QUESTIONS AND CORRECT

ECON 221 Final ACTUAL EXAM 130

QUESTIONS AND CORRECT

ANSWERS * -

GRADED A+

Which of the following is true about a monopolistically competitive firm?

• It can earn an economic profit in the short run, but not the long run.
• It can earn an economic profit in the short run and the long run.
• It can earn an economic profit in the long run, but not the short run.
• It cannot earn an economic profit in either the short or long run. - CORRECT ANSWER-A. It

can earn an economic profit in the short run, but not the long run.

Which of the following statements is correct?

• Monopolistic competition is similar to monopoly because both market structures are

characterized by firms being price makers rather than price takers.

• Monopolistic competition is similar to perfect competition because both market structures are

characterized by differentiated products.

• Monopolistic competition is similar to oligopoly because both market structures are characterized

by strategic interaction between firms in the market.

• Monopolistic competition is similar to perfect competition because both market structures are

characterized by perfectly elastic demand curves facing each firm. - CORRECT ANSWER-A.Monopolistic competition is similar to monopoly because both market structures are characterized by firms being price makers rather than price takers.

Which of the following graphs illustrates the demand curve most likely faced by a firm in a monopolistically competitive market?

• Graph (a)
• Graph (b)
• Graph (c)
• Graph (d) - CORRECT ANSWER-B. Graph B (downward sloping)

For a monopolistically competitive firm, 1 / 3

• marginal revenue and price are the same.
• at the profit-maximizing quantity of output, marginal revenue equals marginal cost.
• at the profit-maximizing quantity of output, price equals marginal cost.
• at the profit-maximizing quantity of output, price equals the minimum of average total cost. -

CORRECT ANSWER-B. at the profit-maximizing quantity of output, marginal revenue equals marginal cost.

A monopolistically competitive firm chooses

• the quantity of output to produce, but all firms in the market agree upon a single price.
• the price, but competition in the market determines the quantity.
• the price, but output is determined by a cartel production quota.
• the quantity of output to produce, but the price of its output is determined by demand. -

CORRECT ANSWER-D. the quantity of output to produce, but the price of its output is determined by demand.

Which of the following conditions is characteristic of a monopolistically competitive firm in both the short run and the long run?

• P > MC
• MC = ATC
• P < MR
• P = ATC - CORRECT ANSWER-A. P > MC

The figure below depicts a situation in a monopolistically competitive market. How much profit will the monopolistically competitive firm earn in this situation?

• $0
• $2,100
• $600
• $900 - CORRECT ANSWER-C. $600

In monopolistically competitive markets, free entry and exit suggests that

• the market structure will eventually be characterized by perfect competition in the long run.
• all firms earn zero economic profits in the long run. 2 / 3

• some firms will be able to earn economic profits in the long run.
• some firms will be forced to incur economic losses in the long run. - CORRECT ANSWER-B. all

firms earn zero economic profits in the long run.

The product-variety externality is associated with the

• producer surplus that accrues to incumbent firms in a monopolistically competitive industry.
• loss of consumer surplus from exposure to additional advertising.
• consumer surplus that is generated from the introduction of a new product.
• opportunity cost of firms exiting a monopolistically competitive industry - CORRECT

ANSWER-C. consumer surplus that is generated from the introduction of a new product.

Which of the following is not an argument made by critics of advertising?

• Advertising manipulates people's tastes.
• Advertising impedes competition.
• Advertising promotes economies of scale.
• Advertising increases the perception of product differentiation. - CORRECT ANSWER-C.

Advertising promotes economies of scale.

Price discrimination

• is illegal in the United States and Europe.
• can occur in both perfectly competitive and monopoly markets.
• is illogical because it does not maximize profits.
• can maximize profits if the seller can prevent the resale of goods between customers. -

CORRECT ANSWER-D. can maximize profits if the seller can prevent the resale of goods between customers.

A firm cannot price discriminate if

• it has declining marginal revenue.
• it operates in a competitive market.
• buyers only reveal the price they are willing to pay for the product.
• it has a constant marginal cost. - CORRECT ANSWER-B. it operates in a competitive market.
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