Chapter 11 2

0Microeconomics: Principles, Applications, & Tools, 7e (O'Sullivan) – Testbank 1
Chapter 11 Market Entry and Monopolistic Competition
11.1 Effects of Market Entry
1) When a second firm enters a monopolist's market:

A) market price will drop.
B) sales for the first firm will rise.
C) the first firm's profits will increase.
D) All of the above will occur.
Answer: A
Diff: 1
Topic: Entry Squeezes Profits from Three Sides
Skill: Conceptual
AACSB: Reflective Thinking

A) market price will rise.
B) the quantity produced by the first firm will decrease.
C) the first firm's profits increase.
Answer: B
Diff: 1
Skill: Conceptual

A) market price will rise.
B) the quantity produced by the first firm will increase.
C) the first firm's profits will decrease.
Answer: C
Diff: 1
Skill: Conceptual
4) When a second firm enters a market, the original firm's profits decline because:
A) the original firm's price decreases.
B) the original firm's ATC increases.
C) the original firm's quantity decreases.
D) All of the above are correct.
Answer: D
Diff: 2
Skill: Conceptual
1
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5) When a second firm enters a monopolist's market, the initial demand curve facing the
monopolist will:
A) shift to the left.
B) shift to the right.
C) remain the same.
D) none of the above
Answer: A
Diff: 2
Skill: Analytical
AACSB: Analytic Skills
6) When a second firm enters a monopolist's market, the monopolist's marginal revenue curve
will:
A) shift to the left as its initial demand curve shifts to the left.
B) shift to the right as its initial demand curve shifts to the right.
C) remain the same.
Answer: A
Diff: 2
Skill: Analytical
7) When a second firm enters a monopolist's market,

A) the former monopolist's average cost decreases as its output level decreases.
B) the demand curve the former monopolist faces shifts to the left.
C) the market price rises as the average cost increases.
Answer: B
Diff: 2
Skill: Conceptual

A) the former monopolist's average cost increases as its output level decreases.
B) the demand curve facing the former monopolist shifts to the right.
C) the market price rises as the average cost increases.
Answer: A
Diff: 2
Skill: Conceptual
2
A) the former monopolist's average cost decreases as its output level decreases.
B) the demand curve facing the former monopolist shifts to the right.
C) the market price falls.
Answer: C
Diff: 2
Skill: Conceptual
10) When the government eliminates artificial barriers to entry:

A) more firms will enter the market.
B) prices to consumers will likely increase.
C) competition in the market will decrease.
Answer: A
Diff: 2
Topic: Examples of Entry: Car Stereos, Trucking, and Tires
Skill: Conceptual
11) When the government eliminates artificial barriers to entry:

A) firm profits will rise.
B) prices to consumers will likely decrease.
C) competition in the market will decrease.
Answer: B
Diff: 1
Skill: Conceptual
12) Empirical studies indicate that entry:

A) increases price and profits.
B) decreases price, but increases profits.
C) decreases price and profits.
D) increases price, but decreases profits.
Answer: C
Diff: 1
Skill: Fact
3
13) Empirical studies suggest that when a large number of firms are present in a market, prices
are usually ________ and profits are usually ________ than when there are only a few firms in a
market.
A) lower; higher
B) lower; lower
C) higher; higher
D) higher; lower
Answer: B
Diff: 2
Skill: Fact
14) Studies of real world markets suggest that prices and the number of firms of comparable size
in a market are:
A) positively related.
B) negatively or inversely related.
C) not related.
D) sometimes negatively or inversely related, but usually positively related.
Answer: B
Diff: 2
Skill: Fact
15) After the U.S. government deregulated the trucking industry:

A) profits rose.
B) freight prices rose.
C) freight prices fell.
D) the number of trucking companies decreased.
Answer: C
Diff: 1
Skill: Fact
16) European nations are currently deregulating many markets. They are expecting:
A) the price of goods sold in these markets to increase.
B) the quality of goods sold in these markets to decrease.
C) the price of goods sold in these markets to decrease.
D) the profits of firms selling in these markets to increase.
Answer: C
Diff: 1
Skill: Conceptual
4
17) The Motor Carrier Act of 1980 removed the government's restriction on:
A) entry into the trucking industry.
B) the size of trucks used to transport goods and services.
C) entry into the industry that produces delivery trucks.
D) entry into parcel delivery.
Answer: A
Diff: 1
Skill: Fact
18) The Motor Carrier Act of 1980 resulted in:

A) lower freight prices.
B) more firms entering the trucking industry.
C) lower value of a trucking license.
Answer: D
Diff: 1
Skill: Fact
19) When the Motor Carrier Act of 1980 was made into law, new firms entered into the trucking
industry. This action by new trucking firms confirm that:
A) the trucking industry was earning profits in the long run prior to the entry of the new firms.
B) the trucking industry was earning losses in the long run prior to the entry of the new firms.
C) the trucking industry was earning profits as a result of the entry of the new firms.
D) the trucking industry was earning losses before and after the entry of the new firms.
Answer: A
Diff: 2
Skill: Conceptual
Recall the Application about the price competition between name brands and store brands
to answer the following question(s).
20) Recall the Application. In stores that introduce store brands at a lower price, usually the price
of the name brand:
A) fell below that of the store brand substitute.
B) fell, but stayed above the price of the store brand.
C) rose.
D) was unaffected.
Answer: B
Diff: 1
Topic: Application 1, Name Brands versus Store Bands
Skill: Fact
5
21) Recall the Application. The introduction of store brands is a form of:
A) price gouging.
B) profiteering.
C) market entry.
D) all of the above.
Answer: C
Diff: 2
Skill: Conceptual
22) Recall the Application. Which of the following is/ are examples of goods with name brands
and store brands?
A) light bulbs
B) aspirin
C) disposable diapers
Answer: D
Diff: 2
Skill: Conceptual
23) Recall the Application. Which of the following NOT an example of a good that has both
name brands and store brands?
A) light bulbs
B) aspirin
C) disposable diapers
D) automobiles
Answer: D
Diff: 2
Skill: Conceptual
6
Additional Application
For many years North Carolina-based Krispy Kreme Doughnuts have been the choice of many
Southerners. But now rival Dunkin' Donuts is working on changing the way Southerners expect a
doughnut to taste. The Northeastern-based Dunkin' Donuts has plans to become a national brand
in the next 15 years by tripling the number of stores in the USA. The difference is in the
doughnut itself. Krispy Kreme offers a glazed, hot, lighter doughnut while the product of
Dunkin' Donuts can be described as “thicker and cakier.” Do consumers notice the difference?
Rosemary Evans from Alabama states, “Dunkin' Donuts just don't have much flavor.” And Jack
Lehnhart from Ohio says Krispy Kremes are “wax doughnuts.” As the size of the industry grows
the efforts to differentiate each product remain strong. Dunkin' Donuts focuses on coffee and
baked goods as important components in its long term business plan. When discussing the two
companies and their approaches to success, the brand officer at Dunkin' Donuts succinctly said,
“We're very different.” Just take note of the different ways they spell the product they produce!
Source: Beth Rucker, “Dunkin' Donuts Raids Krispy Kreme's Turf,” October 22, 2006,
http://hosted.ap.org/dynamic/stories/D/DONUT_WARS, accessed10/30/2006.
24) What market structure best describes the doughnut industry discussed in the article above?
A) monopolistic competition
B) monopoly
C) governmental
D) perfect competition
Answer: A
Diff: 1
Topic: Additional Application
Skill: Conceptual
25) Why would Dunkin' Donuts want to keep their product different from Krispy Kreme?
A) They do not want Southerners confusing the two doughnuts.
B) They want to maintain a specific brand identity.
C) They do not have the level of technology to produce a Krispy Kreme-like doughnut.
D) They do not want customers to accuse them of stealing trade secrets.
Answer: B
Diff: 2
Skill: Conceptual
7
26) As more Dunkin' Donuts outlets open in the areas where Krispy Kreme has been dominant,
market prices will ________ and profits will ________.
A) increase, increase
B) increase, decrease
C) decrease, increase
D) decrease, decrease
Answer: D
Diff: 2
Skill: Conceptual
27) The entry of an additional firm into a market decreases the profit per unit of output because
entry decreases the price.
Answer: TRUE
Diff: 1
Skill: Conceptual
28) The entry of an additional firm into a market shifts the demand curve for the original firm to
the left.
Answer: TRUE
Diff: 2
Skill: Conceptual
29) Entry leads to higher prices and profits in an industry.

