TEST I: MULTIPLE CHOICE. Below are given questions along with their multiple choices’ answers.

Read the statement carefully and shade the letter that represents your best answers on the ANSWER
SHEET. (Erasures are not allowed)
1. The restaurant industry is an example of a(n) ________ industry.
A) perfectly competitive
B) monopolistic
C) monopolistically competitive
D) oligopolistic

2. A(n) ________ industry does not have price as a decision variable.

A) perfectly competitively
B) monopolistic
C) monopolistically competitive
D) oligopolistic

3. Monopolistic competition differs from perfect competition primarily because in

A) monopolistic competition, firms can differentiate their products.
B) perfect competition, firms can differentiate their products.
C) monopolistic competition, entry into the industry is blocked.
D) monopolistic competition, there are relatively few barriers to entry.

4. In San Francisco there are many retail clothing stores. Each store is slightly different from every other
store. Retail clothing stores are an example of what market structure?
A) perfect competition
B) monopolistic competition
C) oligopoly
D) monopoly

5. Firms gain control over price in monopolistic competition by

A) blocking entry of other firms into the industry.
B) producing a product for which there are no close substitutes.
C) differentiating their products.
D) colluding with other firms to set prices.

6. The feature that distinguishes monopolistic competition from perfect competition is that
monopolistically competitive firms are
A) large relative to the market.
B) price takers.
C) able to block the entry of other firms.
D) able to differentiate their products.

7. Perfect competition differs from monopolistic competition primarily because

A) in perfect competition, firms have homogeneous products.
B) in perfect competition, price is a decision variable.
C) in monopolistic competition, entry into the industry is limited.
D) in monopolistic competition, there are many firms in the industry.

8. The feature that distinguishes perfect competition from monopolistic competition is that perfectly
competitive firms are
A) large relative to the market.
B) price takers.
C) able to block the entry of other firms.
D) unable to differentiate their products.

9. The case for advertising includes the fact that

A) it wastes society's scarce resources.
B) firms spend large sums of money to create meaningless differences among products.
C) it provides consumers with valuable information about product availability, quality, and price.
D) it creates wants that otherwise would not have existed.

10. In order to achieve market power, monopolistically competitive firms use

A) their size.
B) product differentiation.
C) strategic behavior.
D) predatory pricing.

11. In well-functioning markets, all of the following reflect the degree of product variety except
A) differences in consumers' tastes.
B) cost economies from standardization.
C) gains from network externalities.
D) gains from coordination.

12. Product differentiation that makes the product better for some consumers and worse for others is
A) always welfare decreasing.
B) vertical differentiation.
C) horizontal differentiation.
D) never undertaken by firms.
Answer: C

13. Product differentiation that makes the product better than a rival's product from everyone's
perspective
A) always increases welfare.
B) is known as vertical differentiation.
C) is known as horizontal differentiation.
D) makes the rival's product obsolete.

14. Product differentiation can be used by firms to do all of the following except
A) gain market share.
B) erect barriers to entry for potential firms.
C) provide consumers with commitment devices.
D) gain complete control over the price of their product.

15. Compared to a perfectly competitive firm, the demand schedule of a monopolistically competitive
firm faces is
A) more price elastic.
B) less price elastic.
C) perfectly price elastic.
D) perfectly price inelastic.

16. The demand facing a monopolistically competitive firm is ________ a monopolistic firm and
________ a perfectly competitive firm.
A) as elastic as; less elastic than
B) less elastic than; more elastic than
C) more elastic than; less elastic than
D) more elastic than; as elastic as

17. Unlike a monopolistic firm's product, a monopolistically competitive firm's product

A) is homogeneous.
B) is a unique product.
C) has many close substitutes.
D) has no close substitutes.

18. The pizza delivery industry is monopolistically competitive. Little Joe's Pizzeria raises its prices by
10%, but all the other pizzerias in town keep their prices the same. Which of the following is most likely
to occur?
A) Little Joe's Pizzeria will not be able to sell any pizzas, because it was the only firm to raise its price.
B) Little Joe's Pizzeria will lose some of its customers.
C) Little Joe's Pizzeria's profits will increase.
D) The number of customers served by Little Joe's Pizzeria will increase.
Answer: B

19. A monopolistically competitive firm produces where

A) marginal revenue equals price.
B) its marginal revenue curve lies above its demand curve.
C) its marginal revenue curve intersects the quantity axis.
D) marginal revenue equals marginal cost.

20. A monopolistically competitive firm maximizes profit where

A) MR > MC.
B) MC > MR.
C) MR = MC.
D) P = MC.

TEST II. TRUE or FALSE. Shade letter A if the statement is correct, shade letter B if it says otherwise.
(Erasures are not allowed)
21. Monopolistically competitive firms, like perfectly competitive firms, sell a differentiated product. B

22. The automobile industry is a good example of a monopolistically competitive industry. B

23. Monopolistically competitive firms engage in both price and quality competition. A

24. Monopolistic competition is a common form of market structure in the United States. A

25. Monopolistically competitive firms are unable to affect the market price of their output, but are able to
control the price of their own output. A

26. A monopolistically competitive firm influences market price because of product differentiation. A

27. Firms in a monopolistically competitive industry are distinguished by strategic behavior. B

28. The airline industry is a good example of a monopolistically competitive industry. B

29. In monopolistically competitive industries, the market sets the price. B

30. A monopolistically competitive industry is characterized by having no barriers to entry. A

31. The basic function of advertising, according to its proponents, is to assist consumers in making
informed, rational choices. A

32. The more significant are economies of scale in an industry, the more product variety will be observed.
B

33. The more homogeneous are consumers' preferences, the less product variety will be observed. A

34. Vertical differentiation makes products better for some consumers and worse for others. B

35. One reason for selecting a section of microeconomics for which attendance is part of the grade (as
opposed to one where it is not) is that it serves as a commitment device that will get you to attend class. A

36. A monopolistically competitive firm maximizes profit by producing where marginal revenue equals
marginal cost. A
37. Since a monopolistically competitive firm has a monopoly over the particular product it produces, the
firm is guaranteed a profit in the long run. B

38. In general, the demand curve facing the monopolistically competitive firm is more elastic than the
demand curve facing the monopoly. A

39. In general, the demand curve facing the monopolistically competitive firm is more elastic than the
demand curve facing the perfectly competitive firm. B

40. Average total cost is minimized in long-run equilibrium for a monopolistically competitive firm. B