Question 1

There are several reasons why demand curves may become more price elastic. Among them are

Accepted Answer

A)   the market becomes more monopolistic and cross elasticities approach zero.
B)   the goods become less differentiated and more firms enter the industry.
C)   consumers have fewer substitutes and firms drop out of the industry.
D)   industry demand increases and consumers increase spending.

Question 2

Critics of advertising argue that advertising

Accepted Answer

A)   wastes resources, because it creates an image without necessarily improving product quality.
B)   lowers barriers to entry into an industry, because new firms can more easily establish themselves as competitors.
C)   advertising increases competition by providing information about prices.
D)   advertising encourages monopolisation of markets by raising entry barriers too high.

Question 3

Many airlines promise "frequent flyer" miles to passengers who travel on their flights regularly. This is an example of a firm attempting to create

Accepted Answer

A)   exclusivity on its flights.
B)   a predatory pricing scheme.
C)   discounting below marginal costs.
D)   brand loyalty.

Question 4

Economists generally agree that monopolistically competitive firms should be regulated in order to increase economic efficiency.

Accepted Answer

A) True 
 B)False

Question 5

The use of the word "competition" in the name of the market structure called "monopolistic competition" refers to the fact that

Accepted Answer

A)   there are many sellers in a monopolistically competitive market, and there is free entry and exit in the market just like a competitive market.
B)   monopolistically competitive firms face a downward sloping demand curve, just like competitive firms.
C)   monopolistically competitive firms charge prices equal to the minimum of their average total cost, just like competitive firms.
D)   the products are differentiated in a monopolistically competitive market, just like in a competitive market.

Question 6

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.

Accepted Answer

Advertising provides information to cons...

Question 7

Similar to firms in perfectly competitive markets, firms in monopolistically competitive markets can enter and exit the market without restriction, so profits are driven to zero in the long run.

Accepted Answer

A) True 
 B)False

Question 8

If some coffee drinkers continue to buy Ricoffy even when Nescafé coffee is on sale and cheaper, it may be a result of

Accepted Answer

A)   irrational consumer behaviour.
B)   a high cross elasticity between the two goods.
C)   brand loyalty.
D)   Ricoffy being a monopoly.

Question 9

Expensive television commercials that appear to provide no specific information about the product being advertised

Accepted Answer

A)   may be useful because they provide a signal to the consumer about the quality of the product.
B)   should be banned by regulators because they add to the cost of the product without providing the consumer with any useful information about the product.
C)   only affect the buying habits of irrational consumers.
D)   are most likely used by firms that are perfect competitors.

Question 10

The typical firm in the South African economy

Accepted Answer

A)   has some degree of market power.
B)   sells its product for a price that is equal to the marginal cost of producing the last unit.
C)   is perfectly competitive.
D)   is a monopoly.

Question 11

One source of inefficiency in monopolistic competition is that

Accepted Answer

A)   since price is above marginal cost, surplus is redistributed from buyers to sellers.
B)   monopolistically competitive firms earn economic profits in the long run.
C)   monopolistically competitive firms produce beyond their efficient scale.
D)   since price is above marginal cost, some units are not produced that buyer's value in excess of the cost of production and this causes a deadweight loss.

Question 12

In the long run, firms in monopolistically competitive markets produce at the minimum of their average total cost curves.

Accepted Answer

A) True 
 B)False

Question 13

Evaluate the following statement: "Advertisements that use celebrity endorsements are devoid of any value and do not enhance the efficient functioning of markets."

Accepted Answer

Some people argue that celebrity endorse...

Question 14

Which of the following firms is most likely to spend a large percentage of their revenue on advertising?

Accepted Answer

A)   The producer of a highly differentiated consumer product.
B)   The manufacturer of an undifferentiated commodity.
C)   A perfect competitor.
D)   The manufacturer of an industrial product.
E)   The producer of a low quality product that costs the same to produce as a similar high quality product.

