is e8ual to the marginal cost of pro+ucing the last unit. c. is perfectly competitive. +. is a monopoly. !F: T%(: 1"#1 NAT: Analytic Imperfect competition
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive ,.
:hich of the follo*ing pairs illustrates the t*o e6treme e6amples of market structuresB a. competition an+ oligopoly .. competition an+ monopoly c. monopoly an+ monopolistic competition +. oligopoly an+ monopolistic competition

ANS: > DIF: 1 $%&: 'onopolistic competition 'S&: Interpretive 0. !F: T%(: 1"#1 NAT: Analytic Imperfect competition
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The general term for market structures that fall some*here in#.et*een monopoly an+ perfect competition is a. incomplete markets. .. imperfectly competitive markets. c. oligopoly markets. +. monopolistically competitive markets. !F: T%(: 1"#1 NAT: Analytic Imperfect competition
ANS: > DIF: 1 $%&: 'onopolistic competition 'S&: Definitional 1.
The t*o types of imperfectly competitive markets are a. markets *ith +ifferentiate+ pro+ucts an+ monopoly. .. markets *ith +ifferentiate+ pro+ucts an+ oligopoly. c. oligopoly an+ monopoly. +. monopolistic competition an+ oligopoly. !F: T%(: 1"#1 NAT: Analytic Imperfect competition
ANS: D DIF: 1 $%&: 'onopolistic competition 'S&: Interpretive ".
The t*o types of imperfectly competitive markets are a. monopoly an+ monopolistic competition. .. monopoly an+ oligopoly. c. monopolistic competition an+ oligopoly. +. monopolistic competition an+ cartels. !F: T%(: 1"#1 NAT: Analytic Imperfect competition
ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Definitional 2.
In a market that is characteri-e+ .y imperfect competition/ a. firms are price takers. .. there are al*ays a large num.er of firms. c. there are at least a fe* firms that compete *ith one another. +. the actions of one firm in the market never have any impact on the other firms< profits. !F: T%(: 1"#1 NAT: Analytic Imperfect competition
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 3.
Firms in in+ustries that have competitors .ut +o not face so much competition that they are price takers are operating in either aCnD a. oligopoly or perfectly competitive market. .. oligopoly or monopoly market. c. oligopoly or monopolistically competitive market. +. monopoly or monopolistically competitive market. !F: T%(: 1"#1 NAT: Analytic Imperfect competition
ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Interpretive 4.
Imperfectly competitive firms are characteri-e+ .y a. hori-ontal +eman+ curves. .. stan+ar+i-e+ pro+ucts. c. a large num.er of small firms. +. price making a.ility. !F: T%(: 1"#1 NAT: Analytic Imperfect competition
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive
"1
15.

An oligopoly a. has a concentration ratio of less than 15 percent. .. is a price taker. c. is a type of imperfectly competitive market. +. has many firms rather than ;ust one firm or a fe* firms. !F: T%(: 1"#1 %ligopoly NAT: Analytic 'S&: Interpretive
ANS: & DIF: 1 $%&: 'onopolistic competition 11.
An oligopoly is a market in *hich a. there are only a fe* sellers/ each offering a pro+uct similar or i+entical to the pro+ucts offere+ .y other firms in the market. .. firms are price takers. c. the actions of one seller in the market have no impact on the other sellers< profits. +. there are many price#taking firms/ each offering a pro+uct similar or i+entical to the pro+ucts offere+ .y other firms in the market. !F: T%(: 1"#1 %ligopoly NAT: Analytic 'S&: Definitional
ANS: A DIF: 1 $%&: 'onopolistic competition 1).
%ne characteristic of an oligopoly market structure is: a. firms in the in+ustry are typically characteri-e+ .y very +iverse pro+uct lines. .. firms in the in+ustry have some +egree of market po*er. c. pro+ucts typically sell at a price e8ual to their marginal cost of pro+uction. +. the actions of one seller have no impact on the profita.ility of other sellers. !F: T%(: 1"#1 %ligopoly NAT: Analytic 'S&: Interpretive
ANS: > DIF: ) $%&: 'onopolistic competition 1,.
A market structure *ith only a fe* sellers/ each offering similar or i+entical pro+ucts/ is kno*n as a. oligopoly. .. monopoly. c. monopolistic competition. +. perfect competition. !F: T%(: 1"#1 %ligopoly NAT: Analytic 'S&: Definitional
ANS: A DIF: 1 $%&: 'onopolistic competition 10.
The commercial ;etliner in+ustry consisting of >oeing an+ Air.us *oul+ .est .e +escri.e+ as a CanD a. perfectly competitive market. .. monopolistically competitive market. c. oligopoly. +. monopoly. !F: T%(: 1"#1 %ligopoly NAT: Analytic 'S&: Interpretive
ANS: & DIF: ) $%&: 'onopolistic competition 11.
&ru+e oil is primarily supplie+ to the *orl+ market .y a fe* 'i++le !astern countries. Such a market is an e6ample of aCnD CiD imperfectly competitive market. CiiD monopoly market. CiiiD oligopoly market. a. .. c. +. CiD an+ CiiD only CiiD an+ CiiiD only CiD an+ CiiiD only CiiiD only !F: T%(: 1"#1 %ligopoly NAT: Analytic 'S&: Interpretive
ANS: & DIF: ) $%&: 'onopolistic competition

1". A concentration ratio a. measures the percentage of total output supplie+ .y the four largest firms in the in+ustry. .. reflects the level of competition in an in+ustry. c. is relate+ to the control that each firm has over price. +. All of the a.ove are correct. !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
""
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Applicative 12.
A concentration ratio a. measures the percentage of total sales of the top firm in the in+ustry. .. reflects the level of competition in an in+ustry. c. is inversely relate+ to the price charge+ .y the top firm in the in+ustry. +. All of the a.ove are correct. !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Applicative 13.
The higher the concentration ratio/ the a. more control an in+ivi+ual firm has to set prices. .. more competitive the in+ustry. c. less competitive the in+ustry. +. >oth a an+ c are correct. !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 14.
The lo*er the concentration ratio/ the a. more control an in+ivi+ual firm has to set prices. .. more competitive the in+ustry. c. less competitive the in+ustry. +. >oth a an+ c are correct. !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive )5.
:hich of the follo*ing in+ustries has the highest concentration ratioB a. *heat .. novels c. cigarettes +. +og foo+ !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative
Table 16-1 The follo*ing ta.le sho*s the percentage of output supplie+ .y the top eight firms in four +ifferent in+ustries. Firm 1 ) , 0 1 " 2 3 +n&!str( A 5.)0 5.1, 5.15 5.53 5.51 5.5, 5.5) 5.51 +n&!str( 5.0" 5.)0 5.15 5.51 5.50 5.5, 5.5) 5.51 +n&!str( C 5.15 5.53 5.5" 5.51 5.50 5.5, 5.5) 5.51 +n&!str( 5.,) 5.1" 5.53 5.50 5.5) 5.51 5.51 5.51
"2
)1.

Re$er to Ta.le 16"1/ :hat is the concentration ratio in In+ustry AB a. )0F .. 11F c. ""F +. 3)F !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Applicative )).
Re$er to Ta.le 16"1/ :hat is the concentration ratio in In+ustry >B a. 1F .. 0"F c. 31F +. 41F !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative ),.
Re$er to Ta.le 16"1/ :hat is the concentration ratio in In+ustry &B a. )4F .. ,4F c. 01F +. 1"F !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Applicative )0.
Re$er to Ta.le 16"1/ :hat is the concentration ratio in In+ustry DB a. ,)F .. 1"F c. "5F +. "1F !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative )1.
Re$er to Ta.le 16"1/ :hich in+ustry has the highest concentration ratioB a. In+ustry A .. In+ustry > c. In+ustry & +. In+ustry D !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Applicative )".
Re$er to Ta.le 16"1/ :hich in+ustry is the least competitiveB a. In+ustry A .. In+ustry > c. In+ustry & +. In+ustry D !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Applicative )2.
Re$er to Ta.le 16"1/ :hich in+ustry has the lo*est concentration ratioB a. In+ustry A .. In+ustry > c. In+ustry & +. In+ustry D

ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative )3. !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
"3
Re$er to Ta.le 16"1/ :hich in+ustry is the most competitiveB a. In+ustry A .. In+ustry > c. In+ustry & +. In+ustry D !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative
Table 16-2 The follo*ing ta.le sho*s the total output pro+uce+ .y the top si6 firms as *ell as the total in+ustry output for each in+ustry. Firm 1 ) , 0 1 " Total )4. +n&!str( A 1,/)15 15/421 3/121 0/)21 1/)15 321 45,350 +n&!str( 3/215 2/155 "/055 1/555 0/)15 0/555 70,900 +n&!str( C 1/215 1/2)1 1/255 1/"21 1/"15 1/")1 30,125 +n&!str( 11/555 10/555 1,/555 1)/555 11/555 15/555 120,000
Re$er to Ta.le 16"0/ :hat is the concentration ratio for In+ustry AB a. a.out 21F .. a.out 31F c. a.out 33F +. 155F !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: > DIF: , $%&: 'onopolistic competition 'S&: Applicative ,5.
Re$er to Ta.le 16"0/ :hat is the concentration ratio for In+ustry >B a. a.out 1)F .. a.out ,)F c. a.out ,4F +. a.out 11F !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: & DIF: , $%&: 'onopolistic competition 'S&: Applicative ,1.
Re$er to Ta.le 16"0/ :hat is the concentration ratio for In+ustry &B a. a.out ),F .. a.out ,0F c. a.out 0,F +. a.out 1)F !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: A DIF: , $%&: 'onopolistic competition 'S&: Applicative ,).
Re$er to Ta.le 16"0/ :hat is the concentration ratio for In+ustry DB a. a.out 1,F .. a.out ,1F c. a.out 01F +. a.out ",F
"4

!F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: & DIF: , $%&: 'onopolistic competition 'S&: Applicative ,,.
Re$er to Ta.le 16"0/ :hich in+ustry has the highest concentration ratioB a. In+ustry A .. In+ustry > c. In+ustry & +. In+ustry D !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: A DIF: , $%&: 'onopolistic competition 'S&: Applicative ,0.
Re$er to Ta.le 16"0/ :hich in+ustry is the least competitiveB a. In+ustry A .. In+ustry > c. In+ustry & +. In+ustry D !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: A DIF: , $%&: 'onopolistic competition 'S&: Applicative ,1.
Re$er to Ta.le 16"0/ :hich in+ustry has the lo*est concentration ratioB a. In+ustry A .. In+ustry > c. In+ustry & +. In+ustry D !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: & DIF: , $%&: 'onopolistic competition 'S&: Applicative ,".
Re$er to Ta.le 16"0/ :hich in+ustry is the most competitiveB a. In+ustry A .. In+ustry > c. In+ustry & +. In+ustry D !F: T%(: 1"#1 NAT: Analytic &oncentration ratio
ANS: & DIF: , $%&: 'onopolistic competition 'S&: Applicative ,2.
%ne key +ifference .et*een an oligopoly market an+ a competitive market is that oligopolistic firms a. are price takers *hile competitive firms are not. .. can affect the profit of other firms in the market .y the choices they make *hile firms in competitive markets +o not affect each other .y the choices they make. c. sell completely unrelate+ pro+ucts *hile competitive firms +o not. +. sell their pro+uct at a price e8ual to marginal cost *hile competitive firms +o not. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition 9 %ligopoly
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive ,3.
%ne *ay in *hich monopolistic competition +iffers from oligopoly is that a. there are no .arriers to entry in oligopolies. .. in oligopoly markets there are only a fe* sellers. c. all firms in an oligopoly eventually earn -ero economic profits. +. strategic interactions .et*een firms are rare in oligopolies. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition 9 %ligopoly
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive

,4. :hich of the follo*ing is an e6ample of a monopolistically competitive in+ustryB a. computer operating systems .. tennis .alls c. movies +. ca.le television !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
25
ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Applicative 05.
:hich of the follo*ing is an e6ample of a monopolistically competitive in+ustryB a. computer operating systems .. tennis .alls c. restaurants in Ne* Aork &ity +. ca.le television !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Applicative 01.
:hich of the follo*ing goo+s are likely to .e sol+ in a monopolistically competitive marketB a. compact +iscs .. *heat c. corn +. postage stamps !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
ANS: A DIF: 1 $%&: 'onopolistic competition 'S&: Applicative 0).
:hich of the follo*ing goo+s are not likely to .e sol+ in monopolistically competitive marketsB a. compact +iscs .. .ooks c. cookies +. *heat !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
ANS: D DIF: 1 $%&: 'onopolistic competition 'S&: Applicative 0,.
!6amples of monopolistically competitive markets inclu+e the markets for a. restaurants an+ furniture. .. *heat an+ corn. c. postage stamps an+ *oo+en pencils. +. All of the a.ove are correct. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
ANS: A DIF: 1 $%&: 'onopolistic competition 'S&: Applicative 00.
:hich of the follo*ing markets is not likely characteri-e+ .y a monopolistically competitive marketB a. piano lessons .. corn c. cookies +. clothing !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
ANS: > DIF: 1 $%&: 'onopolistic competition 'S&: Applicative 01.
A monopolistically competitive in+ustry is characteri-e+ .y a. many firms selling pro+ucts that are similar .ut not i+entical. .. many firms selling i+entical pro+ucts. c. a fe* firms selling pro+ucts that are similar .ut not i+entical. +. a fe* firms selling highly +ifferent pro+ucts.
21

!F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
ANS: A DIF: 1 $%&: 'onopolistic competition 'S&: Definitional 0".
A monopolistically competitive in+ustry is characteri-e+ .y a. many firms/ +ifferentiate+ pro+ucts/ an+ .arriers to entry. .. many firms/ +ifferentiate+ pro+ucts/ an+ free entry. c. a fe* firms/ i+entical pro+ucts/ an+ free entry. +. a fe* firms/ +ifferentiate+ pro+ucts/ an+ .arriers to entry. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Definitional 02.
A market structure in *hich there are many firms selling pro+ucts that are similar .ut not i+entical is kno*n as a. oligopoly. .. monopoly. c. monopolistic competition. +. perfect competition. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
:hat +o economists call a market structure in *hich there are many firms selling pro+ucts that are similar .ut not i+enticalB a. perfect competition .. monopoly c. monopolistic competition +. oligopoly !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
:hich of the follo*ing is not a characteristic of monopolistic competitionB a. a large num.er of sellers .. firms are price takers c. free entry into the market +. a +ifferentiate+ pro+uct !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
ANS: > DIF: 1 $%&: 'onopolistic competition 'S&: Definitional
15. 'onopolistic competition is characteri-e+ .y *hich of the follo*ing attri.utesB CiD free entry CiiD pro+uct +ifferentiation CiiiD many sellers a. .. c. +. CiD an+ CiiiD only CiD an+ CiiD only CiiD an+ CiiiD only CiD/ CiiD/ an+ CiiiD !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
ANS: D DIF: 1 $%&: 'onopolistic competition 'S&: Definitional

11. In a monopolistically competitive market/ a. there are only a fe* sellers. .. each firm takes the price of its pro+uct as given. c. firms can enter or e6it the market *ithout restrictions. +. each firm pro+uces a pro+uct that is essentially i+entical to the pro+ucts of other firms in the market. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
2)
ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Definitional 1).
A monopolistically competitive market a. has some features of monopoly an+ some features of competition. .. has one large/ +ominant firm an+ many other smaller firms. c. is +ifficult to enter. +. occurs *henever firms earn -ero economic profit. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
ANS: A DIF: 1 $%&: 'onopolistic competition 'S&: Definitional 1,.
Select the type of market that is +escri.e+ .y the follo*ing attri.utes: many firms/ +ifferentiate+ pro+ucts/ an+ free entry. a. natural monopoly .. perfectly competition c. monopolistic competition +. monopoly !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Definitional
10. If firms in a particular market sell i+entical pro+ucts/ then the market is CiD perfectly competitive. CiiD monopolistically competitive. CiiiD an oligopoly. a. .. c. +. CiD or CiiD only CiiD or CiiiD only CiD or CiiiD only CiD only !F: T%(: 1"#1 NAT: Analytic (erfect competition
:hen an in+ustry has many firms/ the in+ustry is a. an oligopoly if the firms sell +ifferentiate+ pro+ucts/ .ut it is monopolistically competitive if the firms sell i+entical pro+ucts. .. an oligopoly if the firms sell +ifferentiate+ pro+ucts/ .ut it is perfectly competitive if the firms sell i+entical pro+ucts. c. monopolistically competitive if the firms sell +ifferentiate+ pro+ucts/ .ut it is perfectly competitive if the firms sell i+entical pro+ucts. +. perfectly competitive if the firms sell +ifferentiate+ pro+ucts/ .ut it is monopolistically competitive if the firms sell i+entical pro+ucts. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition 9 (erfect competition
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive
2,
1".

