ECO 251 Ch. 17 Document

ECO 251 Ch. 17 Document - CHAPTER 17 MONOPOLISTIC...

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Unformatted text preview: CHAPTER 17 MONOPOLISTIC COMPETITION 269 Multiple-Choice Questions 1-. Which of the following is not a characteristic of a monopolistically competitive market? ' a. many sellers b. differentiated products long~runeconomic profits . free entry and exit 2. Which of the following products is least likely to be sold in a monopoli'stically competitive market? a. video .games b. breakfast cereal c. beer @ cottOn 3. Which of the following is true regarding the similarities and differences in mo- nopolistic competition and monopolY? a. The mon0poiist faces a downward-sloping demand curve while the monOpo- listic competitor faces an elastic demand curve. @ The monopolist makes ecOnomic profits in the long run while the monopolis- tic competitor makes zero economic profits in the long run. c. Both the monopolist and the monopolistic competitor operate at-the efficient scale. d. The monopolist charges a price above marginal cost while the monopolistic competitor charges a-price equal to marginal cost. 4. In the-short run, if the-price is above average total cost in a monopolistically com- petitive market, the firm makes a. lessee and films enter the market. b. losses and'firms exit the market. profits and firms enter the market . profits and finns-eidt the market. .5. If the monopolistic competitor described by Exhibit 3 is producing at the profit-maximizing (loss-Hurti- mining) level Of Output, it a is generating lesses. . is generating profits. c. is generating zero profits. d. could be generating either profits or losses dependmg. on what quantity it chooses to produce. 6. The monopolistically competitive market shown in Exhibit 3 will, in the long run, a. attract new producers into the market, which will shift the demand faced by incumbent firms to the right. b. attract new producers into the market, which will shift the demand faced by incumbent firms to the left. ®cause producers to exit the market, which will shift the demand faced by incumbent firms to the right. ‘ (1. cause producers to exit the market, which will shift the demand faced by incumbent firm-ts to the left. 270 PARTS FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY 7. Which of the following is true regarding the production and pricing decisions of monopolistically competitive firins? Monopolisticaily competitive firms choose the quantity at which marginal cost equals a. average total cost and then use the demand curve to determine the price con- sistent with this quantity. marginal revenue and-then use-the demand curve to determine the price con- sistent with this quantity. c. average total cost and then use the supply curve to determine the price con- sistent with this quantity. cl. marginal revenue and then use the. supply curve to detennine the price con— sistent with this quantity. 8. Exhibit 4 depicts a monopolistically competitive firm a. generating profits in the short run. ' . generating losses in the short run. ’6; generating zero profits in the long run. . It is impossible to determine from this. graph whether the firm is generating profits or losses. 9. Which of the following is true with regard to monopolisticaily competitive firms’ stale of production and pricing decisions? Monopolistically competitive firms produce a. at the efficient 'scale and charge a price equal to margtml cost. b. at the efficient scale and charge a price above marginal cost. c. with excess capacrty and charge a price equal to. marginal coat.- 10. One source of inefficiency in monopolistic cmnpefitim is that _ a. since price is above marginal cost, surplus is redistributed from buyers to sellers. r® since price is above marginal cost, some units- are. not produced that buyers value in excess of the cost of production and this causes a deadweight loss. c. monop‘olistically competitive firms produce beyond their efficient scale. d. monopolistically competitive firms earn economic profits in the long run. CHAPTER 17 MONOPOLISTIC COMPETITION 271 11. When firms enter a monopolistically competitive market and the business-steal- ' u ; externality is larger than the product-variety externality, then there are too many firms in the market and market efficiency could be in- creased if firms exited the market. b. there are too few firms in the market and market efficiency could be increased with additional entry. c. the number of firms in the market is optimal and the market is efficient. d. the only way to improve efficiency in this market is for the government to regulate it like a natural monopol . 12. The use of the word ”competition” in the name of the market structure called "monopolistic competition” refers to the fact that a. monopolistically competitive firms charge prices equal to the minimum of their average total cost just like competitive firms. b. monopolistically competitive firms face a downward-sloping demand curve just like competitive firms. c. the products are differentiated in a monopolistically competitive market just like in a competitive market. @there are many sellers in a monopolistically competitive market and there is free entry and exit in the market just like a competitive market. 13. The use of the word “monopoly” in the name of the market structure called ”mo~ nopolistic competition” refers to the fact that a monopolistic-ally competitive firm faces a downward-slepmg demand curve for its differentiated product and so does a monopolist. b. monopolistically competitive markets have free entry and exit just like a mo— nopolistic market. c. monopolistically competitive firms charge prices equal to their marginal costs just like monopolists. d. monopolistically competitive firms produce beyond their efficient scale and so do monopolists. ' 14. Which of the following firms is most likely to spend a large percentage of their revonue on advertising? a. the manufacturer of an undifferentiated commodity b. a perfect competitor c. the manufacturer of an industrial product @ the producer of a highly differentiated consumer product e. the producer of a low-quality product that costs the same to produce as a similar high-quality product. '- 15. For the economy as a whole, what percentage of firm revenue is spent on advert-15mg? . d. 6percent e. 10 percent 272 PART 5 FIRM BEHAVIOR AND THE ORGANIZATION OF INDUSTRY 16. Which of the following is not put forth as a criticism of advertising and brand names? . a. Advertising manipulates people’s tastes to create a desire that otherwise . would not exist. 0 Advertising increases competition, which causes unnecessary bankruptcies and layoffs. c. Advertising increases brand loyalty, causes demand to be more inelastic, and thus, increases markup over marginal cost. at. Brand names cause consumers to perceive differences between goods that do not exist. e. All of the above are criticisms of advertising and brand names. 17. Expensive televisioncommercials that appear to provide no specific information about the product being advertised a. are most likely used by firms that are perfect competitors. b. should be banned by regulators because they add to the cost of the prod- uct without providing the consumer with any useful information abOut the product. _ ' may be useful because they provide a signal to the consumer about the qual— ity of the product. d. only affect the buying habits of irrational consumers. 18. Which of the following is not an argument put forth by economists in support of the use of advertising? a. Advertising provides information to customers about prices, new products, and location of retail outlets. Advertising provides a creative outlet for artists and writers. c. Advertising increases competition. d. Advertising provides new firms with the means to attract customers from existing firms. 19. Defenders of the use of brand names argue that brand names a. provide information about the quality of the product. b. give firms incentive to maintain high quality. are useful even in socialist economies such as the former Soviet Union. @ do all of the above. 20. Which of the following firms has the least incentive to advertise? a. a manufacturer of home heating and air conditioning b. a manufacturer of breakfast cereal [email protected] a wholesaler of crude oil . a restaurant ...
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