Mankiw Chapter 16 Answer Key

Advanced Placement Microeconomics
Ms. Fry
Name: __________________________________ Pd: ___ Date: __________________
Chapter 16 Test KEY

MULTIPLE CHOICE
1. Which of the following statements is not correct?
a. Monopolistic competition is similar to monopoly because in each market structure
the firm can charge a price above marginal costs.
b. Monopolistic competition is similar to perfect competition because both market
structures are characterized by free entry.
c. Monopolistic competition is similar to oligopoly because both market structures
are characterized by barriers to entry.
d. Monopolistic competition is similar to perfect competition because both market
structures are characterized by many sellers.
e. Monopolistic competition is similar to perfect competition because both market
structures are characterized by profit maximizing behavior.
ANS: C
NAT: Analytic
MSC: Analytical
PTS: 1
DIF: 2
LOC: Monopolistic competition
REF: 16-0
TOP: Monopolistic competition
2. A similarity between monopoly and monopolistic competition is that in both market structures,
a. strategic interactions among sellers are important.
b. there are a small number of sellers.
c. sellers are price makers rather than price takers.
d. there are only a few buyers but many sellers.
e. firms earn economic profits in the long run.
ANS: C
PTS: 1
DIF: 2
NAT: Analytic
TOP: Monopolistic competition | Monopoly
REF: 16-1
MSC: Interpretive
3. In which of the following market structures is(are) there a large number of sellers?
(i)
monopolistic competition
(ii)
perfect competition
(iii
)
a.
b.
c.
d.
e.
oligopoly
(i) only
(ii) only
(i) and (ii) only
(ii) and (iii) only
(i), (ii), and (iii)
ANS: C
PTS: 1
DIF: 1
NAT: Analytic
TOP: Monopolistic competition | Perfect competition
REF: 16-1
MSC: Definitional
4. If firms in a particular market sell identical products, then the market is

(i)
perfectly competitive.
(ii)
monopolistically competitive.
(iii an oligopoly.
)
a.
b.
c.
d.
e.
(i) and (ii) only

(ii) and (iii) only
(iii) only
(ii) only
(i) only
ANS: E
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-1
TOP: Perfect competition
5. Monopolistic competition is characterized by which of the following attributes?

(i)
free entry
(ii)
product differentiation
(iii many sellers
)
a.
b.
c.
d.
e.
(ii) only
(i) and (ii) only
(i) and (iii) only
(ii) and (iii) only
ANS: E
NAT: Analytic
PTS: 1
DIF: 1
REF: 16-1
MSC: Definitional
6. One key difference between an oligopoly market and a competitive market is that oligopolistic
firms
a. are price takers whereas competitive firms are not.
b. can affect the profit of other firms in the market by the choices they make whereas
firms in competitive markets do not affect each other by the choices they make.
c. sell completely unrelated products whereas competitive firms do not.
d. sell their product at a price equal to marginal cost whereas competitive firms do
not.
e. operate at a level of output where P=MC.
ANS: B
PTS: 1
DIF: 2
NAT: Analytic
TOP: Monopolistic competition | Oligopoly
REF: 16-1
MSC: Interpretive
7. Crude oil is primarily supplied to the world market by a few Middle Eastern countries. Such a
market is an example of a(n)
(i)
imperfectly competitive market.
(ii)
monopoly market.
(iii oligopoly market.
)
a.
b.
c.
d.
e.
(i) and (ii) only

(ii) and (iii) only
(i) and (iii) only
(ii) only
(iii) only
ANS: C
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-1
TOP: Oligopoly
8. An oligopoly is a market in which

a. there are only a few sellers, each offering a product similar or identical to the
products offered by other firms in the market.
b. firms are price takers.
c. the actions of one seller in the market have no impact on the other sellers' profits.
d. there are many price-taking firms, each offering a product similar or identical to
the products offered by other firms in the market.
e. firms operate where P=MC.
ANS: A
PTS: 1
DIF: 1
REF: 16-1
NAT: Analytic
MSC: Definitional
TOP: Oligopoly
9. Monopolistic competition is characterized by

(i) efficient scale
(ii) markup pricing over marginal cost
(iii deadweight loss
)
(iv) excess capacity
a.
b.
c.
d.
e.
(i) and (ii) only

