Exercise 11 SolutionChapter 12 Monopolistic Competition: The Competitive Model in a More Realistic Setting

12.1 Demand and Marginal Revenue for a Firm in a Monopolistically Competitive Market

1) One reason why the coffeehouse market is competitive is thatA) demand for specialty coffee is very high.B) it is trendy and therefore is likely to have a customer following.C) barriers to entry are low.D) consumption takes place in public. Answer: CDiff: 1 Page Ref: 401/401Topic: Characteristics of Monopolistic CompetitionObjective: LO1: Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves.AACSB: Reflective ThinkingSpecial Feature: Chapter Opener: Starbucks: The Limits to Growth through Product Differentiation

2) The key characteristics of a monopolistically competitive market structure includeA) many small (relative to the total market) sellers acting independently.B) all sellers sell a homogeneous product.C) barriers to entry are strong.D) sellers have no incentive to advertise their products. Answer: AComment: RecurringDiff: 1 Page Ref: 402/402Topic: Characteristics of Monopolistic CompetitionObjective: LO1: Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves.AACSB: Reflective ThinkingSpecial Feature: None

3) Which of the following characteristics is common to monopolistic competition and perfect competition?A) Firms produce identical products. B) Entry barriers into the industry are low.C) Each firm faces a downward -sloping demand curve.D) Firms take market prices as given.Answer: BComment: RecurringDiff: 2 Page Ref: 402/402

Topic: Characteristics of Monopolistic CompetitionObjective: LO1: Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves.AACSB: Reflective ThinkingSpecial Feature: None

4) The key characteristics of a monopolistically competitive market structure includeA) few sellers.B) sellers selling similar but differentiated products.C) high barriers to entry.D) sellers acting to maximize revenue.Answer: BComment: RecurringDiff: 1 Page Ref: 402/402Topic: Characteristics of Monopolistic CompetitionObjective: LO1: Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves.AACSB: Reflective ThinkingSpecial Feature: None

5) In monopolistic competition there is/areA) many sellers who each face a downward-sloping demand curve.B) a few sellers who each face a downward-sloping demand curve. C) only one seller who faces a downward-sloping demand curve.D) many sellers who each face a perfectly elastic demand curve.Answer: AComment: RecurringDiff: 1 Page Ref: 402/402Topic: Characteristics of Monopolistic CompetitionObjective: LO1: Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves.AACSB: Reflective ThinkingSpecial Feature: None

6) If a firm faces a downward-sloping demand curve, A) the demand for its product must be inelastic.B) it can control both price and quantity sold.C) it must reduce its price to sell more units.D) it will always make a profit.Answer: CComment: RecurringDiff: 2 Page Ref: 402-404/402-404Topic: Demand and Marginal RevenueObjective: LO1: Explain why a monopolistically competitive firm has downward-

sloping demand and marginal revenue curves.AACSB: Reflective ThinkingSpecial Feature: None

7) A monopolistically competitive firm willA) charge the same price as its competitors do.B) always produce at the minimum efficient scale of production.C) have some control over its price because its product is differentiated.D) produce an output level that is productively and allocatively efficient.Answer: CComment: RecurringDiff: 2 Page Ref: 402/402Topic: Characteristics of Monopolistic CompetitionObjective: LO1: Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves.AACSB: Reflective ThinkingSpecial Feature: None

8) For a monopolistically competitive firm, marginal revenue A) equals the price.B) is greater than the price.C) is less than the price.D) and price are unrelated. Answer: CComment: RecurringDiff: 2 Page Ref: 402-404/402-404Topic: Demand and Marginal RevenueObjective: LO1: Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves.AACSB: Reflective ThinkingSpecial Feature: None

9) When a monopolistically competitive firm cuts its price to increase its sales, it experiences a gain in revenue due to the A) substitution effect.B) income effect.C) price effect.D) output effect.Answer: DComment: RecurringDiff: 2 Page Ref: 402-404/402-404Topic: Demand and Marginal RevenueObjective: LO1: Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves.