Answer: FALSE
Diff: 1
Skill: Conceptual
30) Entry leads reduces firm profits because it leads to a lower price.
Answer: TRUE
Diff: 1
Skill: Conceptual
31) Entry of a second firm will result in a downward shift in the ATC curve.
Answer: FALSE
Diff: 2
Skill: Conceptual
8
32) Empirical studies show that entry into markets increases both price and quantity of goods
supplied.
Answer: FALSE
Diff: 1
Skill: Conceptual
33) Why does entry into markets decrease firm profits?

Answer: Three reasons: 1) the market price drops; 2) the quantity produced by each firm
decreases; and 3) entry may cause average cost per unit increases.
Diff: 2
Skill: Conceptual
34) What are the effects on a market when there is entry?

Answer: Market price usually falls, economic profit is reduced and if there is a license required
to entry the business its value usually falls.
Diff: 2
Skill: Conceptual
35) What entices a second firm to enter a market that was previously a single price monopoly?
Answer: A firm will enter a market when the incumbent monopolist is earning positive profits in
the short run and in the long run. This occurs when the price that the firm charges is higher than
the ATC at the profit maximizing quantity.
Diff: 2
Skill: Conceptual
36) Why does the government work to eliminate artificial barriers to entry?
Answer: Because if there are economic profits being earned in the industry eliminating artificial
barriers to entry will encourage more firms to enter the industry. The increase in competition is
expected to decrease price to consumers and improve service.
Diff: 2
Skill: Conceptual
9
11.2 Monopolistic Competition
1) Which of the following is NOT a characteristic of a monopolistically competitive market?

A) Firms hold patents on their products.
B) The products that firms sell are slightly different.
C) Firms have some control over price.
D) There are no artificial barriers to entry.
Answer: A
Diff: 1
Topic: Monopolistic Competition
Skill: Conceptual

A) There are many firms.
B) Firms sell products that are similar but not identical.
C) Firms must take the market price as given.
Answer: C
Diff: 1
Skill: Conceptual

A) There is only one firm selling a product.
B) There are many firms selling products that are similar but not identical.
C) There are many firms that have some control over price.
Answer: A
Diff: 1
Skill: Conceptual

A) There are many firms.
B) Firms sell differentiated products.
C) Firms have control over price.
D) There are substantial barriers to entry.
Answer: D
Diff: 1
Skill: Conceptual
10
5) A market in which there are many firms each selling differentiated products is most likely a
________ market.
A) perfectly competitive
B) monopoly
C) monopolistically competitive
D) natural monopoly
Answer: C
Diff: 1
Skill: Definition
6) Which of the following is the reason why pharmaceutical firms are NOT monopolistically
competitive?
A) Pharmaceutical firms sell differentiated products
B) There are many buyers in the market.
C) There are many sellers in the market.
D) There are barriers to entry in the market, like patents.
Answer: D
Diff: 2
Skill: Conceptual
7) Which of the following is an example of a monopolistically competitive firm?

A) Farmer Smith's corn farm
B) Tino's Italian eatery, a local restaurant
C) TCI Cablevision, a supplier of cable television services
D) Northwest Electricity, a supplier of electricity in the Northwest U.S.
Answer: B
Diff: 2
Skill: Conceptual
8) Which of the following is a characteristic of a monopolistically competitive market?

I. There are many sellers.
II. Firms sell slightly differentiated products.
III. Each firm faces a downward-sloping demand curve.
A) I only
B) I and II only
C) II and III only
D) I, II, and III
Answer: D
Diff: 2
Skill: Conceptual
11
I. Each firm is a price-taker.
III. Each firm faces a downward-sloping demand curve.
A) I only
B) I and II only
C) II and III only
D) I, II, and III
Answer: C
Diff: 2
Skill: Conceptual

I. There are many sellers.
III. The demand curve facing each individual firm is horizontal.
A) I and II only
B) I and III only
C) II and III only
D) I, II, and III
Answer: A
Diff: 2
Skill: Conceptual
11) Which of the following is NOT an example of a monopolistically competitive firm?

A) Farmer Jones's wheat farm
B) the Post Cereal Company
C) Procter and Gamble, a large consumer products corporation
D) T.J.'s Clothes, a local retail clothing store
Answer: A
Diff: 2
Skill: Conceptual
12
12) Monopolistically competitive firms do NOT differentiate their products by:
A) changing the products' physical characteristics.
B) selling products at different locations.
C) offering different levels of service that come with a product.
D) charging different prices to different groups of consumers.
Answer: D
Diff: 1
Skill: Conceptual
13) Monopolistically competitive firms differentiate their products by:

A) selling products with slightly different physical characteristics.
B) selling products at different locations.
C) creating a special aura or image for the product with advertising.
D) all of the above
Answer: D
Diff: 1
Skill: Conceptual
14) Monopolistically competitive firms do NOT differentiate their products by:

