ECON 202
Multiple Choice Questions
Monopolistic competition means
a market situationwhere competition is based entirelyon product differentiation and advertising.
a large number of firms producinga standardized or homogeneous product.
C. many firms producingdifferentiated products.
D. a few firms producinga standardized or homogeneous product.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Monopolistic competition is characterized by a
few dominant firms and low entry barriers.
large number of firms and substantial entry barriers.
C. large number of firms and low entry barriers.
D. few dominant firms and substantial entry barriers.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Under monopolistic competition,entry to the industry is
completely free of barriers.
B. more difficult than under pure competition but not nearlyas difficult as under pure monopoly.
more difficult than under pure monopoly.
blocked.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
In which of these continuums of degrees of competition (highest to lowest) is monopolistic competition properlyplaced?
pure competition, oligopoly, pure monopoly, monopolistic competition
oligopoly, pure competition,monopolistic competition, pure monopoly
monopolistic competition, pure competition, pure monopoly, oligopoly
D. pure competition, monopolistic competition, oligopoly, pure monopoly
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Monopolistic competition resembles pure competition because
both industries emphasize nonprice competition.
in both instances firms will operate at the minimumpoint on their long-runaverage total cost curves.
both industries entail the production of differentiated products.
D. barriers to entry are either weak or nonexistent.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Which of the followingis not a basic characteristic of monopolistic competition?
the use of trademarks and brand names
B. recognizedmutual interdependence
product differentiation
a relatively large number of sellers
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Nonprice competition refers to
competition between products of differentindustries, for example, competition between aluminumand steel in the manufacture of automobile parts.
price increases by a firm that are ignored by its rivals.
C. advertising, product promotion,and changes in the real or perceivedcharacteristics of a product.
D. reductions in production costs that are not reflected in price reductions.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
The restaurant, legal assistance, and clothing industries are each illustrations of
countervailing power.
homogeneous oligopoly.
C. monopolistic competition.
D. pure monopoly.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
If the number of firms in a monopolistically competitive industry increases and the degree of product differentiation diminishes,
the likelihood of realizing economic profits in the long run would be enhanced.
individual firms would now be operating at outputs where their average total costs would be higher.
C. the industrywould more closelyapproximate pure competition.
D. the likelihood of collusive pricingwould increase.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Economic analysis of a monopolistically competitive industry is more complicated than that of pure competition because
of productdifferentiation and consequent productpromotion activities.
monopolistically competitive firms cannot realizean economic profit in the long run.
the number of firms in the industryis larger.
monopolistically competitive producers use strategic pricing strategies to combat rivals.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
A monopolistically competitive industry combines elementsof both competitionand monopoly. The monopoly elementresults from
the likelihood of collusion.
high entry barriers.
C. product differentiation.
D. mutual interdependence in decisionmaking.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
A monopolistically competitive industry combines elementsof both competitionand monopoly. The competition element resultsfrom
the likelihood of collusion.
product differentiation.
C. low entry barriers.
D. mutual interdependence in decisionmaking.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
A significant differencebetween a monopolistically competitive firm and a purelycompetitive firm is that the
former does not seek to maximize profits.
latter recognizes that price must be reduced to sell more output.
C. former sells similar,although not identical, products.
D. former's demand curve is perfectly inelastic.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
A significant differencebetween a monopolistically competitive firm and a purelycompetitive firm is that the
former has fewer barriers to entry into the industry.
latter recognizes that price must be reduced to sell more output.
C. latter’s demand curve is perfectly elastic.
D. latter differentiates its product.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
A monopolistically competitive industry combines elements of both competitionand monopoly. It is correctto say that the competitive element resultsfrom
a relatively large number of firms, and the monopolistic element from product differentiation.
product differentiation, and the monopolistic elementfromhigh entry barriers.
a perfectly elasticdemand curve, and the monopolistic element from low entry barriers.
a highly inelastic demand curve, and the monopolistic elementfrom advertising and productpromotion.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Monopolistically competitive and purely competitive industries are similar in that
both are assuredof short-run economic profits.
both produce differentiated products.
the demand curves facing individual firms are perfectlyelastic in both industries.
D. there are few, if any, barriers to entry.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
The monopolistic competition model assumes that
allocative efficiency will be achieved.
productive efficiency will be achieved.
C. firms will engage in nonprice competition.
D. firms will realize economicprofits in the long run.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Use your basic knowledge and your understanding of market structuresto answer this question. Which of the followingcompanies most closelyapproximates a monopolistic competitor?
