Monopolistic Competition Quiz

In the short run, a monopolistic competitor can earn economic profit because:

• There are infinite buyers

• Product differentiation allows pricing above marginal cost

• Entry is impossible

• Marginal cost is constant

• Prices are regulated

A monopolistic competitor faces a downward-sloping demand curve. To increase sales, the firm must:

• Increase price

• Decrease advertising

• Lower price

• Reduce fixed cost

• Raise marginal cost

Why can firms in monopolistic competition set prices in the short run?

• They are price takers

• They face no competition

• They differentiate products

• Their demand is perfectly elastic

• Costs are always fixed

A firm sets price above marginal cost but below ATC in the short run. This implies:

• Profit

• Loss minimizing

• Shut down

• Monopoly behavior

• Price rigidity

What best explains why monopolistically competitive firms advertise in the short run?

• To reduce cost

• To avoid taxes

• To increase product differentiation and demand

• To align with government

• To lower marginal revenue

What occurs at the break-even point in monopolistic competition?

• TR = TVC

• P < MC

• TR > TC

• Profit is maximized

• Economic profit = 0

A firm should shut down in the short run if:

• Price > ATC

• Price < AVC

• MC < MR

• TR = TC

• Price > AVC

When price equals AVC but is below ATC, the firm is:

• Breaking even

• Making loss but still operating

• Making profit

• Maximizing output

• Near monopoly

What best explains the shutdown rule?

• Stop if P < TC
• Stop if TR = TC

• Stop if P < ATC

• Continue at any loss

• Continue if TR > TC

A firm has P = $6, AVC = $7, ATC = $9. What should the firm do in the short run?

• Raise output

• Cut cost

• Shut down

• Continue operating

• Lower AFC