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Table 12-1

QuantityPrice

(dollars)Total Revenue

(dollars)1 $7.50 $7.502 7.00 14.003 6.50 19.504 6.00 24.005 5.50 27.506 5.00 30.00

10) Refer to Table 12-1. What is the marginal revenue of the 3rd unit?A) $6.50B) $5.50C) $1.83D) $0.50Answer: BComment: RecurringDiff: 1 Page Ref: 402-404/402-404Topic: Demand and Marginal RevenueObjective: LO1: Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves.AACSB: Analytic SkillsSpecial Feature: None

11) Refer to Table 12-1. The Table showsA) an elastic segment of the demand curve.B) an inelastic segment of the demand curve.C) a demand curve with an elastic segment of the demand curve from $7.50 to $6.50 followed by an inelastic segment. D) a demand curve with an inelastic segment of the demand curve from $7.50 to $6.50 followed by an elastic segment.Answer: AComment: RecurringDiff: 2 Page Ref: 402-404/402-404Topic: Demand and Marginal RevenueObjective: LO1: Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves.AACSB: Analytic SkillsSpecial Feature: None

12) Refer to Table 12-1. What portion of the marginal revenue of the 4th unit is due to the output effect and what portion is due to the price effect?A) output effect = $24.00; price effect = $19.50B) output effect = $6.50; price effect = $2.00C) output effect = -$0.50; price effect = $5.00D) output effect = $6.00; price effect = -$1.50Answer: DComment: RecurringDiff: 2 Page Ref: 402-404/402-404Topic: Demand and Marginal RevenueObjective: LO1: Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves.AACSB: Analytic SkillsSpecial Feature: None

13) Refer to Table 12-1. What portion of the marginal revenue of the 5th unit is due to the output effect and what portion is due to the price effect?A) output effect = $3.00; price effect = $0.50B) output effect = $1.50; price effect = $2.00C) output effect = $5.50; price effect = -$2.00D) output effect = $4.00; price effect = -$0.50Answer: CComment: RecurringDiff: 2 Page Ref: 402-404/402-404Topic: Demand and Marginal RevenueObjective: LO1: Explain why a monopolistically competitive firm has downward-sloping demand and marginal revenue curves.AACSB: Analytic SkillsSpecial Feature: None

12.2 How a Monopolistically Competitive Firm Maximizes Profits in the Short Run

1) What is the profit-maximizing rule for a monopolistically competitive firm?A) to produce a quantity that maximizes market share B) to produce a quantity that maximizes total revenueC) to produce a quantity such that marginal revenue equals marginal costD) to produce a quantity such that price equals marginal costAnswer: CComment: RecurringDiff: 1 Page Ref: 404-406/404-406Topic: Short-Run Profit MaximizationObjective: LO2: Explain how a monopolistically competitive firm maximizes profits in the short run.

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2) Unlike a perfectly competitive firm, for a monopolistically competitive firmA) price ≠ marginal cost for all output levels.B) price ≠ marginal revenue for all output levels.C) price ≠ average revenue for all output levels.D) marginal revenue = marginal cost at the profit-maximizing output. Answer: BComment: RecurringDiff: 3 Page Ref: 404-406/404-406Topic: Short-Run Profit MaximizationObjective: LO2: Explain how a monopolistically competitive firm maximizes profits in the short run.AACSB: Reflective ThinkingSpecial Feature: None

Figure 12-1

Figure 12-1 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer watches.

3) Refer to Figure 12-1. If the firm represented in the diagram is currently producing

and selling Qa units, what is the price charged?

A) P0

B) P1

C) P2

D) P3

Answer: CComment: RecurringDiff: 1 Page Ref: 404-406/404-406Topic: Short-Run Profit MaximizationSkill: GraphingObjective: LO2: Explain how a monopolistically competitive firm maximizes profits in the short run.AACSB: Analytic SkillsSpecial Feature: None

4) Refer to Figure 12-1.What is the area that represents the total revenue made by the firm?

