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Exam 17: Monopolistic Competition

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Question 111

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In the long run,a profit-maximizing firm in a monopolistically competitive market operates at

A) efficient scale.
B) a level of output at which average total cost is rising.
C) a level of output at which average total cost is falling.
D) the level of output at which total revenue is maximized.

E) A) and B)
F) C) and D)

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Question 112

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Firm A produces and sells in a market that is characterized by highly differentiated consumer goods.Firm B produces and sells industrial products.Firm C produces and sells an agricultural commodity.Which firm is likely to spend the greatest portion of its total revenue on advertising?

A) Firm A
B) Firm B
C) Firm C
D) There is no reason to believe that any one of the three firms would spend a greater portion of its total revenue on advertising than the other two firms.

E) All of the above
F) C) and D)

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Question 113

Multiple Choice

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A recent outbreak of hepatitis was linked to a national fast-food restaurant chain.This is an example of a case in which

The profit-maximizing rule for a firm in a monopolistically competitive market is to always select the quantity at which

When monopolistically competitive firms advertise,in the long run

Excess capacity

Scenario 17-2 Consider the problem facing two firms, Firm A and Firm B, in the fast-food restaurant market. Each firm has just come up with an idea for a new fast-food menu item which it would sell for $4. Assume that the marginal cost for each new menu item is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 2 million consumers to try its new product. Firm A has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 2 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Firm B's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Firm B estimates that its initial 2 million customers will buy one unit of the product each month in the coming year, for a total of 24 million units. -Refer to Scenario 17-2.If firm B decides to advertise its product it can expect to

Scenario 17-2 Consider the problem facing two firms, Firm A and Firm B, in the fast-food restaurant market. Each firm has just come up with an idea for a new fast-food menu item which it would sell for $4. Assume that the marginal cost for each new menu item is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 2 million consumers to try its new product. Firm A has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 2 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Firm B's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Firm B estimates that its initial 2 million customers will buy one unit of the product each month in the coming year, for a total of 24 million units. -Refer to Scenario 17-2.By its willingness to spend money on advertising,Firm B

Which of the following is a characteristic of oligopoly or monopolistic competition,but not perfect competition?

Table 17-3 Traci's Hairstyling is one salon among many in the market for hairstyling. The following table presents cost and revenue data for Traci's Hairstyling. -Refer to Table 17-3.Given the cost and revenue data,Traci's is

A monopolistically competitive firm faces the following demand curve for its product: The firm has total fixed costs of $40 and a constant marginal cost of $2 per unit.We can conclude that

Table 17-1 -Refer to Table 17-1.This table shows the demand schedule,marginal cost,and average total cost for a monopolistically competitive market.Which of the following is likely to happen in the long run in this market?

In some countries,brand name fast-food restaurants are not allowed to operate.Such restrictions are likely to

If firms in a monopolistically competitive market are incurring economic losses,which of the following scenarios would best describe the change existing firms (who are able to stay in the market) would face as the market adjusts to the long-run equilibrium?

When firms sell highly differentiated consumer goods,it is likely that a significant cost to the firms will be

When a monopolistically competitive firm is in long-run equilibrium,

Ignoring oligopoly and focusing on the other three market structures,in which of those market structures does a profit-maximizing firm charge a price that exceeds marginal cost?

An important difference between the situation faced by a profit-maximizing monopolistically competitive firm in the short run and the situation faced by that same firm in the long run is that in the short run,

A markup of price over marginal cost is inconsistent with free entry and zero profit.

In which of the following market structures are there a large number of sellers? (i) Monopolistic competition (ii) Perfect competition (iii) Oligopoly