If there are many firms participating in a market/ the market is either a. an oligopoly or monopolistically competitive. .. perfectly competitive or monopolistically competitive. c. an oligopoly or perfectly competitive. +. an oligopoly or a cartel. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition 9 (erfect competition
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 12.
:hich of the follo*ing statements is correctB a. 'onopolistic competition is similar to monopoly .ecause .oth market structures are characteri-e+ .y patents. .. 'onopolistic competition is similar to perfect competition .ecause .oth market structures are characteri-e+ .y each seller .eing small compare+ to the market. c. 'onopolistic competition is similar to oligopoly .ecause .oth market structures are characteri-e+ .y free entry. +. 'onopolistic competition is similar to perfect competition .ecause .oth market structures are characteri-e+ .y e6cess capacity. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition 9 (erfect competition
ANS: > DIF: , $%&: 'onopolistic competition 'S&: Analytical
13. In *hich of the follo*ing market structures isCareD there a large num.er of sellersB CiD monopolistic competition CiiD perfect competition CiiiD oligopoly a. .. c. +. CiD an+ CiiD only CiiD an+ CiiiD only CiiD only CiD/ CiiD/ an+ CiiiD !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition 9 (erfect competition
ANS: A DIF: 1 $%&: 'onopolistic competition 'S&: Definitional 14.
'onopolistic competition +iffers from perfect competition .ecause in monopolistically competitive markets a. there are .arriers to entry. .. all firms can eventually earn economic profits. c. each of the sellers offers a some*hat +ifferent pro+uct. +. strategic interactions .et*een firms are important. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition 9 (erfect competition
"5. 'onopolistically competitive markets +iffer from perfectly competitive markets +ue to CiD the num.er of sellers. CiiD the .arriers to entry. CiiiD the pro+uct +ifferentiation among the sellers. a. .. c. +. CiD only CiiiD only CiD an+ CiiiD only CiiD an+ CiiiD only !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition 9 (erfect competition
ANS: > DIF: 1 $%&: 'onopolistic competition 'S&: Interpretive

"1. In .oth perfect competition an+ monopolistic competition/ each firm a. has some monopoly po*er. .. sells a pro+uct that is at least slightly +ifferent from those of other firms. c. faces a +o*n*ar+#sloping +eman+ curve. +. has many competitors. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition 9 (erfect competition
20
ANS: D DIF: 1 $%&: 'onopolistic competition 'S&: Definitional ").
:hich of the follo*ing con+itions +istinguishes monopolistic competition from perfect competitionB a. the num.er of sellers in the market .. the free+om of entry an+ e6it .y firms in the market c. the si-e of firms in the market +. pro+uct +ifferentiation !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition 9 (erfect competition
ANS: D DIF: 1 $%&: 'onopolistic competition 'S&: Interpretive ",.
A similarity .et*een monopoly an+ monopolistic competition is that in .oth market structures a. strategic interactions among sellers are important. .. there are a small num.er of sellers. c. sellers are price makers rather than price takers. +. there are only a fe* .uyers .ut many sellers. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition 9 'onopoly
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive "0.
:hich of the follo*ing statements is correctB a. &igarettes are likely to .e pro+uce+ in a monopolistically competitive in+ustry. .. Novels are likely to .e pro+uce+ in a monopoly in+ustry. c. 'ovies are likely to .e pro+uce+ in a monopolistically competitive in+ustry. +. 'ilk is likely to .e pro+uce+ in an oligopoly in+ustry. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
:hich of the follo*ing statements is not correctB a. Novels are likely to .e pro+uce+ in a monopolistically competitive in+ustry. .. &a.le television is likely to .e pro+uce+ in a monopoly in+ustry. c. 'ilk is likely to .e pro+uce+ in a monopolistically competitive in+ustry. +. &igarettes are likely to .e pro+uce+ in an oligopoly in+ustry. !F: T%(: 1"#1 NAT: Analytic 'onopolistic competition
Sec*0 " Monopolistic Competition " Competition ,ith -i$$erentiate& %ro&!cts

MULT+%LE CHO+CE 1. A +o*n*ar+#sloping +eman+ curve a. is a feature of all monopolistically competitive firms. .. means that the firm in 8uestion *ill never e6perience a -ero profit. c. causes marginal revenue to e6cee+ price. +. prohi.its firms from earning positive economic profits in the long run. !F: T%(: 1"#) NAT: Analytic Deman+ curve
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive
21
).

!ach firm in a monopolistically competitive firm faces a +o*n*ar+#sloping +eman+ curve .ecause a. there are many other sellers in the market. .. there are very fe* other sellers in the market. c. the firm<s pro+uct is +ifferent from those offere+ .y other firms in the market. +. that firm faces the threat of entry into the market .y ne* firms. !F: T%(: 1"#) NAT: Analytic Deman+ curve
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive ,.
For a monopolistically competitive firm/ a. marginal revenue an+ price are the same. .. average revenue an+ price are the same. c. at the profit#ma6imi-ing 8uantity of output/ price e8uals marginal cost. +. at the profit#ma6imi-ing 8uantity of output/ price e8uals the minimum of average total cost. !F: T%(: 1"#) NAT: Analytic Deman+ curve
For a monopolistically competitive firm/ at the profit#ma6imi-ing 8uantity of output/ a. price e6cee+s marginal cost. .. marginal revenue e6cee+s marginal cost. c. marginal cost e6cee+s average revenue. +. price e8uals marginal revenue. !F: T%(: 1"#) NAT: Analytic Deman+ curve
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 1.
(ro+uct +ifferentiation causes the seller of a goo+ to face *hat type of +eman+ curveB a. +o*n*ar+ sloping .. vertical c. hori-ontal +. Any of the a.ove coul+ .e correct since pro+uct +ifferentiation +oes not affect the shape of the +eman+ curve. !F: T%(: 1"#) NAT: Analytic Deman+ curve
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive ".
A firm in a monopolistically competitive market faces a a. +o*n*ar+#sloping +eman+ curve .ecause the firm=s pro+uct is +ifferent from those offere+ .y other firms. .. +o*n*ar+#sloping +eman+ curve .ecause there are only a fe* firms in the market. c. hori-ontal +eman+ curve .ecause there are many firms in the market. +. hori-ontal +eman+ curve .ecause firms can enter the market *ithout restriction. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition 9 Deman+ curve
ANS: A DIF: 1 $%&: 'onopolistic competition 'S&: Interpretive 2.
In the short run/ a firm in a monopolistically competitive market operates much like a a. firm in a perfectly competitive market. .. firm in an oligopoly. c. monopolist. +. monopsonist. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition

3. !ach firm in a monopolistically competitive market a. earns .oth short#run an+ long#run profits. .. faces a +o*n*ar+#sloping +eman+ curve. c. cannot earn economic profit in the short run. +. sets price e8ual to marginal cost. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition 9 Deman+ curve
2"
In a monopolistically competitive in+ustry/ firms set price a. e8ual to marginal cost since each firm is a price taker. .. .elo* marginal cost since each firm is a price taker. c. a.ove marginal cost since each firm is a price setter. +. al*ays a fraction of marginal cost since each firm is a price setter. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition 9 Deman+ curve
A profit#ma6imi-ing firm in a monopolistically competitive market +iffers from a firm in a perfectly competitive market .ecause the firm in the monopolistically competitive market a. is characteri-e+ .y market#share ma6imi-ation. .. has no .arriers to entry. c. faces a +o*n*ar+#sloping +eman+ curve for its pro+uct. +. faces a hori-ontal +eman+ curve at the market clearing price. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition 9 Deman+ curve
A monopolistically competitive firm chooses a. the 8uantity of output to pro+uce/ .ut the market +etermines price. .. the price/ .ut competition in the market +etermines the 8uantity. c. price/ .ut output is +etermine+ .y a cartel pro+uction 8uota. +. the 8uantity of output to pro+uce an+ the price at *hich it *ill sell its output. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition 9 Deman+ curve
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 1).
(ro+uct +ifferentiation in monopolistically competitive markets ensures that/ for profit#ma6imi-ing firms/ a. marginal revenue *ill e8ual average total cost. .. price *ill e6cee+ marginal cost. c. marginal cost *ill e6cee+ average revenue. +. average varia.le cost *ill .e +eclining. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition 9 Deman+ curve
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 1,.
In a monopolistically competitive in+ustry/ a firm=s +eman+ curve also represent its a. marginal revenue. .. marginal cost. c. average revenue. +. profit. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition 9 Deman+ curve
ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Definitional
10. A firm in a monopolistically competitive market is similar to a monopoly in the sense that CiD they .oth face +o*n*ar+#sloping +eman+ curves. CiiD they .oth charge a price that e6cee+s marginal cost. CiiiD free entry an+ e6it +etermines the long#run e8uili.rium.
22

a. .. c. +. CiD only CiiD only CiD an+ CiiD only CiD/ CiiD/ an+ CiiiD only !F: T%(: 1"#) NAT: Analytic 'onopolistic competition 9 Deman+ curve
A monopolistically competitive firm<s choice of output level is virtually i+entical to the choice ma+e .y a. a perfectly competitive firm. .. a +uopolist. c. a monopolist. +. an oligopolist. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition 9 Deman+ curve
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 1".
To ma6imi-e its profit/ a monopolistically competitive firm a. takes the price as given an+ chooses its 8uantity/ ;ust as a competitive firm +oes. .. takes the price as given an+ chooses its 8uantity/ ;ust as a collu+ing oligopolist +oes. c. chooses its 8uantity an+ price/ ;ust as a competitive firm +oes. +. chooses its 8uantity an+ price/ ;ust as a monopoly +oes. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition 9 Deman+ curve
>ecause monopolistically competitive firms pro+uce +ifferentiate+ pro+ucts/ each firm a. faces a +eman+ curve that is hori-ontal. .. faces a +eman+ curve that is vertical. c. has no control over pro+uct price. +. has some control over pro+uct price. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition 9 Deman+ curve
ANS: D DIF: 1 $%&: 'onopolistic competition 'S&: Interpretive 13.
A monopolistically competitive firm chooses its a. price an+ 8uantity ;ust as a monopoly +oes. .. 8uantity .ut faces a hori-ontal +eman+ curve ;ust as a competitive firm +oes. c. price .ut can sell any 8uantity at the market price ;ust as an oligopoly +oes. +. price an+ 8uantity .ase+ on the +ecisions of the other firms in the in+ustry ;ust as an oligopoly +oes. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation 9 Deman+ curve
:hen a monopolistically competitive firm raises its price/ a. 8uantity +eman+e+ falls to -ero. .. 8uantity +eman+e+ +eclines .ut not to -ero. c. the market supply curve shifts out*ar+. +. 8uantity +eman+e+ remains constant. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Analytical

)5. A monopolistically competitive firm chooses the 8uantity to pro+uce *here a. price e8uals marginal cost. .. +eman+ e8uals marginal cost. c. marginal revenue e8uals marginal cost. +. >oth a an+ c are correct. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
23
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive )1.
The profit#ma6imi-ing rule for a firm in a monopolistically competitive market is to al*ays select the 8uantity at *hich a. marginal revenue is e8ual to marginal cost. .. average total cost is e8ual to marginal revenue. c. average total cost is e8ual to price. +. average revenue e6cee+s average total cost. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive )).
A profit#ma6imi-ing firm in a monopolistically competitive market is characteri-e+ .y *hich of the follo*ingB a. average revenue e6cee+s marginal revenue .. marginal revenue e6cee+s average revenue c. average revenue is e8ual to marginal revenue +. revenue is al*ays ma6imi-e+ along *ith profit !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive ),.
A profit#ma6imi-ing firm in a monopolistically competitive market is characteri-e+ .y *hich of the follo*ingB a. average revenue e6cee+s marginal revenue .. marginal revenue e8uals marginal cost c. price e6cee+s marginal cost +. All of the a.ove are correct. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive )0.
A profit#ma6imi-ing firm in a monopolistically competitive market is characteri-e+ .y *hich of the follo*ingB a. marginal cost e6cee+s marginal revenue .. average revenue e8uals marginal cost c. price e6cee+s marginal cost +. All of the a.ove are correct. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive )1.
To ma6imi-e its profit/ a monopolistically competitive firm chooses its level of output .y looking for the level of output at *hich a. price e8uals marginal cost. .. marginal revenue e8uals marginal cost. c. average total cost is minimi-e+. +. All of the a.ove are correct. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
24
)".

A monopolistically competitive firm faces the follo*ing +eman+ sche+ule for its pro+uct: 15 ) 4 0 3 " 2 4 " 11 1 1, 0 11 , 12 ) 14 1 )1
%rice 123 4!antit(
The firm has total fi6e+ costs of G)5 an+ a constant marginal cost of G) per unit. The firm *ill ma6imi-e profit *ith a. " units of output. .. 4 units of output. c. 11 units of output. +. 1, units of output. ANS: > DIF: , $%&: 'onopolistic competition 'S&: Applicative )2. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
A monopolistically competitive firm faces the follo*ing +eman+ curve for its pro+uct: 15 ) 4 0 3 " 2 3 " 15 1 1) 0 10 , 1" ) 13 1 )5
%rice 123 4!antit(
The firm has total fi6e+ costs of G)5 an+ a constant marginal cost of G1 per unit. The firm *ill ma6imi-e profit *ith the pro+uction of a. " units of output. .. 3 units of output. c. 15 units of output. +. 1) units of output. ANS: A DIF: , $%&: 'onopolistic competition 'S&: Applicative )3. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
A monopolistically competitive firm has the follo*ing cost structure: 1 ,5 ) ,) , ," 0 0) 1 15 " ", 2 22
O!tp!t Total Cost123
The firm faces the follo*ing +eman+ curve: %rice 123 4!antit( )5 1 13 ) 11 , 1) 0 4 1 2 " 0 2
To ma6imi-e profit Cor minimi-e lossesD/ the firm *ill pro+uce a. ) units. .. , units. c. 0 units. +. 1 units. ANS: > DIF: , $%&: 'onopolistic competition 'S&: Applicative )4. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
A monopolistically competitive firm is currently pro+ucing 15 units of output. At this level of output the firm is charging a price e8ual to G15/ has marginal revenue e8ual to G"/ has marginal cost e8ual to G"/ an+ has average total cost e8ual to G1). From this information *e can infer that a. the firm is currently ma6imi-ing its profit. .. the profits of the firm are negative. c. firms are likely to leave this market in the long run. +. All of the a.ove are correct. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Analytical

,5. If "too much choice" is a pro.lem for consumers/ it *oul+ occur in *hich market structureCsDB a. perfect competition .. monopoly c. monopolistic competition +. perfect competition an+ monopolistic competition !F: T%(: 1"#) NAT: Analytic 'onopolistic competition
35
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive ,1.
In the short run/ a firm operating in a monopolistically competitive market can earn a. positive economic profits. .. economic losses. c. -ero economic profits. +. All of the a.ove are possi.le. !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive ,).
In the short run/ a firm operating in a monopolistically competitive market a. pro+uces an output level *here marginal revenue e8uals average total cost. .. ma6imi-es revenues as *ell as profits. c. can earn -ero economic profits. +. sets price e8ual to marginal cost. !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive ,,.
In the short run/ a firm operating in a monopolistically competitive market a. pro+uces an output level *here marginal revenue e8uals average total cost. .. sets price e8ual to +eman+ *here marginal revenue e8uals marginal cost. c. must earn -ero economic profits. +. ma6imi-es revenues as *ell as profits. !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive ,0.
:hen a profit#ma6imi-ing firm in a monopolistically competitive market charges a price higher than marginal cost/ a. the firm must .e earning a positive economic profit. .. the firm may .e incurring economic losses c. there is a +ea+*eight loss to society/ .ut it is e6actly offset .y the .enefit of e6cess capacity. +. ne* firms *ill enter the market in the long run. !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Analytical ,1.
:hich of the follo*ing con+itions is characteristic of a monopolistically competitive firm in short#run e8uili.riumB a. ( H A .. ' H '& c. ( I '& +. All of the a.ove are correct. !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium
ANS: D DIF: , $%&: 'onopolistic competition 'S&: Analytical
31
,".

