Student name:__________

TRUE/FALSE - Write 'T' if the statement is true and 'F'

if the statement is false.
1) In the long run, monopolistically competitive firms
make normal profits because they are forced to operate at the
minimum point on their average total cost curve.

⊚ true
⊚ false

2) The monopolistically competitive seller maximizes

profits by equating price and marginal cost.

⊚ true
⊚ false

3) Monopolistically competitive firms are inefficient

because they produce at a point on the rising segment of their
average cost curves.

⊚ true
⊚ false

4) The demand curve of a monopolistically competitive

producer is less elastic than that of a purely competitive
producer.

⊚ true
⊚ false

5) The larger the number of firms and the less the degree
of product differentiation, the greater will be the elasticity of a
monopolistically competitive seller's demand curve.

⊚ true
⊚ false

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6) The economic profits earned by monopolistically
competitive sellers are zero in the long run.

⊚ true
⊚ false

7) The excess capacity problem associated with produce the same industry
monopolistic competition implies that fewer firms could output at a lower total cost.

⊚ true
⊚ false

8) The demand curve of a monopolistically competitive

firm is more elastic than that of a pure monopolist.

⊚ true
⊚ false

9) Monopolistically competitive sellers realize economic

profits in the long run because entry barriers are significant.

⊚ true
⊚ false

10) Monopolistically competitive sellers produce

efficiently because they obtain only normal profits in the long
run.

⊚ true
⊚ false

11) Two industries that have the same four-firm

concentration ratio can have significantly different Herfindahl
indexes.

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 ⊚ true ⊚ false

12) The highest possible value of the Herfindahl index is

1,000.

⊚ true
⊚ false

13) Monopolistically competitive firms exist due to high

barriers to entry.

⊚ true
⊚ false

14) Monopolistically competitive firms have some control

over the price of their products.

⊚ true
⊚ false

15) Brand names and packaging are forms of product

differentiation under monopolistic competition.

⊚ true
⊚ false

16) Product differentiation is what allows

monopolistically competitive firms to have some market
power.

⊚ true
⊚ false

17) The four-firm concentration ratio cannot have a value

above 1.0, or 100 percent.

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 ⊚ true ⊚ false

18) The Herfindahl index is a measure of the degree of

product differentiation in an industry.

⊚ true
⊚ false

19) We would expect the four-firm concentration ratio of 0.80, or 80 percent, and
the restaurant industry in a large metropolitan area to be about higher.

⊚ true
⊚ false

20) The demand curve faced by a monopolistically

competitive firm is more elastic than the monopolist's demand
curve.

⊚ true
⊚ false

21) The larger the number of firms in an industry and the

less the extent of product differentiation, the greater will be
the elasticity of the individual seller's demand curve.

⊚ true
⊚ false

22) If the representative firm in a monopolistically the industry will expand in

competitive industry has an optimal output where P < ATC, the long run.

⊚ true
⊚ false

23) In the long run, a typical firm in a monopolistically competitive market earns

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positive economic profits.

⊚ true
⊚ false

24) In monopolistic competition, easy industry entry and

exit drives long-run profits of firms to zero.

⊚ true
⊚ false

25) In monopolistic competition, short-run positive

economic profits of firms in the market will cause the market
demand to expand.

⊚ true
⊚ false

26) Long-run profits of individual firms in monopolistic

competition will be larger than their short-run profits.

⊚ true
⊚ false

27) As new firms enter a monopolistically competitive

market, the demand curves facing existing firms will tend to
shift left.

⊚ true
⊚ false

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 ⊚ true

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29) Monopolistically competitive firms will achieve the are no significant barriers
most efficient allocation of society's resources because there to entry into the industry.

⊚ true
⊚ false

30) Pure competition results in a lower price but identical

output level compared to those in monopolistic competition.

⊚ true
⊚ false

31) Monopolistic competition entails a deadweight loss to

society, even if the firms earn zero economic profits.

⊚ true
⊚ false

32) "Excess capacity" exists in monopolistic competition

but not in pure competition.

⊚ true
⊚ false

33) The amount of excess capacity in pure competition

tends to become larger the more elastic the individual firm’s
demand curve becomes.

⊚ true
⊚ false

34) The entry of more firms into a monopolistically

competitive market tends to increase the excess capacity of
firms in the industry in the long run.

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 ⊚ true ⊚ false

35) Monopolistic competition provides the benefit of

product variety but at the cost of productive inefficiency.

⊚ true
⊚ false

36) That one thing that monopolistic competition

provides, which is not assured in the other market structures,
is product variety.

⊚ true
⊚ false

37) Product differentiation in a monopolistically

competitive market always entails more costs than benefits.

⊚ true
⊚ false

38) If we believe that "variety is the spice of life," then we

should be more concerned about the excess capacity in
monopolistic competition and do our best to eliminate it.

⊚ true
⊚ false

MULTIPLE CHOICE - Choose the one alternative that

best completes the statement or answers the question.
39) Monopolistic competition means

B) a large number
A) a market situation where competition is based of firms producing a
entirely on product differentiation and advertising. standardized or

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homogeneous product. homogeneous product.
C) many firms producing differentiated products.
D) a few firms producing a standardized or

40) Monopolistic competition is characterized by a

D) few dominant
A) few dominant firms and low entry barriers. firms and substantial entry
B) large number of firms and substantial entry barriers.
barriers.
C) large number of firms and low entry barriers.

41) Under monopolistic competition, entry to the industry

is

C) more difficult
A) completely free of barriers. than under pure monopoly.
B) more difficult than under pure competition but not D) blocked.
nearly as difficult as under pure monopoly.

42) In which of these continuums of degrees of

competition (highest to lowest) is monopolistic competition
properly placed?

monopoly, oligopoly
A) pure competition, oligopoly, pure monopoly, D) pure
monopolistic competition competition, monopolistic
B) oligopoly, pure competition, monopolistic competition, oligopoly,
competition, pure monopoly pure monopoly
C) monopolistic competition, pure competition, pure

43) Monopolistic competition resembles pure competition

because

B) in both
A) both industries emphasize nonprice competition. instances firms will
operate at the minimum

Version 1 9
point on their long-run average total cost curves. or nonexistent.
C) both industries entail the production of
differentiated products.
D) in both industries barriers to entry are either weak

44) Which of the following is not a basic characteristic of

monopolistic competition?

D) a relatively
A) the use of trademarks and brand names large number of sellers
B) recognized mutual interdependence
C) product differentiation

45) Nonprice competition refers to

D) reductions in
A) competition between products of different production costs that are
industries, for example, competition between aluminum and not reflected in price
steel in the manufacture of automobile parts. reductions.
B) price increases by a firm that are ignored by its
rivals.
C) advertising, product promotion, and changes in
the real or perceived characteristics of a product.

46) The restaurant, legal assistance, and clothing

industries are each illustrations of

D) pure
A) countervailing power. monopoly.
B) homogeneous oligopoly.
C) monopolistic competition.

47) If the number of firms in a monopolistically

competitive industry increases and the degree of product
differentiation diminishes,

A) the likelihood

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of realizing economic profits in the long run would be competition.
enhanced. D) the likelihood
B) individual firms would now be operating at of collusive pricing would
outputs where their average total costs would be higher. increase.
C) the industry would more closely approximate pure

48) Economic analysis of a monopolistically competitive

industry is more complicated than that of pure competition
because

D)
A) of product differentiation and consequent product monopolistically
promotion activities. competitive producers use
B) monopolistically competitive firms cannot realize strategic pricing strategies
an economic profit in the long run. to combat rivals.
C) the number of firms in the industry is larger.

49) A monopolistically competitive industry combines

elements of both competition and monopoly. The monopoly
element results from

D) mutual
A) the likelihood of collusion. interdependence in
B) high entry barriers. decision making.
C) product differentiation.

50) A monopolistically competitive industry combines competition element

elements of both competition and monopoly. The results from

D) mutual
A) the likelihood of collusion. interdependence in
B) product differentiation. decision making.
C) low entry barriers.

51) A significant difference between a monopolistically

competitive firm and a purely competitive firm is that the

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 products.
A) former does not seek to maximize profits. D) former's
B) latter recognizes that price must be reduced to sell demand curve is perfectly
more output. inelastic.
C) former sells similar, although not identical,

52) A significant difference between a monopolistically

competitive firm and a purely competitive firm is that the

C) latter’s demand
A) former has fewer barriers to entry into the curve is perfectly elastic.
industry. D) latter
B) latter recognizes that price must be reduced to sell differentiates its product.
more output.

53) A monopolistically competitive industry combines say that the competitive

elements of both competition and monopoly. It is correct to element results from

D) a highly
A) a relatively large number of firms, and the inelastic demand curve,
monopolistic element from product differentiation. and the monopolistic
B) product differentiation, and the monopolistic element from advertising
element from high entry barriers. and product promotion.
C) a perfectly elastic demand curve, and the
monopolistic element from low entry barriers.

54) Monopolistically competitive and purely competitive

industries are similar in that

D) there are few,

A) both are assured of short-run economic profits. if any, barriers to entry.
B) both produce differentiated products.
C) the demand curves facing individual firms are
perfectly elastic in both industries.

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 D) firms will
A) allocative efficiency will be achieved. realize economic profits in
B) productive efficiency will be achieved. the long run.
C) firms will engage in nonprice competition.

56) Use your basic knowledge and your understanding of

market structures to answer this question. Which of the
following companies most closely approximates a
monopolistic competitor?

D) Microsoft
A) Subway Sandwiches
B) Pittsburgh Plate Glass
C) Ford Motor Company

57) In which of the following market models do demand

and marginal revenue diverge?

