When the demand curve for a firm in monopolistic competition shifts the marginal revenue curve quizlet?

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If the firms form a cartel, they will act like a monopoly, choosing the quantity of output where MR = MC. Drawing a line from the monopoly quantity up to the demand curve shows the monopoly price. Assuming that fixed costs are zero, and with an understanding of cost and profit, we can infer that when the marginal cost curve is horizontal, average cost is the same as marginal cost. Thus, the cartel will earn positive economic profits equal to the area of the rectangle, with a base equal to the monopoly quantity and a height equal to the difference between price (on the demand above the monopoly quantity) and average cost, as shown in the following figure.
The graph shows three solid lines: a downward sloping demand curve, a downward sloping marginal revenue curve, and a horizontal, straight marginal cost line. The graph also shows two dashed lines that meet at the demand curve and identify the profit-maximizing price and quantity.
The firms will expand output and cut price as long as there are profits remaining. The long-run equilibrium will occur at the point where average cost equals demand. As a result, the oligopoly will earn zero economic profits due to "cutthroat competition," as shown in the next figure.
The graph shows three solid lines: a downward sloping demand curve, a downward sloping marginal revenue curve, and a horizontal, straight marginal cost line. The graph also shows one dashed line that extends from the x-axis and ends at the demand curve/marginal cost intersection.
Pc > Pcc. Qc < Qcc. Profit for the cartel is positive and large. Profit for cutthroat competition is zero.

Firm B reasons that if it cheats and Firm A does not notice, it will double its money. Since Firm A's profits will decline substantially, however, it is likely that Firm A will notice and if so, Firm A will cheat also, with the result that Firm B will lose 90% of what it gained by cheating. Firm A will reason that Firm B is unlikely to risk cheating. If neither firm cheats, Firm A earns $1000. If Firm A cheats, assuming Firm B does not cheat, A can boost its profits only a little, since Firm B is so small. If both firms cheat, then Firm A loses at least 50% of what it could have earned. The possibility of a small gain ($50) is probably not enough to induce Firm A to cheat, so in this case it is likely that both firms will collude.

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Terms in this set (38)

Monopolistic competition means:
A) a market situation where competition is based entirely on product differentiation and advertising.
B) a large number of firms producing a standardized or homogeneous product.
C) many firms producing differentiated products.
D) a few firms producing a standardized or homogeneous product

c

Monopolistic competition is characterized by a:
A) few dominant firms and low entry barriers.
B) 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.

c

Monopolistic competition resembles pure competition because:
A) both industries emphasize nonprice competition.
B) in both instances firms will operate at the minimum point on their long-run average total cost curves.
C) both industries entail the production of differentiated products.
D) barriers to entry are either weak or nonexistent.

d

Which of the following is not a basic characteristic of monopolistic competition?
A) the use of trademarks and brand names C) product differentiation
B) recognized mutual interdependence D) a relatively large number of sellers

b

Nonprice competition refers to:
A) competition between products of different industries, for example, competition between aluminum and
steel in the manufacture of automobile parts.
B) price increases by a firm that are ignored by its rivals.
C) advertising, product promotion, and changes in the real or perceived characteristics of a product.
D) reductions in production costs that are not reflected in price reductions.

c

Which of the following is not characteristic of monopolistic competition?
A) relatively large numbers of sellers C) production at minimum ATC in the long-run
B) product differentiation D) relatively easy entry to the industry

c

. If the number of firms in a monopolistically competitive industry increases and the degree of product
differentiation diminishes:
A) the likelihood of realizing economic profits in the long run would be enhanced.
B) individual firms would now be operating at outputs where their average total costs would be higher.
C) the industry would more closely approximate pure competition.
D) the likelihood of collusive pricing would increase.

c

Economic analysis of a monopolistically competitive industry is more complicated than that of pure
competition because:
A) the number of firms in the industry is larger.
B) monopolistically competitive firms cannot realize an economic profit in the long run.
C) of product differentiation and consequent product promotion activities.
D) monopolistically competitive producers use strategic pricing strategies to combat rivals.

c

Nonprice competition refers to:
A) low barriers to entry.
B) product development, advertising, and product packaging.
C) the differences in information which consumers have regarding various products.
D) an industry or firm in long-run equilibrium.

b

A monopolistically competitive industry combines elements of both competition and monopoly. It is correct
to say that the competitive element results from:
A) a relatively large number of firms and the monopolistic element from product differentiation.
B) product differentiation and the monopolistic element from high entry barriers.
C) a perfectly elastic demand curve and the monopolistic element from low entry barriers.
D) a highly inelastic demand curve and the monopolistic element from advertising and product promotion.

a

The monopolistic competition model predicts that:
A) allocative efficiency will be achieved.
B) productive efficiency will be achieved.
C) firms will engage in nonprice competition.
D) firms will realize economic profits in the long run.

c

A monopolistically competitive firm has a:
A) highly elastic demand curve. C) perfectly inelastic demand curve.
B) highly inelastic demand curve. D) perfectly elastic demand curve.

a

The monopolistically competitive seller's demand curve will become more elastic the:
A) more significant the barriers to entering the industry.
B) greater the degree of product differentiation.
C) larger the number of competitors.
D) smaller the number of competitors.

c

The larger the number of firms and the smaller the degree of product differentiation the:
A) greater the divergence between the demand and the marginal revenue curves of the monopolistically
competitive firm.
B) larger will be the monopolistically competitive firm's fixed costs.
C) less elastic is the monopolistically competitive firm's demand curve.
D) more elastic is the monopolistically competitive firm's demand curve.

d

The demand curve of a monopolistically competitive producer is:
A) less elastic than that of either a pure monopolist or a pure competitor.
B) 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.

c

. In comparing the demand curve of a pure monopolist with that of a monopolistically competitive firm, we
would expect the monopolistic competitor to have a:
A) perfectly elastic demand curve and the monopolist to have a perfectly inelastic demand curve.
B) generally more elastic demand curve.
C) generally less elastic demand curve.
D) demand curve whose elasticity coefficient is 1 at all possible prices.

b

The price elasticity of a monopolistically competitive firm's demand curve varies:
A) inversely with the number of competitors and the degree of product differentiation.
B) 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 product differentiation.

c

In short-run equilibrium, a monopolistically competitive firm sets it price:
A) equal to marginal revenue. C) above marginal cost.
B) equal to marginal cost. D) below marginal cost.

c

In long-run equilibrium, a monopolistically competitive firm sets it price:
A) above marginal cost. C) equal to marginal revenue.
B) below marginal cost. D) equal to marginal cost.

a

In short-run equilibrium, the price charged by the monopolistically competitive firm:
A) must be less than ATC.
B) 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.

c

In long-run equilibrium, the price charged by the monopolistically competitive firm:
A) must be less than ATC.
B) must be more than ATC.
C) may be either equal to ATC, less than ATC, or more than ATC.
D) will be equal to ATC

d

. Monopolistically competitive firms:
A) realize normal profits in the short run but losses in the long run.
B) 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 realize economic profits in both the short run and long run.

c

. The monopolistically competitive seller maximizes profit by producing at the point where:
A) total revenue is at a maximum. C) marginal revenue equals marginal cost.
B) average costs are at a minimum. D) price equals marginal revenue.