A) 0P0aQa

B) 0P1bQa

C) 0P2cQa

D) 0P3dQa

Answer: CComment: RecurringDiff: 2 Page Ref: 404-406/404-406Topic: Short-Run Profit MaximizationSkill: GraphingObjective: LO2: Explain how a monopolistically competitive firm maximizes profits in the short run.AACSB: Analytic SkillsSpecial Feature: None

5) Refer to Figure 12-1.What is the area that represents the total variable cost of production?

A) 0P0aQa

B) 0P1bQa

C) P0abP1

D) P1bdP3

Answer: BComment: RecurringDiff: 2 Page Ref: 404-406/404-406Topic: Short-Run Profit MaximizationSkill: GraphingObjective: LO2: Explain how a monopolistically competitive firm maximizes profits in the short run.AACSB: Analytic SkillsSpecial Feature: None

6) Refer to Figure 12-1.What is the area that represents the total fixed cost of production?

A) 0P1aQa

B) P0adP3

C) P1bdP3

D) That information cannot be determined from the graph.Answer: CComment: RecurringDiff: 2 Page Ref: 404-406/404-406Topic: Short-Run Profit MaximizationSkill: GraphingObjective: LO2: Explain how a monopolistically competitive firm maximizes profits in the short run.AACSB: Analytic SkillsSpecial Feature: None

12.3 What Happens to Profits in the Long Run?

1) A monopolistically competitive industry that earns economic profits in the short run willA) continue to earn economic profits in the long run.B) experience the entry of new rival firms into the industry in the long run.C) experience the exit of existing firms out of the industry in the long run.D) experience a rise in demand in the long run.Answer: BComment: RecurringDiff: 1 Page Ref: 407-409Topic: Monopolistic Competition in the Long RunObjective: LO3: Analyze the situation of a monopolistically competitive firm in the

long run.AACSB: Reflective ThinkingSpecial Feature: None

2) A monopolistically competitive firm that is earning profits will, in the long run, experience all of the following exceptA) new rivals entering the market.B) a decrease in demand for its product.C) demand for the firm's product becomes more elastic.D) a decrease in the number of rival products.Answer: DComment: RecurringDiff: 2 Page Ref: 407-409Topic: Monopolistic Competition in the Long RunObjective: LO3: Analyze the situation of a monopolistically competitive firm in the long run.AACSB: Reflective ThinkingSpecial Feature: None

3) You are planning to open a new Italian restaurant in your hometown where there are three other Italian restaurants. You plan to distinguish your restaurant from your competitors by offering northern Italian cuisine and using locally grown organic produce. What is likely to happen in the restaurant market in your hometown after you open?A) Your competitors are likely to change their menus to make their products more similar to yours. B) The demand curve facing each restaurant owner shifts to the right.C) The demand curve facing each restaurant owner becomes more elastic.D) While the demand curves facing your competitors becomes more elastic, your demand curve will be inelastic.Answer: CDiff: 2 Page Ref: 401/401Topic: Monopolistic Competition in the Long RunObjective: LO3: Analyze the situation of a monopolistically competitive firm in the long run.AACSB: Reflective ThinkingSpecial Feature: Economics in YOUR LIFE!: Opening Your Own Restaurant

4) A monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing and becoming more elastic in the long run as new firms move into the industry untilA) the original firm is driven into bankruptcy.B) the firm's demand curve is perfectly elastic.C) the firm's demand curve is tangent to its average total cost curve.

D) the firm exits the market.Answer: CComment: RecurringDiff: 2 Page Ref: 407-409/407-409Topic: Long-Run EquilibriumObjective: LO3: Analyze the situation of a monopolistically competitive firm in the long run.AACSB: Reflective ThinkingSpecial Feature: None

5) If a typical monopolistically competitive firm is making short-run losses, thenA) other more competitive firms will enter the market.B) as some firms leave, the remaining firms will experience an increase in the demand for their products.C) as some firms leave, the demand for the products of the remaining firms will become more elastic.D) the industry will eventually cease to exist.Answer: BComment: RecurringDiff: 2 Page Ref: 407-409/407-409Topic: Monopolistic Competition in the Long RunObjective: LO3: Analyze the situation of a monopolistically competitive firm in the long run.AACSB: Reflective ThinkingSpecial Feature: None

Figure 12-2

6) Refer to Figure 12-2. What is the monopolistic competitor's profit maximizing

output?