C) pure monopoly
A) pure monopoly, oligopoly, and monopolistic only
competition D) oligopoly only
B) pure monopoly, oligopoly, and pure competition

58) Concentration ratios measure the

the largest firms in the

A) geographic location of the largest corporations in industry.
each industry. D) number of
B) degree to which product price exceeds marginal firms in an industry.
cost in various industries.
C) percentage of total industry sales accounted for by

59) If the four-firm concentration ratio for industry X is

80,

total sales.
A) the four largest firms account for 80 percent of B) each of the

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four largest firms accounts for 20 percent of total sales. D) the industry is
C) the four largest firms account for 20 percent of monopolistically
total sales. competitive.

60) An industry having a four-firm concentration ratio of

30 percent

D) is
A) approximates pure competition. monopolistically
B) is an oligopoly. competitive.
C) is a pure monopoly.

61) The Herfindahl index for a pure monopolist is

C) 100,000.
A) 100. D) 10.
B) 10,000.

62) Industries X and Y both have four-firm concentration while that for Y is 264.
ratios of 32 percent, but the Herfindahl index for X is 256, These data suggest

D) that price
A) greater market power in X than in Y. competition is stronger in
B) greater market power in Y than in X. Y than in X.
C) both industries are strongly oligopolistic.

63) Industries X and Y both have four-firm concentration while that for Y is 898.
ratios of 48 percent, but the Herfindahl index for X is 860, These data suggest

D) that price
A) greater market power in X than in Y. competition is stronger in
B) greater market power in Y than in X. Y than in X.
C) both industries are monopolistically competitive.

64) Suppose that total sales in an industry in a particular year are $800 million and

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sales by the top four sellers are $50 million, $40 million, $30
million, and $30 million, respectively. We can conclude that

D) firms in this
A) allocative efficiency will be achieved. industry likely collude
B) this industry is monopolistically competitive. with each other.
C) the concentration ratio is 25 percent.

65) The four-firm sales concentration ratio for an industry

measures the

D) degree of X-
A) geographic concentration of firms. inefficiency in the
B) extent to which the four largest firms dominate industry.
the production of a good.
C) percentage of the industry's capital facilities
owned by the four largest firms.

66) If an industry evolves from oligopoly to monopolistic

competition, we would expect

same.
A) the four-firm concentration ratio to increase. D) barriers to
B) the four-firm concentration ratio to decrease. entry to strengthen.
C) the four-firm concentration ratio to remain the

67) If you sum the squares of the market shares of each

firm in an industry (as measured by percent of industry sales),
you are calculating the

D) Lerner index.
A) four-firm concentration ratio.
B) Herfindahl index.
C) degree of collusion.

68) The Herfindahl

index

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 in collusion.
A) tells us the degree to which monopolistically D) gives much
competitive firms are differentiating their products. greater weight to larger
B) is another name for the four-firm concentration firms than to smaller firms
ratio. in an industry.
C) tells us whether oligopolistic firms are engaging

69) If the four-firm concentration ratio in an oligopolistic of sales, the Herfindahl

industry is 100 percent and each firm has an equal percentage index is

C) 3,750.
A) 10,000. D) 1,000.
B) 2,500.

70) Assume the top six firms comprising an industry have Herfindahl index for this
market shares of 10, 8, 8, 5, 5, and 4 percent. The remaining industry is
30 firms each have market shares of 2 percent. The

C) 414.
A) 253. D) 294.
B) 31.

71) Suppose the Herfindahl indexes for industries A, B,

and C are 1,200, 5,000, and 7,500 respectively. These data
imply that

D) industry A is
A) market power is greatest in industry A. more monopolistic than
B) market power is greatest in industry B. industry C.
C) market power is greatest in industry C.

72)

Firm Market Share (%) C 20

A 20 D 20
B 20 E 10
F 10

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Refer to the data. The Herfindahl index for the industry is

C) 1,800.
A) 1,600. D) 80.
B) 18,000.

73)

Firm Market Share (%) F 10

A 20 Refer to the data. If all the
B 20 firms in the industry
C 20 merged into a single firm,
D 20 the Herfindahl index
would become
E 10

C) 10,000.
A) 100. D) 100,000.
B) 1,000.

74)

Firm Market Share (%) Refer to the data. Suppose

A 20 that firms in this industry
B 20 split up such that there
were 100 firms, each with
C 20
a 1 percent market share.
D 20
The four-firm
E 10 concentration ratio and the
F 10 Herfindahl index
respectively would be

D) 4 percent and
A) 100 percent and 10,000. 100.
B) 4 percent and 4.
C) 100 percent and 16.

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75)

Firm Market Share (%) D 5

A 40 E 5
B 30 Refer to the data. The four-
C 20 firm concentration ratio for
this industry is

firms are included.

A) 90 percent.
B) 95 percent.
C) 100 percent.
D) indeterminate because we don't know which four

76)

Firm Market Share (%) D 5

A 40 E 5
B 30 Refer to the data. The
C 20 Herfindahl index for this
industry is

C) 1,000.
A) 95. D) 2,925.
B) 2,950.

77)

Firm Market Share (%) Refer to the data. If Firm B

A 40 merged with Firm E, the
B 30 industry's four-firm
concentration ratio would
C 20
____ and its Herfindahl
D 5
index would ____.
E 5

D) remain the
A) rise; rise same; fall
B) fall; rise
C) remain the same; rise

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78) A monopolistically competitive firm has a

D) perfectly
A) highly elastic demand curve. elastic demand curve.
B) highly inelastic demand curve.
C) perfectly inelastic demand curve.

79) Which of the following is a characteristic of

monopolistic competition?

D) relatively easy
A) standardized product entry
B) a relatively small number of firms
C) absence of nonprice competition

80) A monopolistically competitive industry is like a

purely competitive industry in that

D) firms in both
A) each firm produces a standardized product. industries face a horizontal
B) nonprice competition is a feature in both demand curve.
industries.
C) neither industry has significant barriers to entry.

81) Which of the following assumptions is part of the

model of monopolistic competition?

market.
A) Firms make identical or homogeneous products. D) Firms have no
control over their products'
B) There is no mutual interdependence among firms. prices.
C) There are significant barriers to entry into the

82) Monopolistic
competition is
characterized by firms

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 D) producing
A) producing differentiated products. where price equals
B) making economic profits in the long run. marginal cost.
C) producing at optimal productive efficiency.

83) Which of the following characteristics provide a

monopolistically competitive firm some monopoly power?

D) price
A) significant barriers to entry into the industry discrimination
B) product differentiation
C) a low concentration ratio in the industry

84) In which industry is monopolistic competition most

likely to be found?

C) retail trade
A) utilities D) mining
B) agriculture

85) One difference between monopolistic competition and

pure competition is that

to entry.
A) products may be homogeneous in monopolistic D) firms
competition. differentiate their products
B) there is some control over price in monopolistic in pure competition.
competition.
C) monopolistic competition has significant barriers

86) For which market model can we not assume a

homogeneous product?

D) oligopoly
A) pure competition
B) pure monopoly
C) monopolistic competition

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87) Which set of characteristics below best describes the
basic features of monopolistic competition?

products
A) easy entry, many firms, and standardized products D) easy entry, few
firms, and standardized
B) barriers to entry, few firms, and differentiated products
products
C) easy entry, many firms, and differentiated

88) The goal of product differentiation and advertising in

monopolistic competition is to make

D) price more of a
A) the firm allocatively efficient even if it is not factor and product
productively efficient. differences less of a factor
B) the firm productively efficient even if it is not in consumer purchases.
allocatively efficient.
C) price less of a factor and product differences more
of a factor in consumer purchases.

89) Which industry would be best characterized as

monopolistically competitive?

D) business cloud-
A) smartphone manufacturing computing services
B) Internet-search sites
C) web design consulting

90) Which of the following is a measure of the degree of

industry concentration?

D) S&P 500 Index

A) Dow Jones Industrial Average
B) Herfindahl Index
C) Employment Cost Index

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91) The following are the respective numbers for the four- monopolistically
firm concentration ratio and Herfindahl index in an industry. competitive?
Which set of numbers is most suggestive that the industry is

C) 80 and 1,800
A) 25 and 207 D) 89 and 2,582
B) 76 and 2,662

92) The monopolistically competitive seller's demand

curve will become more elastic the

D) smaller the
A) more significant the barriers to entering the number of competitors.
industry.
B) greater the degree of product differentiation.
C) larger the number of competitors.

93) The larger the number of firms and the smaller the
degree of product differentiation, the

firm's demand curve.

A) greater the divergence between the demand and D) more elastic is
the marginal revenue curves of the monopolistically the monopolistically
competitive firm. competitive firm's demand
B) larger will be the monopolistically competitive curve.
firm's fixed costs.
C) less elastic is the monopolistically competitive

94) The demand curve of a monopolistically competitive

producer is

less elastic than that of a

A) less elastic than that of either a pure monopolist or
a pure competitor.
B) less elastic than that of a pure monopolist, but
more elastic than that of a pure competitor.
C) more elastic than that of a pure monopolist, but

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pure competitor.
D) more elastic than that of either a pure monopolist
or a pure competitor.

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95) A monopolistically competitive firm's marginal
revenue curve

D) does not exist

A) is downsloping and coincides with the demand because the firm is a "price
curve. maker."
B) coincides with the demand curve and is parallel to
the horizontal axis.
C) is downsloping and lies below the demand curve.

96) The price elasticity of a monopolistically competitive

firm's demand curve varies

D) inversely with
A) inversely with the number of competitors and the the number of competitors
degree of product differentiation. but directly with the degree
B) directly with the number of competitors and the of product differentiation.
degree of product differentiation.
C) directly with the number of competitors but
inversely with the degree of product differentiation.

97) In the short run, a profit-maximizing monopolistically

competitive firm sets it price

D) below
A) equal to marginal revenue. marginal cost.
B) equal to marginal cost.
C) above marginal cost.

98) In the long run, a profit-maximizing monopolistically

competitive firm sets it price

D) equal to
A) above marginal cost. marginal cost.
B) below marginal cost.
C) equal to marginal revenue.

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99) In the short run, the price charged by a
monopolistically competitive firm attempting to maximize
profits

more than ATC.

A) must be less than ATC. D) must be equal
B) must be more than ATC. to ATC.
C) may be either equal to ATC, less than ATC, or

100) In the long run, the price charged by the

monopolistically competitive firm attempting to maximize
profits

more than ATC.

A) must be less than ATC. D) will be equal to
B) must be more than ATC. ATC.
C) may be either equal to ATC, less than ATC, or

101) Monopolistically competitive firms

D) persistently
A) realize normal profits in the short run but losses in realize economic profits in
the long run. both the short run and long
B) incur persistent losses in both the short run and run.
long run.
C) may realize either profits or losses in the short run
but realize normal profits in the long run.

102) The monopolistically competitive seller maximizes

profit by producing at the point where

D) price equals
A) total revenue is at a maximum. marginal revenue.
B) average costs are at a minimum.
C) marginal revenue equals marginal cost.

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103) In the long run, the price charged by a
monopolistically competitive firm seeking to maximize profit
will

D) exceed both
A) be less than both MC and ATC. MC and ATC.
B) exceed ATC but equal MC.
C) exceed MC but equal ATC.

104) Which of the following is correct for a

monopolistically competitive firm in long-run equilibrium?

D) P = MC.
A) MC = ATC.
B) MC exceeds MR.
C) P exceeds minimum ATC.

105) In the long run, economic theory predicts that a

monopolistically competitive firm will

D) have excess
A) earn an economic profit. production capacity.
B) realize all economies of scale.
C) equate price and marginal cost.

106) Excess capacity refers to the

D) fact that most

A) amount by which actual production falls short of monopolistically
the minimum ATC output. competitive firms
B) fact that entry barriers artificially reduce the encounter diseconomies of
number of firms in an industry. scale.
C) differential between price and marginal costs that
characterizes monopolistically competitive firms.

107)

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 Refer to the diagram for
a monopolistically
competitive firm in short-
run equilibrium. This
firm's profit-maximizing
price will be

C) $16.
A) $10. D) $19.
B) $13.

108) Refer to the diagram for

a monopolistically
competitive firm in short-
run equilibrium. The
profit-maximizing output
for this firm will be

C) 180.
A) 100. D) 210.
B) 160.

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109)

Refer to the diagram for a monopolistically competitive

firm in short-run equilibrium. This firm will realize an
economic

C) profit of $280.
A) loss of $320. D) profit of $600.
B) profit of $480.

In short-run equilibrium,
the monopolistically
competitive firm shown
will set its price

110)

C) below MC.
A) below ATC. D) below MR.
B) above ATC.

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 The monopolistically
competitive firm shown in
the figure

111)

D) can realize an
A) is in long-run equilibrium. economic profit.
B) might realize an economic profit or a loss,
depending on its choice of output level.
C) cannot operate profitably in the short run.

If all monopolistically
competitive firms in the
industry have profit
circumstances similar to
the firm shown,

112)

D) no firms will
A) new firms will enter the industry. exit the industry.
B) some firms will exit the industry.
C) all firms will exit the industry.

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 Refer to the diagram. In
short-run equilibrium, the
monopolistically
competitive firm shown
will set its price

113)

C) below MC.
A) below ATC. D) below MR.
B) above ATC.

Refer to the diagram.

The monopolistically
competitive firm shown

114)

D) is realizing an
A) will realize allocative efficiency at its profit- economic profit.
maximizing output.
B) cannot operate at a loss.
C) is in long-run equilibrium.

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 Refer to the diagram. If
all monopolistically
competitive firms in the
industry have profit
circumstances similar to
the firm shown above,

115)

D) no firms will
A) new firms will enter the industry. enter the industry.
B) some firms will exit the industry.
C) all firms will exit the industry.

116)

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 Refer to the diagrams, which pertain to monopolistically
competitive firms. Short-run equilibrium entailing economic
loss is shown by

D) both diagrams
A) diagram a only. a and c.
B) diagram b only.
C) diagram c only.

117) Refer to the diagrams,

which pertain to
monopolistically
competitive firms. A short-
run equilibrium entailing
economic profits is shown
by

D) both diagrams
A) diagram a only. b and c.
B) diagram b only.
C) diagram c only.

118)

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 Refer to the diagrams,
which pertain to
monopolistically
competitive firms. Long-
run equilibrium is shown
by

D) none of these
A) diagram a only. diagrams.
B) diagram b only.
C) diagram c only.

119) Which of the following is not characteristic of long-

run equilibrium under monopolistic competition?

D) Price exceeds
A) Price equals minimum average total cost. marginal cost.
B) Marginal cost equals marginal revenue.
C) Price is equal to average total cost.

120)

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 Refer to the diagram for
a monopolistically
competitive firm. Long-run
equilibrium price will be

C) A.
A) above A. D) B.
B) EF.

121) Refer to the diagram for

a monopolistically
competitive firm. Long-run
equilibrium output will be

C) D.
A) greater than E. D) C.
B) E.

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122) Refer to the diagram for
a monopolistically
competitive firm. If more
firms were to enter the
industry and product
differentiation were to
weaken, then

D) the firm would

A) resource misallocation would become more achieve allocative
severe. efficiency.
B) the demand curve would become more elastic.
C) firms would begin earning economic profits.

123) Long-run equilibrium for a monopolistically

competitive firm where economic profits are zero results from

D) product
A) rising marginal costs. differentiation and
B) a perfectly elastic product demand curve. development.
C) relatively easy entry.

124) When a monopolistically competitive firm is in long-

run equilibrium,

equals average total cost.

A) production takes place where ATC is minimized. C) normal profit is
zero and price equals
B) marginal revenue equals marginal cost and price marginal cost.

Version 1 35
 D) economic profit is zero and price equals marginal cost.

125) If some firms leave a monopolistically competitive

industry, the demand curves of the remaining firms will

D) shift to the
A) be unaffected. right.
B) shift to the left.
C) become more elastic.

126) When a monopolistically competitive firm is in long-

run equilibrium,

D) MR = MC and
A) P = MC = ATC. P> minimum ATC.
B) MR = MC and minimum ATC > P.
C) MR > MC and P = minimum ATC.

127) Other things equal, if more firms enter a

monopolistically competitive industry,

become less elastic.

A) the demand curves facing existing firms would D) losses would
shift to the right. necessarily occur.
B) the demand curves facing existing firms would
shift to the left.
C) the demand curves facing existing firms would

128) Which of the following statements is correct?

economic profits in the

A) Purely competitive firms, monopolistically long run.
competitive firms, and pure monopolies all earn zero C) In the long run,
economic profits in the long run. purely competitive firms
B) Purely competitive firms, monopolistically and monopolistically
competitive firms, and pure monopolies all earn positive competitive firms earn

Version 1 36
zero economic profits, while pure monopolies may or may not economic profits in both
earn economic profits. the short run and the long
D) Monopolistically competitive firms earn zero run.

129) For a monopolistically competitive firm in long-run

equilibrium,

D) price will
A) price will equal marginal cost. equal the minimum
B) price will equal average total cost. average total cost.
C) marginal revenue will exceed marginal cost.

130) In long-run equilibrium, both purely competitive and

monopolistically competitive firms will

D) equate
A) produce at minimum average total cost. marginal cost and marginal
B) earn economic profits. revenue.
C) achieve allocative efficiency.

131) In long-run equilibrium, monopolistic competition

entails

capacity.
A) an efficient allocation of resources. D) production at
B) an overallocation of resources due to inadequate the minimum attainable
capacity. average total cost.
C) an underallocation of resources due to excess

132) Which of the following statements concerning a

monopolistically competitive industry is correct?

B) If there are
A) If there are short-run losses, firms will leave the short-run economic profits,
industry and the demand curves of the remaining firms will firms will enter the
shift to the right. industry and the demand

Version 1 37
curves of existing firms will shift to the right. leave the industry and the
C) If there are short-run losses, firms will leave the demand curves of the
industry and the demand curves of the remaining firms will remaining firms will shift
shift to the left. to the right.
D) If there are short-run economic profits, firms will

133) Answer the question on the basis of the following

demand and cost data for a specific firm.

Demand Cost Data If columns (1) and (3) of

Data the demand data shown are
(1) (2) (3) Output Total Cost this firm's demand
Price Price Quantity schedule, the profit-
$11.00 $10.00 6 6 $61 maximizing level of output
9.99 8.85 7 7 62 will be
9.00 8.00 8 8 64
8.00 7.00 9 9 67
7.10 6.10 10 10 72
6.00 5.00 11 11 79
5.15 4.15 12 12 86

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 C) 10 units.
A) 12 units. D) 9 units.
B) 8 units.

134) Answer the question on the basis of the following

demand and cost data for a specific firm.

Demand Cost Data

Data 5 4 1 1 8
(1) (2) (3) Output Total Cost . .
Price Price Quantity 1 1
$11.00 $10.00 6 6 $61 5 5
9.99 8.85 7 7 62 If columns (1) and (3) of
9.00 8.00 8 8 64 the demand data shown are
8.00 7.00 9 9 67
this firm's demand
schedule, the profit-
7.10 6.10 10 10 72
maximizing price will be
6.00 5.00 11 11 79

C) $11.
A) $7. D) $6.
B) $9.

135) Answer the question on the basis of the following

demand and cost data for a specific firm.

Demand Cost Data If columns (1) and (3) of

Data the demand data shown are
(1) (2) (3) Output Total Cost this firm's demand
Price Price Quantity schedule, economic profit
$11.00 $10.00 6 6 $61 will be
9.99 8.85 7 7 62
9.00 8.00 8 8 64
8.00 7.00 9 9 67
7.10 6.10 10 10 72
6.00 5.00 11 11 79
5.15 4.15 12 12 86

Version 1 39
 C) $19.
A) $6. D) $10.
B) $8.

136) Answer the question on the basis of the following

demand and cost data for a specific firm.

Demand Cost Data Suppose that entry into the

Data industry changes this firm's
(1) (2) (3) Output Total Cost demand schedule from
Price Price Quantity columns (1) and (3) to
$11.00 $10.00 6 6 $61 columns (2) and (3).
9.99 8.85 7 7 62 Economic profit will
9.00 8.00 8 8 64
8.00 7.00 9 9 67
7.10 6.10 10 10 72
6.00 5.00 11 11 79
5.15 4.15 12 12 86

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 D) decline to zero.
A) fall by $10.
B) fall to $6.
C) increase by $10.

137) Answer the question on the basis of the following

demand and cost data for a specific firm.

Demand Cost Data 5 4 1 1 8

Data . .
(1) (2) (3) Output Total Cost 1 1
Price Price Quantity 5 5
$11.00 $10.00 6 6 $61 Suppose that entry into this
9.99 8.85 7 7 62 industry changes this firm's
demand schedule from
9.00 8.00 8 8 64
columns (1) and (3) to
8.00 7.00 9 9 67
columns (2) and (3). We
7.10 6.10 10 10 72
can conclude that this
6.00 5.00 11 11 79 industry is

D)
A) a pure monopoly. monopolistically
B) purely competitive. competitive.
C) a constant cost industry.

138) Answer the question on the basis of the following

demand and cost data for a specific firm.

Demand Cost Data 6 5 1 1 7

Data . .
(1) (2) (3) Output Total Cost 0 0
Price Price Quantity 0 0
$11.00 $10.00 6 6 $61 5 4 1 1 8
. .
9.99 8.85 7 7 62
1 1
9.00 8.00 8 8 64 5 5
8.00 7.00 9 9 67
7.10 6.10 10 10 72

Version 1 41
With the demand schedule shown by columns (2) and (3), in long-run equilibrium

D) price will
A) price will equal average total cost. equal marginal revenue.
B) total cost will exceed total revenue.
C) marginal cost will exceed price.

139) An important similarity between a monopolistically

competitive firm and a purely competitive firm is that

D) both realize
A) both face perfectly elastic demand schedules. allocative efficiency.
B) economic profit tends toward zero for both.
C) both realize productive efficiency.

140) An important similarity between a monopolistically

competitive firm and a pure monopolist is that both

elastic.
A) realize an economic profit in the long run. D) achieve
B) achieve allocative efficiency. productive efficiency.
C) face demand curves that are less than perfectly

141) The less elastic a monopolistic competitor's long-run

demand curve, the

D) lower its
A) less its excess capacity. average total cost at its
B) higher its price relative to that of a pure equilibrium level of output.
competitor having the same cost curves.
C) higher its long-run profits.

Version 1 42
 Refer to the diagram for
a monopolistically
competitive producer. The
firm is

142)

D) about to leave
A) minimizing losses in the long run. the industry.
B) minimizing losses in the short run.
C) realizing a normal profit in the long run.

143) Monopolistically competitive firms are similar to

monopolies in that they have

D) marginal
A) high barriers to entry in their industry. revenues that are less than
B) close substitutes for their products. price.
C) inelastic demand for their products.

144) Demand and marginal revenue curves are downward-

sloping for monopolistically competitive firms because

D) mutual
A) each firm has to take the market price as given. interdependence among all
B) product differentiation allows each firm some firms in the industry leads
degree of monopoly power. to collusion.
C) there are a few large firms in the industry and they
each act as a monopolist.

Version 1 43
145) The downward-sloping demand curve of a monopolistic competitor

D) ensures that
A) reflects some level of control over its own price. the firm will produce at
minimum average cost in
B) becomes eventually horizontal in the long run. the long run.
C) indicates collusion among the members of the
product group.

146) The monopolistically competitive seller's demand

curve will become more elastic the

D) smaller the
A) larger the number of competitors. number of competitors.
B) greater the degree of product differentiation.
C) more significant the barriers to entry.

147) The demand curve faced by a monopolistically

competitive firm

D) is more elastic
A) is more elastic than the monopolist's demand than the demand curve
curve. faced by the purely
B) is less elastic than the monopolist's demand curve. competitive firm.
C) will shift outward as new firms enter the industry.

148) In monopolistic competition, which of the following

would make an individual firm's demand curve less elastic?

D) an increase in
A) the purchase of more efficient machinery the number of rival firms
B) an increase in the price of the firm's product
C) increased brand loyalty toward the firm's product

Version 1 44
 Refer to the above graph
for a monopolistically
competitive firm. A
successful advertising
campaign by the firm will
cause its demand curve to
shift from

149)

D) B to A and
A) A to B and become more elastic. become less elastic.
B) A to B and become less elastic.
C) B to A and become more elastic.

150) A monopolistically competitive firm is producing at cost is $2.50. This firm is

an output level in the short run where average total cost is operating
$4.50, price is $4.00, marginal revenue is $2.50, and marginal

D) at a
A) with positive profits. nonoptimal level of output.
B) with a loss.
C) at the break-even point.

Version 1 45
151) The graph depicts a monopolistically competitive
firm.

D) $52 and
A) $55 and produce 45 units of output. produce 50 units of output.
B) $65 and produce 35 units of output.
C) $50 and produce 35 units of output.

152) The graph depicts a

monopolistically
competitive firm.

Version 1 46
 C) $500.
A) $275. D) $525.
B) $350.

153) The graph depicts a monopolistically competitive

firm.

This monopolistically competitive firm is earning economic

profits in the short run and

right in the long run.

A) will continue to have economic profits in the long D) this will cause
run. its cost curves to rise in the
B) will earn only normal profits in the long run. long run.
C) this will cause its demand curve to shift to the

154) A monopolistically competitive firm is producing at a

short-run output level where average total cost is $10.00,
marginal cost is $5.00, marginal revenue is $6.00, and price is
$12.00. In the short run, the firm should

C) make no
A) decrease the level of output. change in the level of
B) increase the level of output. output.

Version 1 47
 D) increase product price.

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155) A monopolistically competitive firm is operating at a the short run this firm
short-run level of output where price is $21, average total cost should
is $15, marginal cost is $13, and marginal revenue is $13. In

D) not change the

A) reduce product price. level of output.
B) increase the level of output.
C) decrease the level of output.

156) Answer the question based on the demand and cost

schedules for a monopolistically competitive firm given in the
table below.

Price Quantity Total Cost Output

Demanded 1 6 4 6
$20 1 $10 1 0 2
18 2 20 2 What output quantity will
16 3 29 3 the monopolistically
14 4 36 4 competitive firm produce
12 5 40 5 to maximize profits?

C) 5
A) 2 D) 6
B) 3

157) Answer the question based on the demand and cost

schedules for a monopolistically competitive firm given in the
table below.

Price Quantity Total Cost Output 1 6 4 6

Demanded 0 2
$20 1 $10 1
18 2 20 2
16 3 29 3
14 4 36 4
12 5 40 5

Version 1 49
What price will this monopolistically competitive firm charge to maximize profits?

C) $12
A) $18 D) $10
B) $16

158) Answer the question based on the demand and cost

schedules for a monopolistically competitive firm given in the
table below.

Price Quantity Total Cost Output 1 6 4 6

Demanded 0 2
$20 1 $10 1 What will be the economic
18 2 20 2 profit (or loss) for this
16 3 29 3 monopolistically
14 4 36 4 competitive firm at the
profit-maximizing level of
12 5 40 5
output?

C) $20
A) $56 D) $40
B) $60

159) Answer the question based on the demand and cost

schedules for a monopolistically competitive firm given in the
table below.

Price Quantity Total Cost Output 1 5 4 5

Demanded 2 0
$20 1 $10 1 1 6 4 6
18 2 20 2 0 2
16 3 29 3 At the profit-maximizing
14 4 36 4 level of output, marginal
revenue is

C) $4.
A) $0. D) $5.
B) $8.

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160) In monopolistic competition, a firm has a limited
degree of "price-making" ability. This means that the profit-
maximizing firm will

D) produce at
A) always earn an economic profit. minimum average total
B) set price equal to marginal cost. cost.
C) set price above marginal cost.

161) Assume that in a monopolistically competitive

industry, firms are earning economic profit. This situation will

the degree of competition.

A) reduce the excess capacity in the industry as firms D) make the
expand production. industry allocatively
B) attract other firms to enter the industry, causing efficient as each firm seeks
the existing firms' profits to shrink. to maintain its profits.
C) cause firms to standardize their product to limit

162) If monopolistically competitive firms in an industry

are making an economic profit, then new firms will enter the
industry and the product demand facing existing firms will

C) not be affected.
A) increase. D) decrease.
B) become less elastic.

163) If monopolistically competitive firms in an industry

are making an economic profit, then new firms will enter the
industry and the product demand facing existing firms will
shift

D) right and
A) right and become more elastic. become less elastic.
B) left and become less elastic.
C) left and become more elastic.

Version 1 51
 Refer to the above graph
of a representative firm in
monopolistic competition.
If curve (2) represents
ATC and line (3)
represents demand, then
curve (1) and line (4)
would be

164)

D) TC and TR,
A) MC and TR, respectively. respectively.
B) AVC and MR, respectively.
C) MC and MR, respectively.

Version 1 52
If columns 1 and 3 are this firm's demand schedule, maximum economic profit will be

C) $90.
A) $60. D) $80.
B) $70.

168) Answer the question on the basis of the following

demand and cost data for a specific firm.

Demand Cost Data 2 1 7 7 1

Data 0
(1) (2) (3) Total Total Cost 2 5 8 8 1
Price Price Quantity Output Suppose that entry of firms
$50 $35 2 2 $45 into the industry changes
45 30 3 3 55 this firm's demand
40 25 4 4 70 schedule from columns 1
35 20 5 5 90 and 3 to columns 2 and 3.
30 15 6 6 115 Maximum economic profit
will

D) decrease to
A) decrease to $25. zero.
B) decrease to $35.
C) decrease to $70.

