Homework answers / question archive / Wesleyan college Chapter 13  Monopolistic Competition: The Competitive Model in a More Realistic Setting 1) Which of the following characteristics is not common to monopolistic competition and perfect competition? A) Firms act to maximize profit

Wesleyan college Chapter 13  Monopolistic Competition: The Competitive Model in a More Realistic Setting 1) Which of the following characteristics is not common to monopolistic competition and perfect competition? A) Firms act to maximize profit

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Chapter 13  Monopolistic Competition: The Competitive Model in a More Realistic Setting

1) Which of the following characteristics is not common to monopolistic competition and perfect competition?

A) Firms act to maximize profit.

B) Entry barriers into the industry are low.

C) The market demand curve is downward -sloping.

D) Firms take market prices as given.

 

 

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

A) few sellers.

B) sellers selling similar but differentiated products.

C) high barriers to entry.

D) sellers acting to maximize revenue.

 

 

3) In monopolistic competition there is/are

A) 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.

 

 

4) Which of the following is true for a firm with a downward-sloping demand curve for its product?

A) Price, average revenue, and marginal revenue are all equal.

B) Price, average revenue, and marginal revenue are all different.

C) Price equals average revenue but is greater than marginal revenue.

D) Price equals average revenue but is less than marginal revenue.

 

 

5) 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.

 

 

 

6) A monopolistically competitive firm faces a downward-sloping demand curve because

A) it is able to control price and quantity demanded.

B) there are few substitutes for its product.

C) of product differentiation.

D) its market decisions are affected by the decisions of its rivals.

 

 

7) A monopolistically competitive firm will

A) 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.

 

 

8) If the demand curve for a firm is downward-sloping, its marginal revenue curve

A) will lie above the demand curve.

B) will lie below the demand curve.

C) is the same as the demand curve.

D) is horizontal.

 

 

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.

 

 

10) When a monopolistically competitive firm cuts its price to increase its sales, it experiences a loss in revenue due to the

A) substitution effect.

B) income effect.

C) price effect.

D) output effect.

 

 

Table 13-1

Quantity	Price (dollars)	Total Revenue (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

 

11) Refer to Table 13-1. What is the marginal revenue of the 3rd unit?

A) $6.50

B) $5.50

C) $1.83

D) $0.50

 

 

12) Refer to Table 13-1. 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 = $19.50

B) output effect = $6.50; price effect = $2.00

C) output effect = -$0.50; price effect = $5.00

D) output effect = $6.00; price effect = -$1.50

 

 

Figure 13-1

 

 

 

13) Refer to Figure 13-1. The marginal revenue from the increase in price from P0 to P1 equals

A) the area A.

B) the area (B + D - A).

C) the area (A - D).

D) the area (C - B).

 

 

Figure 13-2

 

 

 

14) Refer to Figure 13-2. The marginal revenue from selling the additional unit Qb instead of Qa equals

A) the area (G + H).

B) the area (H - E).

C) the area (E + F) - (G + H).

D) the area G.

 

 

 

15) Which of the following statements is true about marginal revenue?

A) If marginal revenue is zero, it means that quantity demanded falls to zero when a firm changes its price.

B) If marginal revenue is negative, the additional revenue received from selling 1 more unit of the good is smaller than the revenue lost from receiving a lower price on all the units that could have been sold at the original price.

C) If marginal revenue is positive, the additional revenue received from selling 1 more unit of the good is smaller than the revenue lost from receiving a lower price on all the units that could have been sold at the original price.

D) Marginal revenue increases as price falls and quantity sold increases.

 

 

Figure 13-3

 

 

 

16) Refer to Figure 13-3. The marginal revenue from one additional unit sold is the sum of the gain in revenue from selling the additional unit and the loss in revenue from having to charge a lower price to sell the additional unit. Based on the diagram in the figure,

A) X represents the gain (price effect) and Y the loss (output effect).

B) X + Z represents the loss (output effect) and Y the gain (price effect).

C) Y represents the gain (output effect) and X the loss (price effect).

D) X represents the loss (price effect) and Y + Z the gain (output effect).

 

 

17) For the monopolistically competitive firm

A) Price (P) = Marginal Revenue (MR) = Average Revenue (AR).

B) P = MR > AR.

C) P = AR > MR.

D) P > MR = AR.

 

 

18) The Jeans Store sells 7 pairs of jeans per day when it charges $100 per pair. It sells 8 pairs of jeans per day at a price of $90 per pair. The marginal revenue of the eighth pair of jeans is

A) $20.

B) $90.

C) $100.

D) $700.

