economics data bank

Sample Exam Monopolistic Competition

Multiple Choice

Identify the choice that best completes the statement or answers the question.

____ 1. A profit-maximizing monopolistic competitor will expand output to the point where

a.

total revenue equals total cost.

b.

marginal revenue equals marginal cost.

c.

price equals average total cost.

d.

price equals marginal cost.

____ 2. When a new firm enters a monopolistically competitive market, the demand curves faced by all existing firms in that market will

a.

shift to the left.

b.

shift to the right.

c.

shift in a direction that is unpredictable without further information.

d.

remain unchanged. It is the supply curve that will shift.

____ 3. Which of the following is not a characteristic of a monopolistically competitive market?

a.

Each firm produces a differentiated product.

b.

The entry barriers are high.

c.

Each firm faces a downward-sloping demand curve.

d.

The number of firms in the market is large.

____ 4. Suppose a monopolistically competitive firm faces the following demand curve data for its product.

Price

Quantity

$8

5

$7

6

$6

7

What is the firm's marginal revenue from selling the seventh unit?

a.

$0

b.

$2

c.

$7

d.

$42

____ 5. If a monopolistically competitive firm is producing at a level of output such that its marginal cost is $5 and its marginal revenue is $3, the firm should

a.

increase output in order to reduce per-unit costs.

b.

decrease the price of its product and expand output.

c.

increase price and reduce its rate of output.

d.

reduce both price and output.

____ 6. Tombstones are produced in a monopolistically competitive price-searcher market. One producer, Rolling Stones, sells 20 tombstones a week at a price of $500 each. Its average total cost is $600. From this information, we can conclude

a.

new tombstone firms will want to enter.

b.

this producer is losing $2,000 a week.

c.

this producer is making an economic profit of $400.

d.

this producer is setting MR = MC.

e.

this producer should increase production.

____ 7. When economic losses are present in a market, firms will tend to

a.

exit from the market.

b.

raise their prices until the break-even point is reached.

c.

lower their prices, regardless of cost, so they can capture more of the market.

d.

increase output.

Use the figure to answer the following question(s).

Figure 10-4

____ 8. What price should a monopolistically competitive price-searcher firm with the cost and demand conditions depicted in Figure 10-4 charge if it wants to maximize its profit?

a.

$10

b.

$15

c.

$20

d.

$24

____ 9. What is the maximum economic profit this firm depicted in Figure 10-4 will be able to earn?

a.

$200 loss

b.

zero profit

c.

$250 profit

d.

$700 profit

____ 10. If the cost and demand conditions of this monopolisticallycompetitive price-searcher firm depicted in Figure 10-4 are representative of the market, what will happen in the future?

a.

Some firms will go out of business, and the market price will rise.

b.

The current market price will tend to persist into the future.

c.

New firms will enter the market, and the market price will decline.

d.

The firms in this industry will prob