169) Answer the question on the basis of the following

short run demand and cost data for a specific firm.

Demand Cost Data 2 5 8 8 1

Data
(1) (2) (3) Total Total Cost
Price Price Quantity Output
$50 $35 2 2 $45
45 30 3 3 55
40 25 4 4 70
35 20 5 5 90
30 15 6 6 115
25 10 7 7 145

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In the long run, the number of firms in this monopolistic
competitive industry will most likely

D) The answer
A) decrease. cannot be determined from
B) increase. the given data.
C) stay the same.

170) Assume that the short-run cost and demand data given
in the tables below confront a monopolistic competitor selling
a given product and engaged in a given amount of product
promotion.

Cost Data Demand Data 5 9 5 3

Total Total Cost Quantity Price 0 5
Output Demanded 6 1 6 3
0 $25 0 $60 1 0
5
1 40 1 55
2 45 2 50
If the firm sells 3 units of
output, marginal revenue
3 55 3 45
will be
4 70 4 40

C) $135.
A) $−5. D) $165.
B) $35.

171) Assume that the short-run cost and demand data given
in the tables below confront a monopolistic competitor selling
a given product and engaged in a given amount of product
promotion.

Cost Data Demand Data 4 7 4 4

Total Total Cost Quantity Price 0 0
Output Demanded 5 9 5 3
0 $25 0 $60 0 5
1 40 1 55 6 1 6 3
1 0
2 45 2 50
5
3 55 3 45

Version 1 54
What output and price levels will maximize the firm's profit in the short run?

C) 5 units and $35

A) 3 units and $45 D) 6 units and $30
B) 4 units and $40

172) Assume that the short-run cost and demand data given
in the tables below confront a monopolistic competitor selling
a given product and engaged in a given amount of product
promotion.

Cost Data Demand Data

Total Total Cost Quantity Price 5 9 5 3
Output Demanded 0 5
0 $25 0 $60 6 1 6 3
1 40 1 55 1 0
5
2 45 2 50
3 55 3 45 What will the maximum
total profits be?
4 70 4 40

C) $85
A) $65 D) $110
B) $90

173) In the long run, a representative firm in a

monopolistically competitive industry will end up

and price are equal.

A) having an elasticity of demand that will be less D) earning a
than it was in the short run. normal profit, but not an
B) having a larger number of competitors than it will economic profit.
in the short run.
C) producing a level of output at which marginal cost

174) In the long run, the economic profits for a

monopolistically competitive firm will be

A) the same as the

Version 1 55
profits for a monopolist. D) slightly more
B) slightly less than the profits of a monopolist. than the profits of a purely
C) the same as the profits for a purely competitive competitive firm.
firm.

175) Which of the following forces does not play a major industry toward its long-
part in the adjustments of a monopolistically competitive run equilibrium?

D) shifts in the
A) profits/losses making firms enter or exit the demand curves of
industry individual firms as the
B) firms expanding or shrinking their productive industry expands or
capacity contracts
C) introduction of new products and patents

176) Firms in an industry will not earn long-run economic

profits if

D) production
A) fixed costs are zero. costs for a given level of
B) the number of firms in the industry is fixed. output are minimized.
C) there is free entry and exit of firms in the industry.

177) Suppose some firms exit an industry characterized by curve of a firm already in
monopolistic competition. We would expect the demand the industry to

customers in the market.

A) shift to the left.
B) shift to the right.
C) become less elastic.
D) remain the same since entering firms serve other

Version 1 56
178)

C) C.
A) A. D) D.
B) B.

Version 1 57
179)

C) C.
A) A. D) D.
B) B.

Version 1 58
180)

C) C.
A) A. D) D.
B) B.

Version 1 59
181)

C) C and D.
A) A and B. D) A and C.
B) B and C.

182)

Refer to the above graph

Version 1 60
for a representative firm in monopolistic competition in a
constant-cost industry. This firm is

D) not in either
A) in short-run equilibrium, but not long-run short-run or long-run
equilibrium. equilibrium.
B) in long-run equilibrium, but not short-run
equilibrium.
C) in both short-run and long-run equilibrium.

183) The long-run equilibrium position of the

monopolistically competitive firm occurs at a point where
average costs are

D) at their
A) constant. minimum point.
B) increasing.
C) decreasing.

184) Which of the following statements is not true for a

monopolistically competitive industry?

D) Firms operate
A) Firms tend to operate with excess capacity. at the lowest point of their
B) Each firm faces a downward-sloping demand ATC curves in the long
curve. run.
C) These firms earn zero economic profits in the long
run.

185) Which statement concerning monopolistic competition

is false?

D) Firms may
A) In the long run P = ATC > MC. experience positive
B) Firms may experience losses in the short run. economic profits in the
C) Firms differentiate their products, but the products long run.
are relatively substitutable.

Version 1 61
186) In the long-run equilibrium of a monopolistically competitive industry,

C) P = MC.
A) P = minimum ATC. D) P < MC.
B) P > minimum ATC.

187) In long-run equilibrium, a profit-maximizing firm in a

monopolistically competitive industry will produce the
quantity of output where

D) ATC = P,
A) ATC = P, MR = MC = P. MR = MC < P.
B) ATC < P, MR = MC = P.
C) ATC < P, MR + MC < P.

Refer to the above graph

of the representative firm
in monopolistic
competition. Marginal
revenue and marginal cost
intersect at point

188)

C) c.
A) a. D) d.
B) b.

Version 1 62
 Refer to the above graph
of the representative firm
in monopolistic
competition. Point b
indicates

189)

point.
A) a situation where the firm is earning economic D) the lowest
profits. possible average cost of
B) the price-output combination that yields producing the firm's
maximum profits. product.
C) a point that cannot be the long-run equilibrium

Version 1 63
 D) diseconomies
A) a shortage of production capacity. of scale.
B) excess capacity of CD.
C) excess capacity of DE.

Refer to the diagram for

a monopolistically
competitive producer. If
this firm were to realize
productive efficiency, it
would

191)

D) have to
A) also realize an economic profit. produce a smaller output.
B) incur a loss.
C) also achieve allocative efficiency.

192) In the long run, a monopolistically competitive firm

D) achieves
A) earns an economic profit. allocative efficiency.
B) produces where P = ATC.
C) produces where MR exceeds MC.

193) Monopolistically competitive industries are inefficient

because

product development.
A) they realize diseconomies of scale. C) they are
B) advertising costs retard technological advance and overpopulated with firms

Version 1 64
whose plants are underutilized. misleading advertising.
D) monopolistically competitive sellers engage in

194) The economic inefficiencies of monopolistic

competition may be offset by the fact that

production of the product.

A) advertising expenditures shift the average cost D) consumers
curve upward. have increased product
B) available capacity is fully utilized. variety.
C) resources are optimally allocated to the

195) Keely says that he’s glad that his morning coffee is Keely buys, it suggests that
sold in a monopolistically competitive market rather than a he
purely competitive market. If this is true for most things

D) is a creature of
A) is most concerned about paying the lowest price habit who always buys the
possible. same type of a particular
B) cares most about allocative efficiency. good.
C) is willing to pay extra for product variety.

196) Dequam likes product variety, while Natasha is most

concerned about paying the lowest price possible for a good.
This suggests that

industries.
A) Dequam cares more about allocative efficiency, D) Dequam
while Natasha cares more about productive efficiency. prefers purely competitive
B) Dequam cares more about productive efficiency, industries, while Natasha
while Natasha cares more about allocative efficiency. prefers monopolistically
C) Dequam prefers monopolistically competitive competitive industries.
industries, while Natasha prefers purely competitive

197) A significant benefit of monopolistic competition

compared with pure competition is

Version 1 65
 D) stronger
A) less likelihood of X-inefficiency. incentives to achieve
B) improved resource allocation. economies of scale.
C) greater product variety.

198) Product variety is likely to be greater in

competition.
A) monopolistic competition than in pure D) homogeneous
competition. oligopoly than in
B) pure competition than in monopolistic differentiated oligopoly.
competition.
C) homogeneous oligopoly than in monopolistic

199) Which of the following statements is correct?

and allocative efficiency.

A) There is a trade-off between product variety and D) Greater excess
allocative efficiency. capacity reduces firms’
B) Product variety and allocative efficiency are ability to differentiate
complementary; increasing one enhances the other. products.
C) There is no relationship between product variation

200) Which of the following is correct?

lesser is the excess

A) The excess capacity problem diminishes as the capacity problem.
monopolistically competitive firm's demand curve becomes D) The greater the
less elastic. degree of product
B) The excess capacity problem means that variation, the greater is the
monopolistically competitive firms typically produce at some excess capacity problem.
point on the rising segment of their average total cost curve.
C) The greater the degree of product variation, the

201) In monopolistically
competitive markets,
resources are

Version 1 66
 D) underallocated
A) overallocated because long-run equilibrium because long-run
occurs where price exceeds marginal cost. equilibrium occurs where
B) underallocated because long-run equilibrium marginal cost exceeds
occurs where price exceeds marginal cost. price.
C) overallocated because long-run equilibrium
occurs where marginal cost exceeds price.

202) In long-run equilibrium, a monopolistically

competitive producer achieves

D) allocative
A) neither productive efficiency nor allocative efficiency but not
efficiency. productive efficiency.
B) both productive efficiency and allocative
efficiency.
C) productive efficiency but not allocative efficiency.

203) Monopolistic competition is characterized by excess

capacity because

D) the demand for

A) firms are always profitable in the long run. the product is perfectly
B) firms charge a price that is greater than marginal elastic in this type of
cost. industry.
C) firms produce at an output level less than the
least-cost output.

204) Excess capacity implies

D) allocative
A) productive inefficiency. efficiency.
B) allocative inefficiency.
C) productive efficiency.