:hich of the follo*ing con+itions is characteristic of a monopolistically competitive firm in short#run e8uili.riumB a. ( I A .. ' I '& c. ( I '& +. All of the a.ove are correct. !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium
ANS: & DIF: , $%&: 'onopolistic competition 'S&: Analytical ,2.
:hich of the follo*ing con+itions is characteristic of a monopolistically competitive firm in short#run e8uili.riumB a. ( I AT& .. ( H AT& c. ( J AT& +. Any of the a.ove coul+ .e correct. !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium
ANS: D DIF: , $%&: 'onopolistic competition 'S&: Analytical ,3.
:hich of the follo*ing con+itions is characteristic of a monopolistically competitive firm in .oth the short#run an+ the long runB a. ( I '& .. '& H AT& c. ( J ' +. All of the a.ove are correct. !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium 9 $ong#run e8uili.rium
ANS: A DIF: , $%&: 'onopolistic competition 'S&: Analytical ,4.
For a profit#ma6imi-ing monopolistically competitive firm/ price e6cee+s marginal cost in a. the short run .ut not in the long run. .. the long run .ut not in the short run. c. .oth the short run an+ the long run. +. neither the short run nor the long run. !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium 9 $ong#run e8uili.rium
For a profit#ma6imi-ing monopolistically competitive firm/ marginal revenue e8uals marginal cost in a. the short run .ut not in the long run. .. the long run .ut not in the short run. c. .oth the short run an+ the long run. +. neither the short run nor the long run. !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium 9 $ong#run e8uili.rium
A firm operating in a monopolistically competitive market can earn economic profits in a. the short run .ut not in the long run. .. the long run .ut not in the short run. c. .oth the short run an+ the long run. +. neither the short run nor the long run. !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium 9 $ong#run e8uili.rium

0). :hen a market is monopolistically competitive/ the typical firm in the market is likely to e6perience a a. positive profit in the short run an+ in the long run. .. positive or negative profit in the short run an+ a -ero profit in the long run. c. -ero profit in the short run an+ a positive or negative profit in the long run. +. -ero profit in the short run an+ in the long run. !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium 9 $ong#run e8uili.rium
3)
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Analytical 0,.
:hen a market is monopolistically competitive/ the typical firm in the market can earn a. losses in the short run an+ profits in the long run. .. profits in the short run an+ the long run. c. losses in the short run an+ -ero profit in the long run. +. -ero profit in the short run an+ losses in the long run. !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium 9 $ong#run e8uili.rium
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Analytical 00.
An important +ifference .et*een the situation face+ .y a profit#ma6imi-ing monopolistically competitive firm in the short run an+ the situation face+ .y that same firm in the long run is that in the short run/ a. price may e6cee+ marginal revenue/ .ut in the long run/ price e8uals marginal revenue. .. price may e6cee+ marginal cost/ .ut in the long run/ price e8uals marginal cost. c. price may e6cee+ average total cost/ .ut in the long run/ price e8uals average total cost. +. there are many firms in the market/ .ut in the long run/ there are only a fe* firms in the market. !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium 9 $ong#run e8uili.rium
Fi#!re 16"1/ The figure is +ra*n for a monopolistically competitive firm.
,) )0 1"
1) 13
'& Deman+ ' 0 3 1) 1" )5 )0 )3 ,) Q
01.
Re$er to Fi#!re 16"1/ The firm=s profit#ma6imi-ing level of output is a. 3 units. .. 1) units. c. 1" units. +. )0 units. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Applicative 0".
Re$er to Fi#!re 16"1/ In or+er to ma6imi-e profit/ the firm *ill charge a price of a. G3. .. G1). c. G1". +. G13.
3,

!F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
Re$er to Fi#!re 16"1/ Suppose that average total cost is G13 *hen KH1). :hat is the profit#ma6imi-ing price an+ resulting profitB a. (HG1)/ profitHG5 .. (HG13/ profitHG2) c. (HG13/ profitHG)0 +. (HG13/ profitHG5 !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
Re$er to Fi#!re 16"1/ If the average total cost is G11 at the profit#ma6imi-ing 8uantity/ then the firm=s ma6imum profit is a. G13. .. G)0. c. G,". +. G01. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative 04.
Re$er to Fi#!re 16"1/ If the average varia.le cost is G1) at the profit#ma6imi-ing 8uantity/ an+ if the firm=s fi6e+ costs amount to G,5/ then the firm=s ma6imum profit is a. G#,5. .. G)). c. G,". +. G0). !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: D DIF: , $%&: 'onopolistic competition 'S&: Applicative 15.
Re$er to Fi#!re 16"1/ If the average varia.le cost is G1, at the profit#ma6imi-ing 8uantity/ an+ if the firm=s profit is G)5 at that 8uantity/ then its fi6e+ costs amount to a. G1). .. G)). c. G05. +. G"5. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: & DIF: , $%&: 'onopolistic competition 'S&: Applicative 11.
Re$er to Fi#!re 16"1/ Suppose AT& H G13 *hen K H 1). Then the a. firm is in a long#run e8uili.rium *hen it pro+uces 1) units of output. .. firm is in a long#run e8uili.rium *hen it pro+uces 1" units of output. c. .est the firm can +o is sustain a loss of G)0. +. .est the firm can +o is earn a profit of G03. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Applicative 1).
Re$er to Fi#!re 16"1/ Suppose you *ere to a++ the AT& curve to the +iagram to sho* the firm in a situation of long#run e8uili.rium. Aou *oul+ +ra* the AT& curve a. *ith its minimum at the point CK H 1)/ ( H G13D. .. *ith its minimum at the point CK H 1)/ ( H G1)D. c. tangent to the +eman+ curve at the point CK H 1)/ ( H G13D. +. tangent to the +eman+ curve at the point CK H 1"/ ( H G1"D.

ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
30
Figure 16-2 This figure +epicts a situation in a monopolistically competitive market.
1,.
Re$er to Fi#!re 16"0/ :hat price *ill the monopolistically competitive firm charge in this marketB a. G"5 .. G25 c. G21 +. G35 !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Analytical 10.
Re$er to Fi#!re 16"0/ :hat is the profit#ma6imi-ing price/ 8uantity/ an+ resulting profitB a. (HG"5/ KH)5 units/ profitHG)55 .. (HG35/ KH)5 units/ profitHG)55 c. (HG21/ KH)1 units/ profitHG155 +. (HG"5/ KH05 units/ profitHG5 !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Analytical 11.
Re$er to Fi#!re 16"0/ @o* much consumer surplus *ill .e +erive+ from the purchase of this pro+uct at the monopolistically competitive priceB a. G)55 .. G,1).15 c. G055 +. G355 !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: A DIF: , $%&: 'onopolistic competition 'S&: Analytical
31
1".

Re$er to Fi#!re 16"0/ @o* much profit *ill the monopolistically competitive firm earn in this situationB a. a G15 profit .. a G)55 profit c. a G055 profit +. No profit/ since monopolistically competitive firms never earn economic profit. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
Re$er to Fi#!re 16"0/ @o* much output *ill the monopolistically competitive firm pro+uce in this situationB a. )5 units .. )1 units c. 05 units +. 35 units !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Analytical Figure 16-3

1555 455 355 255 "55 155 055 ,55 )55 155 1 15 $
'& AT&
'
11 )5 )1
D
,5 ,1 05 Quantity
13.
Re$er to Fi#!re 16"5/ The firm in this figure is monopolistically competitive. It illustrates a. the shut#+o*n case. .. a long#run economic profit. c. a short#run economic profit. +. a short#run loss. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition
Re$er to Fi#!re 16"5/ At the profit#ma6imi-ing/ or loss#minimi-ing/ output level/ the firm in this figure has total costs of appro6imately a. G)/555. .. G,/555. c. G0/555. +. G1/555. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Applicative

"5. Re$er to Fi#!re 16"5/ Assume the firm in the figure is currently pro+ucing 3 units of output an+ charging G055. The firm a. *ill increase its profits if it raises its price an+ re+uces its pro+uction level. .. *ill increase its profits if it lo*ers its price an+ e6pan+s its pro+uction level. c. is ma6imi-ing profits. +. *ill increase its profits if it raises its prices an+ e6pan+s its pro+uction level. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
3"
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Analytical "1.
Re$er to Fi#!re 16"5/ The ma6imum total short#run economic profit for the monopolistically competitive firm in this figure is a. G1/555. .. G)/555. c. G,/555. +. G1/555. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Applicative Figure 16-4
").
Re$er to Fi#!re 16"6/ :hich of the graphs +epicts a short#run e8uili.rium that *ill encourage the entry of other firms into a monopolistically competitive in+ustryB a. panel a .. panel . c. panel c +. panel + !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium
32
",.

Re$er to Fi#!re 16"6/ :hich of the graphs +epicts a short#run e8uili.rium that *ill encourage the e6it of some firms from a monopolistically competitive in+ustryB a. panel a .. panel . c. panel c +. panel + !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive "0.
Re$er to Fi#!re 16"6/ :hich of the graphs +epicts a short#run e8uili.rium that *ill not encourage either the entry or e6it of firms in a monopolistically competitive in+ustryB a. panel a .. panel . c. panel c +. panel + !F: T%(: 1"#) NAT: Analytic Short#run e8uili.rium
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive "1.
Re$er to Fi#!re 16"6. (anel a sho*s a profit#ma6imi-ing monopolistically competitive firm that is a. earning -ero economic profit. .. likely to e6it the market in the long run. c. pro+ucing its efficient scale of output. +. not ma6imi-ing its profit. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive "".
Re$er to Fi#!re 16"6. :hich of the panels +epicts a firm in a monopolistically competitive market earning positive economic profitsB a. panel a .. panel . c. panel c +. panel + !F: T%(: 1"#) NAT: Analytic 'onopolistic competition
Re$er to Fi#!re 16"6. (anel . is consistent *ith a firm in a monopolistically competitive market that is a. not in long#run e8uili.rium. .. in long#run e8uili.rium. c. pro+ucing its efficient scale of output. +. earning a positive economic profit. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive "3.
Re$er to Fi#!re 16"6. :hich of the panels sho*n coul+ illustrate the short#run situation for a monopolistically competitive firmB a. panel a .. panel . c. panel c +. All of the a.ove are correct. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition

Figure 16-5
33
"4.
Re$er to Fi#!re 16"7. :hich of the graphs sho*n *oul+ .e consistent *ith a firm in a monopolistically competitive market that is earning a positive profitB a. panel a .. panel . c. panel c +. panel + !F: T%(: 1"#) NAT: Analytic 'onopolistic competition
Re$er to Fi#!re 16"7. :hich of the graphs sho*n *oul+ .e consistent *ith a firm in a monopolistically competitive market that is +oing its .est .ut still losing moneyB a. panel a .. panel . c. panel c +. panel + !F: T%(: 1"#) NAT: Analytic 'onopolistic competition
Re$er to Fi#!re 16"7. :hich of the graphs +epicts a monopolistically competitive firm in long#run e8uili.riumB a. panel a .. panel . c. panel c +. None of the a.ove is correct. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
34
Figure 16-6
2).
Re$er to Fi#!re 16"6. :hich of the graphs +epicts the situation for a profit#ma6imi-ing firm in a monopolistically competitive marketB a. panel a .. panel . c. panel c +. panel + !F: T%(: 1"#) NAT: Analytic 'onopolistic competition
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 2,.
Re$er to Fi#!re 16"6. Suppose a firm is operating in the situation +epicte+ in panel a. :hich of the follo*ing statements is correctB a. The firm is earning positive short#run profits. .. The firm is earning negative short#run profits. c. The firm is earning -ero short#run profits. +. :e cannot +etermine profits .ecause *e +o not kno* the firm=s average total costs. !F: T%(: 1"#) NAT: Analytic 'onopolistic competition
Re$er to Fi#!re 16"6. If a firm in a monopolistically competitive market *as pro+ucing the level of output +epicte+ as K+ in panel C+D/ it *oul+ a. not .e ma6imi-ing its profit. .. .e minimi-ing its losses. c. .e losing market share to other firms in the market. +. .e operating at e6cess capacity. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
ANS: A DIF: , $%&: 'onopolistic competition 'S&: Analytical

21. Re$er to Fi#!re 16"6. The firm +epicte+ in panel . faces a hori-ontal +eman+ curve. If panel . +epicts a profit#ma6imi-ing firm/ a. it coul+ .e operating in either a perfectly competitive market or in a monopolistically competitive market. .. it *oul+ not have e6cess capacity in its pro+uction as long as it is earning -ero economic profit. c. it is a.le to choose the price at *hich it sells its pro+uct. +. the firm can al*ays raise its profit .y increasing pro+uction since consumers *ill .uy as much as the firm can pro+uce. !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
45
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 2".
In *hich of the follo*ing markets is economic profit +riven to -ero in the long runB a. oligopoly .. monopoly c. monopolistic competition +. cartels !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
:hich of the follo*ing con+itions is characteristic of a monopolistically competitive firm in long#run e8uili.riumB a. ( I +eman+ an+ ( H ' .. AT& I +eman+ an+ ' H '& c. ( I '& an+ +eman+ H AT& +. ( J AT& an+ +eman+ I ' !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
ANS: & DIF: , $%&: 'onopolistic competition 'S&: Analytical 23.
:hich of the follo*ing con+itions is characteristic of a monopolistically competitive firm in long#run e8uili.riumB a. ( I ' an+ ( H '& .. AT& H +eman+ an+ ' H '& c. ( J '& an+ +eman+ H AT& +. ( I AT& an+ +eman+ I ' !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
ANS: > DIF: , $%&: 'onopolistic competition 'S&: Analytical 24.
A monopolistically competitive firm a. charges a price that is e8ual to marginal cost. .. e6periences a -ero profit in the long run. c. pro+uces at the efficient scale in the long run. +. All of the a.ove are correct. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
In a monopolistically competitive market/ a. entry .y ne* firms is impe+e+ .y .arriers to entryE thus/ the num.er of firms in the market is never i+eal. .. entry .y ne* firms is impe+e+ .y .arriers to entry/ .ut the num.er of firms in the market is nevertheless al*ays i+eal. c. free entry ensures that the num.er of firms in the market is i+eal. +. there may .e too fe* or too many firms in the market/ +espite free entry.
41

!F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
In *hich of the follo*ing market structures +oes free entry an+ e6it play an important role in the long#run e8uili.rium outcomeB CiD perfect competition CiiD monopolistic competition CiiiD monopoly a. .. c. +. CiD only CiD an+ CiiD only CiiD an+ CiiiD only CiD/ CiiD/ an+ CiiiD !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 3).
If firms in a monopolistically competitive market are earning positive profits/ then a. firms *ill likely .e su.;ect to regulation. .. .arriers to entry *ill .e strengthene+. c. some firms *ill e6it the market. +. ne* firms *ill enter the market. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 3,.
If firms in a monopolistically competitive market are earning economic profits/ *hich of the follo*ing scenarios *oul+ .est +escri.e the change e6isting firms *oul+ face as the market a+;usts to the long#run e8uili.riumB a. an increase in +eman+ for each firm .. a +ecrease in +eman+ for each firm c. a +o*n*ar+ shift in the marginal cost curve for each firm +. an up*ar+ shift in the marginal cost curve for each firm !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
If firms in a monopolistically competitive market are incurring economic losses/ *hich of the follo*ing scenarios *oul+ .est +escri.e the change e6isting firms C*ho are a.le to stay in the marketD *oul+ face as the market a+;usts to the long#run e8uili.riumB a. a +o*n*ar+ shift in the marginal cost curve for each firm .. an up*ar+ shift in the marginal cost curve for each firm c. a +ecrease in +eman+ for each firm +. an increase in +eman+ for each firm !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
In monopolistically competitive markets/ positive economic profits a. suggest that some e6isting firms *ill e6it the market. .. suggest that ne* firms *ill enter the market. c. are sustaine+ through government#impose+ .arriers to entry. +. are never possi.le. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
ANS: > DIF: 1 $%&: 'onopolistic competition 'S&: Interpretive

3". In monopolistically competitive markets/ economic losses a. suggest that some e6isting firms *ill e6it the market. .. suggest that ne* firms *ill enter the market. c. are minimi-e+ through government#impose+ .arriers to entry. +. are never possi.le. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
4)
As ne* firms enter a monopolistically competitive market/ profits of e6isting firms a. rise/ an+ pro+uct +iversity in the market increases. .. rise/ an+ pro+uct +iversity in the market +ecreases. c. +ecline/ an+ pro+uct +iversity in the market increases. +. +ecline/ an+ pro+uct +iversity in the market +ecreases. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
As firms e6it a monopolistically competitive market/ profits of remaining firms a. +ecline/ an+ pro+uct +iversity in the market +ecreases. .. +ecline/ an+ pro+uct +iversity in the market increases. c. rise/ an+ pro+uct +iversity in the market +ecreases. +. rise/ an+ pro+uct +iversity in the market increases. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
The free entry an+ e6it of firms in a monopolistically competitive market guarantees that a. .oth economic profits an+ economic losses can persist in the long run. .. .oth economic profits an+ economic losses +isappear in the long run. c. economic profits/ .ut not economic losses/ can persist in the long run. +. economic losses/ .ut not economic profits/ can persist in the long run. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
In monopolistically competitive markets/ free entry an+ e6it suggests that a. the market structure *ill eventually .e characteri-e+ .y perfect competition in the long run. .. all firms earn -ero economic profits in the long run. c. some firms *ill .e a.le to earn economic profits in the long run. +. some firms *ill .e force+ to incur economic losses in the long run. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
:hen a profit#ma6imi-ing firm in a monopolistically competitive market is pro+ucing the long#run e8uili.rium 8uantity/ a. its average revenue *ill e8ual its marginal cost. .. its marginal revenue *ill e6cee+ its marginal cost. c. it *ill .e earning positive economic profits. +. its +eman+ curve *ill .e tangent to its average#total#cost curve. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
4,
4).

