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A profit-maximising monopolistically competitive firm produces and sells an allocatively efficient quantity of output.

A) True
B) False

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-Refer to Figure 10-5. The chocolate store represented in the diagram is currently selling Q<sub>a</sub> units of candy at a price of P<sub>a</sub>. Is this candy store maximising its profit and if it is not, what would you recommend to the firm? A) Yes, it is maximising its profit by charging the highest price possible. B) No, it is not; since its marginal cost is constant, it should produce and sell as much chocolate as it can. It should sell Q<sub>d</sub> units at a price of P<sub>d</sub>. C) No, it is not; it should lower its price to P<sub>c</sub> and sell Q<sub>c</sub> units. D) No, it is not; it should lower its price to P<sub>b</sub> and sell Q<sub>b</sub> units. -Refer to Figure 10-5. The chocolate store represented in the diagram is currently selling Qa units of candy at a price of Pa. Is this candy store maximising its profit and if it is not, what would you recommend to the firm?


A) Yes, it is maximising its profit by charging the highest price possible.
B) No, it is not; since its marginal cost is constant, it should produce and sell as much chocolate as it can. It should sell Qd units at a price of Pd.
C) No, it is not; it should lower its price to Pc and sell Qc units.
D) No, it is not; it should lower its price to Pb and sell Qb units.

E) All of the above
F) A) and C)

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The entry and exit of firms in a monopolistically competitive market guarantee that


A) marginal revenue equals marginal cost, and average total cost is minimised.
B) firms can earn economic profits in the long run.
C) price equals average total cost in the long run.
D) firms can earn economic profits in the short run.

E) B) and C)
F) C) and D)

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If a firm has excess capacity, it means


A) that the firm expends too much of its resources on advertising its product without seeing an appreciable increase in sales.
B) that the firm is not producing its minimum efficient scale of output.
C) that the firm's long-run average cost of producing a given quantity exceeds its short-run cost of producing that same quantity.
D) that the firm's quantity supplied exceeds its quantity demanded.

E) A) and C)
F) C) and D)

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Assuming that the total market size remains constant, a monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing in the long run because


A) new entrants into the market are more likely to have cutting edge products.
B) as the firm raises its price in the long run, it will lose some customers to new entrants in the market.
C) some of its customers have switched to purchasing the products of new entrants in the market.
D) its costs of production rises.

E) A) and B)
F) A) and C)

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Both the perfectly competitive firm and the monopolistically competitive firm produce at the output where marginal revenue equals marginal cost (MR = MC) but only the perfectly competitive firm achieves allocative efficiency. Explain why this is the case.

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but will not hold for the prof...

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-Refer to Table 10-4. Victoria's profit-maximising output is where


A) total profit equals $3.
B) marginal revenue and marginal cost both equal $4.
C) marginal revenue and marginal cost both equal $3.
D) marginal cost is at its minimum value.

E) C) and D)
F) B) and D)

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-Refer to Figure 10-15. It is possible to lower the average cost of production by expanding output beyond Q<sub>0</sub> to Q<sub>1</sub>. Why wouldn't a firm expand its output to Q<sub>1</sub>? A) The firm wants to maximise accounting profit rather than economic profit. B) The firm would suffer an economic loss at Q<sub>1</sub> while it would break even at Q<sub>0</sub>. C) The firm's marginal revenue would be negative at Q<sub>1</sub>. D) Demand is not sufficient for consumers to buy Q<sub>1</sub>. -Refer to Figure 10-15. It is possible to lower the average cost of production by expanding output beyond Q0 to Q1. Why wouldn't a firm expand its output to Q1?


A) The firm wants to maximise accounting profit rather than economic profit.
B) The firm would suffer an economic loss at Q1 while it would break even at Q0.
C) The firm's marginal revenue would be negative at Q1.
D) Demand is not sufficient for consumers to buy Q1.

E) None of the above
F) B) and D)

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Does the fact that monopolistically competitive firms do not achieve productive efficiency or allocative efficiency mean that there is a significant loss in consumer welfare?

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No. Although monopolistically competitiv...

