Chapter14—MonopolisticCompetitionandProductDifferentiation
TRUE/FALSE
1. Monopolisticcompetitionisamixtureofmonopolyandperfectcompetition.
ANS: T PTS: 1
2. Allfirmsinmonopolisticallycompetitiveindustriesearneconomicprofitsinthelongrun.
ANS: F PTS: 1
3. Bydifferentiatingtheirproductsandpromotingbrand-nameloyalty,firmsinmonopolisticcompetitioncanraisepriceswithoutlosingalltheircustomers.
ANS: T PTS: 1
4. Inmonopolisticcompetition,asinperfectcompetition,allfirmsinanindustrychargethesameprice.
ANS: F PTS: 1
5. Competitivefirmsandmonopolisticcompetitivefirmsfollowthesamegeneralrulewhendecidinghowmuchtoproduce.
ANS: T PTS: 1
6. Amonopolisticcompetitor’sdemandcurveisrelativelyinelastic(steep).
ANS: F PTS: 1
7. Unlikeperfectlycompetitivefirms,firmsinmonopolisticcompetitionwilloperatewithexcesscapacity,eveninthelongrun.
ANS: T PTS: 1
8. Althoughcertaininefficienciesareassociatedwithmonopolisticcompetition,societyreceivesabenefitfrommonopolisticcompetitionintheformofdifferentiatedgoodsandservices.
ANS: T PTS: 1
9. Eventhoughadvertisingwilladdtothecostofproduction,itmayleadtosignificanteconomiesofscalethatmaylowertheper-unittotalcost.
ANS: T PTS: 1
10. Misleadingclaimsandpreposterousbraggingaboutproductsareatypeofadvertisingthatwillresultinincreaseddemandforafirm’sproducts.
ANS: F PTS: 1
MULTIPLECHOICE
1. Whichofthefollowingisnotasourceofproductdifferentiation?
a. physicaldifferencesinproducts b. differencesinquantitiesthatfirmsofferforsale c. differencesinserviceprovidedbyfirms d. differencesinlocationofsalesoutlets
ANS: B PTS: 1
2. Whichofthefollowingcharacteristicsdomonopolisticcompetitionandperfectcompetitionhaveincommon?
a. Individualfirmsbelievethattheycaninfluencemarketprice. b. Firmssellbrand-nameproducts. c. Firmsareabletoearnlong-runeconomicprofits. d. Competingfirmscanentertheindustryeasily.
ANS: D PTS: 1
3. Firmsinmonopolisticallycompetitiveindustriescannotearneconomicprofitsinthelongrunbecause
a. governmentregulators,whosefirstinterestisthepublicgood,willimposeregulationsthatlimiteconomicprofits. b. theadditionalcostsofproductdifferentiationwilleliminatelong-runeconomicprofits. c. economicprofitswillattractcompetitorswhosepresencewilleliminateprofitsinthelongrun. d. wheneveronefirmintheindustrybeginsmakingeconomicprofits,otherswilllowertheirprices,thuseliminatinglong-runeconomicprofits.
ANS: C PTS: 1
4. Maria’sWestSideBakeryistheonlybakeryonthewestsideofthecity.Sheisamonopolisticcompetitorandsheisopenforbusiness.WhichofthefollowingcannotbetrueofMaria’sprofits?
a. Sheismakinganeconomicprofit. b. Sheismakingneitheraneconomicprofitnoraloss. c. Sheismakinganeconomiclossthatislessthanherfixedcost. d. Sheismakinganeconomiclossthatisgreaterthanherfixedcost.
ANS: D PTS: 1
5. Whichofthedemandcurvesrepresentsalong-runequilibriumforthefirm?
a. D0 b. D1 c. D2 d. D3
ANS: B PTS: 1
Usethediagramonpage384toanswerthefollowingquestion(s).
6. Whichofthedemandcurveswillresultinthefirmshuttingdownintheshortrun?
a. D0 b. D1 c. D2 d. D3
ANS: D PTS: 1
7. Inthelongrun,firmsinmonopolisticcompetitiondonotattainproductiveefficiencybecausetheyproduce
a. atapointwhereeconomicprofitsarepositive. b. atapointwheremarginalrevenueislessthanmarginalcost. c. atapointtotheleftofthelowpointoftheirlong-runaveragetotalcostcurve. d. wheremarginalcostisequaltolong-runaveragetotalcost.