:hen a firm<s +eman+ curve is tangent to its average total cost curve/ the a. firm<s economic profit is -ero. .. firm must .e earning economic profits. c. firm must .e incurring economic losses. +. firm must .e operating at its efficient scale. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 4,.
:hen a firm<s +eman+ curve is tangent to its average total cost curve/ the a. firm<s economic profit is -ero. .. firm may .e earning economic profits. c. firm must .e operating at its efficient scale. +. >oth a an+ c are correct. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
:hen a profit#ma6imi-ing firm in a monopolistically competitive market is in long#run e8uili.rium/ a. the +eman+ curve *ill .e perfectly elastic. .. price e6cee+s marginal cost. c. marginal cost must .e falling. +. marginal revenue e6cee+s marginal cost. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
A profit#ma6imi-ing firm operating in a monopolistically competitive market that is in a long#run e8uili.rium has a. minimi-e+ average total cost. .. chosen to pro+uce *here +eman+ is unitary elastic. c. pro+uce+ the efficient scale of output. +. chosen a 8uantity of output *here average revenue e8uals average total cost. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 4".
In a long#run e8uili.rium/ a firm in a monopolistically competitive market operates a. *here marginal revenue is -ero. .. *here marginal revenue is negative. c. on the rising portion of its average total cost curve. +. on the +eclining portion of its average total cost curve. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
:hen a ne* firm enters a monopolistically competitive market/ the in+ivi+ual +eman+ curves face+ .y all e6isting firms in that market *ill a. shift to the left. .. shift to the right. c. shift in a +irection that is unpre+icta.le *ithout further information. +. remain unchange+. It is the supply curve that *ill shift. !F: T%(: 1"#) NAT: Analytic Deman+ curve 9 $ong#run e8uili.rium
ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Analytical

43.
40
:hen a firm e6its a monopolistically competitive market/ the in+ivi+ual +eman+ curves face+ .y all remaining firms in that market *ill a. shift in a +irection that is unpre+icta.le *ithout further information. .. shift to the right. c. shift to the left. +. remain unchange+. It is the supply curve that *ill shift. !F: T%(: 1"#) NAT: Analytic Deman+ curve 9 $ong#run e8uili.rium
$ong#run profit earne+ .y a monopolistically competitive firm is +riven to the competitive level +ue to aCnD a. change in the technology that the firm utili-es. .. shift of its +eman+ curve. c. shift of its supply curve. +. increase in the firm=s average cost of pro+uction. !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
155. >ecause a monopolistically competitive firm has some market po*er/ in the long#run the price of its pro+uct e6cee+s its a. average revenue. .. average total cost. c. marginal cost. +. profit per unit. ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
151. Ne* firms *ill likely enter a monopolistically competitive market *hen price e6cee+s a. marginal revenue. .. average revenue. c. marginal cost. +. average total cost. ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
15). :hich t*o curves are tangent to each other in a monopolistically competitive market *ith -ero economic profitB a. +eman+ an+ average varia.le cost .. +eman+ an+ average total cost c. marginal revenue an+ average varia.le cost +. marginal revenue an+ average total cost ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
15,. In a monopolistically competitive market/ a. strategic interactions among the firms are very important. .. the threat of entry .y ne* firms is not an important consi+eration. c. the attainment of a Nash e8uili.rium is an important o.;ective. +. firms may enter even though they *ill earn -ero economic profit in the long run. ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
41
150. Among the follo*ing situations/ *hich one is least likely to apply to a monopolistically competitive firmB a. profit is positive in the short run .. total cost e6cee+s total revenue in the short run c. profit is positive in the long run +. total revenue e8uals total cost in the long run ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
151. Suppose that monopolistically competitive firms in a certain market are earning positive profits. In the transition from this initial situation to a long#run e8uili.rium/ a. the num.er of firms in the market +ecreases. .. each e6isting firm e6periences a +ecrease in +eman+ for its pro+uct. c. each e6isting firm e6periences a right*ar+ shift of its marginal revenue curve. +. each e6isting firm e6periences an up*ar+ shift in its average total cost curve. ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
15". Suppose that monopolistically competitive firms in a certain market are e6periencing losses. In the transition from this initial situation to a long#run e8uili.rium/ a. the num.er of firms in the market +ecreases. .. each e6isting firm e6periences a +ecrease in +eman+ for its pro+uct. c. each firm e6periences an up*ar+ shift of its marginal cost an+ average total cost curves. +. each e6isting firm=s average total cost falls to .ring economic profit .ack to -ero. ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
152. :hen a monopolistically competitive firm is in long#run e8uili.rium/ a. marginal revenue is e8ual to marginal cost. .. price is e8ual to average total cost. c. +eman+ is e8ual to average total cost. +. All of the a.ove are correct. ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
153. :hen a monopolistically competitive firm is in long#run e8uili.rium/ a. price is e8ual to average total cost. .. price is e8ual to marginal cost. c. price is e8ual to marginal revenue. +. the firm operates at its efficient scale. ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
154. :hich of these types of firms can earn a positive economic profit in the long runB a. monopolies/ .ut not competitive firms or monopolistically competitive firms .. monopolies an+ monopolistically competitive firms/ .ut not competitive firms c. monopolies/ monopolistically competitive firms/ an+ monopolies +. No firms earn positive economic profit in the long run. !ntry *ill re+uce all firms= economic profit to -ero in the long run. ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium

115. "In a long#run e8uili.rium/ price is e8ual to average total cost." This statement applies to a. competitive markets/ .ut not to monopolistically competitive markets or monopolies. .. competitive an+ monopolistically competitive markets/ .ut not to monopolies. c. competitive markets/ monopolistically competitive markets/ an+ monopolies. +. None of the a.ove is correct. ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
4"
111. !ntry an+ e6it +rive each firm in a monopolistically competitive market to a point of tangency .et*een its a. marginal revenue curve an+ its total cost curve. .. marginal revenue curve an+ its average total cost curve. c. +eman+ curve an+ its total cost curve. +. +eman+ curve an+ its average total cost curve. ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
11). Suppose the point of tangency that characteri-es long#run e8uili.rium for a monopolistically competitive firm occurs at K1 units of output. This level of output/ K1/ a. e6cee+s the level of output at *hich marginal revenue e8uals marginal cost. .. e6cee+s the level of output at *hich marginal cost e8uals average total cost. c. falls short of the level of output at *hich price e8uals marginal cost. +. e6cee+s the firm=s efficient scale of output. ANS: & DIF: , $%&: 'onopolistic competition 'S&: Analytical !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
11,. Suppose for some firm that average total cost is minimi-e+ at K1 units of output. For a monopolistically competitive firm in long#run e8uili.rium/ K1 a. is also the level of output at *hich marginal cost e8uals average total cost. .. e6cee+s the level of output at *hich there is a point of tangency .et*een the +eman+ curve an+ the average total cost curve. c. e6cee+s the level of output at *hich marginal revenue e8uals marginal cost. +. All of the a.ove are correct. ANS: D DIF: , $%&: 'onopolistic competition 'S&: Analytical !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
110. In a long#run e8uili.rium/ a. only a perfectly competitive firm operates at its efficient scale. .. 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. +. .oth a perfectly competitive firm an+ a monopolistically competitive firm operate at their efficient scale of pro+uction. ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
111. A monopolistically competitive firm faces the follo*ing +eman+ curve for its pro+uct: %rice 123 4!antit( 15 ) 4 0 3 " 2 3 " 15 1 1) 0 10 , 1" ) 13 1 )5
42
The firm has total fi6e+ costs of G05 an+ a constant marginal cost of G) per unit. :e can conclu+e that a. firms *ill e6it this market. .. firms *ill enter this market. c. this market is in long#run e8uili.rium. +. this firm is operating at its efficient scale. ANS: & DIF: , $%&: 'onopolistic competition 'S&: Analytical 11". A firm has the follo*ing cost structure: O!tp!t Total Cost123 1 ,5 ) ,) , ," 0 0) 1 15 " ", 2 22 !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
If this firm is in a typical perfectly competitive market/ in the long run it *ill likely pro+uce a. 0 or fe*er units of output. .. 1 units of output. c. more than 1 units of output. +. None of the a.ove are necessarily correct .ecause there is not enough information to tell. ANS: > DIF: , $%&: 'onopolistic competition 'S&: Interpretive 112. A firm has the follo*ing cost structure: O!tp!t Total Cost123 1 ,5 ) ,) , ," 0 0) 1 15 " ", 2 22 !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
If this firm is in a typical monopolistically competitive market/ in the long run it *ill likely pro+uce a. 0 or fe*er units of output. .. 1 units of output. c. more than 1 units of output. +. None of the a.ove are necessarily correct .ecause there is not enough information to tell. ANS: A DIF: , $%&: 'onopolistic competition 'S&: Analytical !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
113. A monopolistically competitive firm is currently earning a positive economic profit. If other firms enter the market/ *e *oul+ e6pect that the a++e+ competition *ill cause this firm to a+;ust its output such that it a. *ill operate closer to its efficient scale. .. *ill operate further from its efficient scale. c. *ill no longer .e at its efficient scale. +. might move either closer to or further from its efficient scale. ANS: > DIF: , $%&: 'onopolistic competition 'S&: Analytical !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
114. In the long run/ a. monopolistically competitive firms earn a higher profit than perfectly competitive firms .ecause monopolistically competitive firms have some monopoly po*er. .. monopolistically competitive firms pro+uce a higher output than perfectly competitive firms .ecause competition +rives the perfectly competitive firm<s output +o*n. c. .oth monopolistically competitive an+ perfectly competitive firms pro+uce *here ( H '&. +. .oth monopolistically competitive an+ perfectly competitive firms pro+uce *here ( H AT&. ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium

1)5. &ecilia<s &afL operates in a monopolistically competitive market. &ecilia<s is currently pro+ucing *here its average total cost is minimi-e+. In the long run *e *oul+ e6pect &ecilia=s output to a. +ecrease an+ average total cost to increase. .. +ecrease an+ average total cost to +ecrease. c. remain unchange+ as &ecilia<s is +oing the .est it can. +. increase an+ average total costs to +ecrease. ANS: A DIF: , $%&: 'onopolistic competition 'S&: Analytical !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
43
1)1. :hich of the follo*ing statements regar+ing monopolistic competition is not correctB a. In the long#run e8uili.rium/ price e8uals average total cost. .. In the long#run e8uili.rium/ firms earn -ero economic profit. c. In the long#run e8uili.rium/ firms charge a price a.ove marginal cost. +. In the long#run e8uili.rium/ firms pro+uce a 8uantity in e6cess of their efficient scale. ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
1)). &onsi+er a monopolistically competitive firm in a market in long#run e8uili.rium. This firm is likely earning a. a positive economic profit since it is charging a price a.ove marginal cost. .. no economic profit since it is charging a price e8ual to its marginal cost. c. a positive economic profit since it is charging a price a.ove its average total cost. +. no economic profit since it is charging a price e8ual to it average total cost. ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
Figure 16-7 The lines in the figures .elo* illustrate the potential effect of entry an+ e6it in a monopolistically competitive market on either the +eman+ curve or the marginal cost curve of e6isting firms.
1),. Re$er to Fi#!re 16"8. (anel C+D illustrates the change that *oul+ occur if e6isting firms face+ a. long#run economic losses. .. a +ecrease in the +iversity of pro+ucts offere+ in the market. c. ne* entrants in the market. +. firms e6iting the market.
44

