In-Class Assignment #1

What is the main reason a firm in Monopolistic Competition is considered a "Price Maker" rather than a "Price Taker" - based on the video discussion?

a) There is only one firm in the entire market.

b) The government sets the prices for them.

c) Their product is perceived as unique through branding.

d) They have reached a secret agreement with their competitors

c) Their product is perceived as unique through branding.

The video explains that if a company like Starbucks raises its prices, it won't lose all its customers immediately. What concept explains this customer behavior?

a) Perfect Information

b) Brand Loyalty

c) Price Ceiling

d) Mandatory Consumption

b) Brand Loyalty

How was the demand curve for a firm in Monopolistic Competition compared to the horizontal curve of Perfect Competition represented in lecture?

a) It is a horizontal straight line.

b) It is a vertical straight line.

c) It is downward sloping.

d) It is a perfectly circular loop

c) It is downward sloping.

What does the video identify as a "barrier to entry" in this market structure?

a) There are virtually no significant barriers; new firms can enter relatively easily.

b) New firms must get a permit from every existing competitor.

c) It is illegal to start a new fast-food restaurant.

d) A new firm must own 100% of the raw materials first.

a) There are virtually no significant barriers; new firms can enter relatively easily.

Why do firms in Monopolistic Competition spend so much money on advertising, according to the video's logic?

a) To convince the public that their product has no close substitutes.

b) To tell people that their product is exactly the same as the competitor's.

c) Because they are required by law to spend 10% of revenue on ads.

d) To help their competitors sell more products.

a) To convince the public that their product has no close substitutes.

A firm under monopolistic competition has market power because

a) product is heterogeneous

b) demand is not perfectly elastic

c) demand is downward sloping

d) the firm advertises for brand loyalty

e) all the above

e) all the above

A firm determines that the price elasticity of demand for its product is 1.6 (in absolute value). If the firm’s marginal cost is constant at $5.00, what is the profit-maximizing price?

a) $3.13

b) $8.00

c) $13.33

d) $2.14

c) $13.33

A firm has a marginal cost of $60 and sets its profit-maximizing price at $100. Based on this information, what is the firm's Lerner Index , and what does this value imply about the price elasticity of demand at that price?

a) LE = 0.40; Price elasticity of demand is -2.5

b) L E= 0.67; Price elasticity of demand is -1.5

c) LE = 0.40; Price elasticity of demand is -0.4

d) LE= 0.67; Price elasticity of demand is -0.6

a) LE = 0.40; Price elasticity of demand is -2.5

When looking at the graph of a profit-maximizing firm in monopolistic competition, which graphical feature specifically illustrates that the firm possesses some degree of market power?

a) The marginal cost curve intersects the average total cost curve at its minimum point.

b) The firm’s demand curve is downward-sloping rather than horizontal.

c) The firm produces at the quantity where marginal revenue equals marginal cost.

d) The average total cost curve is tangent to the demand curve in the long run.

b) The firm’s demand curve is downward-sloping rather than horizontal.

To calculate the degree of market power for a monopolistic competitive firm using a standard cost-and-revenue graph, one should identify the profit-maximizing quantity and then look at the vertical axis to find the difference between which two values?

a) The value where MC intersects ATC and the value where MC intersects MR.

b) The price coordinate on the demand curve and the cost coordinate on the marginal cost curve.

c) The price coordinate on the demand curve and the cost coordinate on the average total cost curve.

d) The value of the y-intercept of the demand curve and the y-intercept of the marginal revenue curve.

b) The price coordinate on the demand curve and the cost coordinate on the marginal cost curve.

In our lecture discussion regarding productive efficiency in the long run, which of the following statements correctly describes the relationship between perfect competition and monopolistic competition?

a) Perfectly competitive firms achieve productive efficiency because they are forced to produce at the minimum point of their ATC curve to survive.

b) Monopolistically competitive firms fail to achieve productive efficiency because they produce on the downward-sloping portion of their ATC curve, a concept known as "excess capacity" (a concept also mentioned in the video).

c) While both market structures earn zero economic profit in the long run, only the perfectly competitive firm produces at the point where P = minimum ATC.

d) All of the above.

d) All of the above.

According to the lecture video, which real-world scenario was specifically used to illustrate the concept of excess capacity in a monopolistically competitive industry?

a) A gas station with multiple pumps where some are often unused during the day.

b) A local restaurant where there are frequently more empty tables and seats than there are customers.

c) A manufacturing plant that produces identical bolts for various construction companies.

d) A software developer who creates a unique application protected by a strict copyright

b) A local restaurant where there are frequently more empty tables and seats than there are customers.

While monopolistic competition provides consumers with a wide variety of differentiated products, having "too much" variety can sometimes lead to consumer overwhelm. According to our class discussion, how can advertising actually benefit a consumer in this high-variety environment?

a) By convincing consumers that there are actually no significant differences between the competing brands.

b) By providing information on product features and availability, thereby reducing the search costs associated with finding the right product among many options.

c) By artificially inflating the price of the product so that only the most dedicated consumers will choose to buy it.

d) By ensuring that the firm reaches its minimum Average Total Cost, eliminating the problem of excess capacity.

b) By providing information on product features and availability, thereby reducing the search costs associated with finding the right product among many options.

In a monopolistically competitive market, advertising is often described as having both an informative element and a persuasive element. Why are both considered important for the market to function?

a) The informative element helps consumers identify the product's existence and features, while the persuasive element helps firms differentiate their products and build brand loyalty.

b) The informative element is used to trick consumers into thinking products are different, while the persuasive element provides technical data about manufacturing costs.

c) Both elements are designed specifically to eliminate excess capacity by forcing the firm to produce at the minimum point of the Average Total Cost curve.

d) The informative element is only used by monopolies, whereas the persuasive element is the only type used by monopolistically competitive firms.

a) The informative element helps consumers identify the product's existence and features, while the persuasive element helps firms differentiate their products and build brand loyalty.

Suppose firms in both perfect competition and monopolistic competition are in long-run equilibrium. Which of the following best describes how an individual firm can attempt to deviate from the zero-profit outcome to earn higher economic profits?

a) Both types of firms can individually increase their advertising budget to create brand loyalty and raise prices above the market average.

b) A monopolistically competitive firm can individually use innovation, product differentiation, or branding, whereas a perfectly competitive firm must act collectively with the industry to shift demand.

c) A perfectly competitive firm can independently innovate its product features, while a monopolistically competitive firm must work with the entire industry to change market demand.

d) Neither firm has any way to deviate from the long-run equilibrium because the force of free entry will always instantly eliminate any potential gains.

b) A monopolistically competitive firm can individually use innovation, product differentiation, or branding, whereas a perfectly competitive firm must act collectively with the industry to shift demand.