BR10D: Bridge: Monopolistic Competition
Question 1
Suppose that at the profit maximizing level of output for a monopolistically competitive firm, the price of a good is \$10, and the average total cost is \$8. Based on this information, the firm is operating in the _____, and we can expect _____.
A. short run; firms to enter the market
B. short run; firms to exit the market
C. long run; firms to exit the market
D. long run; firms to enter the market
Hint
In a monopolistically competitive market, in the long run, economic profits are zero.Answer
A. short run; firms to enter the market Because the firm’s price of \$10 exceeds its average total cost of \$8, the firm is earning economic profits. However, this is a short-run situation. Over time, outside firms, eyeing the profits to be had in this industry, will enter the market, pushing price down and reducing the profitability of existing firms. This process will continue until the market reaches a long-run equilibrium in which economic profits have been competed to zero.Question 2
Which of the following is most likely a monopolistically competitive market?
A. Lobsters
B. Blue jeans
C. Segway scooters
D. Commercial aircraft
Hint
Under monopolistic competition, many firms sell differentiated products, and there is free entry and exit.Answer
B. Blue jeans A monopolistically competitive market is one in which many firms compete by selling somewhat differentiated products and in which there is free entry into and exit from the market in the long run. Of the markets listed, blue jeans is the most likely to be monopolistically competitive, as different brands of blue jeans are somewhat differentiated, and there are no significant barriers to entry. By contrast, the market for lobsters more closely resembles perfect competition, since lobsters are essentially undifferentiated. The commercial aircraft industry is an oligopoly; globally, it is dominated by just two firms, Boeing and Airbus. And the market for Segway scooters is a monopoly: Segway scooters can be purchased from just one firm, Segway.Question 3
Shani’s Frozen Treats is one of 15 ice cream shops on the boardwalk. If Shani sells ice cream for \$5 and sells 100 per day, how much economic profit will she earn in the long run?
A. \$0
B. \$5
C. \$500
D. There is not enough information to answer this question.
Hint
In the long run, monopolistic competitive firms earn normal profits.Answer
A. \$0 Given that Shani's Frozen Treats is "one of 15 ice cream shops on the boardwalk, the industry in monopolistically competitive." Due to low barriers to entry, other firms will enter the market and, in the long run, drive economic profits for Shani's Frozen Treats to zero.Question 4
Which of the following is not a characteristic of a monopolistically competitive market?
A. Firms can earn economic profits in the short run.
B. Firms differentiate their products from those of other firms.
C. Many firms compete in the market.
D. Each firm in the market takes price as given.
Hint
Monopolistically competitive firms, in contrast to perfectly competitive firms, have some degree of market power.Answer
D. Each firm in the market takes price as given. Monopolistic competition is a market structure characterized by free entry and exit and in which many competing firms sell differentiated products. Because products are differentiated, each firm has some market power and thus some capacity to determine price. In this respect, monopolistic competition contrasts with perfect competition, where each firm in the market takes price as given.Question 5
Suppose that Fortune 8 Casino is one of ten casinos in the town of Luckyville, and every casino is earning substantial economic profits. What is likely to happen in the long run?
A. New casinos will enter the market and continue to earn economic profits.
B. Some casinos will take their profits and exit the market.
C. Some casinos will downsize because their profits are not high enough.
D. New casinos will enter the market, but economic profits will be eliminated.