ANS: C PTS: 1
8. Inthelongrun,firmsinmonopolisticcompetitiondonotattainallocativeefficiencybecausethey
a. operatewherepriceequalsmarginalcost. b. donotoperatewherepriceequalsmarginalcost. c. producemoreoutputthansocietywants. d. chargepricesthatarelessthanproductioncosts.
ANS: B PTS: 1
9. Comparedtoperfectcompetition,firmsinmonopolistcompetitioninthelongrunproduce
a. lessoutputatalowercost. b. lessoutputatahighercost. c. moreoutputatalowercost. d. moreoutputatahighercost.
ANS: B PTS: 1
10. IfRolfwantstouseadvertisingtoreducetheelasticityofdemandforhischiropracticservices,hemustmakesuretheadvertising
a. clearlystatesthepriceshecharges. b. showsthatheisproducingaproductlikethatoftheotherchiropractorsintown. c. showswhyhisservicesaretrulydifferentfromtheotherchiropractorsintown. d. explainsthehoursanddaysthatheisopenforbusiness.
ANS: C PTS: 1
11. Advertisingaboutpricesbyfirmsinanindustrywillmakeanindustrymorecompetitivebecauseit
a. reducesthecostoffindingasubstitutewhenoneproducerraiseshisprice. b. assurestheconsumersthatpricesarethesameeverywhere. c. increasesthecostforallfirmsbecauseoftheexistenceofeconomiesofscale. d. reducesthenumberoffirmsbecauseoftheexistenceofeconomiesofscale.
ANS: A PTS: 1
12. ClaireisconsideringbuyingtheonlyHungarianrestaurantinBoise,Idaho.Therestaurant’suniquefoodmeansthatitfacesanegativelyslopeddemandcurveandiscurrentlyearninganeconomicprofit.Whyshouldn’tClaireassumethatthecurrentprofitswillcontinuewhenshemakesherdecision?
a. Clairewillnotearnthoseprofitsrightawaybecauseshedoesn’tknowmuchaboutcooking. b. Thefirmisamonopolist,whichattractsgovernmentregulation. c. Currenteconomicprofitswillbeeliminatedbytheentryofcompetitors. d. Whileeconomicprofitsarepositive,accountingprofitsmaybenegative.
ANS: C PTS: 1
PROBLEM
1. Whichofthefollowingmarketsareperfectlycompetitiveormonopolisticallycompetitive.Why?
a.soymarket
b.retailclothingstores
c.Spago’sRestaurantBeverlyHills
ANS:
Themarketforsoybeansisperfectlycompetitive,aslargenumbersofbuyersandsellerstradestandardizedproductsonaworldmarket.Retailclothingandrestaurantsofferdifferentiatedproductsandservices,andarethereforemonopolisticallycompetitive.
PTS: 1
2. Listthreewaysinwhichagrocerystoremightdifferentiateitselffromitscompetitors.
ANS:
Agrocerystorecandifferentiateitselffromitscompetitorsinmanyways,includinglocation,service,thequalityofproductsandservicesoffered,creditterms,andimage.
PTS: 1
3. Whatmightmakeyouchooseonegasstationoveranother?
ANS:
Answerswillvary.One''schoiceofgasstationsmaybebaseduponthepriceofgasoline,location,servicesandamenitiesoffered,thequalityofgas,brandidentity,etc.
PTS: 1
4. IfFrank’shotdogstandwasprofitablewhenhefirstopened,whyshouldheexpectthoseprofitstofallovertime?
ANS:
IfFrankearnssignificantprofitswhenhefirstopened,hecanexpecttofacecompetitioninthefuture.Barrierstoentryinthehotdogvendingbusinessarelikelyinsignificant.Newcompetitorsarelikelytoentertheindustryuntileconomicprofitsaredissipatedinthelongrun.
