Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) The key characteristics of a monopolistically competitive market structure include 1)

A) many small (relative to the total market) sellers acting independently.
B) barriers to entry are strong.
C) all sellers sell a homogeneous product.
D) sellers have no incentive to advertise their products.

2) All of the following characteristics are common to both monopolistic competition and perfect 2)
competition except
A) firms take market prices as given.
B) the market demand curves are downward-sloping.
C) entry barriers into the industries are low.
D) firms act to maximize profit.

3) A major difference between monopolistic competition and perfect competition is 3)

A) the degree by which the market demand curves slope downwards.
B) that products are not standardized in monopolistic competition unlike in perfect competition.
C) the barriers to entry in the two markets.
D) the number of sellers in the markets.

4) In monopolistic competition there is/are 4)

A) many sellers who each face a perfectly elastic demand curve.
B) many sellers who each face a downward-sloping demand curve.
C) only one seller who faces a downward-sloping demand curve.
D) a few sellers who each face a downward-sloping demand curve.

5) If a firm faces a downward-sloping demand curve, 5)

A) the demand for its product must be inelastic.
B) it will always make a profit.
C) it has no control over the price or the quantity sold.
D) it must reduce its price to sell more units.

6) A monopolistically competitive firm will 6)

A) always produce at the minimum efficient scale of production.
B) have some control over its price because its product is differentiated.
C) charge the same price as its competitors do.
D) produce an output level that is productively and allocatively efficient.

7) For a monopolistically competitive firm, marginal revenue 7)

A) is greater than the price. B) equals the price.
C) and the price are unrelated. D) is less than the price.

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Table 13-1

Price Total Revenue

Quantity
(dollars) (dollars)
1 $7.50 $7.50
2 7.00 14.00
3 6.50 19.50
4 6.00 24.00
5 5.50 27.50
6 5.00 30.00

8) Refer to Table 13-1. What is the marginal revenue of the 3rd unit? 8)
A) $6.50 B) $5.50 C) $1.83 D) $0.50

9) Refer to Table 13-1. The Table shows 9)

A) a demand schedule with an elastic segment from $7.50 to $6.50 followed by an inelastic
segment.
B) a demand schedule with an inelastic segment from $7.50 to $6.50 followed by an elastic
segment.
C) an inelastic segment of the demand schedule.
D) an elastic segment of the demand schedule.

10) Refer to Table 13-1. What portion of the marginal revenue of the 5th unit is due to the output effect 10)
and what portion is due to the price effect?
A) output effect = $1.50; price effect = $2.00 B) output effect = $5.50; price effect = -$2.00
C) output effect = $4.00; price effect = -$0.50 D) output effect = $3.00; price effect = $0.50

11) Which of the following is not a characteristic of monopolistic competition? 11)

A) Average revenue is equal to price.
B) There are many buyers and sellers.
C) The products sold by all firms are identical.
D) There are low barriers to entry.

12) A monopolistically competitive firm maximizes profit where 12)

A) price > marginal cost. B) total revenue > marginal cost.
C) marginal revenue > average revenue. D) price = marginal revenue.

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Table 13-2

Quantity Price Total Revenue Total Cost

(cases) (dollars) (dollars) (dollars)
1 $75 $75 $60
2 70 140 85
3 65 195 105
4 60 240 115
5 55 275 130
6 50 300 155
7 45 315 190
8 40 320 230
9 35 315 280

Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. Table 13-2 shows the firm's
demand and cost schedules.

13) Refer to Table 13-2. What is the output (Q) that maximizes profit and what is the price (P) charged? 13)
A) P = $55; Q = 5 cases B) P = $50; Q = 6 cases
C) P = $45; Q = 7 cases D) P = $40; Q = 8 cases

14) Refer to Table 13-2. How much additional profit will be made if the firm chooses to produce and 14)
sell 5 cases instead of 4 cases?
A) $275 B) $145 C) $35 D) $20

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Figure 13-4

Figure 13-4 shows short-run cost and demand curves for a monopolistically competitive firm in the market for designer
watches.

15) Refer to Figure 13-4. What is the area that represents the total revenue made by the firm? 15)
A) 0P1 bQa B) 0P3 dQa C) 0P0 aQa D) 0P2 cQa

16) Refer to Figure 13-4. Should the firm represented in the diagram continue to stay in business 16)
despite its losses?
A) Yes, it should increase its revenue by raising its price.
B) No, it is not able to cover its fixed cost.
C) Yes, its total revenue covers its variable cost.
D) No, it should shut down.