 

 

19) Suppose that if a local McDonald's restaurant reduces the price of a Big Mac from $4.00 to $3.25, the number of Big Macs it sells per day will increase from 4 to 5. Explain the output effect and the price effect resulting from this change. Using a graph, illustrate both the loss in revenue from selling each of the first 4 Big Macs for $0.75 less and the additional revenue from selling 1 more Big Mac. What is the total change in revenue received which results from this price decrease?

Answer:  The 1 extra Big Mac sold is the output effect. The $0.75 cents less it receives for each Big Mac sold at the lower price is the price effect. The total change in revenue resulting from the price decrease is $3.25 - $3.00 = $0.25.

 

 

 

20) Complete the following table.

 

Energy Drinks Consumed per Week	Price (P)	Total Revenue (TR)	Average Revenue (AR)	Marginal Revenue (MR)
0	$6.00
1	5.50
2	5.00
3	4.50
4	4.00
5	3.50
6	3.00
7	2.50
8	2.00

 

 

 

21) A monopolistically competitive firm maximizes profit where

A) price = marginal revenue.

B) price > marginal cost.

C) marginal revenue > average revenue.

D) total revenue > marginal cost.

 

 

22) Unlike a perfectly competitive firm, for a monopolistically competitive firm

A) 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.

 

 

Figure 13-4

 

 

 

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

 

23) Refer to Figure 13-4. 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

 

 

24) Refer to Figure 13-4.What is the area that represents the total revenue made by the firm?

A) 0P0aQa

B) 0P1bQa

C) 0P2cQa

D) 0P3dQa

 

Diff: 2    Page Ref: 429-430

 

25) Refer to Figure 13-4.What is the area that represents the total variable cost of production?

A) 0P0aQa

B) 0P1bQa

C) P0abP1

D) P1bdP3

 

 

26) Refer to Figure 13-4.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.

 

 

27) Refer to Figure 13-4.What is the area that represents the loss made by the firm?

A) the area P0adP3

B) the area P1bcP2

C) the area P0acP2

D) the area P2cdP3

 

 

28) Refer to Figure 13-4. Should the firm represented in the diagram continue to stay in business despite its losses?

A) No, it should shut down.

B) Yes, its total revenue covers its variable cost.

C) No, it is not able to cover its fixed cost.

D) Yes, it should increase its revenue by raising its price.

 

 

29) In the short run, a profit-maximizing firm's decision to produce should be guided by whether

A) it makes a profit.

B) its marginal profit is maximized.

C) its total revenue exceeds its fixed cost.

D) its total revenue covers its variable cost.

 

 

30) If price exceeds average variable cost but is less than average total cost, a firm

A) should further differentiate its product.

B) should stay in business for a while longer until its fixed costs expire.

C) is making some profit but less than maximum profit.

D) should shut down.

 

 

 

Table 13-3

Quantity	Price (dollars)	Total Revenue (dollars)	Total Variable Cost (dollars)	Total Cost (dollars)
0	$21	$0	$0	$50
1	20	20	16	66
2	19	38	31	81
3	18	54	45	95
4	17	68	59	109
5	16	80	75	125
6	15	90	93	143
7	14	98	112	162
8	13	104	140	190
9	12	108	180	230
10	11	110	230	280

 

 Table 13-3 shows the demand and cost schedules for a monopolistically competitive firm.

 

31) Refer to Table 13-3. What are the profit-maximizing/loss-minimizing output level and price?

A) Q=0 (firm should not produce)

B) Q=3; P=$18

C) Q=4; P=$17

D) Q=5; P=$16

 

 

32) Refer to Table 13-3. What is the amount of the firm's loss at its optimal output level?

A) $0

B) $41

C) $45

D) $50

 

 

33) Refer to Table 13-3. What is its average variable cost of production at its optimal output level?

A) $0 (because its optimal output =0)

B) $15

C) $14.75

D) $29

 

 

34) Refer to Table 13-3. What is the best course of action for the firm in the short run?

A) It should shut down.

B) It should stay in business because it covers some of its fixed cost.

C) It should increase its sales by lowering its price.

D) It should not cut its price but it should increase its sales by advertising.

 

 

35) Assume price exceeds average variable cost over the relevant range of demand. If a monopolistically competitive firm is producing at an output where marginal revenue is $23 and marginal cost is $19, then to maximize profits the firm should

A) continue to produce the same quantity.

B) increase output.

C) decrease output.

D) shutdown.

 

 

Figure 13-5

 

 

 

36) Refer to Figure 13-5. The candy store represented in the diagram is currently selling Qa units of candy at a price of Pa. Is this candy store maximizing its profit and if it is not, what would you recommend to the firm?

A) Yes, it is maximizing its profit by charging the highest price possible.

B) No, it is not; since its marginal cost is constant, it should produce and sell as much candy as it can. It should sell Qd units at a price of Pd.