PTS: 1
5. Canyouexplainwhysomerestaurantsarehighlyprofitablewhileotherrestaurantsinthesamegeneralareaaregoingoutofbusiness?
ANS:
Somerestaurantsaremoresuccessfulatdifferentiatingtheirestablishmentsandappealingtocustomersthanareothers.Restaurantsthatareparticularlysuccessfulinpromotingcustomergoodwillmaycontinuetoearneconomicprofitsevenwhileotherrestaurantsintheareafail.
PTS: 1
6. Supposethathalftherestaurantsinacityareclosedsothattheremainingeateriescanoperateatfullcapacity.What“cost”mightrestaurantpatronsincurasaresult?
ANS:
The"cost"restaurantpatronsmightincurisalossofproductdifferentiation.Fewerrestaurantchoiceswillbeavailabletopatrons.Inaddition,addedwaitingtimesmayincreasecostsduringpeakdemandperiods.
PTS: 1
7. WhyisadvertisingmoreimportantforthesuccessofchainssuchasToys“R”UsandOfficeDepotthanforthecornerbarbershop?
ANS:
Thecornerbarbershopservicesclientsinalimitedarea.Manypeopleareawareofthebarbershopbecauseitislocalandtheypatronizelocalbarbershopsforthesakeofconvenience.Advertisingisunlikelytoattractasignificantnumberofpeoplefromadifferentpartoftowntoaparticularbarbershop.ToysRUsandOfficeDepot,ontheotherhand,whichofferalargevarietyofproducts,arenationalchainstoreswhichstandtobenefitmuchmorefromadvertising.AdvertisingmaysignificantlyincreasethecustomerbaseofToysRUsandOfficeDepotbyattractingpeoplewhodonotliveinthevicinityoftheirstores.
PTS: 1
8. Whatismeantbythepriceofvariety?Graphandexplain.
ANS:
Thepriceofvarietyisthehighercostduetotheexcesscapacitythatresultsinmonopolisticallycompetitivemarkets.Firmsdonotproduceatminimumlongrunaveragetotalcost.Priceexceedsmarginalcostattheprofit-maximizinglevelofoutput.Societyplacesahighervalueonthelastunitofoutputthanitcoststoproduce.Lessoutputisproducedthanwhatisconsideredallocativelyefficient.
PTS: 1
9. Thinkofyourfavoriteadsontelevision.Doyouthinkthattheseadshaveaneffectonyourspending?Theseadsareexpensive;doyouthinktheyareawastefromsociety’sstandpoint?
ANS:
Answerswillvary.Certainlynotallindividualswillrespondtoeachandeveryadvertisement.Byadvertising,afirmhopesitcanbothincreasedemandandmakeitmoreinelastic,therebyenhancingprofits.Criticsofadvertisingarguethatadvertisersattempttomanipulatepreferencesandengenderbrandloyaltytoreducecompetition.Defendersofadvertisingarguethatproductioncostscanbereducedifsubstantialeconomiesofscaleexist.Also,byraisingconsumerawarenessofsubstituteproducts,advertisingcanhelpincreasethecompetitivenesswithinmarketsandleadtolowerprices.Advertisingmaybeconsidereda"waste"bysomeonewhoalwaysknowswhichgoodhewants,butadvertisingwouldnotbeemployedbysellerswhodonotthinkitwouldincreasedemandsufficientlytomakeitprofitable.
PTS: 1
10. HowdoesStarbucksdifferentiateitsproduct?WhydoesStarbucksstayopenuntillateatnightbutadonutorbagelshopmightcloseatnoon?
ANS:
Starbucksdifferentiatesitsproductbylocation,hoursofoperation,service,andqualityofproducts.Starbucksisgenerallyopenlateatnightwhenmanypeopledesiretodrinkcoffeebecauseofitscaffeinestimulant.Peoplewhogenerallyoptfordonutsandbagelsinthemorningwilldrinkcoffeethroughouttheday.