Version 1 67
205) In monopolistic competition there is an
underallocation of resources at the profit-maximizing level of
output, which means that

Version 1 68
 D) price is greater
A) ATC is not equal to MC. than MC.
B) price is greater than MR.
C) price is greater than minimum ATC.

206) Monopolistic competitive firms are productively

inefficient because production occurs where

D) average total
A) price is greater than marginal revenue. cost is not at its lowest.
B) marginal cost is less than price.
C) marginal cost is not at its lowest.

207) In the long run, the representative firm in monopolistic

competition tends to have

D) a perfectly
A) excess capacity. elastic demand curve.
B) economic profits.
C) no product differentiation.

208) At long-run equilibrium in monopolistic competition,

there is

D) neither
A) allocative efficiency but not productive allocative nor productive
efficiency. efficiency.
B) productive efficiency but not allocative efficiency.
C) both allocative and productive efficiency.

209) Compared to a purely competitive firm in long-run

equilibrium, the monopolistic competitor has a

D) price and
A) lower price and lower output. output that may be higher
B) higher price and lower output. or lower.
C) higher price and higher output.

Version 1 69
210) Which is true of pure competition but not of
monopolistic competition?

point on the ATC curve.

A) There are no significant barriers to entry.
B) Long-run economic profits are zero.
C) There are a large number of firms in the market.
D) Long-run equilibrium occurs at the minimum

211) The less elastic a monopolistic competitor's long-run

demand curve, the

D) lower its
A) greater its excess capacity. average total cost at its
B) lower its price relative to that of a pure competitor equilibrium level of output.
having the same cost curves.
C) higher its long-run economic profit.

212) The more elastic a monopolistic competitor's long-run

demand curve, the

D) lower its
A) greater its excess capacity. average total cost at its
B) higher its price relative to that of a pure profit-maximizing level of
competitor having the same cost curves. output.
C) lower its long-run economic profit.

213) Compared to pure competition, monopolistic

competition

D) offers less
A) provides greater product differentiation at the cost product differentiation and
of lower productive efficiency. lower productive
B) offers less product differentiation but attains a efficiency.
higher productive efficiency.
C) provides greater product differentiation and
achieves greater productive efficiency.

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214) The variety of products and features that consumers
may choose from in monopolistically competitive industries

output levels.
A) at least partially offsets the economic D) makes the
inefficiencies of this market structure. demand curves facing
B) leads to an optimal allocation of resources in the firms in these industries
market structure. perfectly elastic.
C) guarantees that firms produce at full-capacity

215) Product variety in monopolistic competition comes at

the cost of

D) excess
A) nonprice competition. capacity.
B) barriers to entry.
C) diminishing returns.

216) In monopolistic competition, if a firm advertises and

effectively raises consumer awareness of its product, it tends
to

D) lower costs
A) raise costs and increase demand for its product. and decrease demand for
B) raise costs and decrease demand for its product. its product.
C) lower costs and increase demand for its product.

217) Which statement concerning monopolistic competition

is false?

is more elastic than the

A) Long-run equilibrium under monopolistic
competition and pure competition both entail zero economic
profits for firms.
B) Monopolistic competition is likely to result in a
greater variety of product brands than pure competition.
C) The monopolistically competitive demand curve

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demand curve facing a monopoly.
D) Long-run equilibrium in monopolistic
competition does not entail any economic inefficiency
because of easy entry and exit.

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218) Which is not a common form of nonprice
competition in monopolistic competition?

D) annual design
A) customer services such as liberal guarantee and and model changes
repair policies
B) advertisements featuring brand names
C) cash rebates and discount coupons

219) The stronger the product differentiation in

monopolistic competition, the

D) more elastic
A) less elastic the demand curve, and production will the demand curve, and
take place further to the left of minimum average costs. production will take place
B) less elastic the demand curve, and production will further to the right of
take place further to the right of minimum average costs. minimum average costs.
C) more elastic the demand curve, and production
will take place further to the left of minimum average costs.

220) Product differentiation in monopolistic competition

involves a trade-off between

D) short-run
A) productive efficiency and allocative efficiency. profits and long-run
B) monopoly power and ease of entry. efficiency.
C) consumer choice and productive efficiency.

221) The market situation of a monopolistic competitor is

made more complex than our simple revenue-and-costs
graphs would suggest, because the firm in reality juggles three
decisions:

D) price, product,
A) price, output quantity, and revenues. and advertising.
B) revenue, costs, and profits.
C) advertising, resources, and product.

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222) (Consider This) The main point of the 1987 Wendy’s
commercial depicting a Soviet fashion show was to

D) highlight the
A) show Wendy’s product differentiation from its dependability of its reliable
competitors. and consistent standardized
B) grow its international customer base. product.
C) emphasize the efficiency of its production model.

223) (Consider This) Which of the following statements is versus those produced by
most accurate about the difference between goods produced American capitalism?
under the old central planning model of the Soviet Union

carefully integrated into

A) Soviet markets were purely competitive, while the central plan, while
U.S. markets were more monopolistically competitive. differentiation in American
B) Soviet production employed mass production capitalism occurs
techniques, while American capitalism did not. haphazardly and with little
C) Soviet production put greater emphasis on forethought.
efficiency, while American capitalism allowed for much more
product differentiation.
D) Product differentiation in the Soviet Union was

224) (Consider This) In Wendy’s 1987 commercial McDonald’s and Burger

depicting a Soviet fashion show, one objective was to portray King products as

D) only appealing
A) all the same and not very appealing. to old women.
B) produced inefficiently.
C) unpredictable in terms of features and quality.

225) (Consider This) Communist central planners didn’t uniform design of products
care about product differentiation, opting instead for a in order to achieve

C) allocative
A) higher prices and profits for their firms. efficiency in society.
B) mass production and lower costs. D) purely

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competitive markets.

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226) (Consider This) "Variety is the spice of life" is best
applied to which market structure?

C) oligopoly
A) pure competition D) monopoly
B) monopolistic competition

227) (Last Word) In a monopolistically competitive market

like restaurants, large capital-intensive firms like McDonald’s
may co-exist with more labor-intensive mom-and-pop shops.
In this case, higher labor costs would tend to favor the
survival of

intensive firms.
A) large-scale capital-intensive firms more than the D) domestic
small firms. restaurant firms more than
B) small firms more than the large-scale capital- the foreign firms.
intensive firms.
C) foreign firms more than the large-scale capital-

228) (Last Word) Raising the minimum wage in the

restaurant industry

restaurants.
A) affects mom and pop and chain restaurants about D) gives mom and
the same. pop restaurants a
B) benefits both mom and pop and chain restaurants competitive advantage
by boosting demand. over highly capitalized
C) makes it more difficult for mom and pop chain restaurants.
restaurants to compete with highly capitalized chain

229) (Last Word) Which of the following best explains why

an increase in the minimum wage is more problematic for
mom and pop restaurants than for big chain restaurants?

wage laws.
A) Chain restaurants are exempt from minimum B) Mom and pop

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restaurants have more difficulty attracting workers when power and can more easily
wages rise. raise prices than mom and
C) Mom and pop restaurants are more dependent on pop stores.
labor relative to chain restaurants.
D) Chain restaurants have more monopoly pricing

230) (Last Word) If the minimum wage in the restaurant

industry increases over time, eventually we would expect

capitalized chain
A) the restaurant industry to expand as higher wages restaurants to increase.
drive up demand. D) the ratio of
B) there to be fewer of all types of restaurants, but no highly capitalized chain
change in the proportion of mom and pop restaurants relative restaurants to mom and
to chain restaurants. pop restaurants to increase.
C) the ratio of mom and pop restaurants to highly

ESSAY. Write your answer in the space provided or on a

separate sheet of paper.
231) What are the major features of monopolistic
competition?

232) Which characteristics of monopolistic competition

provide the monopoly aspects, and which provide the
competitive aspects?

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233) List and explain the different ways firms can
differentiate their product.

234) What are the goals of advertising?

235) Define nonprice competition.

236) What are four-firm concentration ratios? How do

economists use them to define monopolistically competitive
industries?

237) What are types of firms that exemplify monopolistic

competition?

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238) What is the Herfindahl index, and how is it calculated?

239) Why is the monopolistic competitor’s demand curve of demand for a

more elastic than a pure monopolist’s but less elastic than a monopolistic competitor?
pure competitor’s? What factors determine the price elasticity

240) In theory, the representative firm in monopolistic outcome not always occur
competition earns only a normal profit. Why might that in the real world?

241) Explain why monopolistically competitive firms have

excess capacity.

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242) If monopolistically competitive firms have some average total cost so they
control over their prices, why don’t they set price above will realize an economic
profit in the long run?

243) “In monopolistically competitive markets neither

allocative nor productive efficiency is realized.” Explain.

244) Why do monopolistically competitive firms spend practice only adds to the
funds for product differentiation and advertising when this firm’s costs?

245) What are the benefits of product variety?

246) Explain why the economic analysis of monopolistic

competition is so complex.

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247) (Consider This) Discuss the phrase "variety is the
spice of life" in reference to monopolistic competition.

248) (Consider This) Monopolistically competitive markets

are most likely to be found in societies considered to have a
capitalist economic system rather than a communist system.
True or False? Explain.

249) (Last Word) Restaurants operate in monopolistically differentiate their

competitive markets. What characteristics allow them to products?

250) (Last Word) Discuss how an increase in the minimum

wage affects a chain restaurant differently than a small, mom-
and-pop restaurant.