A) selling products at different locations.
B) selling a product with different levels of services accompanying the product.
C) convincing consumers that the product is identical to those sold by competitors.
D) using advertising to create a special aura or image for the product.
Answer: C
Diff: 1
Skill: Conceptual
15) In Eugene, Oregon, there are several Italian restaurants, each offering slightly different items
prepared in slightly different ways. It is likely that an Italian restaurant in Eugene, Oregon,
operates in a:
A) perfectly competitive market.
B) monopolistically competitive market.
C) monopoly market.
D) oligopoly market.
Answer: B
Diff: 1
Skill: Conceptual
13
16) In Washington, D.C., there are many coffee shops, each offering nearly identical coffee but
each shop located in a different place around the city. It is likely a coffee shop in Washington,
D.C., operates in a:
C) monopoly market.
Answer: B
Diff: 1
Skill: Conceptual
17) In Sioux Falls, South Dakota, there are many pizza restaurants, each offering similar types of
pizza but each restaurant located in a different place around the city. It is likely a pizza restaurant
in Sioux Falls, South Dakota, operates in a:
C) monopoly market.
Answer: B
Diff: 1
Skill: Conceptual
18) Nike has used Michael Jordan to create the impression that Air Jordan basketball shoes are
superior to any other basketball shoe. Nike is attempting to:
A) differentiate Air Jordan basketball shoes from other types of basketball shoe.
B) lower the marginal cost of producing Air Jordan basketball shoes.
C) sell fewer Air Jordan basketball shoes so they can raise the price.
D) convince consumers that Air Jordan basketball shoes are identical to other basketball shoes.
Answer: A
Diff: 1
Skill: Conceptual
14
19) Pepsi uses advertising to create the impression that Pepsi is superior to any other soft drink.
Pepsi is attempting to:
A) differentiate Pepsi from other types of soft drinks.
B) lower the marginal cost of producing for Pepsi.
C) sell less Pepsi so they can raise the price of Pepsi.
D) convince consumers that Pepsi is identical to other soft drinks.
Answer: A
Diff: 1
Skill: Conceptual
20) When a credit card company offers different services with its card, like travel insurance for
air travel tickets purchased with the credit card or product insurance for items purchased with the
card, the credit card company is trying to:
A) create a barrier to entry for competing firms.
B) create a perfectly competitive market in which to sell its credit card.
C) differentiate its credit card from those offered by other companies.
D) shift the demand curve for competing firms to the right.
Answer: C
Diff: 1
Skill: Conceptual
21) In the mid 1990s, Coke introduced a new soda in the soft drink market. Coke then used a
new advertising campaign to associate the new soda with youth and strength. Coke was trying to:
A) shift the demand curve for competing soft drinks to the left.
B) create a perfectly competitive market for soft drinks.
C) maximize its per unit costs through advertising.
D) lower the market price of soft drinks.
Answer: A
Diff: 2
Skill: Conceptual
22) A monopolistically competitive market is one in which:

A) only one firm sells a product.
B) all firms sell an identical product.
C) many firms sell similar yet slightly different products.
D) firms have no control over the price they charge for their product.
Answer: C
Diff: 1
Skill: Definition
15
23) The word "monopolistic" in the label "monopolistic competition" refers to the fact that:
A) there is only one firm producing in the market.
B) firms have no control over the price they charge.
C) each firm produces a slightly different version of the product.
Answer: C
Diff: 1
Skill: Conceptual
24) The word "competition" in the label "monopolistic competition" refers to the fact that:
A) there are very few firms producing in the market.
B) firms have no control over the price they charge.
C) firms vie against each other to get customers to buy their version of the product.
Answer: C
Diff: 1
Skill: Conceptual
25) In a monopolistically competitive market, there:

A) are many firms selling an identical product.
B) is only one firm that sells many similar yet slightly different products.
C) are many firms that have slight control over the price they charge for their product.
D) are substantial barriers to entry.
Answer: C
Diff: 1
Skill: Conceptual
26) For a monopolistically competitive firm, the firm's demand curve is:
A) downward sloping.
B) horizontal.
C) upward sloping.
Answer: A
Diff: 1
Skill: Conceptual
16
I. Firms sell differentiated products.
II. Each firm's product is a close substitute for other firms' products.
III. Firms freely enter and exit the market.
A) I only
B) I and III only
C) II and III only
D) I, II, and III
Answer: D
Diff: 2
Skill: Conceptual

II. Each firm earns a positive economic profit in the long-run.
III. Firms freely enter and exit the market.
A) II only
B) I and II only
C) I and III only
D) I, II, and III
Answer: C
Diff: 2
Skill: Conceptual

II. Each firm is earning a zero economic profit in the long-run.
III. Potential entrants face artificial barriers to entry.
A) I only
B) I and II only
C) II and III only
D) I, II, and III
Answer: B
Diff: 2
Skill: Conceptual
17
30) Suppose you operate in a monopolistically competitive market. If you sell your good at a
price of $10 and your average cost of production is $8:
A) your market is in long-run equilibrium.
B) we can expect firms to enter your market and sell a similar good in the long run.
C) there will be no incentive for competing firms to enter your market in the long-run.
D) you cannot be in short-run equilibrium.
Answer: B
Diff: 2
Topic: When Entry Stops: Long-Run Equilibrium
Skill: Analytical
31) Suppose you operate in a monopolistically competitive market. If you sell your good at a
price of $20 and your average cost of production is $15:
A) your market may be in long-run equilibrium.
B) you cannot be in short-run equilibrium.
C) you should expect competing firms to enter your market and shift the demand curve for your
good to the left.
D) you should expect competing firms to enter your market and shift the demand curve for your
good to the right.
Answer: C
Diff: 2
Skill: Analytical
32) Under the conditions of monopolistic competition:

A) firm profits are higher in the long run than in the short run.
B) average costs of production are the same in the short run as they are in the long run.
C) economic profit is zero in the long run.
D) price equals marginal cost.
Answer: C
Diff: 1
Skill: Conceptual
33) If short-run economic profits are greater than zero for firms in a monopolistically
competitive market, in the long run we expect:
A) entry barriers to prevent competing firms from entering this market.
B) the demand curve for firms in the market to shift to the right.
C) competing firms to enter the market and sell similar products.
D) profits to increase.
Answer: C
Diff: 2
Skill: Conceptual
18
34) If short-run economic profits are greater than zero for firms in a monopolistically
competitive market, in the long run we expect:
A) entry barriers to prevent competing firms from entering this market.
B) the demand curve for firms in the market to shift to the right.
C) the average cost of production to decrease.
D) the average cost of production to increase.
Answer: D
Diff: 2
Skill: Conceptual
35) Suppose in the city of Smugsburg, DVD rental stores operate in a monopolistically
competitive market. If the price of DVD rentals in Smugsburg is currently equal to $5 per tape
and the average cost of renting videos is $1 per DVD, in the long run we expect the price of
renting DVDs to:
A) increase.
B) stay the same.
C) decrease, and the average cost of producing DVD rentals to increase.
D) decrease, and the average cost of producing DVD rentals to decrease.
Answer: C
Diff: 2
Skill: Analytical
36) Suppose in the city of Blacksburg, music stores operate in a monopolistically competitive
market. If the price of CDs in Blacksburg is currently equal to $20 per CD and the average cost
of CDs is $15, in the long run we expect the price of CDs to:
A) increase.
B) stay the same.
C) decrease, and the average cost of selling CDs to increase.
D) decrease, and the average cost of selling CDs to decrease.
Answer: C
Diff: 2
Skill: Analytical
19
37) If firms in a monopolistically competitive market are earning economic profits greater than
zero in the short run, then in the long run:
A) firms will exit this market.
B) profits will increase.
C) profits will decrease.
D) demand will not change.
Answer: C
Diff: 2
Skill: Conceptual
38) If a firm is operating in a monopolistically competitive market, then in the long-run:

