Purdue University North Central

Economics 251

Review Questions - Chapter 26 (11) - Monopolistic Competition

(1) Monopolistic competition is a market structure in which:

(a) many interdependent firms sell a homogeneous product.

(b) a few firms produce a particular kind of product.

(c) many firms produce a particular kind of product, but each maintains some independent control over its own price.

(d) one firm produces the entire market supply of a good.

(2) A major difference between monopoly and monopolistic competition is:

(a) one maximizes profits by producing at marginal revenue equal marginal cost, and the other does not.

(b) the number of firms in the market.

(c) firms involved in monopolistic competitive markets do not have market power, whereas the monopolist has market power.

(d) the monopolist faces a downward sloping demand curve, and the firms involved in monopolistic competition do not.

(3) A major difference between oligopoly and monopolistic competition is that oligopolies:

(a) have higher concentration ratios.

(b) earn zero economic profits in the long run.

(c) have lower barriers to entry.

(d) use price competition more frequently.

(4) Which of the following is an example of product differentiation?

(a) Two bottles of mayonnaise are essentially the same, but consumers pay $0.20 more for the label they recognize and value as unique.

(b) Sugar can be made from sugar beets or sugar cane, and consumers cannot recognize the difference between the two products.

(c) A consumer trades in his car for a pick-up truck so he can haul building materials while constructing a new home.

(d) A sawmill manufactures and markets two types and species of lumber for two different markets: Spruce 2x4's for building framing, and Red Cedar shingles for roofing.

(5) Perfect competition and monopolistic competition are best distinguished, one from the other by:

(a) the degree of product differentiation.

(b) the long run economic profits (zero) that are expected.

(c) the number of firms in the market, as the number of firms in monopolistic competitive markets is small, and in competitive markets - large.

(d) the ease of entry and exit.

(6) In monopolistic competition, if economic profits are being earned:

(a) firms will exit the market.

(b) entry will shift the market demand curve for each firm to the right.

(c) entry will shift the market supply curve to the right.

(d) None of the above.

Consider Figure 1 in answering Questions (7) and (8) below.

Figure 1

(7) In Figure 1, for a monopolistically competitive firm, the profit-maximizing output and price combination in the short run is:

(a) Q(1), P(1).

(b) Q(1), P(4).

(c) Q(2), P(2).

(d) Q(3), P(3).

(8) The allocatively efficient output and price combination for the firm in Figure 1 is:

(a) Q(2), P(2).

(b) Q(3), P(3).

(c) Q(1), P(4).

(d) Q(1), P(3).

Consider Figure 2 in answering Question (9) below.

Figure 2

(9) In Figure 2, for a monopolistically competitive firm, at the profit-maximizing output and price, this firm is experiencing:

(a) economic profits and it should stay in the market in the long run.

(b) economic profits, but it could make even higher economic profits by increasing output.

(c) economic losses, but it should keep producing in the short run.

(d) economic losses, and it should shut down in the short run.

Consider Figure 3 in answering Question (10) below.

Figure 3

(10) In Figure 3, which of the firms is earning an economic profit?

(a) Firms A and C.

(b) Firms B and D.

(c) Firm A only.

(d) All the firms are earning economic profits.