Microeconomics Instructor Miller Practice Problems Monopolistic Competition

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1 Microeconomics Instructor Miller Practice Problems Monopolistic Competition 1. A monopolistically competitive market is described as one in which there are A) a few firms producing an identical product. B) a large number of firms selling similar, but not identical, products. C) a few firms producing differentiated products. D) one large firm and many small firms producing identical products. 2. Which of the following is not a characteristic of monopolistic competition? A) Firms are price takers. B) There are many buyers and sellers. C) Barriers to entry are low. D) Firms sell similar, but not identical, products. 3. Because the monopolistically competitive firm faces a demand curve for its product, it the price of its output. A) downward-sloping; cannot influence B) horizontal; can influence C) horizontal; cannot influence D) downward-sloping; can influence 4. A major difference between monopolistic competition and perfect competition is A) the number of sellers in the markets. B) the degree by which the market demand curves slope downwards. C) that products are not standardized in monopolistic competition unlike in perfect competition. D) the barriers to entry in the two markets. 5. For a monopolistically competitive firm, marginal revenue A) always equals the price. B) is greater than the price. C) is less than the price. D) and price are unrelated.

2 6. The Jeans Store sells 7 pairs of jeans per day when it charges $100 per pair. It sells 8 pairs of jeans per day at a price of $90 per pair. The marginal revenue of the eighth pair of jeans is A) $20. B) $90. C) $100. D) $ What is the profit-maximizing rule for a monopolistically competitive firm? A) to produce a quantity that maximizes market share B) to produce a quantity that maximizes total revenue C) to produce a quantity such that marginal revenue equals marginal cost D) to produce a quantity such that price equals marginal cost Quantity (cases) Price (dollars) Total Revenue (dollars) 1 $75 $75 $ Total Cost (dollars) Eco Energy is a monopolistically competitive producer of a sports beverage called Power On. Table 13-2 shows the firm's demand and cost schedules. 8. Refer to above table. What is the output (Q) that maximizes profit and what is the price (P) charged? A) P=$55; Q=5 cases B) P=$50; Q=6 cases C) P=$45; Q=7 cases D) P=$40; Q=8 cases 9. Refer to above table. What is Eco Energy's profit? A) $125 B) $140 C) $145 D) $150

3 10. Refer to above table. What is the marginal profit from producing and selling the 5th case? A) $275 B) $145 C) $35 D) $ Refer to above table. What is likely to happen to the product's price in the long run? A) It will fall. B) It will increase. C) It will remain constant. D) This cannot be determined without information on its long-run demand curve. The above figure 13-4 shows cost and demand curves for a monopolistically competitive producer of iced-tea. 12. Refer to the above figure. What is the profit-maximizing output level? A) 22 cases B) 24 cases C) 30 cases D) 38 cases 13. Refer to the above figure. What is the firm's profit-maximizing price? A) $12 B) $13 C) $14 D) $16

4 14. Refer to the above figure. At the profit-maximizing output level the firm will A) earn a profit of $176. B) break even. C) earn a profit of $88. D) earn a profit of $ Refer to the above figure. Based on the diagram, one can conclude that A) some existing firms will exit the market. B) new firms will enter the market. C) the industry is in long-run equilibrium. D) firms achieve productive efficiency. 16. If price exceeds average variable cost but is less than average total cost, a firm A) should further differentiate its product. B) should stay in business for a while longer until its fixed costs expire. C) is making some profit but less than maximum profit. D) should shut down. 17. A monopolistically competitive firm that earns an accounting profit in the short run A) must also earn an economic profit in the short run. B) does not earn enough to earn an economic profit in the short run. C) could earn an economic profit, break even or suffer an economic loss in the short run. D) could earn an economic profit or break even, but could not suffer an economic loss in the short run. 18. When new firms are encouraged to enter a monopolistically competitive market A) some existing firms must be earning economic profits. B) they do so because there is insufficient product differentiation. C) the demand curve facing an existing firm shifts to the right. D) the marginal cost curve facing an existing firm shifts downwards. 19. The entry and exit of firms in a monopolistically competitive market guarantee that A) marginal revenue equals marginal cost and average total cost is minimized. B) firms can earn economic profits in the long run. C) price equals average total cost in the long run. D) firms can earn economic profits in the short run.

5 20. In long-run equilibrium, compared to a perfectly competitive market, a monopolistically competitive industry produces a level of output and charges a price. A) higher; lower B) lower; lower C) lower; higher D) higher; higher 21. Economists have long debated whether there is a significant loss of well-being to society in markets that are monopolistically competitive rather than perfectly competitive. Which of the following offers the best reason why some economists believe that monopolistically competitive markets benefit consumers despite any loss of well-being? A) Although consumers may pay a price greater than marginal cost for a product, the product is produced at the minimum average total cost. B) Although consumers may pay a price greater than marginal cost and the product is not produced at minimum average total cost, they benefit from being able to buy a differentiated product more closely suited to their tastes. C) Consumers pay a price equal to the marginal cost of producing a product, even though it is not produced at the minimum average total cost. D) Consumers are better off choosing from a variety of differentiated products, even though product differentiation causes barriers that restrict entry into monopolistically competitive markets. 22. Monopolistically competitive firms can differentiate their products A) by producing at minimum efficient scale. B) by producing where marginal revenue equals marginal cost. C) by equating price and average total cost. D) through marketing. 23. One goal a firm tries to achieve when it advertises a product is to A) make the demand curve for the product more elastic. B) shift the demand curve for the product to the left. C) make the demand curve for the product unitary elastic. D) make the demand curve for the product more inelastic.

6 Key 1. B 2. A 3. D 4. C 5. C 6. A 7. C 8. B 9. C 10. D 11. A 12. A 13. D 14. C 15. B 16. B 17. C 18. A 19. C 20. C 21. B 22. D 23. D