AP_Krugman_Textbook

module 68 Product Differentiation and Advertising 673

Section 12 Market Structures: Imperfect Competition
Tackle the Test: Multiple-Choice Questions

1. Which of the following is a form of product differentiation?
   I. style or type
   II. location
   III. quality
   a. I only
   b. II only
   c. III only
   d. I and II only
   e. I, II, and III


2. In which of the following market structures will individual
   firms advertise?
   I. perfect competition
   II. oligopoly
   III. monopolistic competition
   a. I only
   b. II only
   c. III only
   d. II and III only
   e. I, II, and III
   3. Advertising is an attempt to affect which of the following?
   a. consumer tastes and preferences
   b. consumer income
   c. the price of complements
   d. the price of substitutes
   e. input prices
   4. Brand names generally serve to
   a. waste resources.
   b. decrease firm profits.
   c. confuse consumers.
   d. decrease information.
   e. signal quality.
   5. Which of the following is true of advertising expenditures in
   monopolistic competition? Monopolistic competitors
   a. will not advertise.
   b. use only informational advertising.
   c. waste resources on advertising.
   d. attempt to create popular brand names.
   e. earn long-run profits through advertising.

Tackle the Test: Free-Response Questions

1. Refer to the table below showing the effects of running
   television commercials on a firm’s total revenue. Assume that
   each commercial costs $1,000 to run.
   Number of Commercials Total revenue
   0 $20,000
   1 30,000
   2 38,000
   3 44,000
   4 48,000
   5 50,000
   6 50,500
   a. What is the marginal revenue from running the second
   commercial?
   b. Should the firm run a third commercial? Explain.
   c. If the firm has no variable costs aside from the cost of
   commercials, how many commercials should the firm run to
   maximize profits? Explain.

Answer (5 points)

1 point:$8,000

1 point:Yes.

1 point:Because the marginal revenue of $6,000 exceeds the marginal cost of

$1,000.

1 point: 5

1 point:Marginal revenue exceeds marginal cost for the first 5 commercials.

Marginal revenue is less than marginal cost for the 6thcommercial.

2. When is product differentiation socially efficient? Explain.
   When is it not socially efficient? Explain.

Summary

1.Many industries are oligopolies, characterized by a small

number of sellers. The smallest type of oligopoly, a du-

opoly,has only two sellers. Oligopolies exist for more or

less the same reasons that monopolies exist, but in

weaker form. They are characterized by imperfect com-

petition: firms compete but possess market power.

2.Predicting the behavior of oligopolists poses some-

thing of a puzzle. The firms in an oligopoly could

maximize their combined profits by acting as a cartel,

setting output levels for each firm as if they were a sin-

gle monopolist; to the extent that firms manage to do

this, they engage in collusion.But each individual

Section 12 Review