c

In long-run equilibrium a monopolistically competitive firm's price will:
A) be less than both MC and ATC. C) exceed MC, but equal ATC.
B) exceed ATC, but equal MC. D) exceed both MC and ATC

c

In long-run equilibrium a monopolistically competitive firm will:
A) earn an economic profit. C) equate price and marginal cost.
B) realize all economies of scale. D) have excess production capacity

d

Which of the following is correct for a monopolistically competitive firm in long-run equilibrium?
A) MC = ATC B) MC exceeds MR C) P exceeds minimum ATC D) P = MC

c

Excess capacity refers to the:
A) amount by which actual production falls short of the minimum ATC output.
B) fact that entry barriers artificially reduce the number of firms in an industry.
C) differential between price and marginal costs which characterizes monopolistically competitive firms.
D) fact that most monopolistically competitive firms encounter diseconomies of scale

a

When a monopolistically competitive firm is in long-run equilibrium:
A) P = MC = ATC. C) MR > MC and P = minimum ATC.
B) MR = MC and minimum ATC > P. D) MR = MC and P > minimum ATC.

d

Other things equal, if more firms enter a monopolistically competitive industry:
A) the demand curves facing existing firms would shift to the right.
B) the demand curves facing existing firms would shift to the left.
C) the demand curves facing existing firms would become less elastic.
D) losses would necessarily occur.

b

Which of the following statements is correct?
A) Purely competitive firms, monopolistically competitive firms, and pure monopolies all earn zero
economic profits in the long run.
B) Purely competitive firms, monopolistically competitive firms, and pure monopolies all earn positive
economic profits in the long run.
C) In the long run purely competitive firms and monopolistically competitive firms earn zero economic
profits, while pure monopolies may or may not earn economic profits.
D) Monopolistically competitive firms earn zero economic profits in both the short run and the long run.

c

Which of the following statements concerning a monopolistically competitive industry is correct?
A) If there are short-run losses, firms will leave the industry and the demand curves of the remaining firms
will shift to the right.
B) If there are short-run economic profits, firms will enter the industry and the demand curves of existing
firms will shift to the right.
C) If there are short-run losses, firms will leave the industry and the demand curves of the remaining firms
will shift to the left.
D) If there are short-run economic profits, firms will leave the industry and the demand curves of the
remaining firms will shift to the right.

a

An important similarity between a monopolistically competitive firm and a purely competitive firm is that:
A) both face perfectly elastic demand schedules. C) both realize productive efficiency.
B) economic profit tends toward zero for both. D) both realize allocative efficiency.

b

An important similarity between a monopolistically competitive firm and a pure monopolist is that both:
A) realize an economic profit in the long run.
B) achieve allocative efficiency.
C) face demand curves which are less than perfectly elastic.
D) achieve productive efficiency.

c

Inefficiencies occur under monopolistic competition because:
A) each firm's demand curve becomes more elastic as we move down the curve.
B) each firm's marginal revenue curve coincides with its demand curve.
C) each firm's downsloping demand curve is tangent to the ATC curve in the long run.
D) entry barriers greatly restrict the entry of new firms.

c

Which of the following is correct?
A) The excess capacity problem diminishes as the monopolistically competitive firm's demand curve
becomes less elastic.
B) The excess capacity problem means that monopolistically competitive firms typically produce at some
point on the rising segment of their average total cost curve.
C) The greater the degree of product variation, the lesser is the excess capacity problem.
D) The greater the degree of product variation, the greater is the excess capacity problem

d

In monopolistically competitive markets resources are:
A) overallocated because long-run equilibrium occurs where price exceeds marginal cost.
B) underallocated because long-run equilibrium occurs where price exceeds marginal cost.
C) overallocated because long-run equilibrium occurs where marginal cost exceeds price.
D) underallocated because long-run equilibrium occurs where marginal cost exceeds price.

b

In long-run equilibrium a monopolistically competitive producer achieves:
A) neither productive efficiency nor allocative efficiency.
B) both productive efficiency and allocative efficiency.
C) productive efficiency, but not allocative efficiency.
D) allocative efficiency, but not productive efficiency.

a

The more elastic a monopolistic competitor's long-run demand curve, the:
A) greater its excess capacity.
B) the higher its price relative to that of a pure competitor having the same cost curves.
C) lower its long-run profit.
D) lower its average total cost at its equilibrium level of output.

d

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