Mankiw Chapter 16 Answer Key

Advanced Placement Microeconomics Ms. Fry

Name: __________________________________ Pd: ___ Date: __________________

Chapter 16 Test KEY MULTIPLE CHOICE 1. Which of the following statements is not correct? a. Monopolistic competition is similar to monopoly because in each market structure the firm can charge a price above marginal costs. b. Monopolistic competition is similar to perfect competition because both market structures are characterized by free entry. c. Monopolistic competition is similar to oligopoly because both market structures are characterized by barriers to entry. d. Monopolistic competition is similar to perfect competition because both market structures are characterized by many sellers. e. Monopolistic competition is similar to perfect competition because both market structures are characterized by profit maximizing behavior. ANS: C NAT: Analytic MSC: Analytical

PTS: 1 DIF: 2 LOC: Monopolistic competition

REF: 16-0 TOP: Monopolistic competition

2. A similarity between monopoly and monopolistic competition is that in both market structures, a. strategic interactions among sellers are important. b. there are a small number of sellers. c. sellers are price makers rather than price takers. d. there are only a few buyers but many sellers. e. firms earn economic profits in the long run. ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Monopoly

REF: 16-1 MSC: Interpretive

3. In which of the following market structures is(are) there a large number of sellers? (i) monopolistic competition (ii) perfect competition

(iii ) a. b. c. d. e.

oligopoly

(i) only (ii) only (i) and (ii) only (ii) and (iii) only (i), (ii), and (iii)

ANS: C PTS: 1 DIF: 1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Perfect competition

REF: 16-1 MSC: Definitional

4. If firms in a particular market sell identical products, then the market is (i) perfectly competitive. (ii) monopolistically competitive. (iii an oligopoly. ) a. b. c. d. e.

(i) and (ii) only (ii) and (iii) only (iii) only (ii) only (i) only

ANS: E PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive

REF: 16-1 TOP: Perfect competition

5. Monopolistic competition is characterized by which of the following attributes? (i) free entry (ii) product differentiation (iii many sellers ) a. b. c. d. e.

(ii) only (i) and (ii) only (i) and (iii) only (ii) and (iii) only (i), (ii), and (iii)

ANS: E NAT: Analytic



MSC: Definitional 6. One key difference between an oligopoly market and a competitive market is that oligopolistic firms a. are price takers whereas competitive firms are not. b. can affect the profit of other firms in the market by the choices they make whereas firms in competitive markets do not affect each other by the choices they make. c. sell completely unrelated products whereas competitive firms do not. d. sell their product at a price equal to marginal cost whereas competitive firms do not. e. operate at a level of output where P=MC. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Oligopoly


7. Crude oil is primarily supplied to the world market by a few Middle Eastern countries. Such a market is an example of a(n) (i) imperfectly competitive market. (ii) monopoly market. (iii oligopoly market. ) a. b. c. d. e.

(i) and (ii) only (ii) and (iii) only (i) and (iii) only (ii) only (iii) only

ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive

REF: 16-1 TOP: Oligopoly

8. An oligopoly is a market in which a. there are only a few sellers, each offering a product similar or identical to the products offered by other firms in the market. b. firms are price takers. c. the actions of one seller in the market have no impact on the other sellers' profits. d. there are many price-taking firms, each offering a product similar or identical to the products offered by other firms in the market. e. firms operate where P=MC. ANS: A

PTS: 1

DIF: 1

REF: 16-1

NAT: Analytic LOC: Monopolistic competition MSC: Definitional

TOP: Oligopoly

9. Monopolistic competition is characterized by (i) efficient scale (ii) markup pricing over marginal cost (iii deadweight loss ) (iv) excess capacity a. b. c. d. e.

(i) and (ii) only (ii) and (iv) only (i), (ii), and (iii) only (ii), (iii), and (iv) only (i), (ii), (iii), and (iv)

ANS: D PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition TOP: Deadweight loss | Excess capacity MSC:

REF: 16-2 Analytical

10. Monopolistic competition is an a. efficient market structure because long-run profits are zero. b. efficient market structure because each firm produces at its efficient scale. c. inefficient market structure because there is deadweight loss. d. inefficient market structure because firms maximize profits. e. Both a and b are correct. ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive

REF: 16-2 TOP: Welfare | Deadweight loss

11. The deadweight loss that is associated with a monopolistically competitive market is a result of a. price falling short of marginal cost in order to increase market share. b. price exceeding marginal cost. c. the firm operating in a regulated industry. d. excessive advertising costs. e. profit maximizing behavior. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive

REF: 16-2 TOP: Welfare

12. Both monopolistic competition and oligopoly are market structures

a. b. c. d. e.

that fail to achieve the total surplus achieved by perfect competition. that feature only a few firms in each market. to which the concept of Nash equilibrium is frequently applied by economists. in which firms earn zero economic profit in the long run. in which firms earn positive economic profit in the long run.