(ii) and (iv) only
(i), (ii), and (iii) only
(ii), (iii), and (iv) only
(i), (ii), (iii), and (iv)
ANS: D
PTS: 1
DIF: 2
NAT: Analytic
TOP: Deadweight loss | Excess capacity
MSC:
REF: 16-2
Analytical
10. Monopolistic competition is an

a. efficient market structure because long-run profits are zero.
b. efficient market structure because each firm produces at its efficient scale.
c. inefficient market structure because there is deadweight loss.
d. inefficient market structure because firms maximize profits.
e. Both a and b are correct.
ANS: C
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
TOP: Welfare | Deadweight loss
11. The deadweight loss that is associated with a monopolistically competitive market is a result of
a. price falling short of marginal cost in order to increase market share.
b. price exceeding marginal cost.
c. the firm operating in a regulated industry.
d. excessive advertising costs.
e. profit maximizing behavior.
ANS: B
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
TOP: Welfare
12. Both monopolistic competition and oligopoly are market structures
a.
b.
c.
d.
e.
that fail to achieve the total surplus achieved by perfect competition.

that feature only a few firms in each market.
to which the concept of Nash equilibrium is frequently applied by economists.
in which firms earn zero economic profit in the long run.
in which firms earn positive economic profit in the long run.
ANS: A
PTS: 1
DIF: 2
NAT: Analytic
TOP: Monopolistic competition | Welfare
REF: 16-2
MSC: Interpretive
13. A monopolistically competitive firm

a. has the usual deadweight loss of monopoly pricing.
b. experiences a zero profit in a long-run equilibrium.
c. is said to have excess capacity.
d. operates where MR = MC.
e. All of the above are correct.
ANS: E
PTS: 1
DIF: 2
NAT: Analytic
TOP: Deadweight loss | Excess capacity
MSC:
REF: 16-2
Interpretive
14. A monopolistically competitive firm has the following cost structure:

Output
Total Cost($)
1
30
2
32
3
36
4
42
5
50
6
63
7
77
9
5
7
6
4
7
The firm faces the following demand curve:

Price ($)
Quantity
20
1
18
2
15
3
12
4
If the government forces this firm to produce at its efficient scale, it will
a. produce three units and make $9.
b. produce four units and make $6.
c. produce five units and lose $5.
d. produce six units and lose $20.
e. produce seven units and lose $49.
ANS: C
PTS: 1
DIF: 3
NAT: Analytic
MSC: Applicative
Figure 16-4
REF: 16-2
TOP: Efficient scale
15. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will encourage
the entry of other firms into a monopolistically competitive industry?
a. panel a only
b. panel b only
c. panel c only
d. panel d only
e. panel a and panel b
ANS: C
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
TOP: Short-run equilibrium
16. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will encourage
the exit of some firms from a monopolistically competitive industry?
a. panel a only
b. panel b only
c. panel c only
d. panel d only
ANS: B
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
17. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will not
encourage either the entry or exit of firms in a monopolistically competitive industry?
a. panel a only
b. panel b only
c. panel c only
d. panel d only
ANS: A
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
18. Refer to Figure 16-4. Which of the panels depicts a firm in a monopolistically competitive
market earning positive economic profits?
a. panel a only
b. panel b only
c. panel c only
d. panel d only
e. panel b and panel c
ANS: C
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
19. Refer to Figure 16-4. Which of the panels shown could illustrate the short-run situation for a
monopolistically competitive firm?
a. panel a
b. panel b
c. panel c
d. All of the above are correct.
e. None of the above is correct.
ANS: D
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
Table 16-5
Tracis Hair Styling is one salon among many in the market for hairstyling. The following table
presents cost and revenue data for haircuts at Tracis Hair Styling.
COSTS
REVENUES
Quantity
Total
Marginal Quantity
Total
Marginal
Produced
Cost
Cost
Demanded
Price
Revenue
Revenue
0
1
2
3
4
5
6
7
8
$10
$15
$21
$28
$36
$45
$55
$66
$78
--
0
1
2
3
4
5
6
7
8
$50
$45
$40
$35
$30
$25
$20
$15
$10
--
20. Refer to Table 16-5. What is the profit-maximizing output for Tracis Hair Styling?
a. three haircuts
b. four haircuts
c. five haircuts
d. six haircuts
e. eight haircuts
ANS: B
PTS: 1
DIF: 2
NAT: Analytic
MSC: Applicative
REF: 16-2
TOP: Profit maximization
21. Refer to Table 16-5. When maximizing profit, what price does Tracis charge for a haircut?
a. $10
b. $20
c. $25
d. $30
e. $35
ANS: D
PTS: 1
DIF: 2
NAT: Analytic
MSC: Applicative
REF: 16-2
22. Refer to Table 16-5. At the profit-maximizing quantity, what is Tracis total profit?
a. $30
b. $59
c. $68
d. $77
e. $84
ANS: E
PTS: 1
DIF: 2
NAT: Analytic
MSC: Applicative
REF: 16-2
23. Refer to Table 16-5. Given the cost and revenue data, Tracis is
a. not in a long-run equilibrium. More businesses will enter the hair salon market in
the long run.
b. not in a short-run equilibrium.
c. not in a long-run equilibrium. Some businesses currently in the hair salon market
will exit the market in the long run.
d. in a long-run equilibrium.
e. not in a long-run or a short-run equilibrium.
ANS: A
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
TOP: Long-run equilibrium
24. Refer to Table 16-5. If the government required Tracis to produce at the efficient scale of
output, how many haircuts would Tracis sell?
a. either three or four
b. either four or five
c. either five or six
d. either six or seven
e. either seven or eight
ANS: B
NAT: Analytic
MSC: Analytical
PTS: 1
DIF: 2
REF: 16-2
25. Refer to Table 16-5. If the government forced Tracis to produce at the efficient scale of output,
what is the maximum profit Tracis could earn?
a. $68
b. $77
c. $80
d. $84
e. $96
ANS: D
PTS: 1
DIF: 2
NAT: Analytic
MSC: Applicative
REF: 16-2
26. Consider a monopolistically competitive firm in a market in long-run equilibrium. This firm is
likely earning
a. a positive economic profit because it is charging a price above marginal cost.
b. no economic profit because it is charging a price equal to its marginal cost.
c. a positive economic profit because it is charging a price above its average total
cost.
d. no economic profit because it is charging a price equal to it average total cost.
e. a positive economic profit because it is charging a price equal to marginal cost.
ANS: D
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
27. In a long-run equilibrium,

