Econ 101 Section 3 – Principles of Microeconomics
Instructor: C. Burkart
Questions 1 to 7 are worth 2 points each. Clearly circle the one best answer to each question. You will not receive credit if your answer choice is unclear or ambiguous.
1. Which of the following is true of monopoly but is NOT true of monopolistic competition?
a. The firm will earn positive economic profits in the long run.
b. The firm will produce at a point where price equals marginal cost.
c. The firm faces a downward-sloping marginal revenue curve.
d. The firm faces a downward-sloping demand curve.
2. Which of the following is true of perfect competition but is NOT true of monopolistic competition?
a. The firm will earn zero economic profit in the long run.
b. The firm will produce at a point where price equals marginal cost.
c. The firm faces a downward-sloping demand curve.
d. The firm faces a downward-sloping marginal revenue curve.
3. What is the effect in the market as more firms enter a monopolistically competitive industry?
a. The market supply curve shifts to the right.
b. The demand curve faced by each firm shifts in and to the left.
c. The demand curve faced by each firm shifts out and to the right.
d. The market supply curve shifts to the left.
4. Monopolistic competitors engage in product differentiation in order to
a. reduce costs.
b. create excess capacity.
c. enhance their market power.
d. make it easer to collude with other firms
5. Suppose that a monopolistically competitive firm is currently producing at the point where marginal revenue equals marginal cost and is incurring a loss. In this situation, economic theory would predict that the firm will
a. raise prices in order to lessen the amount of the loss.
b. collude with other producers.
c. be able to switch to a point of profitability by producing where price equals marginal cost.
d. exit the industry.
6. Since a monopolistic competitor produces a product with many close substitutes, it
a. faces a highly inelastic demand curve.
b. has unlimited market power.
c. has some degree of market power.
d. has no market power.
7. The product diversity resulting from monopolistic competition comes at the expense of having
a. firms that will earn positive profits.
b. higher profit than would prevail under perfect competition.
c. firms that are too small to maximize profit.
d. a higher average total cost of production than would prevail under perfect competition.
Question 8 [4 pts.] You must determine which of two types of market structure best describe an industry, but you are allowed to ask only one question about the industry. What question should you ask to determine if the industry is:
a. Perfectly competitive or monopolistically competitive? Are products differentiated? Do firms have any market power?
b. Monopoly or monopolistically competitive? How many firms are there? Are there barriers to entry?
Question 9 [12 pts.] The structure of the local gas station industry is monopolistic competition. Suppose that currently each gas station incurs a loss. Draw a diagram for a typical gas station to show this short-run situation. Then, in a separate diagram, show what will happen to the typical gas station in the long run. Below your diagrams give a short explanation of what happens in the short run, and how adjustment to the long run takes place. Assume cost structure is the same as it was in the class examples.
In the short run, firms are producing at a loss, which is indicated in the diagram. This leads to exit from the industry, which increases demand for the individual firm. Firms exit (and demand increases) until the losses are eliminated (and profits therefore go to zero) in the long run.
Question 10 [10 pts.] In the following cases is advertisement likely to be economically useful or economically wasteful?
Advertisements on the benefits of aspirin: __useful___
Advertisements for Bayer brand aspirin: ___wasteful____
Advertisements on the benefits of drinking orange juice: __useful___
Advertisements on Tropicana orange juice: ___wasteful____
Advertisements that state how long a plumber, electrician, etc. has been in business: __useful___