A) Q1 units

B) Q2 units

C) Q3 units

D) Q4 units

Answer: BComment: RecurringDiff: 1 Page Ref: 408-409/408-409Topic: Long-Run EquilibriumSkill: GraphingObjective: LO3: Analyze the situation of a monopolistically competitive firm in the long run.AACSB: Analytic SkillsSpecial Feature: None

7) Refer to Figure 12-2. What is the monopolistic competitor's profit maximizing price?

A) P1

B) P2

C) P3

D) P4

Answer: DComment: RecurringDiff: 1 Page Ref: 408-409/408-409Topic: Long-Run EquilibriumSkill: GraphingObjective: LO3: Analyze the situation of a monopolistically competitive firm in the long run.AACSB: Analytic SkillsSpecial Feature: None

8) Refer to Figure 12-2. The firm represented in the diagram A) makes zero economic profit.B) makes zero accounting profit.C) should exit the industry.D) should expand its output to take advantage of economies of scale.

Answer: AComment: RecurringDiff: 1 Page Ref: 408-409/408-409Topic: Long-Run EquilibriumSkill: GraphingObjective: LO3: Analyze the situation of a monopolistically competitive firm in the long run.AACSB: Analytic SkillsSpecial Feature: None

9) Refer to Figure 12-2. What is the productively efficient output for the firm represented in the diagram?

A) Q1 units

B) Q2 units

C) Q3 units

D) Q4 units

Answer: DComment: RecurringDiff: 2 Page Ref: 408-409/408-409Topic: Long-Run EquilibriumSkill: GraphingObjective: LO3: Analyze the situation of a monopolistically competitive firm in the long run.AACSB: Analytic SkillsSpecial Feature: None

10) Refer to Figure 12-2. What is the allocatively efficient output for the firm represented in the diagram?

A) Q1 units

B) Q2 units

C) Q3 units

D) Q4 units

Answer: CComment: RecurringDiff: 2 Page Ref: 408-409/408-409Topic: Long-Run Equilibrium

Skill: GraphingObjective: LO3: Analyze the situation of a monopolistically competitive firm in the long run.AACSB: Analytic SkillsSpecial Feature: None

11) Refer to Figure 12-2. The diagram depicts a firmA) in a constant cost industry.B) in an increasing cost industry.C) in long run equilibrium.D) that is making short run losses.Answer: CComment: RecurringDiff: 2 Page Ref: 408-409/408-409Topic: Long-Run EquilibriumSkill: GraphingObjective: LO3: Analyze the situation of a monopolistically competitive firm in the long run.AACSB: Analytic SkillsSpecial Feature: None

12) Refer to Figure 12-2. What is the amount of excess capacity?

A) Q4 - Q3 units

B) Q4 - Q2 units

C) Q3 - Q2 units

D) Q3 - Q1 units

Answer: BComment: RecurringDiff: 2 Page Ref: 408-409/408-409Topic: Long-Run EquilibriumSkill: GraphingObjective: LO3: Analyze the situation of a monopolistically competitive firm in the long run.AACSB: Analytic SkillsSpecial Feature: None

12.4 Comparing Perfect Competition and Monopolistic Competition

1) How does the long run equilibrium of a monopolistically competitive industry differ from that of a perfectly competitive industry?

