Chapter 15: Monopolistic Competition and Product Differentiation

Because each firm in monopolistic competition offers a distinct product, this feature makes:

• monopolistic competition similar to a monopolistic industry.

• firms face a horizontal demand curve.

• monopolistic competition similar to a perfectly competitive industry.

• monopolistically competitive firms price takers.

In which industry do firms have an incentive to advertise?

• The wheat growing industry

• The soybean growing industry

• The hotel industry

• The corn growing industry

Products produced by monopolistically competitive firms are viewed by consumers as:

• unrelated goods.

• perfect complements.

• imperfect substitutes.

• perfect substitutes.

In both monopolistic competition and monopoly, a firm faces a demand curve that is:

• downward-sloping.

• perfectly elastic.

• perfectly inelastic.

• upward-sloping.

Excess capacity in monopolistically competitive firms:

• means that the variety of products offered will be limited.

• leads to lower product prices.

• may cause inefficiency due to wasteful duplication because firms offer too many varieties.

• reduces the average total cost of the industry.

Which characteristic of monopolistic competition allows firms to gain market power?

• product differentiation

• low number of firms

• collusion among firms

• similarity of products

If firms in a monopolistically competitive industry have demand curves that lie below the average total cost curve, then in the long run:

• the industry is in long-run equilibrium.

• firms will exit the industry.

• firms will enter the industry.

• firms are making zero economic profits.

in both perfect competition and monopolistic competition, long-run economic profit is _____

A perfectly competitive industry differs from a monopolistically competitive industry in that, in perfect competition,

• all firms sell at exactly the same price.

• there is free entry into and exit from industry in the long run.

• there is motivation to advertise products.

• each firm has some ability to determine its own selling price.

If firms in a monopolistically competitive industry have demand curves that lie below the average total cost curve, then in the long run:

• firms will enter the industry.

• existing firms will have a larger share of the market.

• existing firms will have a smaller share of the market.

• the market shares of the existing firms will not change.