PTS: 1
11. Productdifferentiationisahallmarkofmonopolisticcompetition,andthetextlistsfoursourcesofsuchdifferentiation:physicaldifferences,prestige,location,andservice.Howdofirmsintheindustrieslistedheredifferentiatetheirproducts?Howimportantiseachofthefoursourcesofdifferentiationineachcase?Givethemostimportantsourceofdifferentiationineachcase.
a.fast-foodrestaurants
b.espressoshops/carts
c.hairstylists
d.softdrinks
e.wine
ANS:
a. Physicaldifferencesareprobablymostimportant.BigMacs,Whoppers,tacos,andvarioussourcesofpizzaallrelyonphysicaldifferencestoattractcustomers.Locationofrestaurantsisimportantaswell. b. Aconvenientlocationisveryimportant,althoughserviceisconsideredanimportantaspectbymanyespressodrinkers. c. Serviceisnumberone,butlocationisimportantaswell.Howfarareyouwillingtodrivetogetagreatcutorhighlight? d. Physicalqualities,includingtasteandthelookofthecontainer,aremostimportant,althoughlocationisimportant,too.Coca-ColagainedmarketleadershipyearsagobymakingCokeavailableeverywhere—atmovietheaters,atlunchcounters,andinubiquitousvendingmachines. e. Physicaldifferencesisprobablythemostimportant,butprestigeisimportantaswell.
PTS: 1
12. Howaremonopolisticallycompetitivefirmsandperfectlycompetitivefirmssimilar?Whydon’tmonopolisticallycompetitivefirmsproducethesameoutputinthelongrunasperfectlycompetitivefirms,whichfacesimilarcosts?
ANS:
Bothtypesoffirmsoperateinindustrieswithmanyothersellersandwithnorealbarrierstoentryorexit.Theyfollowsimilarruleswhenchoosingthelevelofoutput.Bothtypesoffirmsalsowillexperiencezeroeconomicprofitsinthelongrun.
Intheshortrunmonopolisticcompetitorsandperfectlycompetitivefirmsfollowsimilarrulesforchoosingtheprofitmaximizingoutput.Theyproducewheremarginalrevenueequalsmarginalcost.Monopolisticcompetitorswillproducelessthanperfectlycompetitivefirmswill,becausetherelationsbetweenpriceandmarginalrevenuediffersbetweenthosetypesoffirms.Sincefirmsthataremonopolisticcompetitorsfaceanegativelyslopeddemandcurve,theyoutputlessthantheoutputwherepriceequalsmarginalcostsincetheyarepricetakers.
Inthelongrun,entrywillforcebothtypesoffirmstotheoutputwhereeconomicprofitsareequaltozero,whichoccurswherethedemandcurvesaretangenttotheaveragetotalcostcurve.Becausethemonopolisticcompetitorfacesanegativelyslopeddemandcurve,thispointwillbeatalevelofoutputlessthantheperfectcompetitor.
PTS: 1
13. Asyouknow,perfectcompetitionandmonopolisticcompetitiondifferinimportantways.Showyourunderstandingofthesedifferencesbylistingthefollowingtermsundereither“perfectcompetition”or“monopolisticcompetition.”
PerfectCompetition MonopolisticCompetition standardizedproduct productiveefficiency differentiatedproduct horizontaldemandcurve allocativeefficiency downward-slopingdemandcurve excesscapacity nocontroloverprice
ANS:
PerfectCompetition MonopolisticCompetition standardizedproduct productiveefficiency standardizedproduct differentiatedproduct differentiatedproduct horizontaldemandcurve allocativeefficiency downward-slopingdemandcurve allocativeefficiency downward-slopingdemandcurve productiveefficiency excesscapacity horizontaldemandcurve excesscapacity nocontroloverprice nocontroloverprice
PTS: 1
14. InwhatwayistheuseofadvertisinganotherexampleofAdamSmith’s“InvisibleHand,”accordingtowhichentrepreneurspursuingtheirownbestinterestmakeconsumersbetteroff?
ANS:
Producersuseadvertisingtoincreasethedemandfortheirproductsandreducetheelasticityofthedemandfacingtheirfirm.Theydothistoincreasetheirprofits.Ifallfirmsadvertise,theresultsareoftennotthoseanticipatedbythefirm.Advertisingbyfirmswillmakeconsumersmoreawareofthepriceschargedbyotherfirmsandtheavailabilityofsubstitutesforthegoodsandservicestheybuy.Thistypeofinformationwillincreasetheelasticityofdemandfacingfirmsaswellasmakingtheindustrymorecompetitive.Advertisingmayresultinlowerpricesandmoreoutputandlowerprofits.
PTS: 1
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