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Exam 16: Monopolistic Competition

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Question 191

Multiple Choice

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Defenders of advertising

A) concede that advertising increases firms' market power.
B) concede that advertising makes entry by new firms more difficult.
C) contend that firms use advertising to provide useful information to consumers.
D) All of the above are correct.

E) B) and D)
F) A) and D)

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Question 192

Multiple Choice

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Critics of advertising argue that advertising

A) creates demand for products that people otherwise do not want or need.
B) lowers barriers to entry into an industry because new firms can more easily establish themselves as competitors.
C) increases competition by providing information about prices.
D) encourages monopolization of markets by raising entry barriers.

E) A) and B)
F) A) and D)

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Question 193

Multiple Choice

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Which of the following is an example of a monopolistically competitive industry?

Monopolistic competition is an

In a monopolistically competitive market, the demand curves faced by incumbent firms are unaffected by the entry of new firms into the market.

Figure 16-5 -Refer to Figure 16-5. Which of the graphs depicts a short-run equilibrium that will encourage the exit of some firms from a monopolistically competitive industry?

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. Which of the following is most likely?

In monopolistically competitive markets, positive economic profits

Scenario 16-3 Peter operates an ice cream shop in the center of Fairfield. He sells several unusual flavors of organic, homemade ice cream so he has a monopoly over his own ice cream, though he competes with many other firms selling ice cream in Fairfield for the same customers. Peter's demand and cost values for sales per day are given in the table below. (Everyone who purchases Peter's ice cream buys a double scoop cone because it's so delicious.) -Refer to Scenario 16-3. How many ice cream cones should Peter sell in one day to maximize his profits?

A monopolistically competitive firm has the following cost structure: The firm faces the following demand curve: If the government forces this firm to produce at its efficient scale, it will

The entry of new firms into a monopolistically competitive market is accompanied by

Critics of advertising argue that in some markets advertising may

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 percent during any given semester."

If regulators required firms in monopolistically competitive markets to set price equal to marginal cost,

The product-variety externality arises in monopolistically competitive markets because

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. What is the profit­maximizing output for Beatrice's Birthday Cakes?

Assume the role of a defender of advertising. Describe the characteristics of advertising that enhance the effectiveness of markets and increase the social welfare of society.

The two types of imperfectly competitive markets are

Table 16-7 A monopolistically competitive firm faces the following demand schedule for its product. In addition, the firm has total fixed costs equal to 20. -Refer to Table 16-7. If this firm profit maximizes and faces a constant marginal cost of $7, does it have excess capacity? How do you know?

Figure 16-10 The figure is drawn for a monopolistically-competitive firm. -Refer to Figure 16-10. As the figure is drawn, the firm is in