Question 15

When firms enter a monopolistically competitive market and the business-stealing externality is larger than the product variety externality, then

Accepted Answer

A)   there are too few firms in the market, and market efficiency could be increased with additional entry.
B)   the only way to improve efficiency in this market is for the government to regulate it like a natural monopoly.
C)   there are too many firms in the market, and market efficiency could be increased if firms exited the market.
D)   the number of firms in the market is optimal, and the market is efficient.

Question 16

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

Accepted Answer

A)   Free entry and exit.
B)   Long run economic profits.
C)   Many sellers.
D)   Differentiated products.

Question 17

List five goods that are likely sold in a monopolistically competitive market.

Accepted Answer

Books, CDs, movies, ...

Question 18

Which of the following firms has the least incentive to advertise?

Accepted Answer

A)   A manufacturer of breakfast cereal.
B)   A wholesaler of crude oil.
C)   A restaurant.
D)   A manufacturer of home heating and air conditioning.

Question 19

What is meant by the term "excess capacity" as it relates to monopolistically competitive firms?

Accepted Answer

Monopolistically competitive f...

Question 20

Assume the role of a critic of advertising. Describe the characteristics of advertising that reduce the effectiveness of markets and decrease the social welfare of society.

Accepted Answer

Advertising manipulates people's tastes,...

Exam 15: Market Structures Ii: Monopolistic Competition

There are several reasons why demand curves may become more price elastic. Among them are

Correct AnswerverifiedShow Answer

Assume the role of a critic of advertising. Describe the characteristics of advertising that reduce the effectiveness of markets and decrease the social welfare of society.

Correct AnswerverifiedAdvertising manipulates people's tastes,...View AnswerShow Answer

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.

Correct AnswerverifiedAdvertising provides information to cons...View AnswerShow Answer

Economists generally agree that monopolistically competitive firms should be regulated in order to increase economic efficiency.

Correct AnswerverifiedShow Answer

List five goods that are likely sold in a monopolistically competitive market.

Correct AnswerverifiedBooks, CDs, movies, ...View AnswerShow Answer

Which of the following firms has the least incentive to advertise?

Correct AnswerverifiedShow Answer

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

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Similar to firms in perfectly competitive markets, firms in monopolistically competitive markets can enter and exit the market without restriction, so profits are driven to zero in the long run.

Correct AnswerverifiedShow Answer

If some coffee drinkers continue to buy Ricoffy even when Nescafé coffee is on sale and cheaper, it may be a result of

Correct AnswerverifiedShow Answer

Evaluate the following statement: "Advertisements that use celebrity endorsements are devoid of any value and do not enhance the efficient functioning of markets."

Correct AnswerverifiedSome people argue that celebrity endorse...View AnswerShow Answer

In the long run, firms in monopolistically competitive markets produce at the minimum of their average total cost curves.

Correct AnswerverifiedShow Answer

What is meant by the term "excess capacity" as it relates to monopolistically competitive firms?

Correct AnswerverifiedMonopolistically competitive f...View AnswerShow Answer

One source of inefficiency in monopolistic competition is that

Correct AnswerverifiedShow Answer

Which of the following firms is most likely to spend a large percentage of their revenue on advertising?

Correct AnswerverifiedShow Answer

When firms enter a monopolistically competitive market and the business-stealing externality is larger than the product variety externality, then

Correct AnswerverifiedShow Answer

The typical firm in the South African economy

Correct AnswerverifiedShow Answer

Many airlines promise "frequent flyer" miles to passengers who travel on their flights regularly. This is an example of a firm attempting to create

Correct AnswerverifiedShow Answer

Expensive television commercials that appear to provide no specific information about the product being advertised

Correct AnswerverifiedShow Answer

Critics of advertising argue that advertising

Correct AnswerverifiedShow Answer

The use of the word "competition" in the name of the market structure called "monopolistic competition" refers to the fact that

Correct AnswerverifiedShow Answer

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Advertising manipulates people's tastes,...
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Advertising provides information to cons...
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Correct Answer
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Books, CDs, movies, ...
View Answer

Correct Answer
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Correct Answer
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Some people argue that celebrity endorse...
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Monopolistically competitive f...
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Correct Answer
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Correct Answer
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Correct Answer
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