!F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
1)0. Re$er to Fi#!re 16"8. :hich of the +iagrams illustrates the impact of some e6isting firms leaving the marketB a. panel a .. panel . c. panel c +. panel + ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
Table 16-3 This ta.le sho*s the +eman+ sche+ule/ marginal cost/ an+ average total cost for a monopolistically competitive firm. 4!antit( %rice Mar#inal Cost A'era#e Total Cost 5 G15 ## ## 1 G4 G, G10 ) G3 G" G15 , G2 G4 G4 0 G" G1) G15 1 G1 G11 G1) " G0 G13 G10 2 G, G)1 G12 3 G) G)0 G)1 4 G1 G)2 G)1 15 G5 G,5 G)4 1)1. Re$er to Ta.le 16"5/ :hat price *ill this firm charge to ma6imi-e profitB a. G" .. G2 c. G3 +. G4 ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
1)". Re$er to Ta.le 16"5/ :hich of the follo*ing is likely to happen in the long run in this marketB a. The market is currently in a long#run e8uili.rium. .. The market price is likely to fall. c. Firms are likely to enter the market since firms are earning a positive economic profit. +. Firms are likely to leave the market since firms are earning a negative economic profit. ANS: D DIF: , $%&: 'onopolistic competition 'S&: Applicative !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
1)2. Re$er to Ta.le 16"5/ @o* much profit *ill this firm earn *hen it chooses its output to ma6imi-e profitB a. a G0 loss .. a G) loss c. a G" profit +. a G1" profit ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Applicative !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
155
Table 16-4 This ta.le sho*s the +eman+ sche+ule/ marginal cost/ an+ average total cost for a monopolistically competitive firm. 4!antit( %rice Mar#inal A'era#e Cost Total Cost 5 G)5 ## ## 1 G1" G) G)1 ) G1) G0 G1) , G3 G" G4."2 0 G0 G3 G4 1 G5 G15 G4 1)3. Re$er to Ta.le 16"6/ :hat price shoul+ this firm charge to ma6imi-e profitB a. G0 .. G3 c. G1) +. G1" ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
1)4. Re$er to Ta.le 16"6/ @o* much profit *ill this firm earn at the monopolistically competitive priceB a. G5 .. G1 c. G1) +. G1" ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Applicative !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
1,5. Re$er to Ta.le 16"6/ :hich of the follo*ing statements regar+ing this monopolistically competitive firm is correctB a. Ne* firms *ill enter this market in the long run since firm profits are greater than -ero. .. Firms *ill leave this market in the long run since firm profits are less than -ero. c. This firm is currently in long#run e8uili.rium. +. This firm is currently in long#run e8uili.rium/ an+ the firm is pro+ucing its efficient scale of output. ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
Table 16-5 Traci=s @airstyling is one salon among many in the market for hairstyling. The follo*ing ta.le presents cost an+ revenue +ata for hair cuts at Traci=s @airstyling. COSTS RE9ENUES Quantity Total Marginal Quantity Total Marginal Produced Cost Cost Demanded Price Revenue Revenue 5 G15 ## 5 G15 ## 1 G11 1 G01 ) G)1 ) G05 , G)3 , G,1 0 G," 0 G,5 1 G01 1 G)1 " G11 " G)5 2 G"" 2 G11 3 G23 3 G15
151
1,1. Re$er to Ta.le 16"7/ :hat is the profit#ma6imi-ing output for Traci=s @airstylingB a. , haircuts .. 0 haircuts c. 1 haircuts +. " haircuts ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Applicative !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
1,). Re$er to Ta.le 16"7/ :hen ma6imi-ing profit/ *hat price +oes Traci=s charge for a haircutB a. G)5 .. G)1 c. G,5 +. G,1 ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
1,,. Re$er to Ta.le 16"7/ At the profit#ma6imi-ing 8uantity/ *hat is Traci=s total profitB a. G,5 .. G14 c. G22 +. G30 ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Applicative !F: T%(: 1"#) NAT: Analytic (rofit ma6imi-ation
1,0. Re$er to Ta.le 16"7/ Miven the cost an+ revenue +ata/ Traci=s is a. not in a long#run e8uili.rium. 'ore .usinesses *ill enter the hair salon market in the long#run. .. not in a short#run e8uili.rium. c. not in a long#run e8uili.rium. Some .usinesses currently in the hair salon market *ill e6it the market in the long#run. +. in a long#run e8uili.rium. ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
1,1. Re$er to Ta.le 16"7/ If the government re8uire+ Traci=s to pro+uce at the efficient scale of output/ ho* many haircuts *oul+ Traci=s sellB a. either , or 0 .. either 0 or 1 c. either 1 or " +. either " or 2 ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Analytical !F: T%(: 1"#) NAT: Analytic !fficient scale
1,". Re$er to Ta.le 16"7/ If the government force+ Traci=s to pro+uce at the efficient scale of output/ *hat is the ma6imum profit Traci=s coul+ earnB a. G22 .. G35 c. G30 +. G4" ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative !F: T%(: 1"#) NAT: Analytic !fficient scale
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1,2. Re$er to Ta.le 16"7/ Suppose the government force+ Traci=s to pro+uce at the efficient scale of output. :ho *oul+ .e .etter off as a result of this policyB :ho *oul+ .e *orse off as a result of this policyB a. Traci=s *oul+ .e .etter offE consumers *oul+ .e *orse off. .. &onsumers *oul+ .e .etter offE Traci=s *oul+ .e *orse off. c. No one *oul+ .e .etter offE consumers *oul+ .e *orse off. +. No one *oul+ .e .etter offE no one *oul+ .e *orse off. ANS: D DIF: , $%&: 'onopolistic competition !F: T%(: 1"#) :elfare NAT: Analytic 'S&: Interpretive
1,3. In *hich of the follo*ing market structures can firms earn economic profits in the long runB a. perfect competition .. monopolistic competition c. monopoly +. >oth . an+ c are correct. ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Analytical !F: T%(: 1"#) NAT: Analytic $ong#run e8uili.rium
1,4. &onsi+er monopoly/ monopolistic competition/ an+ perfect competition. In *hich of these three market structures +oes a profit#ma6imi-ing firm charge a price that e6cee+s marginal costB a. monopoly only .. monopoly an+ monopolistic competition only c. monopoly/ monopolistic competition/ an+ perfect competition +. The ans*er cannot .e +etermine+ *ithout kno*ing *hether the market is in the long run or short run. ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic 'onopolistic competition 9 'onopoly
105. &onsi+er monopoly/ monopolistic competition/ an+ perfect competition. In *hich of these three market structures +oes a profit#ma6imi-ing firm e6perience -ero economic profitB a. perfect competition only .. perfect competition an+ monopolistic competition only c. perfect competition/ monopolistic competition/ an+ monopoly +. The ans*er cannot .e +etermine+ *ithout kno*ing *hether the market is in the long run or short run. ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic 'onopolistic competition
101. Firm A is a perfectly competitive firm. Firm > is a monopolistically competitive firm. >oth firms are currently ma6imi-ing their respective profits. :hich of the follo*ing statements is correctB a. >oth Firm A an+ Firm > *oul+ .e eager to make an a++itional sale. .. Firm A *oul+ .e eager to make an a++itional sale/ .ut Firm > *oul+ not care *hether it ma+e an a++itional sale or not. c. Firm > *oul+ .e eager to make an a++itional sale/ .ut Firm A *oul+ not care *hether it ma+e an a++itional sale or not. +. Neither Firm A nor Firm > *oul+ care *hether it ma+e an a++itional sale or not. ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic 'onopolistic competition 9 (erfect competition
10). ?n+er *hich of the follo*ing market structures *oul+ consumers likely pay the highest price for a pro+uctB a. perfect competition .. monopolistic competition c. oligopoly +. monopoly ANS: D DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) 'onopoly NAT: Analytic 'S&: Analytical
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10,. ?n+er *hich of the follo*ing market structures *oul+ the highest output of a particular goo+ .e pro+uce+B a. perfect competition .. monopolistic competition c. oligopoly +. monopoly ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Analytical !F: T%(: 1"#) NAT: Analytic (erfect competition
100. ?n+er *hich of the follo*ing market structures *oul+ consumers likely receive the most pro+uct varietyB a. perfect competition .. monopolistic competition c. oligopoly +. monopoly ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Analytical !F: T%(: 1"#) NAT: Analytic 'onopolistic competition
101. In the long run/ a monopolistically competitive firm pro+uces a 8uantity that is a. e8ual to the efficient scale. .. less than the efficient scale. c. greater than the efficient scale. +. consistent *ith +iseconomies of scale. ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic !fficient scale
10". A monopolistically competitive firm has the follo*ing cost structure: O!tp!t Total Cost123 1 ,5 ) ,) , ," 0 0) 1 15 " ", 2 22
The firm faces the follo*ing +eman+ curve: %rice 123 4!antit( )5 1 13 ) 11 , 1) 0 4 1 2 " 0 2
If the government forces this firm to pro+uce at its efficient scale/ it *ill a. pro+uce , units an+ make G4. .. pro+uce 0 units an+ make G". c. pro+uce 1 units an+ lose G1. +. pro+uce 2 units an+ lose G04. ANS: & DIF: , $%&: 'onopolistic competition 'S&: Applicative !F: T%(: 1"#) NAT: Analytic !fficient scale
102. In the long run/ a firm in a perfectly competitive market operates a. at its efficient scale/ an+ a monopolistically competitive firm operates at efficient scale. .. at its efficient scale/ an+ a monopolistically competitive firm operates *ith e6cess capacity. c. *ith e6cess capacity/ an+ a monopolistically competitive firm operates *ith e6cess capacity. +. *ith e6cess capacity/ an+ a monopolistically competitive firm operates at its efficient scale. ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic !fficient scale 9 !6cess capacity

103. :hich of the follo*ing statements is correctB a. In the long run/ .oth perfectly competitive firms an+ monopolistically competitive firms operate *ith e6cess capacity. .. A firm operates *ith e6cess capacity *hen/ in the long run/ its level of output is .elo* the efficient scale. c. For any firm/ efficient scale is the level of output at *hich the average#total#cost curve is tangent to the +eman+ curve. +. All of the a.ove are correct. ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic !fficient scale 9 !6cess capacity
150
104. A monopolistically competitive firm a. has the usual +ea+*eight loss of monopoly pricing. .. e6periences a -ero profit in a long#run e8uili.rium. c. is sai+ to have e6cess capacity. +. All of the a.ove are correct. ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic Dea+*eight loss 9 !6cess capacity
115. In comparison to perfect competition/ monopolistic competition is characteri-e+ .y a. efficient scale. .. pricing at marginal cost. c. e6cess capacity. +. All of the a.ove are correct. ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic !6cess capacity
111. In a monopolistically competitive market/ social *elfare *oul+ .e enhance+ if a. price e8uale+ marginal cost. .. government regulation eliminate+ the pro+uct#variety e6ternality. c. the government raise+ ta6es to su.si+i-e firms that price .elo* average total cost. +. there *ere fe*er firms/ making the in+ustry closer to an oligopoly. ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic !6cess capacity
11). Since a firm in a monopolistically competitive market faces a a. +o*n*ar+#sloping +eman+ curve/ it *ill al*ays operate *ith e6cess capacity. .. +o*n*ar+#sloping +eman+ curve/ it *ill al*ays operate at its efficient scale. c. perfectly elastic +eman+ curve/ it *ill al*ays operate *ith e6cess capacity. +. perfectly inelastic +eman+ curve/ it *ill al*ays operate at efficient scale. ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic !6cess capacity
11,. :hen a firm operates *ith e6cess capacity/ a. a++itional pro+uction *oul+ lo*er the average total cost. .. a++itional pro+uction *oul+ increase the average total cost. c. it must .e a perfectly competitive firm. +. it must .e a monopolistically competitive firm. ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic !6cess capacity
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110. In the long run/ a profit#ma6imi-ing firm in a monopolistically competitive market operates at a. efficient scale. .. a level of output at *hich average total cost is rising. c. a level of output at *hich average total cost is falling. +. the level of output at *hich total revenue is ma6imi-e+. ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic !6cess capacity
111. @otels in Ne* Aork &ity fre8uently e6perience an average vacancy rate of a.out )5 percent Ci.e./ on an average night/ 35 percent of the hotel rooms are fullD. This kin+ of e6cess capacity is in+icative of *hat kin+ of marketB a. monopoly .. perfect competition c. monopolistic competition +. oligopoly ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic !6cess capacity
11". !6cess capacity is a. an e6ample of the inefficiencies of monopolistically competitive markets. .. a short#run pro.lem .ut not a long#run pro.lem. c. a characteristic of rising average total cost curves. +. >oth a an+ . are correct. ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic !6cess capacity
112. In a long#run e8uili.rium/ a. e6cess capacity applies to monopolistically competitive firms .ut not to competitive firms. .. -ero economic profit applies to competitive firms .ut not to monopolistically competitive firms. c. markup over marginal cost applies to .oth monopolistically competitive an+ competitive firms. +. pro+uct variety e6ternalities apply to .oth perfectly competitive firms an+ monopolistically competitive firms. ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic !6cess capacity
113. 'onopolistically competitive firms have e6cess capacity. To ma6imi-e profits/ firms *ill a. increase their output to lo*er their average total cost of pro+uction an+ eliminate the e6cess capacity. .. pro+uce *here price e8uals marginal cost to eliminate the e6cess capacity. c. pro+uce *here average revenue e8uals marginal cost to eliminate the e6cess capacity. +. maintain the e6cess capacity. ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic !6cess capacity
114. :hich of the follo*ing .est +escri.es the i+ea of e6cess capacity in monopolistic competitionB a. Firms pro+uce more output than is socially +esira.le. .. The output pro+uce+ .y a typical firm is less than *hat *oul+ occur at the minimum point on its AT& curve. c. Due to pro+uct +ifferentiation/ firms choose output levels *here price e8uals average total cost. +. Firms keep some surplus output on han+ in case there is a shift in the +eman+ for their pro+uct. ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic !6cess capacity

1"5. >oth monopolistic competition an+ oligopoly are market structures a. that fail to achieve the total surplus achieve+ .y perfect competition. .. that feature only a fe* firms in each market. c. to *hich the concept of Nash e8uili.rium is fre8uently applie+ .y economists. +. in *hich firms earn -ero economic profit in the long run. ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic 'onopolistic competition 9 :elfare
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1"1. A monopolistically competitive market coul+ .e consi+ere+ inefficient .ecause a. marginal revenue e6cee+s average revenue. .. price e6cee+s marginal cost. c. the efficient scale of pro+uction is only achieve+ in the long run/ not in the short run. +. markup pricing +oes not occur in any other market structure. ANS: > DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) :elfare NAT: Analytic 'S&: Interpretive
1"). The +ea+*eight loss that is associate+ *ith a monopolistically competitive market is a result of a. price falling short of marginal cost in or+er to increase market share. .. price e6cee+ing marginal cost. c. the firm operating in a regulate+ in+ustry. +. e6cessive a+vertising costs. ANS: > DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) :elfare NAT: Analytic 'S&: Interpretive
1",. 'onopolistically competitive markets may .e socially inefficient .ecause a. most firms pro+uce inferior pro+ucts. .. government programs cannot effectively regulate price. c. firms earn -ero economic profit. +. the market may have too much or too little entry .y ne* firms. ANS: D DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) :elfare NAT: Analytic 'S&: Interpretive
1"0. In *hich of the follo*ing market structures +o firms pro+uce the *elfare#ma6imi-ing level of outputB a. perfect competition .. monopolistic competition c. monopoly +. >oth a an+ . are correct. ANS: A DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) :elfare NAT: Analytic 'S&: Analytical
1"1. The tra+itional vie* of monopolistic competition hol+s that this type of in+ustrial structure is inefficient .ecause a. there are too fe* firms to reach an efficient level of pro+uction. .. firms +o not operate at the output that minimi-es average costs. c. more a+vertising is nee+e+ to inform customers a.out pro+uct +ifferences. +. consumers +o not have enough choice among the pro+uct varieties availa.le. ANS: > DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) :elfare NAT: Analytic 'S&: Interpretive
1"". 'onopolistic competition is consi+ere+ .y some to .e inefficient .ecause a. price e6cee+s marginal cost. .. output is e6cessive. c. long#run profits are positive. +. .arriers to entry limit the num.er of firms in the market. ANS: A DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) :elfare NAT: Analytic 'S&: Interpretive
152
1"2. 'onopolistic competition is an inefficient market structure .ecause a. price e6cee+s marginal cost. .. it has a +ea+*eight loss/ ;ust as monopoly +oes. c. at the e8uili.rium/ some consumers *ill value the goo+ at more than the marginal cost of pro+uction. +. All of the a.ove are correct. ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic :elfare 9 Dea+*eight loss
1"3. 'onopolistic competition is an inefficient market structure .ecause a. marginal revenue e8uals marginal cost. .. it has a +ea+*eight loss/ ;ust as monopoly +oes. c. long#run profits are -ero +ue to free entry. +. All of the a.ove are correct. ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic :elfare 9 Dea+*eight loss
1"4. 'onopolistic competition is an a. efficient market structure .ecause long#run profits are -ero. .. efficient market structure .ecause each firm pro+uces at its efficient scale. c. inefficient market structure .ecause there is +ea+*eight loss. +. >oth a an+ . are correct. ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic :elfare 9 Dea+*eight loss
125. 'onopolistic competition is an a. inefficient market structure .ecause there is +ea+*eight loss. .. inefficient market structure .ecause price e6cee+s marginal cost. c. efficient market structure .ecause free entry +rives long#run profits to -ero. +. >oth a an+ . are correct. ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic :elfare 9 Dea+*eight loss
121. A monopolistically competitive market a. usually has too many firms/ re+ucing the economic profit of each firm to -ero. .. usually has too fe* firms/ re+ucing the pro+uct variety for consumers. c. may have too many or too fe* firms/ an+ the government can intervene to achieve the optimal num.er of firms. +. may have too many or too fe* firms/ .ut the government can +o little to rectify the situation. ANS: D DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) egulation NAT: Analytic 'S&: Interpretive
12). Senator @u.ris *ants to pass a la* that *oul+ re8uire all monopolistically competitive firms to operate at their efficient scale. If this la* *ere to pass an+ .e enforce+/ *e *oul+ e6pect that monopolistically competitive firms *oul+ a. see their profits increase. .. .reak even. c. lose money. +. not really .e affecte+ .y the la*. ANS: & DIF: , $%&: 'onopolistic competition !F: T%(: 1"#) egulation NAT: Analytic 'S&: Interpretive

12,. egulation of a firm in a monopolistically competitive market a. usually implies a very small a+ministrative .ur+en. .. *ill lo*er the firm<s costs. c. is commonly use+ to enhance market efficiency. +. is unlikely to improve market efficiency. !F: T%(: 1"#) egulation NAT: Analytic 'S&: Interpretive
153
ANS: D DIF: ) $%&: 'onopolistic competition
120. The a+ministrative .ur+en of regulating price in a monopolistically competitive market is a. small +ue to economies of scale. .. large .ecause price is usually .elo* marginal cost. c. large .ecause of the large num.er of firms that pro+uce +ifferentiate+ pro+ucts. +. small .ecause firms pro+uce *ith e6cess capacity. ANS: & DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) egulation NAT: Analytic 'S&: Interpretive
121. If regulators re8uire+ firms in monopolistically competitive markets to set price e8ual to marginal cost/ a. firms *oul+ most likely e6perience economic losses. .. firms *oul+ also operate at their efficient scale. c. ne* firms *oul+ likely to enter the market. +. the most efficient firms *oul+ not likely to .e affecte+. ANS: A DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) egulation NAT: Analytic 'S&: Interpretive
12". If regulators re8uire+ firms in monopolistically competitive markets to set price e8ual to marginal cost/ a. firms *oul+ respon+ .y lo*ering their costs. .. firms *oul+ re8uire a su.si+y to stay in .usiness c. ne* firms that enter the market *oul+ operate at efficient scale. +. the most efficient firms *oul+ not .e affecte+. ANS: > DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) egulation NAT: Analytic 'S&: Interpretive
122. :hich of the follo*ing represents the .est government policy to re+uce the +ea+*eight loss associate+ *ith a monopolistically competitive marketB a. The government shoul+ regulate firms in a manner similar to natural monopolies. .. The government shoul+ encourage more firms to enter the in+ustry .ecause *ithout government intervention/ there are likely to .e Ntoo fe*O firms. c. The government shoul+ encourage some firms to e6it the in+ustry .ecause *ithout government intervention/ there are likely to .e Ntoo manyO firms. +. There is no government policy that can re+uce +ea+*eight loss *ithout creating other pro.lems. ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive !F: T%(: 1"#) NAT: Analytic Dea+*eight loss
123. :hich of the follo*ing markets impose +ea+*eight losses on societyB CiD perfect competition CiiD monopolistic competition CiiiD monopoly a. .. c. +. CiD an+ CiiD only CiiD an+ CiiiD only CiD an+ CiiiD only CiD only !F: T%(: 1"#) NAT: Analytic Dea+*eight loss
154
124. iD iiD iiiD ivD