A) the firm will earn a zero economic profit.
B) the firm will maximize its profit by producing the output level at which the average cost is
minimized.
C) the firm will maximize its profit by producing the output level at which the marginal revenue
is minimized.
D) all of the above
Answer: A
Diff: 2
Skill: Conceptual
39) Suppose that a monopolistically competitive market is in its long-run equilibrium. If the
market demand curve shifts to the right due to changes in consumer preferences,
A) the number of firms in the market will increase in the short-run.
B) firms will earn positive economic profits in the short-run.
C) firms' average costs of production will increase as they increase output levels in the short-run.
Answer: B
Diff: 2
Skill: Conceptual
40) Suppose that a monopolistically competitive market is in its long-run equilibrium. If the
market demand curve shifts to the left due to a recession,
A) the number of firms in the market decreases in the short-run.
B) some firms may earn negative profits in the short-run.
C) firms' average costs of production decreases as they decrease output levels in the short-run.
Answer: B
Diff: 2
Skill: Conceptual
20
41) Under the conditions of monopolistic competition:
A) prices are always lower in the long run than in the short run.
B) firm profits are always higher in the long run than in the short run.
C) average costs of production are always higher in the short run than in the long run.
D) None of the above is correct.
Answer: D
Diff: 2
Skill: Conceptual
42) Under the conditions of monopolistic competition, if a firm is earning economic profits in the
short run:
A) prices are higher in the long run than in the short run.
B) firm profits are higher in the long run than in the short run.
C) average costs of production are higher in the long run than in the short run.
D) long-run economic profits are positive.
Answer: C
Diff: 2
Skill: Conceptual
43) Suppose coffee is sold in a monopolistically competitive market, where coffee is

differentiated by coffee shop location. As firms enter in the long run and the price of coffee falls:
A) the market quantity of coffee demanded will increase, but the quantity of coffee supplied by
any individual coffee shop declines.
B) the market quantity of coffee demanded will decrease as does the quantity supplied from any
individual coffee shop.
C) the average costs of production decline.
D) the profits of individual coffee shops increase.
Answer: A
Diff: 2
Skill: Conceptual
21
44) As firms enter a monopolistically competitive market in the long run:
A) price increases, the market quantity demanded increases, and the quantity supplied by an
individual firm increases.
B) price decreases, the market quantity demanded increases, and the quantity supplied by an
individual firm decreases.
C) price decreases, but firm profits increase as average costs decrease.
D) price increases and firm profits increase.
Answer: B
Diff: 2
Skill: Analytical
45) In a monopolistically competitive market, if price is greater than average cost:

A) firms will enter.
B) firms will exit.
C) there will be no change in the number of firms.
D) the market is in long-run equilibrium.
Answer: A
Diff: 2
Skill: Conceptual
46) If price is less than average cost in a monopolistically competitive market:

