ECON 301-Chapter 14—Monopolistic Competition and Product Differentiation. Questions and Answers

ECON 301-Chapter 14—Monopolistic Competition and Product Differentiation. Questions and Answers TRUE/FALSE 1. Monopolistic competition is more similar to monopoly than any other industry model. ANS: F PTS: 1 2. Monopolistic competition differs from perfect competition only with regard to the number of firms participating in the market. ANS: F PTS: 1 3. Monopolistic competition is a market structure characterized by many small firms selling a homogeneous product. ANS: F PTS: 1 4. Monopolistic competition, like perfect competition, is a market structure in which firms can easily enter and leave the industry. ANS: T PTS: 1 5. By differentiating their products and promoting brand name loyalty, monopolistically competitive firms can raise prices without losing all their customers. ANS: T PTS: 1 6. Monopolistic competitors in long-run equilibrium will generally find that they are earning economic profits. ANS: F PTS: 1 7. In long-run equilibrium, a monopolistically competitive firm's demand curve will be tangent to its average cost curve. ANS: T PTS: 1 8. Monopolistically competitive sellers have some ability to influence the price of their products. ANS: T PTS: 1 9. Monopolistically competitive sellers are price takers. ANS: F PTS: 1 10. Monopolistically competitive industries have significant barriers to entry and exit. ANS: F PTS: 1 11. A monopolistic competitor's demand curve tends to be more inelastic than a monopolist's demand curve. ANS: F PTS: 1 12. A monopolistic competitor's demand curve tends to be more elastic than a monopolist's demand curve. ANS: T PTS: 1 13. Unlike purely competitive firms, firms in monopolistic competition will operate with excess capacity even in long-run equilibrium. ANS: T PTS: 1 14. Although there are certain inefficiencies associated with monopolistic competition, society receives a benefit from monopolistic competition in the form of product variety. ANS: T PTS: 1 15. A monopolistic competitor's demand curve becomes less elastic as new entry occurs. ANS: F PTS: 1 16. In the long run, monopolistically competitive firms typically produce with allocative efficiency. ANS: F PTS: 1 17. In the monopolistic competition model, firms earn zero economic profits in long-run equilibrium. ANS: T PTS: 1 18. Extensive advertising will always lead to an increase in average total cost for the firm. ANS: T PTS: 1 MULTIPLE CHOICE 1. Which of the following is a correct listing of industry models ordered from most competitive to least competitive? a. perfect competition - monopolistic competition - oligopoly - monopoly b. perfect competition - oligopoly - monopolistic competition - monopoly c. perfect competition - oligopoly - monopoly - monopolistic competition d. oligopoly - perfect competition -monopoly - monopolistic competition ANS: A PTS: 1 2. Monopolistic competition is characterized by: a. a small number of firms selling differentiated products. b. a large number of firms selling identical products. c. high barriers to entry. d. a large number of firms selling differentiated products. e. firms that are all price takers. ANS: D PTS: 1 3. Under monopolistic competition: a. there are significant barriers to entry. b. there are few barriers to entry. c. firms sell identical products. d. firms face perfectly elastic demand curves. ANS: B PTS: 1 4. In a monopolistically competitive market: a. there are significant barriers to the entry of new sellers. b. firms sell differentiated products. c. firms face horizontal demand curves. d. there are a few producers selling standardized products. ANS: B PTS: 1 5. A monopolistically competitive firm: a. tries to differentiate its product from the products of competitors. b. faces a perfectly elastic demand curve for its product. c. unlike a perfectly competitive firm, is able to earn positive economic profits in the long run. d. is always a retail establishment. ANS: A PTS: 1 6. Monopolistic competition is characterized by: a. one firm selling several products. b. many firms selling the same product. c. many firms selling slightly different products. d. one firm selling one product. ANS: C PTS: 1 7. Monopolistic competition is characterized by: a. homogeneous products. b. barriers to entry c. firms earning economic profits in the long run. d. differentiated products. e. firms facing perfectly elastic demand curves. ANS: D PTS: 1 8. Monopolistic competition is common in: a. retail selling. b. farming. c. basic manufacturing. d. electric power generation. ANS: A PTS: 1 9. Which of the following is not common to perfect competition and monopolistic competition? a. Free entry b. Many sellers c. Elimination of long run economic profits d. Product differentiation ANS: D PTS: 1 10. Which of the following industries would most likely represent monopolistic competition? a. clothing b. wheat c. water utilities d. soft drinks ANS: A PTS: 1 11. If the eyeglass industry is monopolistically competitive, then: a. the price of eyeglasses will equal marginal revenue. b. the price of eyeglasses will exceed marginal cost in equilibrium. c. firms can earn economic profits in the long run. d. firms are price takers. ANS: B PTS: 1 12. If the ice cream industry is monopolistically competitive, then: a. the price of ice cream equals marginal cost in equilibrium. b. the price of ice cream equals average cost in long-run equilibrium. c. the price of ice cream is less than marginal cost in equilibrium. d. there are significant barriers to entering the ice cream business. e. firms are price takers. ANS: B PTS: 1 13. If toothpaste manufacturers compete in a monopolistically competitive market, then: a. firms are price takers. b. firms try to differentiate their products from those of competitors. c. firms maximize profits by choosing output where price equals marginal cost. d. there are significant barriers to entering the toothpaste industry. e. both b. and c. are true. ANS: B PTS: 1 14. Which of the following characteristics of perfect competition does not apply to monopolistic competition? a. free entry and exit b. homogeneous products c. numerous participants d. individual firms face perfectly elastic demand curves e. neither b. nor d. applies to monopolistic competition ANS: E PTS: 1 15. Firms in monopolistically competitive markets can differentiate their products on the basis of: a. geographical location. b. service. c. credit terms. d. packaging. e. all of the above. ANS: E PTS: 1 16. Firms in monopolistically competitive markets can differentiate their products on the basis of: a. brand identity. b. quality. c. convenience. d. product guarantees. e. all of the above. ANS: E PTS: 1 17. Characteristics of a monopolistically com