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Exam 18: Monopolistic Competition

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Question 61

Multiple Choice

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A monopolistically competitive firm chooses:

A) price, but output is determined by cartel production quota
B) the quantity of output to produce and the price at which it will sell its output
C) the quantity of output to produce, but the market determines price
D) price, but competition in the market determines the quantity

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

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Question 62

Multiple Choice

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Advocates for advertising argue that the efficiency of markets is enhanced when advertising:

A) is psychological rather than informational
B) reduces the elasticity of demand for a product
C) provides information that is useful to consumers
D) increases brand loyalty

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

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Question 63

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The Pizza Hut in Agra, India has a very similar menu design, layout and content as the Pizza Hut in Bondi Junction, Sydney. This is an example of a brand name enhancing market efficiency for Australian tourists visiting the India.

The cost for television advertisements aired during the Olympics is very high. A theory asserting that people buy a product simply because it is advertised would suggest that information on the cost of advertising:

Advertising during the Rugby World Cup is an example of providing information in the advertisement's content.

Suppose a firm enters a monopolistically competitive market with a new product. Consumers now have more choice. This increase in choice means that:

Graph 17-2 -Refer to Graph 17-2. Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is making economic profits?

A downward-sloping demand curve:

Brand names are likely to ensure product quality:

A profit-maximising firm in a monopolistically competitive market always operates at:

Excess capacity and efficient scale characterise firms in monopolistically competitive markets.

Evaluate the following statement in the context of business-stealing and product-variety externalities: 'We have too many student apartments in this town already; statistics show that vacancy rates average 15 per cent during any given semester'.

Inefficiency in monopolistically competitive markets can be identified with:

Consider the problem facing two firms in the fast-food restaurant market, Firm A and Firm B. Each company has just come up with an idea for a new fast-food menu item, which it would sell for $4. Assume that the marginal cost for each new menu item 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 two million consumers to try its new product. Firm A has done market research that suggests that its product does not have any 'staying' power in the market. Even though it could get two million consumers to buy the product once, it is unlikely that they will continue to buy the product in the future. Firm B'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, Firm B estimates that its initial 2 million customers will buy one unit of the product each month in the coming year, for a total of 24 million units. -According to the information provided, if Firm B decides to advertise its product it can expect to:

The 'competition' in monopolistically competitive markets is most likely a result of having many sellers in the market.

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

As market restrictions begin to be relaxed in China, computer hardware manufacturers have started advertising their products on billboards throughout China. The Premier of China expressed dismay that individual manufacturers had chosen to use advertising, in open disregard of an industry-wide 'gentleman's agreement' not to openly advertise 'technology products'. In the past the Computer Hardware Manufacturers Association informally monitored the agreement. -Refer to the information provided. Consumer advocacy groups that have encouraged the Premier to restrict advertising of computer hardware on billboards are most likely to do so on the basis that advertising:

Graph 17-4 -Refer to Graph 17-4. Which of the panels shown could not characterise a short-run equilibrium for a firm in a monopolistically competitive market?

New firms will necessarily enter a monopolistically competitive market when price exceeds:

Graph 17-3 Lines in these figures reflect the potential effect of entry and exit in a monopolistically competitive market on the demand and/or marginal cost curves of incumbent firms. -Refer to Graph 17-3. Panel c in the set of graphs shown depicts the effect on incumbent firms of: