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Exam 16: Monopolistic Competition

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Question 221

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Figure 16-4 -Refer to Figure 16-4. What price will the monopolistically competitive firm charge in this market?

A) $400
B) $600
C) $700
D) $800

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

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Question 222

Multiple Choice

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Monopolistically competitive firms have excess capacity. To maximize profits, firms will

A) increase their output to lower their average total cost of production and eliminate the excess capacity.
B) produce where price equals marginal cost to eliminate the excess capacity.
C) produce where average revenue equals marginal cost to eliminate the excess capacity.
D) maintain the excess capacity.

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

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Question 223

Multiple Choice

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Select the type of market that is described by the following attributes: many firms, differentiated products, and free entry.

A monopolistically competitive market

Use a graph to demonstrate why a profit-maximizing monopolistically competitive firm must operate at excess capacity. Explain why a perfectly competitive firm is not subject to the same constraint.

Scenario 16-7 Consider the problem facing two firms, YumYum and Bertollini, in the frozen food market. Each firm has just come up with an idea for a new "frozen meal for two" which it would sell for $9. Assume that the marginal cost for each new product is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 1.5 million consumers to try its new product. YumYum has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 1.5 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Bertollini's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Bertollini estimates that its initial 1.5 million customers will buy one unit of the product each month in the coming year, for a total of 18 million units. -Refer to Scenario 16-7. Suppose YumYum has an opportunity to create a cheaper advertising campaign in newspapers rather than on television for its new product. This campaign will cost $8 million and is expected to result in the same 1.5 million one-time customers. YumYum should

Each firm in a monopolistically competitive industry faces a downward-sloping demand curve because

In markets where the government imposes an excise tax on unit sales, it also has a tendency to dabble with restrictions on advertising (for example, cigarettes and hard liquor). Do potential (or actual) restrictions on advertising in these markets serve the interest of a government that is interested in maximizing its tax revenue from the sale of these products? Explain your answer.

Figure 16-2. The figure is drawn for a monopolistically competitive firm. -Refer to Figure 16-2. Suppose you were to add the ATC curve to the diagram to show the firm in a situation of long-run equilibrium. You would draw the ATC curve

One key difference between an oligopoly market and a competitive market is that oligopolistic firms

Describe the shape of the monopolistically competitive firm's demand curve.

Figure 16-2. The figure is drawn for a monopolistically competitive firm. -Refer to Figure 16-2. Suppose ATC = $36 when Q = 24. Then the

Due to free entry and exit in monopolistic competition, in the long run price must be equal to

Which market structure(s) is(are) imperfectly competitive?

Scenario 16-7 Consider the problem facing two firms, YumYum and Bertollini, in the frozen food market. Each firm has just come up with an idea for a new "frozen meal for two" which it would sell for $9. Assume that the marginal cost for each new product is a constant $2, and the only fixed cost is for advertising. Each company knows that if it spends $12 million on advertising it will get 1.5 million consumers to try its new product. YumYum has done market research which suggests that its product does not have any "staying" power in the market. Even though it could get 1.5 million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Bertollini's market research suggests that its product is very good, and consumers who try the product will continue to be consumers over the ensuing year. On the basis of its market research, Bertollini estimates that its initial 1.5 million customers will buy one unit of the product each month in the coming year, for a total of 18 million units. -Refer to Scenario 16-7. If Bertollini decides to advertise its product it can expect to

When firms in a monopolistically competitive market engage in price-related advertising, defenders of advertising argue that

A firm in a monopolistically competitive market can earn both short-run and long-run profits.

Table 16-6 Beatrice's Birthday Cakes is one bakery among many in the market for birthday cakes. The following table presents cost and revenue data for birthday cakes at Beatrice's. -Refer to Table 16-6. When maximizing profit, what price does Beatrice's charge for a cake?

Which of the following statements regarding monopolistic competition is not correct?

Which of the following statements is not correct?