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Version 1 82
Answer Key

Test name: Chap 13_22e_Micro_Static

1) FALSE
2) FALSE
3) FALSE
4) TRUE
5) TRUE
6) TRUE
7) TRUE
8) TRUE
9) FALSE
10) FALSE
11) TRUE
12) FALSE
13) FALSE
14) TRUE
15) TRUE
16) TRUE
17) TRUE
18) FALSE
19) FALSE

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20) TRUE
21) TRUE
22) FALSE
23) FALSE
24) TRUE
25) FALSE
26) FALSE
27) TRUE
28) TRUE
29) FALSE
30) FALSE
31) TRUE
32) TRUE
33) FALSE
34) FALSE
35) TRUE
36) TRUE
37) FALSE
38) FALSE
39) C
40) C

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41) B
42) D
43) D
44) B
45) C
46) C
47) C
48) A
49) C
50) C
51) C
52) C
53) A
54) D
55) C
56) A
57) A
58) C
59) A
60) D
Four-firm concentration ratios measure the percentage of total

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sales of the four largest firms in an industry. 40 percent typically
Ratio approaching zero percent signify an reflect an oligopoly
industry approximating pure competition. market structure.
Ratios less than 40 percent indicate
monopolistic competition, while those above
61) B
62) B
Four-firm concentration ratios less than 40 the industry. Greater
percent indicate that an industry is market power
monopolistically competitive, while those generally indicates
above 40 percent typically reflect an oligopoly less price
market structure. The Herfindahl index also competition.
indicates the type of market structure and
degree of market power. The greater the index
value, the greater the market power of firms in
63) B
Four-firm concentration ratios less than 40 the industry. Greater
percent indicate that an industry is market power
monopolistically competitive, while those generally indicates
above 40 percent typically reflect an oligopoly less price
market structure. The Herfindahl index also competition.
indicates the type of market structure and
degree of market power. The greater the index
value, the greater the market power of firms in
64) B
Four-firm concentration ratios measure the firms in the market.
percentage of industry sales of the four largest Ratios less than 40

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percent indicate that an industry is million,
monopolistically competitive, while those respectively, will
above 40 percent typically reflect an oligopoly have a
market structure. For example, an industry concentration ratio
with total sales of $800 million in a year, with of 18.75 percent [=
the top four sellers posting sales of $50 (50 + 40 + 30 +
million, $40 million, $30 million, and $30 30)/800].
65) B
66) B
67) B
68) D
69) B
70) C
The Herfindahl index is the sum of the the Herfindahl
squared percentage market shares of all firms index is 414.
in the industry. In an industry where the top 414 = 100 + 64 +
six firms have market shares of 10, 8, 8, 5, 5, 64 + 25 + 25 + 16 +
and 4 percent, respectively, and the remaining (30 × 4)
30 firms have market shares of 2 percent each,
71) C
The Herfindahl index measures the degree of suggest a more
market power in an industry. Higher index competitive
values signify greater market power and are industry.
therefore more monopolistic. Lower numbers
72) C

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The Herfindahl index is the sum of the index is 1,800.
squared percentage market shares of all firms 1,800 = 400 + 400
in the industry. In an industry where the six + 400 + 400 + 100
firms have market shares of 20, 20, 20, 20, 10, + 100
and 10 percent, respectively, the Herfindahl
73) C
If all the firms in an industry merge into a the Herfindahl
single firm, that creates a monopoly, for which index always equals
10,000 (= 100 2).
74) D
The Herfindahl index is the sum of the Herfindahl index is
squared percentage market shares of all firms 100.
in the industry. In an industry where 100 each 100= (1)2 × 100
have 1 percent of the market share, the
75) B
Four-firm concentration ratios measure the the four largest
percentage of total sales of the four largest market shares given.
firms in the industry, so is found by summing
76) B
The Herfindahl index is the sum of the 2,950 = 1,600 +
squared percentage market shares of all firms 900 + 400 + 25 + 25
in the industry. In an industry where five firms
have market shares of 40, 30, 20, 5, and 5
percent, the Herfindahl index is 2,950.
77) A
When any of the four largest firms in an industry merges

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with another firm (either within that top four shares will increase
or not), that will increase the four-firm the Herfindahl
concentration ratio. Likewise, any mergers index.
that create fewer firms with larger market
78) A
79) D
80) C
81) B
82) A
83) B
84) C
85) B
86) C
87) C
88) C
89) C
90) B
91) A
Four-firm concentration ratios range from 0 to competitive
100, with numbers below 40 suggesting industry.
monopolistic competition. Herfindahl index
numbers range from 0 to 10,000, again with
lower numbers indicating a monopolistically

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92) C
93) D
94) C
95) C
96) C
97) C
98) A
99) C
100) D
101) C
102) C
103) C
104) C
105) D
106) A
107) C
108) B
109) B
110) A
111) C
112) B

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113) B
114) D
115) A
116) C
117) B
118) A
119) A
120) C
121) C
122) B
123) C
124) B
125) D
126) D
127) B
128) C
129) B
130) D
131) C
132) A
133) B

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To find the profit-maximizing level of output profit (loss).
with the information given, calculate total Identify the greatest
revenue (TR = price × quantity) for all positive value; its
price/quantity combinations for demand associated price and
schedule (1). From each total revenue value, quantity are the
subtract the total cost for the corresponding profit-maximizing
level of output; the difference represents the values.
134) B
To find the profit-maximizing level of output profit (loss).
with the information given, calculate total Identify the greatest
revenue (TR = price × quantity) for all positive value; its
price/quantity combinations for demand associated price and
schedule (1). From each total revenue value, quantity are the
subtract the total cost for the corresponding profit-maximizing
level of output; the difference represents the values.
135) B
To find the profit-maximizing level of output profit (loss).
with the information given, calculate total Identify the greatest
revenue (TR = price × quantity) for all positive value; its
price/quantity combinations for demand associated price and
schedule (1). From each total revenue value, quantity are the
subtract the total cost for the corresponding profit-maximizing
level of output; the difference represents the values.
136) D
To find the profit-maximizing level of output price/quantity
with the information given, calculate total combinations for
revenue (TR = price × quantity) for all demand schedule

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(1). From each total revenue value, subtract particular case, new
the total cost for the corresponding level of firm entry drives the
output; the difference represents the profit market to long run
(loss). Identify the greatest positive value; its equilibrium with
associated price and quantity are the profit- zero economic
maximizing values. When the demand profits.
changes, these values get recalculated. In this
137) D
When firm entry decreases demand for each competitive market
firm to the point where economic profits (purely competitive
disappear, that signifies either pure firms face a
competition or monopolistic competition. perfectly elastic
Because the firm's demand curve is downward demand curve).
sloping, that indicates a monopolistically
138) A
Monopolistically competitive firms break equals average total
even in the long run; that occurs when price cost.
139) B
140) C
141) B
142) C
143) D
144) B
145) A
146) A

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147) A
148) C
149) B
150) B
Firms earn economic profits when price $2.50, then the firm
exceeds average total cost, and incur losses is operating with a
when P < ATC. The firm is at the optimal loss., but is at the
level when MR = MC. If, for example, ATC = optimal level of
$4$4.50, P = $4.00, MR = $2.50, and MC = output.
151) B
152) D
153) B
154) B
155) D
The firm is at the profit-maximizing (or loss- marginal cost is
minimizing) level of output when MR = MC. $13, and marginal
Therefore, if MR = MC, they should leave revenue is $13 in
output unchanged. When MR > MC, the firm the short-run the
should increase output; when MR < MC, it firm should not
should reduce it. When the firm is operating change the level of
where price is $21, average total cost is $15, output.
156) C
To find the profit-maximizing level of output price/quantity
with the information given, calculate total combinations. From
revenue (TR = price × quantity) for all each total revenue

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value, subtract the total cost for the quantity are the
corresponding level of output; the difference profit-maximizing
represents the profit (loss). Identify the values.
greatest positive value; its associated price and
157) C
To find the profit-maximizing level of output greatest positive
with the information given, calculate total value; its associated
revenue (TR = price × quantity) for all price and quantity
price/quantity combinations. From each total are the profit-
revenue value, subtract the total cost for the maximizing values.
corresponding level of output; the difference
represents the profit (loss). Identify the
158) C
To find the profit-maximizing level of output greatest positive
with the information given, calculate total value; its associated
revenue (TR = price × quantity) for all price and quantity
price/quantity combinations. From each total are the profit-
revenue value, subtract the total cost for the maximizing values.
corresponding level of output; the difference
represents the profit (loss). Identify the
159) C
Marginal revenue is the change in total revenue of the
revenue from selling an additional unit of previous output
output. Once the profit-maximizing level of level. If, for
output has been determined, the marginal example, total
revenue for that last unit of output is the total revenue is $60 at
revenue from that output level minus the total the profit-

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maximizing level of 5 units, and $56 at 4
units, then marginal revenue is $4 (= $60 −
$56).
160) C
161) B
162) D
163) C
164) C
165) B
166) C
To find the profit-maximizing level of output same maximum
with the information given, calculate total profit, convention is
revenue (TR = price × quantity) for all to choose the
price/quantity combinations. From each total greater level of
revenue value, subtract the total cost for the output, as it is the
corresponding level of output; the difference quantity where MR
represents the profit (loss). Identify the = MC.
greatest positive value; its associated price and
quantity are the profit-maximizing values.
When two consecutive output levels yield the
167) C
To find the profit-maximizing level of output corresponding level
with the information given, calculate total of output; the
revenue (TR = price × quantity) for all difference
price/quantity combinations. From each total represents the profit
revenue value, subtract the total cost for the (loss). Identify the

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greatest positive value; its associated price and the greater level of
quantity are the profit-maximizing values. output, as it is the
When two consecutive output levels yield the quantity where MR
same maximum profit, convention is to choose = MC.
168) B
To find the profit-maximizing level of output these calculations
with the information given, calculate total for both demand
revenue (TR = price × quantity) for all schedules given to
price/quantity combinations. From each total find the change in
revenue value, subtract the total cost for the economic profit
corresponding level of output; the difference from the shift in
represents the profit (loss). Identify the demand.
greatest positive value; its associated price and
quantity are the profit-maximizing values. Do
169) B
Both short run demand schedules given have increase the number
the industry earning economic profits. Given of firms in the
that entry barriers in monopolistic competition industry.
are weak or nonexistent, firm entry will
170) B
Marginal revenue is the change in total instead they sold
revenue from selling an additional unit. To 2units at a price of
find marginal revenue for a particular level of $50, total revenue
output, find total revenue (price × quantity) at would be $100.
that level of output, as well as the previous That means the
quantity. If, for example, the firm sells 3 units
at a price of $45 each, total revenue is $135. If

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marginal revenue of the third unit is $35 (=
$135 − $100).

