666 section 12 Market Structures: Imperfect Competition
Module 67 AP Review
Check Your Understanding
- Suppose a monopolistically competitive industry composed of
firms with U-shaped average total cost curves is in long-run
equilibrium. For each of the following changes, explain how the
industry is affected in the short run and how it adjusts to a new
long-run equilibrium.
a. a technological change that increases fixed cost for every
firm in the industry
b. a technological change that decreases marginal cost for every
firm in the industry - Why is it impossible for firms in a monopolistically competitive
industry to join together to form a monopoly that is capable of
maintaining positive economic profit in the long run?
3. Indicate whether the following statements are true or false, and
explain your answers.
a. Like a firm in a perfectly competitive industry, a firm in a
monopolistically competitive industry is willing to sell a
good at any price that equals or exceeds marginal cost.
b. Suppose there is a monopolistically competitive industry in
long-run equilibrium that possesses excess capacity. All the
firms in the industry would be better off if they merged into
a single firm and produced a single product, but whether
consumers would be made better off by this is ambiguous.
c. Fads and fashions are more likely to arise in industries
characterized by monopolistic competition or oligopoly
than in those characterized by perfect competition or
monopoly.
Solutions appear at the back of the book.
Tackle the Test: Multiple-Choice Questions
- Which of the following is a characteristic of monopolistic
competition?
a. a standardized product
b. many sellers
c. barriers to entry
d. positive long-run profits
e. a perfectly elastic demand curve - Which of the following results is possible for a monopolistic
competitor in the short run?
I. positive economic profit
II. normal profit
III. loss
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III - Which of the following results is possible for a monopolistic
competitor in the long run?
I. positive economic profit
II. normal profit
III. loss
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III
4. Which of the following best describes a monopolistic
competitor’s demand curve?
a. upward sloping
b. downward sloping
c. U-shaped
d. horizontal
e. vertical
5. The long-run outcome in a monopolistically competitive
industry results in
a. inefficiency because firms earn positive economic profits.
b. efficiency due to excess capacity.
c. inefficiency due to product diversity.
d. efficiency because price exceeds marginal cost.
e. a trade-off between higher average total cost and more
product diversity.