Subway Sandwiches
Pittsburgh Plate Glass
Ford Motor Company
Microsoft
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
In which of the following market models do demand and marginalrevenue diverge?
pure monopoly, oligopoly, and monopolistic competition
pure monopoly, oligopoly, and pure competition
pure monopoly only
oligopoly only
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Concentration ratios measure the
geographic location of thelargest corporations in each industry.
degree to which product price exceeds marginalcost in various industries.
C. percentageof total industrysales accounted for by the largest firms in the industry.
D. number of firms in an industry.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
If the four-firm concentration ratio for industry X is 80,
the four largest firms account for 80 percentof total sales.
each of the four largestfirms accounts for 20 percentof total sales.
the four largest firms account for 20 percent of total sales.
the industry is monopolistically competitive.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
An industry having a four-firmconcentration ratio of 30 percent
approximates pure competition.
is an oligopoly.
is a pure monopoly.
D. is monopolistically competitive.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
The Herfindahl index for a pure monopolistis A. 100.
B. 10,000.
C. 100,000.
D. 10.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Industries X and Y both have four-firm concentration ratios of 32 percent, but the Herfindahlindex for X is 256, while that for Y is264. These data suggest
greater market power in X than in Y.
B. greater market power in Y than in X.
that X is more technologically progressive than Y.
that pricecompetition is stronger in Y than in X.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Suppose that total sales in an industry in a particular year are $800 million and sales by the top four sellers are $50 million,$40 million, $30 million, and $30 million,respectively. We can conclude that
this industry is an oligopoly.
B. this industryis monopolistically competitive.
the concentration ratio is 25 percent.
firms in this industry likely collude with each other.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
The four-firm sales concentration ratio for an industry measures the
geographic concentration of firms.
B. extent to which the four largest firms dominate the production of a good.
percentage of the industry's capital facilitiesowned by the four largest firms.
degree of X-inefficiency in the industry.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
If an industryevolves from oligopolyto monopolistic competition, we would expect
the four-firm concentration ratio to increase.
B. the four-firmconcentration ratio to decrease.
the four-firm concentration ratio to remain the same.
barriers to entry to strengthen.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
If you sum the squares of the market shares of each firm in an industry (as measured by percent of industry sales), you are calculating the
four-firm concentration ratio.
B. Herfindahlindex.
degree of collusion.
Lerner index.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
The Herfindahl index
tells us the degree to which monopolistically competitive firms are differentiating their products.
is another name for the four-firm concentration ratio.
tells us whether oligopolistic firms are engagingin collusion.
D. gives much greater weight to larger firms than to smallerfirms in an industry.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
If the four-firm concentration ratio in an oligopolistic industry is 100 percent and each firm has an equal percentage of sales, the Herfindahl index is A. 10,000.
B. 2,500.
C. 3,750.
D. 1,000.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Assume the top six firms comprising an industryhave market shares of 10, 8, 8, 5, 5, and 4 percent. The remaining 20 firms each have market shares of 2 percent.The Herfindahl index for this industry is A. 294.
B. 31.
C. 374.
D. 253.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Suppose the Herfindahl indexes for industries A, B, and C are 1,200, 5,000, and 7,500 respectively. These data imply that
market power is greatestin industry A.
market power is greatestin industry B.
C. market power is greatest in industry C.
D. industry A is more monopolistic than industry C.
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Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
FirmMarket Share (%)A20B20C20D20E10F10 33.
Refer to the data. The Herfindahl index for the industry is
A. 1,600.
B. 1,800.
C. 18,000.
D. 80.
AACSB: Reflective Thinking
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Type: Table
FirmMarket Share (%)A20B20C20D20E10F10 34.
Refer to the data. If all the firms in the industry merged into a single firm, the Herfindahl index would become
A. 100.
B. 1,000.
C. 10,000.
D. 100,000.
AACSB: Reflective Thinking
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Type: Table
FirmMarket Share (%)A20B20C20D20E10F10 35.
Refer to the data. Suppose that firms in this industry split up such that there were 100 firms, each with a 1 percent market share. The four-firm concentration ratio and the Herfindahl index respectively would be
100 percent and 10,000.
4 percent and 4.
100 percent and 16.
D. 4 percent and 100.
AACSB: Reflective Thinking
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Type: Table
FirmMarket Share (%)A40B30C20D5E5 36.
Refer to the data. The four-firm concentration ratio for this industryis
A. 90 percent.
B. 95 percent.
100 percent.
indeterminate because we don't know which four firms are included.
AACSB: Reflective Thinking
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Type: Table
FirmMarket Share (%)A40B30C20D5E5 37.