a. only a perfectly competitive firm operates at its efficient scale.
b. only a monopolistically competitive firm operates at its efficient scale.
c. neither a competitive firm nor a monopolistically competitive firm charges a
markup over marginal cost.
d. both a perfectly competitive firm and a monopolistically competitive firm operate
at their efficient scale of production.
e. only in monopoly does a firm operate where MR = MC.
ANS: A
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
28. Suppose the point of tangency that characterizes long-run equilibrium for a monopolistically
competitive firm occurs at Q1 units of output. This level of output, Q1,
a. exceeds the level of output at which marginal revenue equals marginal cost.
b. exceeds the level of output at which marginal cost equals average total cost.
c. falls short of the level of output at which price equals marginal cost.
d. exceeds the firms efficient scale of output.
e. equals the level of output where average total cost is at a minimum.
ANS: C
NAT: Analytic
MSC: Analytical
PTS: 1
DIF: 3
REF: 16-2
29. When a monopolistically competitive firm is in long-run equilibrium,

a. price is equal to average total cost.
b. price is equal to marginal cost.
c. price is equal to marginal revenue.
d. price is equal to average variable cost.
e. the firm operates at its efficient scale.
ANS: A
NAT: Analytic
PTS: 1
DIF: 2
REF: 16-2
MSC: Interpretive
30. Which two curves are tangent to each other in a monopolistically competitive market with zero
economic profit?
a. demand and average variable cost
b. demand and average total cost
c. marginal revenue and average variable cost
d. marginal revenue and average total cost
e. marginal revenue and marginal cost.
ANS: B
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
31. When a new firm enters a monopolistically competitive market, the individual demand curves
faced by all existing firms in that market will
a. shift to the left.
b. shift to the right.
c. shift in a direction that is unpredictable without further information.
d. remain unchanged. It is the supply curve that will shift to the right.
e. remain unchanged. It is the supply curve that will shift to the left.
ANS: A
PTS: 1
DIF: 2
NAT: Analytic
TOP: Demand curve | Long-run equilibrium
REF: 16-2
MSC: Analytical
32. When a firm's demand curve is tangent to its average total cost curve, the
a. firm's economic profit is zero.
b. firm must be earning economic profits.
c. firm must be incurring economic losses.
d. firm must be operating at its efficient scale.
e. firm must be operating at the socially optimum level of output.
ANS: A
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
33. The free entry and exit of firms in a monopolistically competitive market guarantees that
a. both economic profits and economic losses can persist in the long run.
b. both economic profits and economic losses disappear in the long run.
c. economic profits, but not economic losses, can persist in the long run.
d. economic losses, but not economic profits, can persist in the long run.
e. long-run equilibrium will be the same as short-run equilibrium.
ANS: B
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
34. In monopolistically competitive markets, economic losses

