Overview

Chapter 11
Monopolistic Competition and Oligopoly

Multiple Choice Questions

1. A monopolistically competitive market is characterized by:
a. one firm selling a homogeneous product.
b. many firms selling identical products.
c. many firms selling similar but differentiated products.
d. few firms selling identical products.
e. few firms selling similar but differentiated products.

ANS: C DIF: Easy REF: 1 OBJ: ch. 11, 1
NAT: Analytic | Monopolistic Competition TOP: Monopolistic Competition
MSC: Knowledge

2. Why is each firm in a monopolistically competitive industry considered as a “mini” monopoly?
a. There is a large number of sellers in the market
b. Each firm in monopolistic competition is a price taker
c. The product of each firm is unique in some way or the other
d. Each firm faces a perfectly elastic demand curve
e. There exists a large number of close substitutes of the products

ANS: C DIF: Easy REF: 1 OBJ: ch. 11, 1
NAT: Analytic | Monopolistic Competition TOP: Monopolistic Competition
MSC: Knowledge

3. The major similarity between a monopolist and a monopolistically competitive firm is:
a. both are price takers.
b. both face a horizontal demand curve.
c. both are the sole producers of a particular good.
d. both face a negatively sloped demand curve.
e. both are affected by the decision of their rivals.

ANS: D DIF: Easy REF: 1 OBJ: ch. 11, 1
NAT: Analytic | Monopolistic Competition TOP: Monopolistic Competition
MSC: Knowledge

4. The market structure called monopolistic competition is named using both monopoly and perfect competition. Why?
a. There are few firms in the market all producing the same product.
b. There is just one firm whose product can be easily differentiated.
c. There are a huge number of firms selling identical products at a constant price.
d. There are many firms with easy entry and exit but each firm sells a unique product.
e. Firms spend very little on advertising and promotion and thus are price takers.

ANS: D DIF: Easy REF: 1 OBJ: ch. 11, 1
NAT: Analytic | Monopolistic Competition TOP: Monopolistic Competition
MSC: Knowledge

5. Monopolistic competition is similar to perfect competition in that:
a. there are only a few firms in the market.
b. entry into and exit from the market is easy.
c. there are significant barriers to entry in the market.
d. each firm sells a homogeneous product.
e. each firm differentiates its product through advertising.

ANS: B DIF: Easy REF: 1 OBJ: ch. 11, 1
NAT: Analytic | Monopolistic Competition TOP: Monopolistic Competition
MSC: Knowledge

6. In the context of market structure, the characteristic that best describes a monopolistically competitive market is that:
a. there are few firms in the market.
b. the products produced cannot be easily differentiated.
c. entry and exit are both difficult.
d. firms spend a great deal on advertising and promotion.
e. firms spend very little on advertising and promotion.

ANS: D DIF: Easy REF: 1 OBJ: ch. 11, 1
NAT: Reflective Thinking | Monopolistic Competition TOP: Monopolistic Competition
MSC: Application

7. A monopolistically competitive firm’s demand curve slopes downward because:
a. other firms are free to enter the market.
b. there are a large number of firms in the market.
c. a differentiated product gives the firm some monopoly power.
d. the firm has complete information about the market.
e. the firm sells a standardized product.

ANS: C DIF: Easy REF: 1 OBJ: ch. 11, 1
NAT: Reflective Thinking | Monopolistic Competition TOP: Monopolistic Competition
MSC: Application

8. In a certain monopolistically competitive market that is characterized by high prices and equally high-quality merchandise, if a firm’s competitors begin to successfully introduce new products that cut into the firm’s market share, the firm’s best counter-strategy is to:
a. raise price in order to increase the revenue.
b. introduce its own new products in order to meet competitors head on.
c. reduce its advertising budget in order to save costs.
d. ignore its competitors and hope its customers’ loyalty carry it through the threat.
e. look to the government for protection.

ANS: B DIF: Easy REF: 1.a OBJ: ch. 11, 1
NAT: Reflective Thinking | Monopolistic Competition TOP: Monopolistic Competition
MSC: Application

9. In the short run, a monopolistically competitive firm:
a. can earn only a normal profit.
b. will produce at the point where marginal revenue is greater than marginal cost, in order to maximize profits.
c. will produce at the point at which price equals minimum ATC to maximize profits.
d. will be able to enter another monopolistically competitive industry.
e. will shut down temporarily if price is less than AVC.

ANS: E DIF: Easy REF: 1.a OBJ: ch. 11, 1
NAT: Analytic | Monopolistic Competition TOP: Monopolistic Competition
MSC: Knowledge

10. If a monopolistically competitive industry is in long-run equilibrium and suddenly the cost of resources increases, then:
a. the demand and average-revenue curves will shift to the right.
b. the demand and average-revenue curves will shift to the left.
c. some firms will eventually leave the industry.
d. new firms will eventually enter the industry.
e. the cost structure of the firm will shift down.

ANS: C DIF: Moderate REF: 1.a OBJ: ch. 11, 1
NAT: Analytic | Monopolistic Competition TOP: Monopolistic Competition
MSC: Knowledge