Q1. In a market characterized by monopolistic competition, which of the following statements about advertising costs is least accurate?

A)   Many firms spend a significant portion of their advertising budget on brand name promotion.

B)   Firms’ advertising costs tend to be greater than those for firms in perfect competition.

C)   The average total cost attributable to advertising will increase as output increases.

Q2. Which of the following is least accurate with regard to advertising for firms operating under monopolistic competition?

A)   Advertising may decrease average total cost.

B)   The increase to average total costs associated with advertising increases as output increases.

C)   Advertising expenses are high relative to perfect competition and monopoly.

Q3. Which of the following statements is least accurate with regard to the efficiency of monopolistic competition?

A)   The expense of advertising and promotion may not be justified by their benefit to consumers.

B)   Consumers benefit from brand name promotion and advertising.

C)   Monopolistic competition is at least as efficient as perfect competition.

Q4. Which of the following is least accurate regarding product development and marketing for firms under monopolistic competition?

A)   Relative to other types of competition, product innovation is critical to the pursuit of economic profits.

B)   Firms that bring new and innovative products to the market face relatively more elastic demand curves than their competitors.

C)   Brand names can provide consumers with information regarding the quality of firm’s products.

Q1. In a market characterized by monopolistic competition, which of the following statements about advertising costs is least accurate?

A)   Many firms spend a significant portion of their advertising budget on brand name promotion.

B)   Firms’ advertising costs tend to be greater than those for firms in perfect competition.

C)   The average total cost attributable to advertising will increase as output increases.

Correct answer is C)

The increase in average total cost attributable to advertising decreases as output increases because a fixed cost is being averaged over a larger quantity. Advertising expenses are relatively high for firms in monopolistic competition. This is not only because firms need to inform consumers about the unique features of their products, but also to create or increase a perception of differences between products that are actually quite similar. Many firms spend a significant portion of their advertising budget on brand name promotion.

Q2. Which of the following is least accurate with regard to advertising for firms operating under monopolistic competition?

A)   Advertising may decrease average total cost.

B)   The increase to average total costs associated with advertising increases as output increases.

C)   Advertising expenses are high relative to perfect competition and monopoly.

Correct answer is B)

Advertising expenses are high for firms in monopolistic competition. Not only because firms need to inform consumers about the unique features of a firm’s products, but also to create or increase a perception of differences between products that are actually quite similar. Advertising costs increase average total costs, but the increase to average total cost attributable to advertising decreases as output increases because more fixed advertising dollars are being averaged over a larger quantity. If advertising increases output (sales) significantly, it can actually decrease a firm’s average total cost if there are economies of scale.

Q3. Which of the following statements is least accurate with regard to the efficiency of monopolistic competition?

A)   The expense of advertising and promotion may not be justified by their benefit to consumers.

B)   Consumers benefit from brand name promotion and advertising.

C)   Monopolistic competition is at least as efficient as perfect competition.

Correct answer is C)

The efficiency of monopolistic competition is unclear. Consumers may make better purchasing decisions due to the information content of brand name promotion and advertising. However, there are those that argue that the increased cost of advertising and sales is not justified by the benefits of these activities and represent inefficient use of resources.

Q4. Which of the following is least accurate regarding product development and marketing for firms under monopolistic competition?

A)   Relative to other types of competition, product innovation is critical to the pursuit of economic profits.

B)   Firms that bring new and innovative products to the market face relatively more elastic demand curves than their competitors.

C)   Brand names can provide consumers with information regarding the quality of firm’s products.

Correct answer is B)

Firms under monopolistic competition face less elastic demand curves when they introduce new and innovative products. This enables them to increase price and earn economic profits. However, close substitutes and imitations will eventually erode the economic profit from a new product. So, firms must constantly seek innovative product features that make their products relatively more desirable than their competitors.

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