A) there is an incentive for firms to exit the market.
B) there is profit incentive for firms to enter the market.
C) the market must be in long-run equilibrium.
D) there is no incentive for the number of firms in the market to change.
Answer: A
Diff: 2
Skill: Conceptual
47) If profits in a monopolistically competitive market are positive, we can conclude that:
A) price is equal to average cost.
B) price is greater than average cost
C) the market is in long-run equilibrium.
D) price is less than average cost.
Answer: B
Diff: 2
Skill: Conceptual
22
48) Suppose Wave detergent is sold in a monopolistically competitive market. If the price of
Wave detergent is currently $6, and the average cost of producing Wave is $4, in the long run we
can expect:
A) firms to enter the detergent market and sell products similar to Wave, shifting the demand
curve for Wave to the left.
B) firms to enter the detergent market and sell product similar to Wave, shifting the demand
curve for Wave to the right.
C) the producers of Wave to go out of business.
D) the producers of Wave to earn economic profits greater than zero.
Answer: A
Diff: 2
Skill: Analytical
49) Suppose Toor's beer is sold in a monopolistically competitive market. If the price of Toor's is
currently $2 and the average cost of producing Toor's is $1, in the long run we can expect:
A) the demand for Toor's beer to increase.
B) the price of Toor's beer to decrease, and the average cost of producing Toor's to increase.
C) the demand curve for Toor's beer to become horizontal.
D) no change in the price or average cost of producing Toor's beer.
Answer: B
Diff: 2
Skill: Analytical
50) Suppose Toor's beer is sold in a monopolistically competitive market. In the long run we
expect the price of Toor's beer to:
A) equal the average cost of production of Toors beer.
B) exceed the average cost of production of Toors beer.
C) equal the marginal cost of production for Toors beer.
D) equal the minimum possible average cost of producing Toors beer.
Answer: A
Diff: 2
Skill: Conceptual
23
Figure 11.1
51) Figure 11.1 depicts demand and costs for a monopolistically competitive firm. At the profit
maximizing output level,
A) this firm is earning economic profits equal to zero.
B) this firm is earning economic profits equal to Q1(P1 - AC1).
C) this firm is earning economic profits equal to P1(Q1 - AC1).
D) this firm is in long-run equilibrium.
Answer: B
Diff: 2
Topic: When Entry Stops: Long-Run Equilibrium, graphing
Skill: Analytical
52) If Figure 11.1 depicts the current situation for a monopolistically competitive firm, then in
the long run we expect:
A) the firm's demand curve to shift to the left.
B) the firm's demand curve to shift to the right.
C) the price of the good to increase.
D) the quantity of the good sold by the firm to increase.
Answer: A
Diff: 2
Skill: Analytical
24
A) the firm to charge a price higher than P1.
B) the firm to produce and sell more than Q1.
C) the average costs of production to decrease below AC1.
D) the firm to charge a price lower than P1.
Answer: D
Diff: 2
Skill: Analytical
A) the firm to charge a price higher than P1.
B) the firm to produce and sell more than Q1.
C) the firm's average cost of production to rise above AC1.
D) the firm to earn higher economic profits.
Answer: C
Diff: 2
Skill: Analytical
55) Profits for the monopolistically competitive firm depicted in Figure 11.1:
A) will increase in the long run.
B) will not change in the long run.
C) will decrease in the long run.
D) are impossible to predict in the long run.
Answer: C
Diff: 2
Skill: Analytical
25
Figure 11.2
56) Figure 11.2 shows demand and costs for a monopolistically competitive firm. At the profit
maximizing output level, the firm's profit is:
A) $1,200.
B) $1,050.
C) $750.
D) $375.
Answer: B
Diff: 2
Skill: Analytical
57) Figure 11.2 shows demand and costs for a monopolistically competitive firm. In the long-run
we expect:
A) more firms to enter the market.
B) the firm's demand curve to shift to the right.
C) the price of the good to increase.
D) the average cost of production to decrease.
Answer: A
Diff: 2
Skill: Analytical
26
58) Figure 11.2 shows demand and costs for a monopolistically competitive firm. At the profit
A) the firm is earning a positive economic profit and more firms are expected to enter the
market.
B) the firm is earning a zero economic profit and no firms are expected to enter the market.
C) the firm is earning a negative economic profit and more firms are expected to leave the
market.
D) There is not sufficient information.
Answer: A
Diff: 2
Skill: Analytical
we expect:
A) the firm to produce more output at a higher price.
B) the firm to charge a price which is equal to its average cost of production.
C) the firm to experience a decrease in the average cost of production.
D) the firm to earn a greater profit.
Answer: B
Diff: 2
Skill: Analytical
we expect:
A) the firm's demand curve to shift to the right.
B) the firm's marginal revenue curve to shift to the left.
C) the firm's average cost curve to shift upward.
D) the firm's marginal cost curve to shift downward.
Answer: B
Diff: 2
Skill: Analytical
27
Figure 11.3
61) Figure 11.3 shows demands and costs for a monopolistically competitive firm. When the
firm's demand curve shifts from D1 to D2 and to D3,
A) the demand for the firm's product is decreasing.
B) the firm's average cost of production is increasing.
C) the firm's marginal revenue curve also shifts to the left.
D) all of the above
Answer: D
Diff: 2
Skill: Analytical
firm's demand curve shifts from D1 to D2 and to D3,
A) the firm's economic profit remains the same.
B) the firm's marginal revenue at the profit maximizing output level is decreasing.
C) the firm's marginal cost at the profit maximizing output level is increasing.
D) the firm's average cost at the profit maximizing output level is decreasing.
Answer: C
Diff: 3
Skill: Analytical
28
firm's demand curve shifts from D1 to D2 and to D3, in the long-run we would expect:
A) the firm to earn a zero economic profit.
B) the firm to charge a price equal to its marginal cost.
C) the firm to increase its output level.
D) the firm to produce at the lowest average cost.
Answer: A
Diff: 2
Skill: Analytical
Figure 11.4
64) Figure 11.4 depicts demand and costs for a monopolistically competitive firm. At the profit
A) the firm is making a positive economic profit.
B) the firm is earning a zero economic profit.
C) the firm is earning a negative economic profit.
Answer: A
Diff: 2
Skill: Analytical
29
65) Figure 11.4 depicts demand and costs for a monopolistically competitive firm. In the long-
run we expect:
A) more firms to enter the market.
B) the firm's demand curve to shift to the left.
C) the firm's average cost of production to increase.
D) all of the above
Answer: D
Diff: 2
Skill: Analytical
66) Figure 11.4 depicts demand and costs for a monopolistically competitive firm. If the firm's
demand curve shifts to the left as more firms enter the market,
A) the firm's average cost will be higher at the new profit maximizing output level.
B) the firm's average cost will be lower at the new profit maximizing output level.
C) the firm's average cost will remain the same at the new profit maximizing output level.
Answer: A
Diff: 2
Skill: Analytical
A) the firm's average cost will be lower at the new profit maximizing output level.
B) the firm's marginal cost will be higher at the new profit maximizing output level.
C) the firm's marginal revenue will remain the same at the mew profit maximizing output level.
D) the firm's marginal cost will remain the same at the new profit maximizing output level.
Answer: D
Diff: 3
Skill: Analytical
A) the firm's profit will be smaller at the new profit maximizing output level.
B) the firm's profit will be greater at the new profit maximizing output level.
C) the firm's profit will remain the same at the new profit maximizing output level.
Answer: A
Diff: 2
Skill: Analytical
30
Figure 11.5
69) The monopolistically competitive firm in Figure 11.5 will produce where:
A) MC= MR.
B) MC=D.
C) MR= D.
D) all of the above
Answer: A
Diff: 2
Skill: Analytical
70) Where the monopolistically competitive firm in Figure 11.5 produces it will:
A) make a positive economic profit.
B) suffer a loss.
C) make a zero economic profit.
D) make a negative economic profit.
Answer: C
Diff: 2
Skill: Analytical
31
71) The monopolistic competitive industry in Figure 11.5 will tend to:
A) contract.
B) remain the same size.
C) expand.
D) go out of business.
Answer: B
Diff: 2
Skill: Analytical
72) Examples of monopolistically competitive industries in which firms differentiate their

products by offering them at more locations include all of the following EXCEPT:
A) restaurants.
B) video rental stores.
C) retail clothing stores.
D) wheat farms.
Answer: D
Diff: 1
Topic: Differentiation by Location
Skill: Conceptual
73) Restaurants, video rental stores, clothing stores, and music stores are examples of industries
in which firms differentiate their products by offering them at more locations. This is an example
of a ________ market.
A) perfectly competitive
B) monopoly
C) monopolistically competitive
D) oligopoly
Answer: C
Diff: 1
Skill: Conceptual
74) Gasoline stations carrying the same fuel brand (e.g., Chevron) are able to charge different
prices in San Francisco because:
A) location is a source for product differentiation.
B) gasoline stations are perfect price discriminators.
C) gasoline station operators for a cartel to act as a monopoly.
D) fuel quality varies across stores.
Answer: A
Diff: 1
Skill: Conceptual
32
Recall the Application about the costs involved in opening a Dunkin' Donuts shop to
answer the following question(s).
75) Recall the Application. Which of the following prevents Dunkin' Donut from being classified
as a monopoly?
A) There are many sellers of donuts other than Dunkin' Donuts.
B) There are no patents or regulations that prevent entry. All an entrepreneur needs is to pay the
franchise fee and the royalties.
C) Donuts are differentiated products that have many close substitutes.
D) All of the above prevent Dunkin' Donuts from being classified as a monopoly.
Answer: D
Diff: 2
Topic: Application 2, Opening a Dunkin' Donuts Shop
Skill: Conceptual
76) Recall the Application. The $40,000 franchise fee is a:

A) fixed cost.
B) variable cost from the point of view of the franchise.
C) part of the franchise's short run profit.
D) part of the franchise's total revenue.
Answer: A
Diff: 2
Skill: Conceptual
77) Recall the Application. If you spend the money to become a Dunkin' Donuts franchise and it
is in a monopolistically competitive market, you would expect in the long-run to earn zero
economic profits because:
A) barriers to entering the donut business are small.
B) you must compete against other donut shops, bakeries, coffee shops and grocery stores.
C) franchise fees make sellers of brand names have higher costs than other sellers.
D) all of the above
Answer: D
Diff: 2
Skill: Conceptual
33
78) Recall the Application. If you spend the money to become a Dunkin' Donuts franchise and it
is in a monopolistically competitive market, you would expect in the long-run to:
A) earn positive economic profits.
B) earn zero economic profits.
C) suffer losses because people are eating healthier.
D) earn monopoly profits.
Answer: B
Diff: 2
Skill: Conceptual
79) A market is called monopolistically competitive if each firm has the same product but
consumers can choose to purchase the product from any firm.
Answer: FALSE
Diff: 1
Skill: Conceptual
80) Monopolistically competitive firms sell differentiated products.