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171) B
To find the profit-maximizing price and smallest negative
quantity, it is first necessary to calculate total number) is the
profits for each price/quantity combination. profit-maximizing
This requires finding total revenue (= price x (or loss-minimizing)
quantity) for each combination and subtracting price and output.
total cost for the corresponding output level.
Whichever price and quantity combination
generates the greatest positive number (or
172) B
To find the maximum profit, it is necessary to corresponding
calculate total profits for each price/quantity output level.
combination. This requires finding total
revenue (= price × quantity) for each
combination and subtracting total cost for the
173) D
174) C
175) C
176) C
177) B
178) A
179) D
180) B
181) B

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182) A
183) C
184) D
185) D
186) B
187) D
188) A
189) B
190) C
191) B
192) B
193) C
194) D
195) C
196) C
197) C
198) A
199) A
200) D
201) B
202) A

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203) C
204) A
205) D
206) D
207) A
208) D
209) B
210) D
211) A
212) D
213) A
214) A
215) A
216) A
217) D
218) C
219) A
220) C
221) D
222) A
223) C

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224) A
225) B
226) B
227) A
228) C
229) C
230) D
231) The major features of monopolistic nonprice
competition are: (1) many firms, (2) a competition.
differentiated product, (3) entry is relatively
easy, (4) each firm has some control over its
product price, and (5) there is considerable
232) The characteristics of many firms and much more
relatively easy entry and exit provide the competitive than
competitive aspect of monopolistic they are
competition; the differentiated product monopolistic. <i>
provides the monopolistic aspect. In general,
monopolistically competitive industries are
233) Product differentiation may entail the firm’s reputation
physical or qualitative differences in the for servicing or
products. Real differences in functional exchanging its
features, materials, design, and workmanship products, and the
are vital aspects of product differentiation. credit it makes
Service and the conditions surrounding the available are all
sale of a product are forms of product service aspects of
differentiation too. A store’s prestige appeal, product

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differentiation. Products may also be use of brand names
differentiated through the location and and trademarks,
accessibility of the stores that sell them. Small packaging, and
convenience stores manage to compete with celebrity
large supermarkets; they compete mainly on connections. <i>
the basis of location, being close to customers
and situated on busy streets. Product
differentiation may also be created through the
234) The expense and effort involved in differences a greater
product differentiation would be wasted if factor. If advertising
consumers are not aware of product is successful, the
differences. Thus, monopolistic competitors firm’s demand
advertise their products. The goal of product curve will shift to
differentiation and advertising, called nonprice the right and
competition, is to make price less of a factor become less elastic.
in consumer purchases and to make product <i>
235) Competition based on distinguishing product differences
one’s product by means of product to consumers. <i>
differentiation and then advertising the
236) Economists measure the degree of industry sales. If the
industry concentration, the extent to which the largest four firms
largest firms account for the bulk of the account for less than
industry’s output to identify monopolistically 40 percent, they are
competitive industries. A four-firm likely to be
concentration ratio, expressed as a percentage, monopolistically
is the ratio of the output (sales) of the four competitive. <i>
largest firms in an industry relative to total
237) In addition to some manufacturers, many providers of

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professional services such as medical care, hair salons, dry
legal assistance, real estate sales, and basic cleaners, clothing
bookkeeping are monopolistic competitors. stores, and
Many retail establishments in metropolitan restaurants.
areas are monopolistically competitive too,
including grocery stores, gasoline stations,
238) The Herfindahl index is a measure of the index will be at its
concentration and competitiveness of an maximum of 10,000
industry; calculated as the sum of the squared (= 100 2),
percentage market shares of the individual indicating an
firms in the industry. For a purely competitive industry with
industry, the index would approach zero complete monopoly
because each firm’s market share is extremely power.
small. In the case of a single firm industry, the
239) The monopolistic competitor’s demand is weaker the product
more elastic than the demand faced by a pure differentiation, the
monopolist because the monopolistically greater the price
competitive seller competes with many other elasticity of each
firms producing close substitutes. The pure seller’s demand and
monopolist has no rivals at all. The price the closer
elasticity of demand faced by the monopolistic
monopolistically competitive firm depends on competition will be
the number of rivals and the degree of product to pure competition.
differentiation. The more rivals and the <i>
240) Some firms may achieve sufficient activities. Or a firm
product differentiation such that other firms may have developed
cannot duplicate them, even over time. One a well-known brand
hotel in a major city may have the best name that gives it a
location relative to business and tourist slight but long-

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lasting advantage over imitators. Such firms standardized
may have sufficient monopoly power to product. The result
realize modest economic profits even in the is some monopoly
long run. And entry to some industries power, with small
populated by small firms is not as free in economic profits
reality as it is in theory. Because of product even in the long run.
differentiation, financial barriers to entry are <i>
likely to be greater than they would be with a
241) In monopolistic competition, the gap competitive
between the minimum ATC output and the industries are
profit-maximizing output identifies excess overpopulated with
capacity: plant and equipment are underused firms, each
because firms are producing less than the operating below its
minimum-ATC output. If each monopolistic optimal (lowest-
competitor could profitably produce at ATC) capacity. For
minimum ATC, the lower average total cost example, in most
would enable a lower price and fewer firms cities, an abundance
would be needed to produce the industry of small motels and
output. But because monopolistically restaurants operate
competitive firms produce less than this in well below half
long-run equilibrium, monopolistically capacity. <i>
242) Entry is relatively easy in monopolistic the typical firm will
competition. If a firm is earning economic fall and become
profits in the short run, this condition will more elastic, which
draw new firms into the industry with the eliminates economic
expectation of earning economic profits. As profits. <i>
new firms enter, the demand curve faced by
243) In monopolistic competition, neither long-run
productive nor allocative efficiency occurs in equilibrium. The

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profit-maximizing price slightly exceeds the efficiency
lowest average total cost. In producing the (deadweight) loss.
profit-maximizing output, the firm’s average The total efficiency
total cost therefore is slightly higher than loss for the industry
optimal from society’s perspective and as a whole is the
productive efficiency is not achieved. Also, sum of the
the profit-maximizing price exceeds marginal individual
cost, meaning that monopolistic competition efficiency losses
causes an underallocation of resources since generated by each
marginal benefits exceed marginal costs. firm in the industry.
Therefore, by producing too few units, the
monopolistic competitive firm creates an
244) Although product differentiation and little or no prospect
advertising add to the firm’s costs, they can of increasing profit
also increase the demand for its product. If by cutting its price,
demand increases by more than enough to why not engage in
compensate for the added costs, the firm will nonprice
improve its profit position. Since the firm has competition? <i>
245) If a product is differentiated, then the meet the wide
consumer can always choose from a wide variation in
range of types, styles, and brands. Compared consumer tastes.
with pure competition, this variety provides an <i>
advantage to the consumer. The range of
choice is widened, and producers more fully
246) The monopolistically competitive firm what level of
juggles three factors, price, product, and advertising will
advertising, in seeking maximum profit. It result in the greatest
must determine what variety of product, profit. This complex
selling at what price, and supplemented by situation is not

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easily expressed in a simple economic model. combination cannot
At best, we can say that each possible be readily forecast
combination of price, product, and advertising but must be found
poses a different demand and cost (production by trial and error.
cost plus advertising cost) situation for the <i>
firm and that one combination will yield
maximum profit. In practice, this optimal
247) The Wendy’s TV commercial hammered product
home a single idea, that we should embrace differentiation. If
the fact that the food produced by Wendy’s "variety is the spice
was different from that produced by its main of life," American
rivals, McDonald’s and Burger King. Unlike capitalism is
the communist central planning of the old extremely well
Soviet Union, the free-market system of the seasoned.
United States allows for huge amounts of
248) True, communist central planners didn’t possible cost. The
care about product differentiation. They result was a society
typically made one design of a given product of painful sameness.
to be able to mass produce it at the lowest <i>
249) Restaurants are monopolistic speed of service,
competitors. Because each one has a unique price, drive-through
location, it has some monopoly power. convenience, and a
Additional bits of monopoly power are wide variety of
generated by product differentiation. additional
Restaurants can differ on menu items, decor, characteristics. <i>
250) Economists have recently discovered that stores. In particular,
wage increases can tilt the local restaurant increases in the
market in favor of highly capitalized chain minimum wage tend

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to reduce the proportion of mom-and-pop which are heavily
restaurants. This happens because increases in reliant on labor. The
the minimum wage have a relatively small result is a greater
impact on the cost curves of highly capitalized tendency on the part
chain restaurants. While it is true that a highly of mom-and-pop
capitalized McDonald’s does hire minimum restaurants to exit
wage workers, the fact that it uses so much the industry. Both
capital to produce hamburgers means that a types of restaurants
large fraction of its costs derives from will see exits. But
machinery and equipment. So, when the when a new
minimum wage goes up, only a relatively equilibrium is
minor part of its production costs goes up. By eventually
contrast, mom-and-pop restaurants use reestablished, there
relatively little capital combined with lots of will be a higher
labor. So, when the minimum wage is proportion of highly
increased, the cost curves of mom-and-pop capitalized chain
stores shift upward by more than the cost restaurants and a
curves of highly capitalized chain restaurants. lower proportion of
In both cases, economic profits will turn labor-intensive
negative, but they will become much more mom-and-pop
negative at the mom-and-pop restaurants, restaurants.

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