17) Both monopolistically competitive firms and perfectly competitive firms maximize profits 17)
A) by producing where price equals average variable cost.
B) by producing where marginal revenue equals average revenue.
C) by producing where price equals average total cost.
D) by producing where marginal revenue equals marginal cost.

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Table 13-4

Marginal Total Marginal

Quantity Sold Price Total Revenue Revenue Cost Cost Profit
0 $10 $0 ----- $2 ----- -$2
1 9 9 8
2 8 16 13
3 7 21 17
4 6 24 20
5 5 25 22
6 4 24 26

Table 13-4 lists estimated revenues and costs (per week) for plastic vials (100 vials per box) for the Victoria Biological
Supplies Company. Victoria sells plastic vials to universities and private research laboratories.

18) Refer to Table 13-4. Victoria's profit-maximizing quantity (Q) and price (P) are 18)
A) Q = 6; P = $4. B) Q = 4; P = $6. C) Q = 5; P = $5. D) Q = 3; P = $7.

Figure 13-8

Figure 13-8 shows cost and demand curves for a monopolistically competitive producer of iced tea.

19) Refer to Figure 13-8. Based on the diagram, one can conclude that 19)
A) the industry is in long-run equilibrium. B) some existing firms will exit the market.
C) new firms will enter the market. D) firms achieve productive efficiency.

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Figure 13-9

20) Refer to Figure 13-9. Which of the graphs in the figure depicts a monopolistically competitive firm 20)
that is minimizing its losses?
A) Panel A B) Panel B
C) Panel C D) Panel A and Panel C

21) A monopolistically competitive industry that earns economic profits in the short run will 21)
A) experience the exit of existing firms out of the industry in the long run.
B) continue to earn economic profits in the long run.
C) experience a rise in demand in the long run.
D) experience the entry of new rival firms into the industry in the long run.

22) In the long run, if price is less than average cost 22)
A) there is no incentive for the number of firms in the market to change.
B) the market must be in long-run equilibrium.
C) there is an incentive for firms to exit the market.
D) there is profit incentive for firms to enter the market.

23) In the long run, what happens to the demand curve facing a monopolistically competitive firm that 23)
is earning short-run profits?
A) The demand curve will shift to the left and became more elastic.
B) The demand curve will shift to the right and became more elastic.
C) The demand curve will shift to the right and became less elastic.
D) The demand curve will shift to the left and became less elastic.

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Figure 13-11

24) Refer to Figure 13-11. What is the productively efficient output for the firm represented in the 24)
diagram?
A) Q1 units B) Q2 units C) Q3 units D) Q4 units

25) Refer to Figure 13-11. What is the allocatively efficient output for the firm represented in the 25)
diagram?
A) Q1 units B) Q2 units C) Q3 units D) Q4 units

26) The entry and exit of firms in a monopolistically competitive market guarantee that 26)
A) marginal revenue equals marginal cost and average total cost is minimized.
B) price equals average total cost in the long run.
C) firms can earn economic profits in the short run.
D) firms can earn economic profits in the long run.

27) If firms in a monopolistically competitive market are earning economic profits, which of the 27)
following scenarios best reflects the change a representative firm experiences as the market adjusts
to its long-run equilibrium?
A) Demand decreases and becomes less elastic.
B) Demand increases and becomes less elastic.
C) Demand decreases and becomes more elastic.
D) Demand increases and becomes more elastic.

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Figure 13-13

28) Refer to Figure 13-13. What is the profit maximizing output level? 28)
A) Q1 units B) Q2 units C) Q3 units D) Q4 units

29) Refer to Figure 13-13. What is the area that represents the firm's profit? 29)
A) profit = 0 B) P4 eaP1 C) P3 baP2 D) P4 edP2

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Figure 13-14

Figure 13-14 illustrates a monopolistically competitive firm.

30) Refer to Figure 13-14. It is possible to lower the average cost of production by expanding output 30)
beyond Q0 to Q1 . Why wouldn't a firm expand its output to Q1 ?
A) Demand is not sufficient for consumers to buy Q1 .
B) The firm would suffer an economic loss at Q1 while it would break even at Q0 .
C) The firm wants to maximize accounting profit rather than economic profit.
D) The firm's marginal revenue would be negative at Q1 .

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Answer Key
Testname: MONOPOLISTIC COMPETITION QUIZ 1

1) A
2) A
3) B
4) B
5) D
6) B
7) D
8) B
9) D
10) B
11) C
12) A
13) B
14) D
15) D
16) C
17) D
18) B
19) C
20) C
21) D
22) C
23) A
24) D
25) C
26) B
27) C
28) D
29) D
30) B

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