C) No, it is not; it should lower its price to Pc and sell Qc units.

D) No, it is not; it should lower its price to Pb and sell Qb units.

 

 

37) Both monopolistically competitive firms and perfectly competitive firms maximize profits

A) by producing where price equals average total cost.

B) by producing where marginal revenue equals average revenue.

C) by producing where marginal revenue is equal to marginal cost.

D) by producing where price equals average variable cost.

 

 

38) A monopolistically competitive firm maximizes profit in the short run by producing where

A) price is less than marginal cost.

B) price is less than marginal revenue.

C) price is less than average revenue.

D) price is greater than marginal cost.

 

 

39) A monopolistically competitive firm chooses

A) both the quantity of output to produce and the price at which it will sell its output.

B) the price of the product it sells but market forces determine the quantity it will be able to sell.

C) the quantity of output to produce but the price of the product it sells is determined collectively by all firms in the industry.

D) the price of the product it sells but the quantity of output to produce is agreed upon by all firms in the industry.

 

 

 

 

 

40) A monopolistically competitive industry that earns economic profits in the short run will

A) 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.

 

 

41) 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 until

A) 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.

 

 

42) In the long run, what happens to the demand curve facing a monopolistically competitive firm that 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 left and became less elastic.

C) The demand curve will shift to the right and became more elastic.

D) The demand curve will shift to the right and became less elastic.

 

 

Figure 13-11

 

 

 

43) Refer to Figure 13-11. What is the monopolistic competitor's profit maximizing output?

A) Q1 units

B) Q2 units

C) Q3 units

D) Q4 units

 

 

44) Refer to Figure 13-11. What is the monopolistic competitor's profit maximizing price in the Long Run?

A) P1

B) P2

C) P3

D) P4

 

 

45) Refer to Figure 13-11. 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.

 

 

46) Refer to Figure 13-11. 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

 

 

47) Refer to Figure 13-11. 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

 

 

48) Refer to Figure 13-11. What is the amount of excess capacity?

A) Q4 - Q3 units

B) Q4 - Q2 units

C) Q3 - Q2 units

D) Q3 - Q1 units

 

 

49) Why do most firms in monopolistic competition typically make zero profit in the long run?

A) because firms produce differentiated products

B) because the lack of entry barriers would compete away profits

C) because firms do not produce at their minimum efficient scale

D) because the total market is not large enough to accommodate so many firms

 

 

50) Which of the following describes the relative positions of the demand curve and the average total cost (ATC) curve of a monopolistically competitive firm that earns a profit in the short run?

A) In the short run, the firm's demand curve will lie above its ATC curve. The demand curve will be tangent to the ATC curve in the long run.

B) In the short run, the firm's demand curve will lie below its ATC curve. The demand curve will be tangent to the ATC curve in the long run.

C) In the short run, the firm's demand curve will cross its ATC curve at the ATC curve's lowest point. The demand curve will be above the ATC curve in the long run.

D) In the short run, the firm's ATC curve will cross the demand curve at the profit maximizing level of output. The demand curve will be tangent to the ATC curve in the long run.

 

 

51) Which of the following is true for a monopolistically competitive firm in long-run equilibrium?

A) P = ATC and MR = MC.

B) P = ATC and P = MC.

C) P > ATC and P > MR.

D) P > MR and MC = ATC.

 

 

Figure 13-15

 

 

 

52) Refer to Figure 13-15 to answer the following questions.

a.   What is the profit-maximizing output level?

b.   What is the profit-maximizing price?

c.   What is the average total cost at the profit-maximizing output level?

d.   What area represents the firm's profit?

e.   At which output level are economies of scale exhausted?

f.    Does this graph most likely represent the long run or the short run? Why?

    

 

53) The table below shows the demand and cost data facing "Velvet Touches," a monopolistically competitive producer of velvet throw pillows.

 

Quantity	Price	Total Revenue	Marginal Revenue	Total Cost	Marginal Cost
1	$30			$32
2	28			43
3	26			53
4	24			64
5	22			76
6	20			90
7	18			106
8	16			126

 

Use the data to answer the following questions.

a.   Complete the Total Revenue (TR), Marginal Revenue (MR) and Marginal Cost (MC) columns above.

b.   What are the profit-maximizing price and quantity for Velvet Touches?

c.   Is the firm making a profit or a loss? How much is the profit or loss? Show your work.

d.   Is this firm operating in the long run or in the short run? Explain your answer.

e.   If the firm's profit or loss is typical of all firms in the market for throw pillows, what is likely to happen in the future? Will there be more firms or will some existing firms leave the industry? Explain your

f.    What will happen to the typical firm's profit or loss after all entry/exit adjustments?