'onopolistic competition is characteri-e+ .y efficient scale markup pricing over marginal cost +ea+*eight loss e6cess capacity a. .. c. +. iD an+ iiD only iiD an+ ivD only iD/ iiD/ an+ iiiD only iiD/ iiiD/ an+ ivD only !F: T%(: 1"#) NAT: Analytic Dea+*eight loss 9 !6cess capacity
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Analytical
135. The pro+uct#variety e6ternality is associate+ *ith the a. pro+ucer surplus that accrues to incum.ent firms in a monopolistically competitive in+ustry. .. loss of consumer surplus from e6posure to a++itional a+vertising. c. consumer surplus that is generate+ from the intro+uction of a ne* pro+uct. +. opportunity cost of firms e6iting a monopolistically competitive in+ustry. ANS: & DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Interpretive
131. :ith respect to monopolistic competition/ a. .oth the .usiness#stealing e6ternality an+ the pro+uct#variety e6ternality are positive e6ternalities. .. the .usiness#stealing e6ternality is a positive e6ternality/ *hile the pro+uct#variety e6ternality is a negative e6ternality. c. the .usiness#stealing e6ternality is a negative e6ternality/ *hile the pro+uct#variety e6ternality is a positive e6ternality. +. .oth the .usiness#stealing e6ternality an+ the pro+uct#variety e6ternality are negative e6ternalities. ANS: & DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Interpretive
13). The fact that monopolistically competitive firms charge a price that e6cee+s marginal cost is responsi.le for the a. .usiness#stealing e6ternality that is o.serve+ in monopolistically competitive markets. .. pro+uct#variety e6ternality that is o.serve+ in monopolistically competitive markets. c. inefficiencies of the long#term losses earne+ .y monopolistically competitive firms.. +. persistence of positive profits into the long run for monopolistically competitive firms. ANS: A DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Interpretive
13,. :hen consumers are e6pose+ to a++itional choices that result from the intro+uction of a ne* pro+uct/ a. their satisfaction is likely to .e lo*ere+ as a result of their having to make a++itional choices. .. a pro+uct#variety e6ternality is sai+ to occur. c. an a+vertising e6ternality is sai+ to occur. +. consumers are likely to e6perience negative consumption e6ternalities. ANS: > DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Interpretive
130. A .usiness#stealing e6ternality is a. an e6ternality that is likely to .e punishe+ un+er antitrust la*s. .. the negative e6ternality that occurs *hen one firm attempts to +uplicate e6actly the pro+uct of a +ifferent firm. c. an e6ternality that is consi+ere+ to .e an e6plicit cost of .usiness in monopolistically competitive markets. +. the negative e6ternality associate+ *ith entry of ne* firms in a monopolistically competitive market. ANS: D DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Interpretive

131. :hen e6isting firms lose customers an+ profits +ue to entry of a ne* competitor/ a a. pre+atory#pricing e6ternality occurs. .. consumption e6ternality occurs. c. .usiness#stealing e6ternality occurs. +. pro+uct#variety e6ternality occurs. ANS: & DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Interpretive
115
13". :hen the loss from a .usiness#stealing e6ternality e6cee+s the gain from a pro+uct#variety e6ternality/ a. firms are more likely to operate at efficient scale. .. there are likely to .e too many firms in a monopolistically competitive market. c. market efficiency is likely to .e enhance+ .y the entry of ne* firms. +. all firms are earning economic losses. ANS: > DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Interpretive
132. The entry of ne* firms into a monopolistically competitive market is accompanie+ .y a. .oth positive an+ negative e6ternalities. .. only positive e6ternalities. c. only negative e6ternalities. +. only private profit opportunities Cno e6ternalitiesD. ANS: A DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Interpretive
133. The pro+uct#variety e6ternality arises in monopolistically competitive markets .ecause a. firms pro+uce *ith e6cess capacity. .. firms try to +ifferentiate their pro+ucts. c. firms *oul+ like to pro+uce homogeneous pro+ucts/ .ut the large num.er of firms prohi.its it. +. entry an+ e6it is not restricte+. ANS: > DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Interpretive
134. In a monopolistically competitive market/ a. the entry of ne* firms creates e6ternalities. .. the a.sence of restrictions on entry .y ne* firms ensures that there *ill .e no +ea+*eight loss. c. there are al*ays too many firms in the market relative to the socially#optimal num.er of firms. +. firms cannot earn positive economic profits in the short run. ANS: A DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Interpretive
145. !ntry .y ne* firms into a monopolistically competitive market a. creates a++itional consumer surplus. .. imposes a positive e6ternality on e6isting firms. c. lea+s to the same e6ternalities that are o.serve+ *hen ne* firms enter a perfectly competitive market. +. increases the +eman+ for e6isting firms= pro+ucts. ANS: A DIF: , $%&: 'onopolistic competition !F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Interpretive
Scenario 16-1 Pacation Inns of America CPIAD has recently announce+ intentions to .uil+ a ne* hotel7resort comple6 in 'yrtle >each/ South &arolina. Assume that the hotel7resort market in 'yrtle >each is characteri-e+ .y monopolistic competition. 141. Re$er to Scenario 16"1. As a result of the ne* PIA hotel7resort/ tourists *ho stay in 'yrtle >each are likely to e6perience a a. pro+uct#variety e6ternality/ *hich harms consumers. .. pro+uct#variety e6ternality/ *hich .enefits consumers. c. .usiness#stealing e6ternality/ *hich harms consumers. +. .usiness#stealing e6ternality/ *hich .enefits consumers.
111

!F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Applicative
ANS: > DIF: ) $%&: 'onopolistic competition
14). Re$er to Scenario 16"1. As a result of the ne* PIA hotel7resort/ e6isting hotels/ motels/ an+ lo+ging facilities in 'yrtle >each are likely to e6perience a a. pro+uct#variety e6ternality/ *hich harms pro+ucers. .. pro+uct#variety e6ternality/ *hich .enefits pro+ucers. c. .usiness#stealing e6ternality/ *hich harms pro+ucers. +. .usiness#stealing e6ternality/ *hich .enefits pro+ucers. ANS: & DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Applicative
Scenario 16-2 'cDonal+=s restaurants has recently announce+ intentions to open a ne* restaurant in Smallto*n/ In+iana. Assume that the fast#foo+ restaurant market in Smallto*n is characteri-e+ .y monopolistic competition. 14,. Re$er to Scenario 16"0. As a result of the ne* 'cDonal+=s/ resi+ents of Smallto*n are likely to .enefit from a. a pro+uct#variety e6ternality. .. a .usiness#stealing e6ternality. c. the fact that 'cDonal+=s *ill increase its pro+uction to achieve the efficient scale. +. >oth . an+ c are correct. ANS: A DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Applicative
140. Re$er to Scenario 16"0. As a result of the ne* 'cDonal+=s/ e6isting fast foo+ restaurants in Smallto*n are likely to a. suffer from a pro+uct#variety e6ternality. .. suffer from a .usiness#stealing e6ternality. c. increase their pro+uction to achieve the efficient scale. +. >oth . an+ c are correct. ANS: > DIF: ) $%&: 'onopolistic competition !F: T%(: 1"#) !6ternalities NAT: Analytic 'S&: Applicative
Sec *5 " Monopolistic Competition " A&'ertisin#

MULT+%LE CHO+CE 1. :hich of the follo*ing is uni8ue to a monopolistically competitive firm *hen compare+ to an oligopolyB a. The monopolistically competitive firm a+vertises. .. The monopolistically competitive firm pro+uces a 8uantity of output that falls short of the socially optimal level. c. 'onopolistic competition features many .uyers. +. 'onopolistic competition features many sellers. !F: T%(: 1"#, 'arkets NAT: Analytic 'S&: Interpretive
ANS: D DIF: ) $%&: 'onopolistic competition ).
:hich of the follo*ing is a characteristic of oligopoly or monopolistic competition/ .ut not perfect competitionB a. a+vertising an+ sales promotion .. profit ma6imi-ation accor+ing to the ' H '& rule c. firms .eing price takers rather than price makers +. hori-ontal +eman+ an+ marginal revenue curves !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: A DIF: ) $%&: 'onopolistic competition ,.
Some firms have an incentive to a+vertise .ecause they sell a a. similar pro+uct an+ charge a price e8ual to marginal cost. .. similar pro+uct an+ charge a price a.ove marginal cost. c. +ifferentiate+ pro+uct an+ charge a price e8ual to marginal cost. +. +ifferentiate+ pro+uct an+ charge a price a.ove marginal cost.

ANS: D DIF: ) $%&: 'onopolistic competition 0. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
11)
The relationship .et*een a+vertising an+ pro+uct +ifferentiation is a. positiveE the more +ifferentiate+ the pro+uct/ the more a firm is likely to spen+ on a+vertising. .. negativeE the more +ifferentiate+ the pro+uct/ the less a firm is likely to spen+ on a+vertising. c. -eroE there is no relationship .et*een pro+uct +ifferentiation an+ a+vertising. +. irrelevantE firms *ith +ifferentiate+ pro+ucts +o not nee+ to a+vertise. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Analytical
ANS: A DIF: ) $%&: 'onopolistic competition 1.
For the economy as a *hole/ spen+ing on a+vertising comprises a.out *hat percent of total firm revenueB a. 5.1 .. ) c. 15 +. )5 !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Applicative
ANS: > DIF: 1 $%&: 'onopolistic competition ".
Firms that sell highly +ifferentiate+ consumer goo+s/ such as soft +rinks/ .reakfast cereals/ an+ +og foo+/ typically spen+ *hat percent of their revenues on a+vertisingB a. 5#1 .. )#0 c. 15#)5 +. over 15 !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Applicative
:hich of the follo*ing correctly lists the pro+ucts in or+er from most a+vertise+ to least a+vertise+B a. soft +rinks/ .reakfast cereals/ +og foo+ .. corn/ +og foo+/ communication satellites c. +og foo+/ communication satellites/ corn +. *heat/ corn/ cru+e oil !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Applicative
Firms that spen+ the greatest percentage of their revenue on a+vertising ten+ to .e firms that sell a. in+ustrial pro+ucts. .. homogeneous pro+ucts. c. consumer goo+s for *hich there are no close su.stitutes. +. highly#+ifferentiate+ consumer goo+s. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: D DIF: 1 $%&: 'onopolistic competition 4.
Firms that spen+ the greatest percentage of their revenue on a+vertising ten+ to .e firms that sell a. highly#+ifferentiate+ consumer goo+s. .. goo+s pro+uce+ .y natural monopolies. c. agricultural pro+ucts. +. pro+ucts *ith a limite+ shelf life such as milk an+ lettuce. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
&ompare+ to other firms/ firms that sell highly +ifferentiate+ pro+ucts likely incur significant costs associate+ *ith a. a+vertising. .. the pro+uct#variety e6ternality. c. interme+iate materials. +. ta6es an+ regulation.
11,

!F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
In *hich of the follo*ing pro+uct markets are *e likely to o.serve the largest amount of a+vertisingB a. markets *ith highly +ifferentiate+ pro+ucts .. perfectly competitive markets c. markets in *hich in+ustrial pro+ucts are sol+ +. markets in *hich there is very little +ifference .et*een +ifferent firms< pro+ucts !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: A DIF: ) $%&: 'onopolistic competition 1).
If *e o.serve a great +eal of a+vertising of men<s shaving pro+ucts/ *e can infer that a. the market for those pro+ucts is perfectly competitive. .. it costs firms very little to pro+uce those pro+ucts. c. those pro+ucts are highly +ifferentiate+. +. firms are irrational in their +ecisions to a+vertise. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: & DIF: ) $%&: 'onopolistic competition 1,.
If *e o.serve a great +eal of a+vertising of +og foo+/ *e can infer that a. consumers spen+ very little of their +isposa.le income on +og foo+. .. +og foo+ is cheap to pro+uce. c. +og foo+ is a highly#+ifferentiate+ pro+uct. +. firms *ho +o not a+vertise earn higher profits than those *ho +o. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
Firm A pro+uces an+ sells in a market that is characteri-e+ .y highly +ifferentiate+ consumer goo+s. Firm > pro+uces an+ sells in+ustrial pro+ucts. Firm & pro+uces an+ sells an agricultural commo+ity. :hich firm is likely to spen+ the greatest portion of its total revenue on a+vertisingB a. firm A .. firm > c. firm & +. There is no reason to .elieve that any one of the three firms *oul+ spen+ a greater portion of its total revenue on a+vertising than the other t*o firms. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Analytical
A+vertising a. provi+es information a.out pro+ucts/ inclu+ing prices an+ seller locations. .. has .een proven to increase competition an+ re+uce prices compare+ to markets *ithout a+vertising. c. signals 8uality to consumers/ .ecause a+vertising is e6pensive. +. All of the a.ove are correct. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: D DIF: ) $%&: 'onopolistic competition 1".
:hich of the follo*ing is not an argument ma+e .y critics of a+vertisingB a. A+vertising manipulates people=s tastes. .. A+vertising impe+es competition. c. A+vertising promotes economies of scale. +. A+vertising increases the perception of pro+uct +ifferentiation. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Applicative
&ritics of a+vertising argue that in some markets a+vertising may a. attract pro+ucts of lo*er 8uality into the market. .. attract less informe+ .uyers into the market. c. +ecrease elasticity of +eman+ allo*ing firms to charge a larger markup over marginal cost. +. enhance competition in markets to an unnecessary +egree.