Refer to the data. The Herfindahl index for this industry is
A. 95.
B. 1,000.
C. 2,925.
D. 2,950.
AACSB: Reflective Thinking
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Type: Table
FirmMarket Share (%)A40B30C20D5E5 38.
Refer to the data. If Firm B merged with Firm C, the industry'sfour-firm concentration ratio would and its Herfindahlindex would .
A. rise; rise
fall; rise
remain the same; rise
remain the same; fall
AACSB: Reflective Thinking
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
Type: Table
A monopolistically competitive firm has a
highly elastic demand curve.
highly inelastic demand curve.
perfectly inelastic demand curve.
perfectly elastic demand curve.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Remember Difficulty: 01 Easy
Learning Objective: 13-01 List the characteristics of monopolistic competition.
Test Bank: I Topic: Monopolistic Competition
The monopolistically competitive seller's demand curve will become more elastic the
more significantthebarriers to enteringthe industry.
greater the degree of productdifferentiation.
C. larger the number of competitors.
D. smaller the number of competitors.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain why monopolistic competitors earn only a normalprofit in the long run.
Test Bank: I Topic: Price and Output inMonopolistic Competition
The larger the number of firms and the smallerthe degree of product differentiation, the
greater the divergence between the demand and the marginal revenue curves of the monopolistically competitive firm.
larger will be the monopolistically competitive firm's fixed costs.
less elastic is the monopolistically competitive firm's demand curve.
D. more elastic is the monopolistically competitive firm's demand curve.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain why monopolistic competitors earn only a normalprofit in the long run.
Test Bank: I Topic: Price and Output in Monopolistic Competition
The demand curve of a monopolistically competitive producer is
less elastic than that of either a pure monopolist or a pure competitor.
less elastic than that of a pure monopolist, but more elastic than that of a pure competitor.
C. more elastic than that of a pure monopolist, but less elastic than that of a pure competitor.
D. more elastic than that of either a pure monopolist or a pure competitor.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain why monopolistic competitors earn only a normalprofit in the long run.
Test Bank: I Topic: Price and Output in Monopolistic Competition
A monopolistically competitive firm's marginal revenue curve
is downsloping and coincides with the demand curve.
coincides with the demand curve and is parallel to the horizontal axis.
C. is downsloping and lies below the demand curve.
D. does not exist because the firm is a "price maker."
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain why monopolistic competitors earn only a normalprofit in the long run.
Test Bank: I Topic: Price and Output inMonopolistic Competition
The price elasticity of a monopolistically competitive firm's demand curve varies
inversely with the number of competitors and the degree of product differentiation.
directly with the number of competitors and the degree of product differentiation.
C. directly with the number of competitors but inversely with the degree of product differentiation.
D. inversely with the number of competitors but directly with the degree of productdifferentiation.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain why monopolistic competitors earn only a normalprofit in the long run.
Test Bank: I Topic: Price and Output inMonopolistic Competition
In the short run, a profit-maximizing monopolistically competitive firm sets it price
equal to marginal revenue.
equal to marginal cost.
C. above marginal cost.
D. belowmarginal cost.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain why monopolistic competitors earn only a normalprofit in the long run.
Test Bank: I Topic: Price and Output in Monopolistic Competition
In the long run, a profit-maximizing monopolistically competitive firm sets it price
above marginal cost.
below marginal cost.
equal to marginal revenue.
equal to marginal cost.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain why monopolistic competitors earn only a normalprofit in the long run.
Test Bank: I Topic: Price and Output inMonopolistic Competition
In the short run, the price charged by a monopolistically competitive firm attempting to maximize profits
must be less than ATC.
must be more than ATC.
C. may be either equal to ATC, less than ATC, or more than ATC.
D. must be equal to ATC.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain why monopolistic competitors earn only a normalprofit in the long run.
Test Bank: I Topic: Price and Output in Monopolistic Competition
In the long run, the price charged by the monopolistically competitive firm attempting to maximize profits
must be less than ATC.
must be more than ATC.
may be either equal to ATC, less than ATC, or more than ATC.
D. will be equal to ATC.
AACSB: Reflective Thinking Accessibility: Keyboard Navigation
Blooms: Understand Difficulty: 02 Medium
Learning Objective: 13-02 Explain why monopolistic competitors earn only a normalprofit in the long run.
Test Bank: I Topic: Price and Output inMonopolistic Competition
Monopolistically competitive firms
realize normal profits in the short run but lossesin the long run.
incur persistent losses in both the short run and long run.
C. may realize either profits or losses in the short run but realize normal profits in the long run.
D. persistently realizeeconomic profits in both the short run and long run.