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If firms in a monopolistically competitive market are earning economic profits, which of the following scenarios best reflects the change a representative firm experiences as the market adjusts to its long-run equilibrium?


A) Demand decreases and becomes less elastic.
B) Demand decreases and becomes more elastic.
C) Demand increases and becomes less elastic.
D) Demand increases and becomes more elastic.

E) C) and D)
F) B) and C)

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Assume that price exceeds average variable cost over the relevant range of demand. If a monopolistically competitive firm is producing at an output where marginal revenue is $111.11 and marginal cost is $118, then to maximise profits the firm should increase its output.

A) True
B) False

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Which of the following is not an example of a monopolistically competitive market?


A) automobile producers
B) supermarkets
C) video stores
D) makers of women's clothing

E) A) and B)
F) A) and C)

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Assume price exceeds average variable cost over the relevant range of demand. If a monopolistically competitive firm is producing at an output where marginal revenue is $23 and marginal cost is $19, then to maximise profits the firm should


A) continue to produce the same quantity.
B) increase output.
C) decrease output.
D) shut down.

E) A) and B)
F) A) and C)

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Which of the following would not occur as a result of a monopolistically competitive firm suffering a short-run economic loss?


A) The firm could exit the industry in the long run.
B) If the firm does not exit the industry in the long run, its demand curve will shift to the left.
C) If the firm does not exit the industry in the long run, its demand curve will shift to the right.
D) If the firm remains in the industry in the long run, it will break even.

E) None of the above
F) C) and D)

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-Refer to Figure 10-16 to answer the following questions. a. What is the profit-maximising output level? b. What is the profit-maximising price? c. What is the average total cost at the profit-maximising output level? d. What area represents the firm's profit? e. At which output level are economies of scale exhausted? f. Does this graph most likely represent the long run or the short run? Why? -Refer to Figure 10-16 to answer the following questions. a. What is the profit-maximising output level? b. What is the profit-maximising price? c. What is the average total cost at the profit-maximising output level? d. What area represents the firm's profit? e. At which output level are economies of scale exhausted? f. Does this graph most likely represent the long run or the short run? Why?

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a. The profit maximising level of output...

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Sparkle, one of many firms in the market for toothpaste, is in long-run equilibrium. Sparkle has a small market share and has been in business for a long time. a. Identify the market structure in which Sparkle operates. Explain your answer. b. What is Sparkle's profit or loss? Explain your answer. If you cannot determine the profit or loss, explain what information is missing. c. Draw a diagram showing Sparkle's demand curve, marginal revenue curve, average total cost curve and marginal cost curve. Label your diagram.

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a. Monopolistic competition; p...

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A successful trademark is one that becomes a generic name for a product, for example, 'Kleenex' has become a generic term for tissues.

A) True
B) False

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-Refer to Figure 10-4. What is the area that represents the total fixed cost of production? A) 0P<sub>1</sub>aQ<sub>a</sub> B) P<sub>0</sub>adP<sub>3</sub> C) P<sub>1</sub>bdP<sub>3</sub> D) That information cannot be determined from the graph. -Refer to Figure 10-4. What is the area that represents the total fixed cost of production?


A) 0P1aQa
B) P0adP3
C) P1bdP3
D) That information cannot be determined from the graph.

E) B) and C)
F) None of the above

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-Refer to Figure 10-4. Should the firm represented in the diagram continue to stay in business despite its losses? A) No, it should shut down. B) Yes, its total revenue covers its variable cost. C) No, it is not able to cover its fixed cost. D) Yes, it should increase its revenue by raising its price. -Refer to Figure 10-4. Should the firm represented in the diagram continue to stay in business despite its losses?


A) No, it should shut down.
B) Yes, its total revenue covers its variable cost.
C) No, it is not able to cover its fixed cost.
D) Yes, it should increase its revenue by raising its price.

E) All of the above
F) B) and C)

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Why are demand and marginal revenue represented by the same curve for a firm in a perfectly competitive market, but by separate curves for a firm in a monopolistically competitive market?

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A perfectly competitive firm faces a hor...

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