chunty

Under monopolistic competition, companies can earn positive economic profits in:

A) the short run and in the long run.

B) neither the short run nor the long run.

C) the short run but not in the long run.

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In a market characterized by monopolistic competition, companies can earn positive economic profits in the short run if the price of their product is greater than the average total cost of producing it. In the long run, because barriers to entry are low, economic profits will attract new entrants. Additional producers will drive the price lower until price equals average total cost, economic profit is zero, and new competitors no longer have an incentive to enter the market.

chunty

If a market features differentiated products but has low barriers to entry, in long-run equilibrium the firms in the market will earn:

A) substantial economic losses.

B) zero economic profits.

C) substantial economic profits.

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Low barriers to entry suggest free entry and exit, which implies zero economic profits in the long run.

chunty

Which of the following most accurately describes why firms under monopolistic competition face elastic demand for their products?

A) The availability of many close substitutes.

B) Allocative efficiency.

C) High barriers to entry.

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The demand for products from firms competing in monopolistic competition is relatively elastic due to the availability of close substitutes. If a firm increases its product price, it will lose customers to firms selling slightly differentiated products at lower prices.

chunty

When a firm is earning positive economic profits in a monopolistic competitive market, what will most likely occur?

A) Losses will occur in the short run.

B) Price takers will be over run by price searchers.

C) New firms will enter driving down the economic profits to zero.

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New firms will enter a monopolistic competitive market with economic profits above zero and will absorb some market demand. This will shift the demand curve down to the point where price equals average total cost and there are zero economic profits.

chunty

When a regulatory agency requires a monopolist to use average cost pricing, the intent is to produce the quantity where the:

A) marginal revenue curve intersects the marginal cost curve.

B) average total cost curve intersects the marginal revenue curve.

C) the market demand curve intersects the average total cost curve.

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When a regulatory agency requires a monopolist to use average cost pricing, the intent is to price the product where the average total cost curve intersects the market demand curve. There are problems in using this method, e.g., determining exactly what the average total cost really is.

chunty

Which of the following statements about a monopolist is least accurate?

A) A monopolist will always be able to earn economic profit.

B) A profit-maximizing monopolist will expand output until marginal revenue equals marginal cost.

C) A profit-maximizing monopolist will supply less of his product than the amount consistent with the conditions of ideal static efficiency for an economy.

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Monopolists maximize profit when MR = MC. If the ATC curve lies above the demand curve, monopolists will lose money.

chunty

Which of the following is least likely to be considered a reason why regulation of monopolies is not effective?

A) Regulation reduces the incentive for firms to reduce costs.

B) Regulation shifts industry demand and increases prices.

C) Regulators do not know the firm’s cost structure.

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Regulation is not associated with a shift in industry demand.

chunty

Which of the following describes the regulatory practice of setting prices at a level where the monopoly firm’s average total cost curve intersects the demand curve?

A) Marginal cost pricing.

B) Average cost pricing.

C) Cost-of-service pricing.

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Under average cost pricing, regulators attempt to force monopolies to reduce prices to where a firm’s average total cost curve intersects the market demand curve. This will increase output and decrease price, increase allocative efficiency, and ensure zero economic profit.

chunty

In a natural monopoly:

A) the price charged by a monopolist is determined by the intersection of the demand curve with the marginal cost curve.

B) the average total cost of production continually declines with increased output.

C) one firm controls all natural resources.

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A monopoly situation in which the average total cost of production continually declines with increased output is called a natural monopoly.

chunty

A monopolist will continue expanding output as long as:

A) marginal revenue is positive.

B) economic profit is greater than zero.

C) marginal revenue is greater than marginal cost.

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The optimum behavior of all firms is to produce until the point where MR = MC. So, the monopolist can increase total profit by increasing production as long as marginal revenue is greater than marginal costs.