ANS: & DIF: ) $%&: 'onopolistic competition 13. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
110
&ritics of a+vertising argue that a+vertising a. creates +esires that other*ise might not e6ist. .. hin+ers competition. c. often fails to convey su.stantive information. +. All of the a.ove are correct. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: D DIF: 1 $%&: 'onopolistic competition 14.
&ritics of a+vertising argue that a+vertising a. creates +esires that other*ise might not e6ist. .. enhances competition. c. .enefits television vie*ers *ho en;oy tv commercials. +. All of the a.ove are correct. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: A DIF: 1 $%&: 'onopolistic competition )5.
If a+vertising re+uces a consumer<s price sensitivity .et*een i+entical goo+s/ it is likely to a. increase the elasticity of +eman+ for +ifferentiate+ pro+ucts. .. enhance competition an+ encourage more pro+uct +iversity. c. re+uce competition an+ re+uce social *elfare. +. encourage the consumption of all homogenous goo+s. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: & DIF: ) $%&: 'onopolistic competition )1.
If a firm in a monopolistically competitive market successfully uses a+vertising to +ecrease the elasticity of +eman+ for its pro+uct/ the firm *ill a. .e a.le to increase its markup over marginal cost. .. eventually have to lo*er price to remain competitive. c. increase the *elfare of society. +. re+uce its average total cost. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: A DIF: ) $%&: 'onopolistic competition )).
&ritics of a+vertising argue that a+vertising a. creates +eman+ for pro+ucts that people other*ise +o not *ant or nee+. .. lo*ers .arriers to entry into an in+ustry .ecause ne* firms can more easily esta.lish themselves as competitors. c. increases competition .y provi+ing information a.out prices. +. encourages monopoli-ation of markets .y raising entry .arriers. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: A DIF: ) $%&: 'onopolistic competition ),.
:hich of the follo*ing is a commonly#cite+ .enefit of a+vertisingB a. A+vertising can .e a signal of the 8uality of a pro+uct. .. A+vertising impe+es competition. c. A+vertising re+uces the +ea+*eight loss associate+ *ith monopolistic competition. +. A+vertising encourages free entry/ *hich increases profits. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Applicative
ANS: A DIF: ) $%&: 'onopolistic competition )0.
Defen+ers of a+vertising a. conce+e that a+vertising increases firms= market po*er. .. conce+e that a+vertising makes entry .y ne* firms more +ifficult. c. conten+ that firms use a+vertising to provi+e useful information to consumers. +. All of the a.ove are correct.
111

:hen firms in a monopolistically competitive market engage in price#relate+ a+vertising/ +efen+ers of a+vertising argue that a. the 8uality of pro+ucts sol+ in the market al*ays increases. .. customers are less likely to .e informe+ a.out other characteristics of the pro+uct. c. ne* firms are +iscourage+ from entering the market. +. each firm has less market po*er. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: D DIF: ) $%&: 'onopolistic competition )".
Defen+ers of a+vertising argue that it is not rational for profit#ma6imi-ing firms to spen+ money on a+vertising for pro+ucts that have a. superior 8uality. .. inferior or me+iocre 8uality. c. lo* prices. +. limite+ availa.ility. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: > DIF: ) $%&: 'onopolistic competition )2.
The primary claim of +efen+ers of a+vertising is that it a. conveys information a.out firm profita.ility. .. is psychological rather than informational. c. enhances the information availa.le to consumers. +. re+uces the elasticity of +eman+ for a firm=s pro+uct. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
In his 1413 .ook/ The Affluent Society/ Qohn Renneth Mal.raith argue+ that a. .ran+ names give firms an incentive to pro+uce an+ sell high#8uality pro+ucts. .. consumers= tastes cannot/ in any real sense/ .e N+etermine+O .y a+vertising. c. firms use a+vertising to create +eman+ for pro+ucts that people other*ise +o not *ant or nee+. +. firms use a+vertising to sen+ a signal to consumers a.out the 8uality of their pro+ucts. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
!vi+ence suggests that/ in markets *ith +ifferentiate+ pro+ucts .ut little a+vertising/ a. consumers are not confuse+ .y conflicting signals. .. firms are generally less profita.le. c. markets are less efficient. +. consumers make .etter choices. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: & DIF: ) $%&: 'onopolistic competition ,5.
In markets *here restrictions on a+vertising have .een use+ to curtail competition/ the ?.S. courts have generally a. referre+ the matters of a+vertising restrictions to e6ecutive regulators. .. enforce+ in+ustry#*i+e agreements to restrict a+vertising. c. .een silent on the effect of e6plicit a+vertising restrictions. +. overturne+ la*s that prohi.it a+vertising. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: D DIF: 1 $%&: 'onopolistic competition ,1.
A la* that restricts the a.ility of hotels7motels to a+vertise on .ill.oar+s outsi+e of a resort community *oul+ likely lea+ to a. a +ecrease in profits for all hotels7motels. .. re+uce+ efficiency of local lo+ging markets. c. a re8uest .y consumers to increase the num.er of .ill.oar+s. +. increase+ price competition among hotels7motels in the community.

ANS: > DIF: ) $%&: 'onopolistic competition ,). !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
11"
Among arguments for an+ against a+vertising/ .oth si+es agree that a+vertising lea+s to a. higher prices an+ less competitive markets. .. higher prices an+ more competitive markets. c. lo*er prices an+ more competitive markets. +. None of the a.ove is correct. The +e.ate fails to resolve the 8uestion of a+vertising<s effect on prices an+ competition. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: D DIF: ) $%&: 'onopolistic competition ,,.
(rofessional organi-ations an+ pro+ucer groups have an incentive to a. restrict a+vertising in or+er to enhance competition on the .asis of price. .. restrict a+vertising in or+er to re+uce competition on the .asis of price. c. encourage a+vertising in or+er to re+uce competition on the .asis of price. +. encourage a+vertising in or+er to enhance competition on the .asis of price. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: > DIF: ) $%&: 'onopolistic competition ,0.
!vi+ence from the market for eyeglasses suggests that a+vertising lea+s to a. lo*er#8uality pro+ucts for consumers. .. lo*er prices for consumers. c. higher prices for consumers. +. less concern on the part of consumers a.out price +ifferences among similar goo+s. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: > DIF: 1 $%&: 'onopolistic competition ,1.
In the stu+y +one .y $ee >enham on a+vertising for eyeglasses/ a. a+vertising increase+ the average price. .. a+vertising +ecrease+ the average price. c. there *as no +ifference in price/ .ut 8uality *as .etter in the states that +i+n<t allo* a+vertising. +. a+vertising appeare+ to have no effect *hatsoever in the states that permitte+ a+vertising. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Applicative
ANS: > DIF: 1 $%&: 'onopolistic competition ,".
esults of the stu+y +one .y $ee >enham on a+vertising for eyeglasses *oul+ suggest that a. .ran+ loyalty an+ market po*er in the eyeglass market *as likely to .e more pervasive in states that allo*e+ a+vertising. .. eyeglass sales *ere more profita.le in states that allo*e+ a+vertising. c. optometrists *oul+ not .e supportive of a+vertising restrictions. +. optometrists *oul+ enthusiastically en+orse a+vertising restrictions. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Applicative
ANS: D DIF: ) $%&: 'onopolistic competition ,2.
A stu+y of the market for optometrists< services in the 14"5s sho*e+ that a. all states in the ?nite+ States prohi.ite+ a+vertising .y optometrists. .. almost all professional optometrists oppose+ legal restrictions on their rights to a+vertise. c. the average price of eyeglasses *oul+ +ecrease if the legal restrictions on a+vertising .y optometrists *ere remove+. +. a+vertising on eyeglasses limite+ competition among optometrists. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
112
,3.

Accor+ing to one theory/ a+vertising sen+s a signal to consumers a.out the 8uality of the pro+uct .eing offere+. An implication of this theory is that a. the actual 8uality of the pro+uct is irrelevant. .. the content of the a+vertisement is irrelevant. c. a+vertising is not in the .est interest of society. +. it is irrational for firms to pay famous people large amounts of money to appear in their a+vertisements. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: > DIF: ) $%&: 'onopolistic competition ,4.
A+vertising that uses cele.rity en+orsements is most likely inten+e+ to a. increase elasticity of +eman+ for the a+vertise+ pro+uct. .. re+uce the a.ility of markets to allocate resources efficiently. c. provi+e a signal of pro+uct 8uality. +. .e useful only for psychological effects. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
Firms that spen+ a large amount of money on a+vertising a particular pro+uct are likely to .e provi+ing consumers *ith a. information a.out the availa.ility of the pro+uct. .. information a.out pro+uct price. c. a signal of pro+uct 8uality. +. a goo+ e6ample of *aste+ resources. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
%ne theory of a+vertising suggests that a. information on price is important to make a+vertising effective. .. the content of a+vertising may .e irrelevant to pro+uct success in the market. c. cele.rity a+vertising is not effective in retail foo+ markets. +. (ost an+ Rellogg shoul+ not a+vertise ne* cereals. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: > DIF: ) $%&: 'onopolistic competition 0).
A+vertisements that appear to convey no information at all a. are usually associate+ *ith "infomercials." .. are useless to consumers .ut valua.le to firms. c. are useless to firms .ut valua.le to consumers for their entertainment 8uality alone. +. may convey information to consumers .y provi+ing them *ith a signal that firms are *illing to spen+ significant amounts of money to a+vertise. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: D DIF: ) $%&: 'onopolistic competition 0,.
Television a+vertisements aire+ +uring ma;or sporting events are very e6pensive. A theory asserting that people .uy a pro+uct simply .ecause it is a+vertise+ *oul+ suggest that information on the high cost of a+vertising a. enhances the effectiveness of the a+vertisement. .. re+uces people<s *illingness to purchase a+vertise+ pro+ucts. c. is leake+ to +iscre+it the firms that spen+ so much on a+vertising. +. re+uces the effective staying po*er of a pro+uct. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: A DIF: ) $%&: 'onopolistic competition

00. Accor+ing to the signaling theory of a+vertising/ consumers a. pay little or no attention to *hich firms a+vertise an+ *hich firms +o not a+vertise. .. are often more impresse+ .y a firm<s *illingness to spen+ money on a+vertising than they are .y the content of the a+vertisement. c. are often more impresse+ .y lo*#cost a+vertisements than they are .y high#cost a+vertisements. +. gain little or no information a.out pro+uct 8uality from a+vertisements. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
113
ANS: > DIF: ) $%&: 'onopolistic competition 01.
A>& &ompany kno*s that it pro+uces an+ sells a very goo+ mouse trap. SAT &ompany kno*s that it pro+uces an+ sells a lousy mouse trap. Accor+ing to the signaling theory of a+vertising/ a. .oth A>& an+ SAT have incentives to spen+ large amounts of money on a+vertising their mouse traps. .. A>& has an incentive to spen+ a large amount of money on a+vertising its mouse trap/ .ut SAT +oes not. c. SAT has an incentive to spen+ a large amount of money on a+vertising its mouse trap/ .ut A>& +oes not. +. neither A>& nor SAT has an incentive to spen+ a large amount of money on a+vertising their mouse traps. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Analytical
ANS: > DIF: ) $%&: 'onopolistic competition 0".
@o* +oes a+vertising signal to consumers that the pro+uct is a goo+ oneB a. >y seeing famous people using the pro+uct/ consumers infer that they too can .e famous. .. >y .eing *illing to spen+ money on a+vertising/ firms let consumers kno* the pro+uct is likely a goo+ one since firms *oul+ not likely a+vertise a poor pro+uct. c. >y making consumers laugh +uring commercials/ firms are associating positive e6periences *ith the pro+uct. +. :ithout allo*ing consumers to actually use the pro+uct/ it is not possi.le for firms to signal to consumers the pro+uct<s 8uality. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
'ost .usinesses a+vertise their pro+ucts an+ services. Some .usiness use S(A' emails to a+vertise .ecause the cost of a mass e#mail is close to -ero. %ther .usiness spen+ millions of +ollars to a+vertise in a ,5#secon+ spot +uring the Super >o*l. @aving o.serve+ this real *orl+ +ata/ economists argue that the amount of money that a .usiness spen+s on a+vertising is a pro6y for a goo+ or service<s a. si-e. .. 8uality. c. ne*ness. +. cost of pro+uction. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
&ritics of markets that are characteri-e+ .y firms that sell .ran+ name pro+ucts argue that .ran+ names encourage consumers to pay more for .ran+e+ pro+ucts that a. have elastic +eman+ curves. .. are very +ifferent from generic pro+ucts. c. are in+istinguisha.le from generic pro+ucts. +. consumer#a+vocate groups have foun+ to .e inferior. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
!+*ar+ &ham.erlin argue+ that .ran+ names a. hampere+ market efficiency. .. *ere instrumental in enhancing market efficiency. c. *ere useful in enhancing market efficiency *hen the government enforce+ the use of e6clusive tra+emarks. +. *ere likely to .e more socially efficient *hen use+ in con;unction *ith a+vertising.
114

!+*ar+ &ham.erlin argue+ that governments shoul+ a. .an the use of .ran+ names. .. not enforce the tra+emarks that companies use to i+entify their pro+ucts. c. vigorously enforce the tra+emarks that companies use to i+entify their pro+ucts. +. ta6 companies *hose pro+ucts have .ran+ names in proportion to ho* much consumers recogni-e their pro+ucts. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: > DIF: 1 $%&: 'onopolistic competition 11.
The +e.ate over the efficiency of markets in *hich pro+ucts *ith .ran+ names are sol+ a. is frame+ .y the role of regulation in a+vertising. .. is likely to .e resolve+ .y reference to anec+otal evi+ence. c. hinges on *hether consumers are rational in their choices. +. hinges on the effectiveness of a+vertising that i+entifies price +ifferences. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: & DIF: ) $%&: 'onopolistic competition 1).
A recent out.reak of hepatitis *as linke+ to a national fast#foo+ restaurant chain. This is an e6ample of a case in *hich a. .ran+ name i+entity increases the effectiveness of markets. .. .ran+ name i+entity can .e +etrimental to the profita.ility of a firm. c. a+vertising is ineffective in salvaging perceptions of pro+uct 8uality. +. a+vertising cannot .e use+ to esta.lish .ran+ loyalty. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Analytical
ANS: > DIF: 1 $%&: 'onopolistic competition 1,.
In some countries/ .ran+ name fast#foo+ restaurants are not allo*e+ to operate. Such restrictions are likely to a. enhance the social *elfare of society. .. increase the num.er of fast#foo+ restaurants. c. re+uce .arriers to entry in imperfect markets. +. re+uce the competitive nature of local fast#foo+ markets. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: D DIF: ) $%&: 'onopolistic competition 10.
!unice consumes &oke e6clusively. She claims that there is a clear taste +ifference an+ that competing .ran+s of cola leave an unsavory taste in her mouth. @o*ever/ in a .lin+ taste test/ !unice is foun+ to prefer generic store#.ran+ cola to &oke eight out of ten times. The results of !unice<s taste test *oul+ reinforce claims .y critics of .ran+ names that a. consumers are al*ays *illing to pay more for .ran+ names. .. .ran+ names cause consumers to perceive +ifferences that +o not really e6ist. c. .ran+ names cause consumers to .e more sensitive to pro+uct +ifferences. +. .ran+ names are a form of socially efficient a+vertising. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
Rirk consumes (epsi e6clusively. @e claims that there is a clear taste +ifference an+ that competing .ran+s of cola leave an unsavory taste in his mouth. In a .lin+ taste test/ Rirk is foun+ to prefer (epsi to store#.ran+ cola eight out of ten times. The results of Rirk=s taste test *oul+ refute claims .y critics of .ran+ names that a. consumers are al*ays *illing to pay more for .ran+ names. .. .ran+ names cause consumers to perceive +ifferences that +o not really e6ist. c. consumers *ith the lo*est levels of income are the most likely to .e influence+ .y .ran+ name a+vertising. +. .ran+ names are a form of socially efficient a+vertising. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: > DIF: 1 $%&: 'onopolistic competition

1".
1)5
Aour company has recently re8ueste+ that you travel to Dhaka/ >angla+esh/ to *ork on negotiations for a ne* factory to .e locate+ in one of the port cities. Aour travel agent provi+es a list of several hun+re+ local hotels an+ a Sheraton. In this case/ the Sheraton .ran+#name is likely to .e use+ as a signal of a. perceive+ +ifferences that are not likely to e6ist among your various options. .. 8uality *hen 8uality cannot .e easily ;u+ge+. c. inefficiency in markets characteri-e+ .y recogni-a.le .ran+ names. +. the 8uality of general lo+ging accommo+ations in Dhaka. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
%n a vacation to &ancun/ 'e6ico/ you fin+ yourself eating every meal at the local 'cDonal+<s rather than having a ham.urger from one of the street ven+ors. Aour traveling companion claims that you are irrational/ since you never eat 'cDonal+<s ham.urgers *hen you are home/ an+ 'cDonal+<s ham.urgers cost more than those prepare+ an+ sol+ .y &ancun<s street ven+ors. An economist *oul+ most likely e6plain your .ehavior .y suggesting that a. your .ehavior is rational/ .ut your frien+<s .ehavior is clearly irrational. .. you are clearly irrational/ .ut your frien+=s .ehavior is rational. c. the 'cDonal+<s .ran+ name suggests consistent 8uality. +. the a+vertising .y 'cDonal+=s in &ancun is more persuasive than the a+vertising .y 'cDonal+=s in your home to*n. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
T*o college stu+ents/ Qosh an+ Qohn/ are spen+ing spring .reak in >oston to visit @arvar+ ?niversity=s la* school. Qosh .uys a cup of coffee each morning at the local Dunkin= Donuts rather than from one of the local coffee shops. Qohn claims that Qosh is irrational .ecause he never purchase+ Dunkin= Donuts= coffee at home/ an+ Dunkin= Donuts= coffee costs more than the coffee sol+ .y local shops. An economist *oul+ most likely e6plain Qosh=s .ehavior .y suggesting that a. Qosh=s .ehavior is rational/ .ut Qohn<s .ehavior is clearly irrational. .. Qosh=s .ehavior is clearly irrational/ .ut Qohn=s .ehavior is rational. c. the Dunkin= Donuts .ran+ name suggests consistent 8uality. +. the a+vertising .y Dunkin= Donuts in >oston is more persuasive than the a+vertising .y Dunkin= Donuts in Qosh an+ Qohn=s home to*n. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
T*o soft +rinks sit si+e#.y#si+e in a grocery store: A si6#pack of &oca#&ola Ca .ran+ nameD sells for G,.55/ *hile a si6#pack of ?ncle Don<s cola Cnot a .ran+ nameD sells for G1.15. !ven +efen+ers of .ran+ names *oul+ have to a+mit that a. no rational consumer *oul+ spen+ t*ice as much for &oca#&ola as he *oul+ for ?ncle Don<s cola. .. the si+e#.y#si+e presence of these t*o colas conveys no useful information to consumers. c. &oca#&ola has no incentive to maintain the 8uality of its pro+uct ;ust .ecause of the &oca#&ola .ran+ name. +. None of the a.ove is correct. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: D DIF: ) $%&: 'onopolistic competition "5.
T*o soft +rinks sit si+e#.y#si+e in a grocery store: A si6#pack of &oca#&ola Ca .ran+ nameD sells for G,.55/ *hile a si6#pack of ?ncle Don<s cola Cnot a .ran+ nameD sells for G1.15. In a typical +ay the store sells some of each type of cola/ *hich suggests that a. no rational consumer *oul+ spen+ t*ice as much for &oca#&ola as he *oul+ for ?ncle Don<s cola. .. some consumers must perceive that &oca#&ola is a higher 8uality pro+uct. c. &oca#&ola has no incentive to maintain the 8uality of its pro+uct ;ust .ecause of the &oca#&ola .ran+ name. +. None of the a.ove is correct. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: > DIF: ) $%&: 'onopolistic competition
1)1
"1.