A) A firm in monopolistic competition will earn economic profits but a firm in perfect competition earns zero profit.B) A firm in monopolistic competition will charge a price higher than the average cost of production but a firm in perfect competition charges a price equal to the average cost of production.C) A firm in monopolistic competition does not take full advantage of its economies of scale but a firm in perfect competition produces at the lowest average cost possible. D) A firm in monopolistic competition produces an allocatively efficient output level while a firm in perfect competition produces a productively efficient output level.Answer: CComment: RecurringDiff: 2 Page Ref: 412-414/412-414Topic: Comparing Perfect Competition and Monopolistic CompetitionObjective: LO4: Compare the efficiency of monopolistic competition and perfect competition.AACSB: Reflective ThinkingSpecial Feature: None

2) Which of the following is not a characteristic of long-run equilibrium in a monopolistically competitive market?A) Selling price equals average total cost.B) Production is at minimum average total cost.C) Marginal revenue equals marginal cost. D) Selling price is greater than marginal cost. Answer: BComment: RecurringDiff: 2 Page Ref: 412-414/412-414Topic: Comparing Perfect Competition and Monopolistic CompetitionObjective: LO4: Compare the efficiency of monopolistic competition and perfect competition.AACSB: Reflective ThinkingSpecial Feature: None

3) For allocative efficiency to hold,A) price must equal marginal revenue of the last unit sold.B) price must equal the marginal cost of the last unit produced.C) average variable cost is minimized in production.D) average total cost is minimized in production.Answer: BComment: RecurringDiff: 1 Page Ref: 413/413Topic: Comparing Perfect Competition and Monopolistic CompetitionObjective: LO4: Compare the efficiency of monopolistic competition and perfect competition.

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4) Is a monopolistically competitive firm allocatively efficient?A) No, because it does not produce at minimum average total cost.B) Yes, because it produces where marginal cost equals marginal revenue.C) No, because price is greater than marginal cost. D) Yes, because price equals average total cost. Answer: CComment: RecurringDiff: 2 Page Ref: 413/413Topic: Comparing Perfect Competition and Monopolistic CompetitionObjective: LO4: Compare the efficiency of monopolistic competition and perfect competition.AACSB: Reflective ThinkingSpecial Feature: None

5) Economists agree that a monopolistically competitive market structureA) lowers consumer utility because consumers pay a price higher than the marginal cost of production. B) is detrimental to society because it leads to a waste of scarce resources.C) benefits consumers because firms produce products that appeal to a wide range of consumer tastes.D) can eliminate any excess capacity if all firms in the industry devote more funds to differentiating their products. Answer: CComment: RecurringDiff: 2 Page Ref: 412-414/412-414Topic: Comparing Perfect Competition and Monopolistic CompetitionObjective: LO4: Compare the efficiency of monopolistic competition and perfect competition.AACSB: Reflective ThinkingSpecial Feature: None

12.5 How Marketing Differentiates Products

1) A trademark isA) a legal instrument which grants a firm the right to differentiate its product.B) a legal right to position a firm's product in high-traffic public areas such as airports and post offices. C) a patent on a firm's product.D) a distinguishing attribute such as a sign or logo that allows a firm to uniquely identify its product.Answer: D

Comment: RecurringDiff: 2 Page Ref: 415-416/415-416Topic: Brand ManagementObjective: LO5: Define marketing and explain how firms use it to differentiate their products.AACSB: Reflective ThinkingSpecial Feature: None

2) Nike has used Michael Jordan to create the impression that Air Jordan basketball shoes are superior to any other basketball shoes. Nike is attempting toA) differentiate Air Jordan basketball shoes from other types of basketball shoes.B) lower the marginal cost of producing Air Jordan basketball shoes.C) increase its profit by raising the price of Air Jordan basketball shoes. D) convince consumers that Air Jordan basketball shoes are no different from other basketball shoes favored by celebrities.Answer: AComment: RecurringDiff: 2 Page Ref: 414-415/414-415Topic: Product DifferentiationObjective: LO5: Define marketing and explain how firms use it to differentiate their products.AACSB: Reflective ThinkingSpecial Feature: None

3) 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 toA) create a barrier to entry for competing firms.B) create a perfectly competitive market in which to sell its credit card.C) convince customers that its card has greater value than those offered by rival firms.D) shift the demand curve for competing firms to the right.Answer: CComment: RecurringDiff: 2 Page Ref: 414-415/414-415Topic: Product DifferentiationObjective: LO5: Define marketing and explain how firms use it to differentiate their products.AACSB: Reflective ThinkingSpecial Feature: None