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Exam 17: Monopolistic Competition

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Question 1

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A monopolistically competitive firm is currently producing 10 units of output.At this level of output the firm is charging a price equal to $10,has marginal revenue equal to $6,has marginal cost equal to $6,and has average total cost equal to $12.From this information we can infer that

A) the firm is currently maximizing its profit.
B) the profits of the firm are negative.
C) firms are likely to leave this market in the long run.
D) All of the above

E) A) and B)
F) None of the above

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Question 2

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A firm in a monopolistically competitive market is similar to a monopoly in the sense that (i) they both face downward-sloping demand curves. (ii) they both charge a price that exceeds marginal cost. (iii) free entry and exit determines the long-run equilibrium.

A) (i) only
B) (ii) only
C) (i) and (ii)
D) (i) , (ii) , and (iii)

E) B) and C)
F) All of the above

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Question 3

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A monopolistically competitive firm's choice of output level is virtually identical to the choice made by

If advertising decreases the elasticity of demand for specific brand names of hard liquor,we would expect firms to be able to charge a larger markup over marginal cost.

Scenario 17-2 Consider the problem facing two firms, Firm A and Firm B, in the fast-food restaurant market. Each firm has just come up with an idea for a new fast-food menu item which it would sell for $4. Assume that the marginal cost for each new menu item is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 2 million consumers to try its new product. Firm A has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 2 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Firm B's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Firm B estimates that its initial 2 million customers will buy one unit of the product each month in the coming year, for a total of 24 million units. -Refer to Scenario 17-2.If Firm A decides to advertise its product it can expect to

Figure 17-6 -Refer to Figure 17-6.At the profit-maximizing,or loss-minimizing,output level,the firm in this figure has total costs of approximately

A profit-maximizing firm in a monopolistically competitive market differs from a firm in a perfectly competitive market because the firm in the monopolistically competitive market

Product differentiation in monopolistically competitive markets ensures that,for profit-maximizing firms,

Which of the following is unique to a monopolistically competitive firm when compared to an oligopoly?

Firms that spend a large amount of money on advertising a particular product are likely to be providing consumers with

In which of the following market structures do firms produce the welfare-maximizing level of output?

Which of the following goods are likely to be sold in a monopolistically competitive market?

A firm that would experience higher average total cost by increasing production is operating with excess capacity.

Figure 17-3 The lines in the figures below illustrate the potential effect of entry and exit in a monopolistically competitive market on either the demand curve or the marginal cost curve of existing firms. -Refer to Figure 17-3.Which of the diagrams illustrates the impact of some existing firms leaving the market?

Figure 17-2 -Refer to Figure 17-2.Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is doing its best but still losing money?

Assume the role of a critic of advertising.Describe the characteristics of advertising that reduce the effectiveness of markets and decrease the social welfare of society.

Table 17-3 Traci's Hairstyling is one salon among many in the market for hairstyling. The following table presents cost and revenue data for Traci's Hairstyling. -Refer to Table 17-3.At the profit-maximizing quantity,what is Traci's total profit?

Monopolistic competition is characterized by which of the following attributes? (i) Free entry (ii) Product differentiation (iii) Many sellers

Which of the following conditions distinguishes monopolistic competition from perfect competition?

Under which of the following market structures would consumers likely pay the highest price for a product?