Multiple Choice
Identify the
letter of the choice that best completes the statement or answers the question.
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Use
the figures below to answer the following questions.
Figure 17-1
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| 1. | Refer
to Figure 17-1. Which of the graphs would most likely represent a profit-maximizing firm in a
monopolistically competitive market? a. | panel a | b. | panel
b | c. | panel
c | d. | panel
d | | |
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Use
the figures below to answer the following questions.
Figure 17-4
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| 2. | Refer
to Figure 17-4. Panel (a) shows a profit-maximizing monopolistically competitive firm that
is a. | earning a zero
profit. | b. | in long-run equilibrium. | c. | charging a price
that is equal to average total cost. | d. | All of the above are correct. | | |
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| 3. | Refer
to Figure 17-4. Which of the panels depicts a firm in a monopolistically competitive market earning
economic profits? a. | panel
c | b. | panel
d | c. | both panels c
and d | d. | None of the above are correct. | | |
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| 4. | A
profit-maximizing firm in a monopolistically competitive market always operates at the point
of a. | minimum average
total cost. | b. | unitary elasticity of demand. | c. | efficient
scale. | d. | None of the above are correct. | | |
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| 5. | Before a new firm enters a monopolistically competitive market with a new product, it
considers a. | the profit
opportunities. | b. | the business-stealing externality. | c. | the
product-variety externality. | d. | All of the above are correct. | | |
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| 6. | When
a new firm enters a monopolistically competitive market, the individual demand curves faced by all
existing firms in that market will a. | shift to the left. | b. | shift to the
right. | c. | shift in a direction that is unpredictable without further
information. | d. | remain unchanged; only the supply curve will
shift. | | |
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| 7. | Which
of the following goods are not sold in monopolistically competitive markets? a. | CDs | b. | books | c. | cookies | d. | wheat | | |
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| 8. | Examples of monopolistically competitive markets do not include the market
for a. | piano
lessons. | b. | soybeans. | c. | cookies. | d. | voice lessons. | | |
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| 9. | Both
monopolistic competition and oligopoly are market structures a. | that lie between
the extreme cases of competition and monopoly. | b. | that feature
only a few firms in each market. | c. | to which the concept of Nash equilibrium is frequently applied
by economists. | d. | All of the above are correct. | | |
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| 10. | When
a market is monopolistically competitive, the typical firm in the market is likely to experience
a a. | positive profit
in the short run and in the long run. | b. | positive or negative profit in the short run and a zero profit
in the long run. | c. | zero profit in the short run and a positive or negative profit
in the long run. | d. | zero profit in the short run and in the long
run. | | |
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| 11. | Suppose that monopolistically competitive firms in a certain market are experiencing
losses. In the transition from this initial situation to a long-run equilibrium, a. | the number of
firms in the market decreases. | b. | each incumbent firm experiences a decrease in demand for its
product. | c. | each firm experiences upward shifts of its marginal-cost and
average-total-cost curves. | d. | All of the above are correct. | | |
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| 12. | Entry
and exit drive each firm in a monopolistically competitive market to a point of tangency between
its a. | marginal revenue
curve and its total-cost curve. | b. | marginal revenue curve and its average-total-cost
curve. | c. | demand curve and its total-cost
curve. | d. | demand curve and its average-total-cost
curve. | | |
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| 13. | A
firm has the following cost structure:
Output |
1 |
2 |
3 |
4 |
5 |
6 |
7 | Total Cost($) | 30 | 32 | 36 | 42 | 50 | 63 | 77 | | | | | | | | |
If this firm is in a typical perfectly competitive
market, in the long run it will likely produce a. | 4 or fewer units of output. | b. | 5 units of
output. | c. | more than 5 units of output. | d. | there is not
enough information to tell. | | |
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| 14. | A
monopolistically competitive firm has the following cost structure:
Output |
1 |
2 |
3 |
4 |
5 |
6 |
7 | Total Cost($) | 30 | 32 | 36 | 42 | 50 | 63 | 77 | | | | | | | | |
The firm faces the following demand
curve:
Price
($) | 20 | 18 | 15 | 12 | 9 | 7 | 4 | Quantity |
1 |
2 |
3 |
4 | 5 | 6 | 7 | | | | | | | | |
If the government forces this firm to produce at its
efficient scale, it will a. | produce 3 units and make $9. | b. | produce 4 units
and make $6. | c. | produce 5 units and lose $5. | d. | produce 7 units
and lose $49. | | |
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| 15. | A
monopolistically competitive firm is currently making a profit. If other firms enter the market, we
would expect that the added competition will cause this firm to adjust its a. | output so that
it will operate closer to its efficient scale. | b. | output so that
it will operate further from its efficient scale. | c. | output so that
it will no longer be at its efficient scale. | d. | output, but it
might move either closer to or further from its efficient scale. | | |
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| 16. | Advertising that conveys information about the existence of new
products a. | usually confuses
consumers about market competition. | b. | enhances the ability of markets to allocate resources
efficiently. | c. | reveals information that is of little value to
consumers. | d. | increases elasticity of demand. | | |
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Use
the following information to answer the following questions.
Scenario 17-2
Consider the
problem facing two firms in the fast-food restaurant market, Firm A and Firm B. Each company 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.
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| 17. | Refer
to Scenario 17-2. By its willingness to spend money on advertising, Firm B a. | signals the
value of its new product to consumers. | b. | signals that it is not a profit
maximizer. | c. | is detracting from the efficiency of
markets. | d. | None of the above are correct. | | |
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| 18. | In
some countries, brand name fast-food restaurants are not allowed to operate. Such restrictions are
likely to a. | enhance the
social well-being of society. | b. | enhance the choice set of consumers among local
restaurants. | c. | reduce barriers to entry in imperfect
markets. | d. | reduce the competitive nature of local fast-food
markets. | | |
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| 19. | Eunice consumes Coke exclusively. She claims that there is a clear taste difference
and that competing brands of cola leave an unsavory residual taste in her mouth. However, in a blind
taste test, Eunice is found to prefer generic store-brand cola to Coke eight out of ten times. The
results of Eunice's taste test would reinforce claims by critics of brand names that a. | consumers are
always willing to pay more for brand names. | b. | brand names
cause consumers to perceive differences that do not really exist. | c. | brand names
cause consumers to be more sensitive to product differences. | d. | brand names are
a form of socially efficient advertising. | | |
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| 20. | The
fact that there is a great deal of advertising of men's shaving products indicates
that a. | the market for
those products is perfectly competitive. | b. | it costs firms very little to produce those
products. | c. | those products are highly
differentiated. | d. | All of the above are correct. | | |
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True/False
Indicate whether the sentence or statement is true
or false.
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| 21. | For a
profit-maximizing firm in a monopolistically competitive market, when price is equal to average total
cost, price must lie above marginal cost.
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| 22. | Critics of advertising that focuses on product characteristics argue that it leads to
less elastic demand for products.
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Short Answer
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| | 23. | Evaluate the following statement in the context of business-stealing and
product-variety externalities: "We have too many student apartments in this town already;
statistics show that vacancy rates average 15 percent during any given semester."
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| | 24. | Use a
graph to demonstrate why a profit-maximizing monopolistically competitive firm must operate at excess
capacity. Explain why a perfectly competitive firm is not subject to the same
constraint.
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| | 25. | What
is meant by the term "excess capacity" as it relates to monopolistically competitive
firms?
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