Monopolistic Competition and Advertising (Questions 1-14)

Which of the following characteristics is not a feature of a monopolistic competition market?

• Products are differentiated (not identical).

• There are many sellers.

• Free entry and exit from the market.

• Firms are price takers.

In the short run, a monopolistic competitive firm will maximize profit by producing at the output level where:

• Price equals average fixed cost (P = AFC).

• Price equals average variable cost (P = AVC).

• Marginal revenue equals marginal cost (MR = MC).

• Price equals marginal cost (P = MC).

Which of the following correctly describes the long-term equilibrium state in a monopoly market?

• P > ATC and the firm has positive economic profit.

• P = MC and the firm achieves scale efficiency.

• P < ATC and the firm incurs losses.

• P = ATC and the firm has zero economic profit.

The main difference between monopolistic competition and perfect competition in the long run is:

• Perfectly competitive firms spend a lot on advertising.

• Monopolistic competitors set prices equal to marginal cost (P = MC).

• Monopolistic competitors have excess capacity.

• Monopolistic competitors produce at the minimum of ATC.

"Markup" (the price difference) in monopoly competition refers to:

• Price equals marginal revenue (P = MR).

• Price equals marginal cost (P = MC).

• Price is higher than marginal cost (P > MC).

• Price is lower than marginal cost (P < MC).

When firms in a monopoly competition market are making economic profits in the short term, what will happen in the long term?

• The demand curve of the current firm will shift to the right.

• Prices will increase.

• New firms will enter, causing the demand curve of the current firm to shift to the left.

• Current firms will leave the market.

What does the "business-stealing externality" refer to when a new business enters the market?

• Market prices increase.

• The new business takes away customers and profits from existing businesses.

• The production costs for society as a whole decrease.

• Consumers benefit from the variety of new products.

Why do monopolistic competition firms have strong advertising incentives?

• Because they sell differentiated products and price above marginal cost (P > MC).

• Because the government requires it.

• Because they want to reduce production costs.

• Because they sell homogeneous products.

What benefits do defenders of brand names believe brands provide?

• Causes consumers to spend irrationally.

• Prevents competitors from entering the market.

• Provides information about quality and motivates businesses to maintain quality.

• Helps consumers understand price differences.

In the long run, where is the equilibrium point of a monopoly firm located on the ATC curve?

• Not located on the ATC curve.

• At the downward slope of the ATC curve.

• At the minimum point of the ATC (efficient scale).

• At the upward slope of the ATC curve.