Multiple Choice Questions

Panel (a) shows the long-run equilibrium in a monopolistically competitive market, and panel (b) shows the long-run equilibrium in a perfectly competitive market. Two differences are notable. (1) The perfectly competitive firm produces at the efficient scale, where average total cost is minimized. By contrast, the monopolistically competitive firm produces at less than the efficient scale. (2) Price equals marginal cost under perfect competition, but price is above marginal cost under monopolistic competition.
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  • Monopolistic Competitors in the Short Run
  • Monopolistic Competition Attributes
  • Monopolistic Competition
  • Monopolistic versus Perfect Competition
Firms that sell highly differentiated consumer goods, such as over-the-counter drugs, perfumes, soft drinks, razor blades, breakfast cereals, and dog food, typically spend between 10 and 20 percent of their revenue on advertising. Firms that sell industrial products, such as drill presses and communications satellites, typically spend very little on advertising. And firms that sell homogeneous products, such as wheat, salt, sugar, and crude oil, spend nothing at all.For the economy as a whole, about 2 percent of total firm revenue is spent on advertising.
  • Advertising and Product Quality
  • Defense of Advertising
  • Advertising and Brand Names
  • Advertising Spend
Advertising is related to brand names. Critics of brand names argue that brand names cause consumers to perceive differences between goods that do not exist. Defenders of brand names argue that brand names ensure that the product is of high quality because;- Brand names provide information about the quality of a product.- Brand names give firms the incentive to maintain high quality.
  • Advertising and Product Quality
  • Advertising Spend
  • Defense of Advertising
  • Advertising and Brand Names
A monopolistically competitive firm chooses to produce the quantity at which marginal revenue equals marginal cost and then uses its demand curve to find the price at which it can sell that quantity.
  • Imperfect Competition
  • Monopolistic Competition
  • Profit Maximization
  • Monopolistic Competitors in the Short Run
A market structure that does not meet the conditions of perfect competition and monopoly.
  • Monopolistic Competition
  • Concentration Ratio
  • Oligopoly
  • Imperfect Competition
Monopolistically competitive markets do not have all the desirable welfare properties of perfectly competitive markets. That is, the invisible hand does not ensure that total surplus is maximized under monopolistic competition. Yet because the inefficiencies are subtle, hard to measure, and hard to fix, there is no easy way for public policy to improve the market outcome.
  • Monopolistic Competition Attributes
  • Monopolistic Competitors in the Short Run
  • Monopolistic versus Perfect Competition
  • Monopolistic Competition and the Welfare of Society
As in a monopoly market, price exceeds marginal cost (P > MC). This conclusion arises because profit maximization requires marginal revenue to equal marginal cost (MR = MC) and because the downward-sloping demand curve makes marginal revenue less than the price (MR < P).As in a competitive market, price equals average total cost (P = ATC). This conclusion arises because free entry and exit drive economic profit to zero.
  • Entry and Exit in a Monopolistically Competitive Market
  • Differentiating b/w The Four Market Structures
  • Characteristics of a Long-Run Equilibrium in a Monopolistically Competitive Market
  • Monopolistic versus Perfect Competition
Defenders of advertising argue that advertising provides information to customers about prices, the existence of new products, and the location of retail outlets. This information increases competition because consumers are aware of price differentials and it provides new firms with the means to attract customers from existing firms. Evidence suggests that advertising increases competition and reduces prices for consumers.
  • Advertising and Brand Names
  • Defense of Advertising
  • Critique of Advertising
  • Advertising Spend
The difference between a firm's profit-maximizing quantity and the quantity that minimizes average cost.
  • Concentration Ratio
  • Profit Maximization
  • Imperfect Competition
  • Excess Capacity
Monopolistic competitors, like monopolists, maximize profit by producing the quantity at which marginal revenue equals marginal cost. The firm in panel (a) makes a profit because, at this quantity, price is greater than average total cost. The firm in panel (b) makes losses because, at this quantity, price is less than average total cost.
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  • Monopolistic Competition Attributes
  • Monopolistic Competitors in the Short Run
  • Monopolistic versus Perfect Competition
  • Monopolistic Competition
The percentage of total output in the market supplied by the four largest firms.
  • Imperfect Competition
  • Concentration Ratio
  • Excess Capacity
  • Monopolistic Competition
Price exceeds marginal cost because the firm always has some market power.In the long-run equilibrium, monopolistically competitive firms operate on the declining portion of their average-total-cost curves, so marginal cost is below average total cost.
  • Markup over Marginal Cost
  • Critique of Advertising
  • Monopolistic Competition
  • Advertising and Brand Names
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Multiple Choice Questions
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