Answer: TRUE
Diff: 1
Skill: Conceptual
81) In the long run, monopolistically competitive firms become perfectly competitive firms.
Answer: FALSE
Diff: 2
Skill: Conceptual
82) Monopolistically competitive industries have only a single firm and there is a barrier to entry.
Answer: FALSE
Diff: 1
Skill: Conceptual
34
83) Some firms in monopolistically competitive markets differentiate their products by their
physical characteristics.
Answer: TRUE
Diff: 1
Skill: Conceptual
84) The market for laundry detergent is monopolistically competitive because products differ by
physical characteristics such as scent, stain fighting ingredients, etc.
Answer: TRUE
Diff: 1
Skill: Conceptual
85) Department stores are monopolistically competitive because stores differ in the amount of
customer service they provide.
Answer: TRUE
Diff: 1
Skill: Conceptual
86) An example of a monopolistically competitive industry is cable television service.

Answer: FALSE
Diff: 1
Skill: Conceptual
87) An example of a monopolistically competitive industry is grocery stores.

Answer: TRUE
Diff: 1
Skill: Conceptual
88) The price that a monopolistically competitive firm will charge depends on what its
competitors charge.
Answer: FALSE
Diff: 1
Skill: Conceptual
35
89) In monopolistically competitive industries, firms find it easy to enter and exit the market in
the long run.
Answer: TRUE
Diff: 1
Skill: Conceptual
90) In the short run, monopolistically competitive firms find their profit-maximizing quantity by
setting price equal to marginal cost.
Answer: FALSE
Diff: 1
Skill: Conceptual
91) In the long run, monopolistically competitive firms earn zero economic profits.
Answer: TRUE
Diff: 1
Skill: Conceptual
92) Some monopolistically competitive firms differentiate their products simply by opening a
new store at a different location.
Answer: TRUE
Diff: 1
Skill: Conceptual
93) Describe some of the ways in which firms differentiate their products.
Answer: Firms might differentiate their products on the basis of physical characteristics,
location, services, or image, among other things.
Diff: 2
Skill: Conceptual
94) Give five examples of industries that are monopolistically competitive.

Answer: Answers can vary. Sample answers include: toys, clothing, cleaning products,
restaurants, haircuts, coffee shops, gasoline stations,etc.
Diff: 2
Skill: Conceptual
36
95) What is "monopolistic" about monopolistic competition?
Answer: Firms sell goods that are close substitutes for each other, but an individual firm's
product is unique. Since each version of the product is only sold by one firm, that firm is a
monopolist in selling its version of product.
Diff: 2
Skill: Conceptual
96) What is "competitive" about a monopolistically competitive market?

Answer: A monopolistically competitive market has many sellers and buyers and each
monopolistically competitive firm can freely enter or exit the market, which in the long-run leads
to a zero economic profit for all existing firms in the market.
Diff: 2
Skill: Conceptual
97) If you were thinking of entering the ice cream business, would you make a product that is
just like one that is already being produced? Explain.
Answer: Yes. If there is a new type of ice cream that is currently earning positive economic
profits then you might. Further, even if the ice cream you produce isn't differentiated, the
location of your store or the level of your service could differentiate your product.
Diff: 2
Skill: Conceptual
98) The market for chicken used to be perfectly competitive. Then producers like Frank Perdue
started marketing chicken under their name. What did they gain by doing this?
Answer: These producers convinced consumers that their chicken was different from and better
than all other chicken. This allows the company to charge higher prices for its chicken than
"generic" chicken manufacturers. Since this was a successful strategy, other chicken producers
now advertise their products.
Diff: 2
Skill: Conceptual
37
99) Suppose that A Cleaner World invents a new type of laundry detergent that has an ingredient
that stops stains from setting into clothes. If the laundry detergent market is monopolistically
competitive, explain what will happen to the price of its product in the short run. What will
happen in the long run?
Answer: In the short run consumers will buy its detergent because it is perceived to be better
than other detergents and A Cleaner World will earn positive economic profits. In the long run
other detergents will put the stain-stopping ingredient into their detergent. This will shift A
Cleaner World's demand curve to the left, decrease the quantity they sell, and decrease the price
they can charge until economic profits will become zero.
Diff: 2
Skill: Conceptual
38
Figure 11.6
100) Figure 11.6 depicts a monopolistically competitive firm in the long run. Illustrate on the
graph the firm's price and output level in long-run equilibrium. Explain.
Answer:
As illustrated on the graph, the firm picks the quantity at which its marginal revenue equals its
marginal cost, shown as Q (this is the level of output at which the MR and LRMC curves
intersect). It will charge price P for that level of output; P is the price associated with Q on the
demand curve facing the firm.
Diff: 2
Skill: Analytical
39
101) Referring to Figure 11.6, how much economic profit does the monopolistically competitive
firm earn in long-run equilibrium?
Answer:
As illustrated on the graph, the firm earns zero economic profit in long-run equilibrium. At the
quantity Q the price P is just equal to long-run average cost. The firm earns just enough to stay in
business.
Diff: 2
Skill: Analytical
102) Can a monopolistically competitive firm producing a good with lots of very close
substitutes earn large positive profits in the long run?
Answer: No. Because monopolistically competitive firms are in industries that have no
significant barriers to entry, then the presence of large profits in the short run will entice other
firms to enter into the market. This will cause the price of the good to decrease, and the profits
earned by the firms in the industry to be wiped out.
Diff: 2
Skill: Conceptual
11.3 Tradeoffs with Entry and Monopolistic Competition
1) A benefit to consumers of monopolistically competitive markets is that:

A) consumers only have to choose from one product.
B) consumers have a variety of products from which to choose.
C) goods are sold at the lowest possible average cost of production.
D) price is equal to marginal cost in equilibrium.
Answer: B
Diff: 1
Topic: Average Cost and Variety
Skill: Conceptual
40
2) Consumers benefit from monopolistically competitive markets because:
A) they only have one good from which to choose.
B) in this type of market, producers supply goods in a variety of locations or with a variety of
characteristics.
C) in this type of market, goods are sold at a price equal to the marginal cost of production.
D) goods are sold at a price equal to marginal revenue.
Answer: B
Diff: 1
Skill: Conceptual
3) The "good news" for consumers from monopolistic competition is ________ but the "bad
news" for producers is that ________.
A) lower prices than monopoly; there are higher production costs
B) lower prices than monopoly; there are higher travel costs
C) lower prices than monopoly; there is less product variety
D) greater product variety; product prices are higher
Answer: A
Diff: 2
Skill: Conceptual
4) As compared to a perfectly competitive firm, a monopolistically competitive firm will:

A) have more control over price.
B) have less control over price.
C) face more barriers to entry.
D) face many more competitors.
Answer: A
Diff: 2
Topic: Monopolistic Competition versus Perfect Competition
Skill: Conceptual
5) As compared to a perfectly competitive firm, a monopolistically competitive firm will:

A) have less control over price.
B) face more barriers to entry.
C) face more competitors.
D) sell a more differentiated product.
Answer: D
Diff: 2
Skill: Conceptual
41
6) Monopolistically competitive markets are like perfectly competitive markets because in both
markets firms:
A) have some control over price.
B) face substantial barriers to entry.
C) face a large number of competitors.
D) have no control over price.
Answer: C
Diff: 2
Skill: Conceptual
7) Monopolistically competitive markets are different from perfectly competitive markets

because in monopolistically competitive markets firms:
A) have some control over price, while in perfectly competitive markets firms have no control
over price.
B) face substantial barriers to entry, while in perfectly competitive markets firms face no
significant barriers to entry.
C) have no control over price, while in perfectly competitive markets firms have some control
over price.
D) sell a standardized product, while in perfectly competitive markets firms sell a differentiated
product.
Answer: A
Diff: 2
Skill: Conceptual
8) In which of the following ways is a monopolistically competitive firm like a perfectly

competitive firm?
A) Short-run economic profits are always positive.
B) Short-run economic profits may be positive, negative, or zero.
C) Long-run economic profits are negative.
D) Long-run economic profits are positive.
Answer: B
Diff: 2
Skill: Conceptual
42
9) Which of the following characteristics of the monopolistically competitive and the perfectly
competitive market will cause the firm to earn zero profits in the long run?
A) no barriers to entry
B) many buyers
C) price taker
D) homogeneous product
Answer: A
Diff: 2
Skill: Conceptual
10) In which of the following ways is a monopolistically competitive firm like a perfectly
competitive firm?
A) Short-run economic profits are always positive.
B) Long-run economic profits are negative.
C) Long-run economic profits are positive.
D) Long-run economic profits are equal to zero.
Answer: D
Diff: 2
Skill: Conceptual
11) The more product differentiation in the market, the ________ the firm specific demand
curve. The less product differentiation in the market, the ________ the firm specific demand
curve.
A) steeper; flatter
B) flatter; steeper
C) more concave; more convex
D) more convex; more concave
Answer: A
Diff: 2
Skill: Conceptual
43
Recall the Application about the programs developed by NASA to encourage private-sector
firms to enter the market for space flight to answer the following question(s).
12) Recall the Application. Prior to encouraging private-sector firms to enter the market for
space flight, in the United States NASA would be considered a(n)
A) monopoly.
C) perfectly competitive market.
D) oligopoly.
Answer: A
Diff: 1
Topic: Application 3, C3PO and Entry in the Market for Space Flight
Skill: Fact
13) Recall the Application. Once NASA ends its space shuttle program, in the market for space
flight, the Russian Space Agency will virtually be a(n) ________.
A) monopoly
B) monopolistically competitive market
C) perfectly competitive market
D) oligopoly
Answer: A
Diff: 1
Skill: Fact
14) Recall the Application. By encouraging the private sector to enter the space flight market, the
price of a trip to the International Space Station is expected to
A) remain stable, at about $47 million per astronaut.
B) be cut by more than half, to about $20 million.
C) only increase slightly, to about $55 million.
D) decrease slightly, to about $38 million.
Answer: B
Diff: 1
Skill: Fact
15) Monopolistically competitive firms have no benefits to consumers relative to perfectly

