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Monopolistic competition means:
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firms differentiate their output, which makes them price-makers, but barriers to entry are low or non-existent.
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A monopolistically competitive market is characterized by:
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many small sellers selling a differentiated product.
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Which of the following statements best describes firms under monopolistic competition?
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The firms compete using quality, location, and style.
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Monopolistic competition:
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is more similar to perfect competition than to monopoly.
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Which of the following market structures describes an industry in which all firms produce differentiated output and there are few barriers to entry?
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monopolistic competition
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If a firm has substantial market power, it must be operating in an industry that would be classified as:
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a monopoly.
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If the marginal revenue curve lies above the demand curve for a firm:
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this is not a firm that exists in any traditional industries.
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A monopolistically competitive firm usually charges less than a monopoly firm because:
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it faces some degree of competition due to low barriers to entry.
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The shape and/or slope of the marginal revenue curve under monopolistic competition is:
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downward-sloping and twice as steep as the demand curve.
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Which of the following statements best describes the price, output, and profit conditions of monopolistic competition?
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Marginal revenue will equal marginal cost in the short run at a profit-maximizing level of output; in the long run, economic profit will be zero.
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Which of the following is true in long-run equilibrium for both a competitive market and monopolistic competition?
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Economic profit is zero.
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The theory of monopolistic competition predicts that, in long-run equilibrium, a monopolistically competitive firm will:
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produce the output level at which price equals long-run average cost.
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Profit-maximizing, monopolistically competitive firms:
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cannot be guaranteed an economic profit in any period and might incur losses.
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If a monopolistically competitive firm is incurring losses, then at the profit-maximizing output amount:
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price is below the average total cost curve.
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Both competitive and monopolistically competitive firms:
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can maximize profit by producing to the point where marginal cost = marginal revenue.
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The marginal revenue of a monopolistically competitive firm will always be:
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less than the price.
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Which of the following best describes the relationship between price and marginal revenue for monopolistic competitors?
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Price is above marginal revenue, as a general rule, regardless of the number of firms in the monopolistically competitive industry.
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If the price that determined where marginal revenue equaled marginal cost were below the bottom of the average variable cost curve, then the profit-maximizing, monopolistically competitive firm would:
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shut down because it would cost more to produce and sell output than it would to shut down and lose all fixed costs.
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An increase in marginal cost causes a profit-maximizing, monopolistically competitive firm to:
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raise price and decrease output.
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Profit-maximizing, monopolistically competitive firms:
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consider only marginal cost and marginal revenue, which determine the level of output—and the level of output determines price.
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If monopolistically competitive firms are making positive economic profits, then new firms would:
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begin to enter the industry.
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Entry of new firms will continue in a monopolistically competitive industry until:
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economic profit equals zero.
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The entry of new firms into a monopolistically competitive industry causes the:
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existing firm's demand curve to shift left.
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The demand curve for a monopolistically competitive firm is downward sloping because of:
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product differentiation.
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The difference between price and marginal cost is:
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markup
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A monopolistically competitive firm usually charges more than a perfectly competitive firm because:
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producing differentiated output is more expensive than producing homogenous output.
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In a monopolistically competitive industry, price:
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is most likely a bit higher than the competitive market price because of the cost of variety.
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Perfect competition and monopolistic competition are similar because, under both market structures:
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there are zero economic profits in the long run.
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A competitive firm would have:
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more elastic demand than a monopolistically competitive firm.
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Excess capacity best describes the fact that:
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monopolistically competitive firms produce less than the cost-minimizing level of output.
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Monopolistic competition is inefficient because:
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price is not equal to the minimum average total cost.
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A monopolistically competitive firm is inefficient because the firm:
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produces an output where average total cost is not minimum.
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One source of economic inefficiency from monopolistic competition is:
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markup
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The concept of markup under monopolistic competition would best be described as the:
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difference between the marginal cost and the price of the monopolistic competitor.
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Markup would generally be highest under:
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a monopoly
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When a perfectly competitive firm or a monopolistically competitive firm is making zero economic profit:
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the industry is in equilibrium; no firms will want to enter or exit.
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If a monopolistically competitive firm wants to maximize profits, it will increase production until:
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marginal revenue = marginal cost.
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Product differentiation makes the demand for a monopolistically competitive firm's product:
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less elastic than in a competitive market.
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Advertising is designed to:
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decrease the price elasticity of demand for the firm and shift the firm's demand curve rightward.
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Successful advertising:
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normally causes demand for the firm to shift right.
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Because of successful advertising:
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the demand curve facing each firm shifts right, while the cost curves shift upward.
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Successful advertising under monopolistic competition might:
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reduce the price elasticity of demand for that firm's output.
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When would advertising be least effective?
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in a perfectly competitive industry
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Why would perfectly competitive industries advertise even though individual firms do not?
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Even though the output of an individual firm would be considered homogeneous to other firms, the industry output would be differentiated (for example, Florida orange juice versus imports).
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One drawback to advertising might be that it could easily:
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raise costs but not increase demand.
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