a. suggest that some existing firms will exit the market.
b. suggest that new firms will enter the market.
c. are minimized through government-imposed barriers to entry.
d. are never possible.
e. are eliminated when firms maximize profits.
ANS: A
PTS: 1
DIF: 1
NAT: Analytic
MSC: Interpretive
REF: 16-2
35. In monopolistically competitive markets, positive economic profits

a. suggest that some existing firms will exit the market.
b. suggest that new firms will enter the market.
c. suggest that the number of firms in the market has reached long-run equilibrium.
d. are sustained through government-imposed barriers to entry.
e. are never possible.
ANS: B
PTS: 1
DIF: 1
NAT: Analytic
MSC: Interpretive
REF: 16-2
36. In which of the following market structures does free entry and exit play an important role in the
long-run equilibrium outcome?
(i)
perfect competition
(ii)
monopolistic competition
(iii monopoly
)
a.
b.
c.
d.
e.
(i) only
(ii) only
(i) and (ii) only
(ii) and (iii) only
ANS: C
NAT: Analytic
PTS: 1
DIF: 2
REF: 16-2
MSC: Interpretive
37. Which of the following conditions is characteristic of a monopolistically competitive firm in
long-run equilibrium?
a. P > MR and P = MC
b. ATC = demand and MR = MC
c. P < MC and demand = ATC
d. P > ATC and demand > MR
e. AVC = demand and MR = MC
ANS: B
NAT: Analytic
MSC: Analytical
PTS: 1
DIF: 3
REF: 16-2
Figure 16-5
38. Refer to Figure 16-5. Which of the graphs shown would be consistent with a firm in a
monopolistically competitive market that is earning a positive profit?
a. panel a only
b. panel b only
c. panel c only
d. panel d only
e. panel c and panel d
ANS: C
PTS: 1
DIF: 2
REF: 16-2
NAT: Analytic
MSC: Interpretive
39. Refer to Figure 16-5. Which of the graphs shown would be consistent with a firm in a
monopolistically competitive market that is doing its best but still losing money?
a. panel a only
b. panel b only
c. panel c only
d. panel d only
ANS: B
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
40. Refer to Figure 16-5. Which of the graphs depicts a monopolistically competitive firm in longrun equilibrium?
a. panel a
b. panel b
c. panel c
d. panel d
e. None of the above is correct.
ANS: E
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
Figure 16-3
1000
900
800
MC
700
ATC
600
500
400
300
200
100
MR
5
10
15
20
25
30
35
40
Quantity
41. Refer to Figure 16-3. The firm in this figure is monopolistically competitive. It illustrates
a.
b.
c.
d.
e.
the shut-down case.

a long-run economic profit.
a short-run economic profit.
a short-run loss.
break even.
ANS: C
PTS: 1
DIF: 2
NAT: Analytic
MSC: Interpretive
REF: 16-2
42. Refer to Figure 16-3. Assume the firm in the figure is currently producing eight units of output
and charging $400. 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.
e. will increase its profits if it lowers its price and reduces its production level.
ANS: D
NAT: Analytic
MSC: Analytical
PTS: 1
DIF: 2
REF: 16-2
Figure 16-1. The figure is drawn for a monopolistically competitive firm.

32
24
MC
18
16
12
Demand
8
MR
4
12
16
20
24
28
32 Q
43. Refer to Figure 16-1. The firms profit-maximizing level of output is