competitive firms.
Answer: FALSE
Diff: 1
Skill: Conceptual
44
16) Monopolistically competitive firms offer consumers more variety than perfectly competitive
firms.
Answer: TRUE
Diff: 1
Skill: Conceptual
Recall the Application about the programs developed by NASA to encourage private-sector
firms to enter the market for space flight to answer the following question(s).
17) Recall the Application. The development of cheaper rockets and more flexible spacecraft
should foster competition among space-flight firms.
Answer: TRUE
Diff: 1
Skill: Conceptual
18) Recall the Application. Once NASA ends the space shuttle program, private-sector firms will
be the only firms in the global space-flight market.
Answer: FALSE
Diff: 1
Skill: Fact
19) What are the benefits and costs associated with monopolistic competition?
Answer: The benefits are lower prices than monopoly and more product variety for consumers.
The cost is that monopolistically competitive firms do not operate at the minimum of their
average cost curves so their average costs are higher.
Diff: 2
Skill: Conceptual
45
20) "If the amount of product differentiation in a monopolistically competitive industry is very
small, the outcome in that market will not be very different than if it were a perfectly competitive
industry." Explain.
Answer: If the amount of product differentiation is very small then the good produced by any
individual firm is a very close substitute for that produced by any other firm. That means that
consumers will pay only a slightly higher price for their favorite good, as opposed to a large
increase in price if the goods were very different. This means that all firms' prices will be
virtually the same. This is a very similar situation to perfect competition where all firms' prices
are exactly the same.
Diff: 2
Skill: Conceptual
11.4 Advertising for Product Differentiation
1) Since people generally know that celebrities are paid to endorse products, celebrity
endorsements signal to consumers that:
A) the product is likely to be popular.
B) the celebrity loves the product.
C) only rich people can afford the product.
D) all of the above
Answer: A
Diff: 1
Topic: Celebrity Endorsements and Signaling
Skill: Conceptual
2) Since people generally know that celebrities are paid to endorse products, celebrity
endorsements signal to consumers that:
A) the celebrity loves the product.
B) the product is appealing.
C) only rich people can afford the product.
D) all of the above
Answer: B
Diff: 1
Skill: Conceptual
46
3) The main purpose of hiring the celebrity endorser is to:
A) make the customers try the product for the first time.
B) make the customers buy the product repeatedly.
C) convince the customers that using the product will turn them into celebrities as well.
D) pay for the endorser's retirement expenses.
Answer: A
Diff: 1
Skill: Conceptual
4) For a company to convince consumers to use their products repeatedly, they must:
A) make the customers see the benefits of the product.
B) hire another celebrity endorser.
C) hire an independent company to evaluate the product.
D) run the celebrity ads repeatedly.
Answer: A
Diff: 1
Skill: Conceptual
5) If a firm that makes $100 profit per pair of shoes pays LeBron James $2,000,000 to endorse
their basketball shoes, then to make the endorsement pay off they must sell at least:
A) $2,000,000 more in shoes.
B) $20,000 more in shoes.
C) 20,000 more pairs of shoes.
D) 200,000 more pairs of shoes.
Answer: C
Diff: 2
Skill: Analytical
6) If a firm that makes $5 profit per box of cigars pays Rush Limbaugh $1,000,000 to endorse
their cigars, then to make the endorsement pay off they must sell at least:
A) $2,000,000 more in cigars.
B) $20,000 more in cigars.
C) 20,000 more boxes of cigars.
D) 200,000 more boxes of cigars.
Answer: D
Diff: 2
Skill: Analytical
47
Recall the Application about advertising campaigns for movies to answer the following
question(s).
7) Recall the Application. Distributors of movies advertise some new releases, but not others.
The movies they advertise are those they expect to:
A) otherwise not be popular.
B) otherwise not have much "buzz" or word of mouth advertising.
C) be appealing and generate a lot of "buzz" or word of mouth advertising.
D) have the biggest budget so that advertising is a small percentage of costs.
Answer: C
Diff: 2
Topic: Application 4, Advertising and Movie Buzz
Skill: Conceptual
8) Recall the Application. Distributors of movies advertise some but not others. Distributors
advertise a movie to signal to movie goers that the movie is:
A) a bomb.
B) appealing and will generate addition "buzz" or word of mouth advertising.
C) a niche movie and the need to inform a certain group about it.
D) priced such that some consumers may have price resistance if not prodded by advertisements.
Answer: B
Diff: 2
Skill: Conceptual
9) Recall the Application. Distributors of movies do not advertise all their movies because:
A) advertising costs money.
B) they want consumers to believe that some of their movies are of inferior quality.
C) the top celebrity endorsers are not always available.
D) they believe that some movies can be blockbusters even without any advertising.
Answer: A
Diff: 2
Skill: Conceptual
10) Monopolistically competitive firms use advertising exclusively to inform customers about
the real differences between their products and their competitors' products.
Answer: FALSE
Diff: 1
Skill: Conceptual
48
11) Advertising can create an image about a product inducing people to try the product.
Answer: TRUE
Diff: 1
Skill: Conceptual
12) Advertising can lead to more competition and lower prices for consumers.
Answer: TRUE
Diff: 1
Skill: Conceptual
13) When a celebrity is endorsing a product, it is usually because the celebrity is enthusiastic
about the product.
Answer: FALSE
Diff: 1
Skill: Conceptual
14) Hiring a more expensive celebrity endorser will always result in higher firm profits.
Answer: FALSE
Diff: 1
Skill: Conceptual
15) Advertising is a waste of money and just drives up costs and thus price to consumers.
Answer: FALSE
Diff: 1
Skill: Conceptual
16) Why might a firm pay a celebrity to endorse its product?

Answer: to signal to consumers the product is likely to be popular and appealing
Diff: 2
Skill: Conceptual
49
17) When is it a good decision to hire a celebrity endorser of your product?
Answer: when you expect your increase in sales to generate additional sales and profits, absent
the endorsement fee, high enough to cover the endorsement fee
Diff: 2
Skill: Conceptual
18) What is the purpose of advertisements that focus on beer drinkers frolicking on the beach?
Answer: to promote an image for the product, ie beer
Diff: 2
Skill: Conceptual
19) Why would a firm choose a lesser known celebrity in its advertising when more famous
celebrities are available?
Answer: Firms will choose a lesser known celebrity because the more famous celebrities are
also more expensive. The firm will choose the celebrity based on the additional profits the
celebrity endorsement can generate compared to the cost of the celebrity endorser. if the cost of a
famous endorser exceeds the additional profits that the endorsement will generate, then firms
may choose a lesser known endorser.
Diff: 2
Skill: Conceptual
50

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0Microeconomics: Principles, Applications, & Tools, 7e (O'Sullivan) – Testbank 1

Chapter 11 Market Entry and Monopolistic Competition

11.1 Effects of Market Entry

1) When a second firm enters a monopolist's market:

2) When a second firm enters a monopolist's market:

3) When a second firm enters a monopolist's market:

7) When a second firm enters a monopolist's market,

8) When a second firm enters a monopolist's market,

10) When the government eliminates artificial barriers to entry:

11) When the government eliminates artificial barriers to entry:

12) Empirical studies indicate that entry:

15) After the U.S. government deregulated the trucking industry:

18) The Motor Carrier Act of 1980 resulted in:

29) Entry leads to higher prices and profits in an industry.

33) Why does entry into markets decrease firm profits?

34) What are the effects on a market when there is entry?

1) Which of the following is NOT a characteristic of a monopolistically competitive market?

2) Which of the following is NOT a characteristic of a monopolistically competitive market?

3) Which of the following is NOT a characteristic of a monopolistically competitive market?

4) Which of the following is NOT a characteristic of a monopolistically competitive market?

7) Which of the following is an example of a monopolistically competitive firm?

8) Which of the following is a characteristic of a monopolistically competitive market?

10) Which of the following is a characteristic of a monopolistically competitive market?

11) Which of the following is NOT an example of a monopolistically competitive firm?

13) Monopolistically competitive firms differentiate their products by:

14) Monopolistically competitive firms do NOT differentiate their products by:

22) A monopolistically competitive market is one in which:

25) In a monopolistically competitive market, there:

28) Which of the following is a characteristic of a monopolistically competitive market?

29) Which of the following is a characteristic of a monopolistically competitive market?

32) Under the conditions of monopolistic competition:

38) If a firm is operating in a monopolistically competitive market, then in the long-run:

43) Suppose coffee is sold in a monopolistically competitive market, where coffee is

45) In a monopolistically competitive market, if price is greater than average cost:

46) If price is less than average cost in a monopolistically competitive market:

72) Examples of monopolistically competitive industries in which firms differentiate their

76) Recall the Application. The $40,000 franchise fee is a:

80) Monopolistically competitive firms sell differentiated products.

86) An example of a monopolistically competitive industry is cable television service.

87) An example of a monopolistically competitive industry is grocery stores.

94) Give five examples of industries that are monopolistically competitive.

96) What is "competitive" about a monopolistically competitive market?

11.3 Tradeoffs with Entry and Monopolistic Competition

1) A benefit to consumers of monopolistically competitive markets is that:

4) As compared to a perfectly competitive firm, a monopolistically competitive firm will:

5) As compared to a perfectly competitive firm, a monopolistically competitive firm will:

7) Monopolistically competitive markets are different from perfectly competitive markets

8) In which of the following ways is a monopolistically competitive firm like a perfectly

15) Monopolistically competitive firms have no benefits to consumers relative to perfectly

11.4 Advertising for Product Differentiation

16) Why might a firm pay a celebrity to endorse its product?

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