Question

1. Which of the following is NOT a characteristic of a monopolistically competitive market?

A. many sellers.

B. differentiated products.

C. long-run economic profits.

D. free entry and exit.

2. Which of the following products is likely to be sold in a monopolistically competitive market?

A. video games.

B. breakfast cereal.

E. beer.

D. all of the above.

3. Which of the following is true regarding the similarities and differences in monopolistic competition and monopoly?

A. The monopolist faces a downward-sloping demand curve while the monopolistic competitor faces an elastic demand curve.

B. The monopolist makes economic profits in the long run while the monopolistic competitor makes zero economic profits in the long run.

C. Both the monopolist and the monopolistic competitor operate at the efficient scale.

D. The monopolist charges a price above marginal cost while the monopolistic competitor charges a price equal to marginal cost

4. In the short run, if the price is above average total cost, a monopolistically competitive firm earns:

A. losses and firms enter the market.

B. Losses and firms exit the market.

C. profits and firms enter the market.

D. profits and firms exit the market.

5. Which of the following firms has the least incentive to advertise?

A. a manufacturer of home heating and air conditioning

B. a manufacturer of breakfast cereal

C. a wholesaler of crude oil.

D. a restaurant.

6. The use of the word "competition" in the name of the market structure called "monopolistic competition" refers to the fact that:

A. monopolistically competitive firms charge prices equal to the minimum of their average total cost just like perfectly competitive firms.

B. monopolistically competitive firms face a downward-sloping demand curve just like perfectly competitive firms.

C. the products are differentiated in a monopolistically competitive market just like in a perfectly competitive market.

D. there are many sellers in a monopolistically competitive market and there is free entry and exit in the market just like a perfectly competitive market.

Answer 1

1 . Long run economic profits

Reason: In a monopolistically competitive firm, there can be short run profits or losses, but in the long run due to free entry/exit of firms, long run profits always come down to 0

2. All of the above

Reason: As producers can offer differentiated varieties of these goods

3 . The monopolist makes economic profits in the long run while monopolistic competitor makes zero economic profits in the long run

Reason: In a monopolistically competitive firm, there can be short run profits or losses, but in the long run due to free entry/exit of firms, long run profits always come down to 0

4 . Profits and firms enter the market

Reason: When P>ATC, profits which are computed as (P-ATC). Q become positive When profits are positive, new firms start entering the market to benefit out of these economic profits

5 . A wholesaler of crude oil

Reason: Wholesalers don't need to advertise their goods as they sell homogeneous goods. Retailers need to do so as they engage in B2C marketing.

6 . There are many sellers in a monopolistically competitive market and there is free entry and exit in the market just like a perfectly competitive market Reason: The free entry/exit of firms in the market make perfectly competitive markets and monopolistically competitive markets alike