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Chapter 17
Monopolistic Competition
1. Because monopolistically competitive firms produce differentiated products, each firm
a. faces a demand curve that is horizontal.
b. faces a demand curve that is vertical.
c. has no control over product price.
d. has some control over product price.
2. Which of the following conditions distinguishes monopolistic competition from perfect
competition?
a. number of sellers
b. freedom of entry and exit
c. small size firms
d. differentiation of product
3. If existing fast-food firms realize sizable economic profits in the short run, the demand curves of
existing firms will
a. decrease and become more elastic.
b. decrease and become less elastic.
c. increase and become more elastic.
d. increase and become less elastic.
4. When a monopolistically competitive firm raises its price,
a. quantity demanded falls to zero.
b. quantity demanded declines, but not to zero.
c. the market supply curve shifts outward.
d. quantity demanded remains constant.
5. There are several reasons why demand curves may become more elastic. Among them are
a. the market becomes more monopolistic and cross elasticities approach zero.
b. the goods become less differentiated and more firms enter the industry.
c. consumers have fewer substitutes and firms drop out of the industry.
d. industry demand increases and consumers increase spending.

6. Which of the following is a characteristic of oligopoly or monopolistic competition, but not perfect
competition?
a. advertising and sales promotion
b. profit maximization according to the MR = MC rule
c. firms being price takers rather than price makers
d. horizontal demand and marginal revenue curves
7. Product differentiation allows the firm to
a. raise price and lower quantity demanded.
b. raise price without suffering a substantial loss of sales.
c. shift the market demand curve to the left.
d. decrease barriers to entry.
8. The maximum total short run economic profit, or minimum loss, for the monopolistically
competitive firm in this figure is
a. zero.
b. a profit of $575.00.
c. a profit of $2,000.00.
d. a loss of $375.00.
100 ! Chapter 17/Monopolistic Competition


9. The firm in this figure is monopolistically competitive. It illustrates
a. the shut-down case.
b. a long-run economic profit.
c. a short-run economic profit.
d. a short-run loss.
10. At the profit-maximizing, or loss-minimizing, output level, the firm in this figure has total costs
approximately equal to
a. $2000.
b. $3000.
c. $3600.
d. $800
11. Assume the firm in the figure is currently producing 8 units of output and charging $380. The firm
a. will increase its profits if it raises its price and reduces its production level.
b. will increase its profits if it lowers its price and expands its production level.
c. is maximizing profits.
d. will increase its profits if it raises its prices and expands its production level.
12. Cecilias Caf is a monopolistic competitor. If Cecilias is currently producing at the output level
where her average total cost is minimized and the caf is earning economic profits, then in the long
run output will
a. decrease and average total cost will increase.
b. decrease and average total cost will decrease.
c. remain unchanged as Cecilias is doing the best it can.
d. increase and average total costs will decrease.
13. In the long run, freedom of entry into a market forces a __________ to charge a price equal to
average total cost, but average total cost exceeds its minimum level.
a. perfectly competitive firm
b. monopolistically competitive firm
c. oligopolistic firm
d. pure monopoly
14. Which of the following best describes the idea of excess capacity in monopolistic competition?
a. Firms produce more output than is socially desirable.
b. The output produced by a typical firm is less than what would occur at the minimum point on
its ATC curve.
c. Due to product differentiation, firms choose output levels where P > ATC.
d. Firms keep some surplus output on hand in case there is a shift in the demand for their product.
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15. Which of the following individuals quoted below is least likely to argue that excess capacity in
monopolistically competitive industries is a waste of resources?
a. An automobile is transportation, nothing else.
b. Tomatoes or no tomatoes. The choice of toppings on a burger can be important to a consumer
these days when individualism is increasingly important to people.
c. Gasoline is gasoline no matter what the brand name.
d. I take the airline that will get me from A to B at the lowest price.
16. The traditional view of monopolistic competition holds that this type of industrial structure is
inefficient because
a. there are too few firms to reach an efficient level of production.
b. firms do not operate at the output that minimizes average costs.
c. advertising is not used extensively enough to yield an efficient differentiation of the products.
d. consumers do not have enough choice among the product varieties available.
17. Monopolistic competition is considered by some to be inefficient because
a. price exceeds marginal cost.
b. output exceeds capacity output.
c. long-run profits are positive.
d. All of the above are correct.
18. Perhaps its not a problem at all, but if too much choice is a problem for consumers, it would
occur in which market structure(s)?
a. perfect competition
b. monopoly
c. monopolistic competition
d. perfect competition and monopolistic competition
19. Which of the following might be an effect of advertising?
a. increased product differentiation
b. increased total costs of production
c. increased demand for the product
d. All of the above are correct.
20. In the long run under monopolistic competition, when firms advertise,
a. they will still earn zero economic profit.
b. they can earn positive economic profit by increasing market share.
c. the market price must fall.
d. the market price must rise.
21. Advertising
a. provides information about products, including prices and seller locations.
b. has been proven to increase competition and reduce prices compared to markets without
advertising.
c. signals quality to consumers, since firms spend so much money on ads.
d. All of the above are correct.
22. Critics of advertising argue that advertising
a. wastes resources because it creates an image without necessarily improving product quality.
b. advertising lowers barriers to entry into an industry because new firms can more easily establish
themselves as competitors.
c. advertising increases competition by providing information about prices.
d. advertising encourages monopolization of markets by raising entry barriers too high.
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23. Many airlines promise frequent flyer miles to passengers who fly their airlines regularly. This is
an example of a firm attempting to create
a. price discrimination.
b. a predatory pricing scheme.
c. discounting below marginal costs.
d. brand loyalty.
24. One of the reasons that Kodak and Fuji films advertise so much is that
a. each hopes to create a natural monopoly.
b. they are in a perfectly competitive industry where advertising is the difference between
economic and normal profits.
c. they want to develop brand loyalty.
d. they want to increase price elasticities of demand.
25. If some coffee drinkers continue to buy Maxwell House coffee even when Folgers coffee is on sale
and cheaper, it may be a result of
a. irrational consumer behavior.
b. a high cross elasticity between the two goods.
c. brand loyalty.
d. Maxwell House being a monopoly.
Chapter 17/Monopolistic Competition ! 103

Chapter 17
Monopolistic Competition
1. ANSWER: d has some control over product price.
2. ANSWER: d differentiation of product
3. ANSWER: a decrease and become more elastic.
4. ANSWER: b quantity demanded declines, but not to zero.
5.
6. ANSWER: a advertising and sales promotion
7. ANSWER: b raise price without suffering a substantial loss of sales.
8. ANSWER: c a profit of $2,000.00.
9. ANSWER: c a short-run economic profit.
10. ANSWER: b $3000.
11. ANSWER: d will increase its profits if it raises its price and expands its production level.
12. ANSWER: a decrease and average total cost will increase.
13. ANSWER: b monopolistically competitive firm
14. ANSWER: b The output produced by a typical firm is less than what would occur at the
15. ANSWER: b Tomatoes or no tomatoes. The choice of toppings on a burger can be important
16. ANSWER: b firms do not operate at the output that minimizes average costs.
17. ANSWER: a price exceeds marginal cost.
18. ANSWER: c monopolistic competition
19. ANSWER: d All of the above are correct.
20. ANSWER: a they will still earn zero economic profit.
21. ANSWER: d All of the above are correct.
22. ANSWER: a advertising wastes resources because it creates an image without necessarily
23. ANSWER: d brand loyalty.
24. ANSWER: c they want to develop brand loyalty.
25. ANSWER: c brand loyalty.