a. eight units.
b. twelve units.
c. sixteen units.
d. twenty-four units.
e. greater than twenty-four units.
ANS: B
PTS: 1
DIF: 2
NAT: Analytic
MSC: Applicative
REF: 16-2
44. Refer to Figure 16-1. In order to maximize profit, the firm will charge a price of
a. $8.
b. $12.
c. $16.
d. $18.
e. $24.
ANS: D
PTS: 1
DIF: 2
NAT: Analytic
MSC: Applicative
REF: 16-2
45. Refer to Figure 16-1. Suppose that average total cost is $18 when Q=12. What is the profitmaximizing price and resulting profit?
a. P=$12, profit=$0
b. P=$18, profit=$72
c. P=$18, profit=$24
d. P=$18, profit=$0
e. P=$12, profit=$24
ANS: D
PTS: 1
DIF: 2
NAT: Analytic
MSC: Applicative
REF: 16-2
46. Refer to Figure 16-1. If the average total cost is $15 at the profit-maximizing quantity, then the
firms maximum profit is
a. $18.
b. $24.
c. $36.
d. $45.
e. $60.
ANS: C
PTS: 1
DIF: 2
NAT: Analytic
MSC: Applicative
REF: 16-2
47. Refer to Figure 16-1. If the average variable cost is $12 at the profit-maximizing quantity, and if
the firms fixed costs amount to $30, then the firms maximum profit is
a. $-30.
b. $22.
c. $36.
d. $42.
e. $60.
ANS: D
PTS: 1
DIF: 3
NAT: Analytic
MSC: Applicative
REF: 16-2
Figure 16-2
This figure depicts a situation in a monopolistically competitive market.
48. Refer to Figure 16-2. What are the profit-maximizing price, quantity, and resulting profit?
a. P=$60, Q=20 units, profit=$200
b. P=$80, Q=20 units, profit=$200
c. P=$75, Q=25 units, profit=$100
d. P=$60, Q=40 units, profit=$0
e. P=$70, Q=20 units, profit=$200
ANS: B
NAT: Analytic
MSC: Analytical
PTS: 1
DIF: 2
REF: 16-2
49. Refer to Figure 16-2. How much consumer surplus will be derived from the purchase of this
product at the monopolistically competitive price?
a. $200.00
b. $312.50
c. $400.00
d. $600.00
e. $800.00
ANS: A
NAT: Analytic
MSC: Analytical
PTS: 1
DIF: 3
REF: 16-2
50. Refer to Figure 16-2. How much output will the monopolistically competitive firm produce in
this situation?
a. twenty units
b. twenty-five units
c. forty units
d. eighty units
e. one hundred units
ANS: A
NAT: Analytic
MSC: Analytical
PTS: 1
DIF: 2
REF: 16-2
FREE RESPONSE
1. Use a correctly labeled graph to demonstrate a monopolistically competitive firm in long-run
equilibrium. On your graph, draw a marginal revenue curve, a demand curve, a marginal cost
curve, and an average total cost curve. Draw a dotted line to the axis to indicate the profitmaximizing level of output.
ANS:
PTS: 1
DIF: 2
MSC: Analytical
REF: 16-2
NAT: Analytic
TOP: Excess capacity
2. Professional organizations (for example, the American Medical Association and the American
Bar Association) have been active advocates for regulation to restrict the right of professionals to
advertise. Describe what economic incentives might exist for existing professionals to restrict
advertising.
ANS:
If advertising increases information about prices and services, then providers of professional
services will be required to compete with each other on the basis of price and service. As such,
existing professionals will be subject to more competitive pressure in the markets they service,
and individual profits are likely to fall.
PTS: 1
DIF: 2
REF: 16-3
NAT: Analytic
TOP: Advertising MSC: Analytical

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Mankiw Chapter 16 Answer Key

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Advanced Placement Microeconomics

Name: __________________________________ Pd: ___ Date: __________________

Chapter 16 Test KEY

4. If firms in a particular market sell identical products, then the market is

(i) and (ii) only

5. Monopolistic competition is characterized by which of the following attributes?

(i) and (ii) only

8. An oligopoly is a market in which

9. Monopolistic competition is characterized by

(i) and (ii) only

10. Monopolistic competition is an

12. Both monopolistic competition and oligopoly are market structures

that fail to achieve the total surplus achieved by perfect competition.

13. A monopolistically competitive firm

14. A monopolistically competitive firm has the following cost structure:

The firm faces the following demand curve:

27. In a long-run equilibrium,

29. When a monopolistically competitive firm is in long-run equilibrium,

34. In monopolistically competitive markets, economic losses

35. In monopolistically competitive markets, positive economic profits

TOP: Monopolistic competition

the shut-down case.

Figure 16-1. The figure is drawn for a monopolistically competitive firm.

43. Refer to Figure 16-1. The firms profit-maximizing level of output is

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Name: ________________________________ Pd: _ Date: __________________