JonnyKay

Monopolistic competition differs from pure monopoly in that:

A) monopolists maximize profit; monopolistic competitors do not.

B) barriers to entry are high under monopoly, but low under monopolistic competition.

C) monopolistic competitors are price takers, monopolists are not.

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Monopolistic competition is characterized by the low barriers to enter its competitive markets. In contrast, a monopoly exists only where there are high barriers to market entry.

JonnyKay

One way in which monopolistic competition can be distinguished from perfect competition is that in monopolistic competition:

A) price is greater than marginal cost.

B) each firm faces a perfectly elastic demand curve.

C) marginal revenue is greater than marginal cost at the quantity produced.

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In monopolistic competition, price is greater than marginal cost (i.e., firms can realize a markup). In perfect competition, P = MC. Firms in monopolistic competition are price searchers, i.e., each firm faces a downward sloping demand curve. Regardless of the market structure, all firms produce the quantity at which marginal revenue equals marginal cost.

JonnyKay

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

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

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

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

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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.

JonnyKay

Under which type of market structure are the production and pricing alternatives of a firm most affected by the decisions of its competitors?

A) Oligopoly.

B) Monopolistic competition.

C) Perfect competition.

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An oligopoly market structure is characterized by a small number of firms producing similar or differentiated products, with a high degree of interdependence among competitors. Each firm’s optimal price and output are strongly affected by the pricing and output decisions of its competitors.

JonnyKay

Monopolistic competition differs from pure monopoly in that:

A) monopolistic competitors are price takers and monopolists are not.

B) monopolistic competitors have low barriers to entry and monopolists do not.

C) monopolists maximize profits and monopolistic competitors do not.

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Another name for monopolistic competition is a competitive price searcher market. Monopolistic competition refers to a large number of independent sellers, each produces a differentiated product, each market has a low barrier to entry, and each producer faces a downward sloping demand curve.

JonnyKay

Which of the following regarding monopolistic competition is most accurate?

A) Zero barriers to entry and exit exist.

B) Each firm produces a differentiated product.

C) There are very few independent sellers.

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Other characteristics of monopolistic competition (also known as competitive price searcher markets) are: a large number of independent sellers, low barriers to entry, and an elastic downward sloping demand curve.

JonnyKay

Which of the following is most accurate for a price-taker firm in long-run equilibrium when there are no barriers to entry?

A) P = MC = ATC = MR.

B) P = AVC = MR.

C) TC = TR = MC.

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For a price-taker firm, long-run equilibrium is where P = MC = ATC. For price taking firms, P = MC. Competition eliminates economic profits in the long run so that P = ATC.

JonnyKay

Assume that a perfectly competitive firm produces 10 units of a good and sells them each for a price (P) equal to $15. If the marginal cost (MC) of the 10th unit is $15 and the average total cost (ATC) is $13, economic profit for the firm is closest to:

A) $0.

B) $120.

C) $20.

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When MR = MC = P, economic profit equals TR – TC. In this case, TR = $150 = 10 × $15 and TC = $130 = 10 × ATC = 10 × $13. So, economic profit is $20 = $150 − $130.

JonnyKay

A competitive firm will tend to expand its output as long as marginal:

A) revenue is greater than marginal cost.

B) revenue is greater than the average cost.

C) cost is less than average cost.

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All firms will continue to expand production until marginal revenue = marginal cost.

JonnyKay

When a firm operates under conditions of perfect competition, marginal revenue always equals:

A) price.

B) total cost.

C) average variable cost.

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When a firm operates under conditions of perfect competition, marginal revenue always equals price. This is because, in perfect competition, price is constant (a horizontal line) so that marginal revenue is constant.