:hich of the follo*ing statements regar+ing .ran+ names in a+vertising is not correctB a. >ran+ names provi+e consumers *ith information a.out 8uality *hen 8uality cannot .e easily ;u+ge+ in a+vance of purchase. .. >ran+ names give firms an incentive to maintain high 8uality to maintain the reputation of the firm. c. >ran+ names allo* firms to pro+uce an+ sell inferior pro+ucts in the long run since people *ill continue to purchase the .ran+#name pro+uct. +. >ran+ names can cause consumers to perceive +ifferences in pro+ucts that +o not actually e6ist. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Definitional
ANS: & DIF: 1 $%&: 'onopolistic competition ").
:hen 8uality cannot .e easily ;u+ge+ in a+vance/ *hat provi+es consumers *ith information a.out the 8uality of a pro+uctB a. a .ran+ name .. a tie#in c. the 8uantity availa.le for sale +. the amount of +ea+*eight loss !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: A DIF: 1 $%&: 'onopolistic competition ",.
:hen monopolistically competitive firms a+vertise/ in the long run a. they *ill still earn -ero economic profit. .. they can earn positive economic profit .y increasing market share. c. the market price must fall. +. the market price must rise. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: A DIF: ) $%&: 'onopolistic competition "0.
:hich of the follo*ing statements is not correctB a. The typical monopolistically competitive firm coul+ re+uce its average total cost if it pro+uce+ more output. .. 'onopolistically competitive firms a+vertise in or+er to increase the elasticity of the +eman+ curve they face. c. !6pensive a+vertising might help consumers if it is a signal that the pro+uct is goo+. +. >ran+ names ac8uire+ at great cost might help consumers .y assuring 8uality. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: > DIF: ) $%&: 'onopolistic competition "1.
:hich of the follo*ing statements is correctB a. The more similar Firm A=s pro+uct is to Firm >=s pro+uct/ the more likely Firm A is to a+vertise. .. 'onopolistically competitive firms a+vertise in or+er to increase the elasticity of the +eman+ curve they face. c. Accor+ing to the signaling theory/ the more pro+uct information an a+vertisement contains/ the more effective it is. +. >ran+ names may help consumers if they provi+e information a.out the 8uality of a pro+uct *hen ac8uiring such information is +ifficult. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: D DIF: ) $%&: 'onopolistic competition "".
:hich of the follo*ing statements is not correctB a. &ritics of a+vertising argue that firms a+vertise to manipulate consumers= tastes. .. Defen+ers of a+vertising argue that a+vertising provi+es valua.le pro+uct information to consumers. c. An in+ustry *ith many .ran+ name pro+ucts *ill .e more competitive than one *ith many generic pro+ucts. +. The *illingness of a firm to spen+ a large amount of money on a+vertising can signal the 8uality of the pro+uct. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
1))
Scenario 16-3 &onsi+er the pro.lem facing t*o firms/ Firm A an+ Firm >/ in the fast#foo+ restaurant market. !ach firm has ;ust come up *ith an i+ea for a ne* fast#foo+ menu item *hich it *oul+ sell for G0. Assume that the marginal cost for each ne* menu item is a constant G)/ an+ the only fi6e+ cost is for a+vertising. !ach company kno*s that if it spen+s G1) million on a+vertising it *ill get ) million consumers to try its ne* pro+uct. Firm A has +one market research *hich suggests that its pro+uct +oes not have any "staying" po*er in the market. !ven though it coul+ get ) million consumers to .uy the pro+uct once/ it is unlikely that they *ill continue to .uy the pro+uct in the future. Firm ><s market research suggests that its pro+uct is very goo+/ an+ consumers *ho try the pro+uct *ill continue to .e consumers over the ensuing year. %n the .asis of its market research/ Firm > estimates that its initial ) million customers *ill .uy one unit of the pro+uct each month in the coming year/ for a total of )0 million units. "2. Re$er to Scenario 16"5. If Firm A +eci+es to a+vertise its pro+uct it can e6pect to a. incur a loss of G3 million. .. incur a loss of G0 million. c. earn a profit of G0 million. +. earn a profit of G3 million. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Applicative
ANS: A DIF: , $%&: 'onopolistic competition "3.
Re$er to Scenario 16"5. If firm > +eci+es to a+vertise its pro+uct it can e6pect to a. earn a profit of G03 million per year. .. earn a profit of G," million per year. c. earn a profit of G1) million per year. +. incur a loss of G1) million per year. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Applicative
ANS: > DIF: , $%&: 'onopolistic competition "4.
Re$er to Scenario 16"5. >y its *illingness to spen+ money on a+vertising/ Firm > a. signals the 8uality of its ne* pro+uct to consumers. .. signals that it is not a profit ma6imi-er. c. is +etracting from the efficiency of markets. +. *ill +rive Firm A out of the market. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
Re$er to Scenario 16"5. %n the .asis of a theory that people .uy a pro+uct .ecause it is a+vertise+/ the content of a+vertisements for Firm ><s pro+uct a. shoul+ focus on 8uality comparisons in or+er to .e successful. .. must inclu+e cele.rity en+orsements in or+er to .e successful. c. is critical to the success of the pro+uct in the market. +. is irrelevant to the success of the a+vertisement. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: D DIF: ) $%&: 'onopolistic competition 21.
Re$er to Scenario 16"5. :hich of the follo*ing is most likelyB a. >oth Firm A an+ Firm > *ill a+vertise. .. Neither Firm A nor Firm > *ill a+vertise. c. Firm A *ill a+vertise/ .ut Firm > *ill not a+vertise. +. Firm > *ill a+vertise/ .ut Firm A *ill not a+vertise. !F: T%(: 1"#, A+vertising NAT: Analytic 'S&: Interpretive
ANS: D DIF: ) $%&: 'onopolistic competition
1),
Sec *6 " Monopolistic Competition " Concl!sion

MULT+%LE CHO+CE 1. Firms in a monopolistically competitive market a. are price takers. .. pro+uce an output level that minimi-es average total cost in the long run. c. ma6imi-e profits .y pro+ucing *here price e8uals marginal cost. +. cannot earn economic profits in the long run. !F: T%(: 1"#0 NAT: Analytic $ong#run e8uili.rium
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive ).
:hich of the follo*ing statements is correctB a. Firms in monopolistic competition an+ monopoly can earn economic profits in .oth the short run an+ the long run. .. >oth perfectly competitive an+ monopolistically competitive firms charge a price e8ual to marginal cost. c. Firms in perfect competition/ monopolistic competition/ an+ monopoly ma6imi-e profits .y pro+ucing *here marginal revenue e8uals marginal cost. +. >oth perfectly competitive an+ monopolistically competitive firms pro+uce the *elfare#ma6imi-ing level of output. !F: T%(: 1"#0 NAT: Analytic (rofit ma6imi-ation
ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Analytical ,.
:hich of the follo*ing statements is correctB a. Firms in monopolistic competition an+ monopoly can earn economic profits in .oth the short run an+ the long run. .. >oth perfectly competitive an+ monopolistically competitive firms are price takers. c. >oth a monopolistically competitive in+ustry an+ a monopoly are characteri-e+ .y a very small num.er Cor oneD firm. +. Firms can easily enter a perfectly competitive or monopolistically competitive in+ustry. !F: T%(: 1"#0 NAT: Analytic (rofit ma6imi-ation
ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Analytical 0.
:hich of the follo*ing statements is not correctB a. >oth monopolistically competitive an+ perfectly competitive firms can earn economic profits in the short run. .. >oth monopolies an+ monopolistically competitive firms can earn economic profits in the long run. c. Firms in perfect competition/ monopolistic competition/ an+ monopoly ma6imi-e profits .y pro+ucing *here marginal revenue e8uals marginal cost. +. %nly competitive firms pro+uce the *elfare#ma6imi-ing level of output. !F: T%(: 1"#0 NAT: Analytic (rofit ma6imi-ation
:hich of the follo*ing statements is not correctB a. Firms in monopolistic competition an+ monopoly can earn economic profits in the short run. .. Firms in monopolistic competition an+ perfect competition pro+uce the *elfare#ma6imi-ing level of output. c. 'onopolistically competitive firms price a.ove marginal cost/ *hereas competitive firms price at marginal cost. +. Firms *ishing to enter a monopolistically competitive market can +o so freely/ *hereas firms *ishing to enter a monopoly market *ill face .arriers. !F: T%(: 1"#0 NAT: Analytic 'onopolistic competition
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Analytical

". A market is comprise+ of many firms as oppose+ to ;ust one firm or a fe* firms a. only *hen it is perfectly competitive. .. only *hen it is perfectly competitive or oligopolistic. c. only *hen it is perfectly competitive or monopolistically competitive. +. *hen it is perfectly competitive/ monopolistically competitive/ or oligopolistic. !F: T%(: 1"#0 NAT: Analytic (erfect competition 9 'onopolistic competition
1)0
A firm is a price taker a. only *hen the market is perfectly competitive. .. only *hen the market is perfectly competitive or monopolistic. c. only *hen the market is perfectly competitive or monopolistically competitive. +. *hen the market is perfectly competitive/ monopolistically competitive/ or monopolistic. !F: T%(: 1"#0 NAT: Analytic (erfect competition 9 'onopolistic competition
A firm ma6imi-es its profit .y pro+ucing output up to the point *here marginal revenue e8uals marginal cost a. only *hen the market is a monopoly. .. only *hen the market is a monopoly or monopolistically competitive. c. only *hen the market is monopolistically competitive or perfectly competitive. +. *hen the market is perfectly competitive/ monopolistically competitive/ or monopolistic. D DIF: ) !F: 1"#0 'onopolistic competition (erfect competition 9 'onopolistic competition 9 'onopoly Interpretive NAT: Analytic
ANS: $%&: T%(: 'S&: 4.
A firm pro+uces the *elfare#ma6imi-ing level of output a. only *hen the market is perfectly competitive. .. only *hen the market is a monopoly or monopolistically competitive. c. only *hen the market is monopolistically competitive or perfectly competitive. +. *hen the market is perfectly competitive/ monopolistically competitive/ or monopolistic. A DIF: ) !F: 1"#0 'onopolistic competition (erfect competition 9 'onopolistic competition 9 'onopoly Interpretive NAT: Analytic
ANS: $%&: T%(: 'S&: 15.
A monopolistically competitive market is like a monopoly in that a. .oth market structures feature easy entry .y ne* firms in the long run. .. the main o.;ective of firms in .oth market structures is something other than profit ma6imi-ation. c. firms in .oth market structures pro+uce the *elfare#ma6imi-ing level of output. +. firms in .oth market structures set price a.ove marginal cost. !F: T%(: 1"#0 NAT: Analytic 'onopolistic competition 9 'onopoly
A monopolistically competitive market is like a competitive market in that a. .oth market structures feature easy entry .y ne* firms in the long run. .. the main o.;ective of firms in .oth market structures is something other than profit ma6imi-ation. c. firms in .oth market structures pro+uce the *elfare#ma6imi-ing level of output. +. firms in .oth market structures set price a.ove marginal cost. !F: T%(: 1"#0 NAT: Analytic 'onopolistic competition 9 'onopoly
1)1
1).

A monopolistically competitive market is like .oth a competitive market an+ a monopoly in that a. all three market structures feature easy entry .y ne* firms in the long run. .. firms in all three market structures ma6imi-e profit .y pro+ucing an output level *here marginal revenue e8uals marginal cost. c. firms in all three market structures pro+uce the *elfare#ma6imi-ing level of output. +. All of the a.ove are correct. !F: T%(: 1"#0 NAT: Analytic 'onopolistic competition 9 'onopoly
ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 1,.
A monopolistically competitive market is like .oth a competitive market an+ a monopoly in that firms in all three market structures a. can earn economic profits in the short run. .. can earn economic profits in the long run. c. charge a price a.ove marginal cost. +. All of the a.ove are correct. !F: T%(: 1"#0 NAT: Analytic 'onopolistic competition 9 'onopoly

Chapter 16

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Chapter 16 Monopolistic Competition

&hapter 1"7'onopolistic &ompetition

&hapter 1"7'onopolistic &ompetition

&hapter 1"7'onopolistic &ompetition

&hapter 1"7'onopolistic &ompetition

&hapter 1"7'onopolistic &ompetition

&hapter 1"7'onopolistic &ompetition

&hapter 1"7'onopolistic &ompetition

&hapter 1"7'onopolistic &ompetition

Sec ** " Monopolistic Competition

ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Applicative ,.

1"#5 NAT: Analytic 'onopolistic competition

ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Analytical

&hapter 1"7'onopolistic &ompetition

ANS: > DIF: 1 $%&: 'onopolistic competition 'S&: Definitional ".

1"#5 NAT: Analytic 'onopolistic competition

ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Applicative

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ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Interpretive ,.

&hapter 1"7'onopolistic &ompetition

ANS: > DIF: 1 $%&: 'onopolistic competition 'S&: Definitional 1.

ANS: D DIF: 1 $%&: 'onopolistic competition 'S&: Interpretive ".

ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Definitional 2.

ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 3.

ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Interpretive 4.

ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive

&hapter 1"7'onopolistic &ompetition

ANS: & DIF: 1 $%&: 'onopolistic competition 11.

ANS: A DIF: 1 $%&: 'onopolistic competition 1).

ANS: > DIF: ) $%&: 'onopolistic competition 1,.

ANS: A DIF: 1 $%&: 'onopolistic competition 10.

ANS: & DIF: ) $%&: 'onopolistic competition 11.

ANS: & DIF: ) $%&: 'onopolistic competition

&hapter 1"7'onopolistic &ompetition

ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Applicative 12.

ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Applicative 13.

ANS: D DIF: ) $%&: 'onopolistic competition 'S&: Interpretive 14.

ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive )5.

ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative

&hapter 1"7'onopolistic &ompetition

ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Applicative )).

ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative ),.

ANS: A DIF: ) $%&: 'onopolistic competition 'S&: Applicative )0.

ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative )1.

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ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Applicative )2.

&hapter 1"7'onopolistic &ompetition

ANS: & DIF: ) $%&: 'onopolistic competition 'S&: Applicative

ANS: > DIF: , $%&: 'onopolistic competition 'S&: Applicative ,5.

ANS: & DIF: , $%&: 'onopolistic competition 'S&: Applicative ,1.

ANS: A DIF: , $%&: 'onopolistic competition 'S&: Applicative ,).

&hapter 1"7'onopolistic &ompetition

ANS: & DIF: , $%&: 'onopolistic competition 'S&: Applicative ,,.

ANS: A DIF: , $%&: 'onopolistic competition 'S&: Applicative ,0.

ANS: A DIF: , $%&: 'onopolistic competition 'S&: Applicative ,1.

ANS: & DIF: , $%&: 'onopolistic competition 'S&: Applicative ,".

ANS: & DIF: , $%&: 'onopolistic competition 'S&: Applicative ,2.

ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive ,3.

ANS: > DIF: ) $%&: 'onopolistic competition 'S&: Interpretive

&hapter 1"7'onopolistic &ompetition

ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Applicative 05.

ANS: & DIF: 1 $%&: 'onopolistic competition 'S&: Applicative 01.

ANS: A DIF: 1 $%&: 'onopolistic competition 'S&: Applicative 0).