ANS: A PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition | Welfare


13. A monopolistically competitive firm a. has the usual deadweight loss of monopoly pricing. b. experiences a zero profit in a long-run equilibrium. c. is said to have excess capacity. d. operates where MR = MC. e. All of the above are correct. ANS: E PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition TOP: Deadweight loss | Excess capacity MSC:

REF: 16-2 Interpretive

14. A monopolistically competitive firm has the following cost structure: Output Total Cost($)

1 30

2 32

3 36

4 42

5 50

6 63

7 77

9 5

7 6

4 7

The firm faces the following demand curve: Price ($) Quantity

20 1

18 2

15 3

12 4

If the government forces this firm to produce at its efficient scale, it will a. produce three units and make $9. b. produce four units and make $6. c. produce five units and lose $5. d. produce six units and lose $20. e. produce seven units and lose $49. ANS: C PTS: 1 DIF: 3 NAT: Analytic LOC: Monopolistic competition MSC: Applicative Figure 16-4

REF: 16-2 TOP: Efficient scale

15. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will encourage the entry of other firms into a monopolistically competitive industry? a. panel a only b. panel b only c. panel c only d. panel d only e. panel a and panel b ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive

REF: 16-2 TOP: Short-run equilibrium

16. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will encourage the exit of some firms from a monopolistically competitive industry? a. panel a only b. panel b only c. panel c only d. panel d only e. panel a and panel b ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive


17. Refer to Figure 16-4. Which of the graphs depicts a short-run equilibrium that will not encourage either the entry or exit of firms in a monopolistically competitive industry? a. panel a only b. panel b only c. panel c only d. panel d only e. panel a and panel b ANS: A PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive


18. Refer to Figure 16-4. Which of the panels depicts a firm in a monopolistically competitive market earning positive economic profits? a. panel a only b. panel b only c. panel c only d. panel d only e. panel b and panel c ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive


19. Refer to Figure 16-4. Which of the panels shown could illustrate the short-run situation for a monopolistically competitive firm? a. panel a b. panel b c. panel c d. All of the above are correct. e. None of the above is correct. ANS: D PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive


Table 16-5 Traci’s Hair Styling is one salon among many in the market for hairstyling. The following table presents cost and revenue data for haircuts at Traci’s Hair Styling. COSTS REVENUES Quantity Total Marginal Quantity Total Marginal Produced Cost Cost Demanded Price Revenue Revenue

0 1 2 3 4 5 6 7 8

$10 $15 $21 $28 $36 $45 $55 $66 $78

--

0 1 2 3 4 5 6 7 8

$50 $45 $40 $35 $30 $25 $20 $15 $10

--

20. Refer to Table 16-5. What is the profit-maximizing output for Traci’s Hair Styling? a. three haircuts b. four haircuts c. five haircuts d. six haircuts e. eight haircuts ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Applicative

REF: 16-2 TOP: Profit maximization

21. Refer to Table 16-5. When maximizing profit, what price does Traci’s charge for a haircut? a. $10 b. $20 c. $25 d. $30 e. $35 ANS: D PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Applicative


22. Refer to Table 16-5. At the profit-maximizing quantity, what is Traci’s total profit? a. $30 b. $59 c. $68 d. $77 e. $84 ANS: E PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Applicative


23. Refer to Table 16-5. Given the cost and revenue data, Traci’s is a. not in a long-run equilibrium. More businesses will enter the hair salon market in the long run. b. not in a short-run equilibrium. c. not in a long-run equilibrium. Some businesses currently in the hair salon market will exit the market in the long run. d. in a long-run equilibrium. e. not in a long-run or a short-run equilibrium. ANS: A PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive

REF: 16-2 TOP: Long-run equilibrium

24. Refer to Table 16-5. If the government required Traci’s to produce at the efficient scale of output, how many haircuts would Traci’s sell? a. either three or four b. either four or five c. either five or six d. either six or seven e. either seven or eight ANS: B NAT: Analytic MSC: Analytical



25. Refer to Table 16-5. If the government forced Traci’s to produce at the efficient scale of output, what is the maximum profit Traci’s could earn? a. $68 b. $77 c. $80 d. $84 e. $96 ANS: D PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Applicative


26. Consider a monopolistically competitive firm in a market in long-run equilibrium. This firm is likely earning a. a positive economic profit because it is charging a price above marginal cost. b. no economic profit because it is charging a price equal to its marginal cost. c. a positive economic profit because it is charging a price above its average total

cost. d. no economic profit because it is charging a price equal to it average total cost. e. a positive economic profit because it is charging a price equal to marginal cost. ANS: D PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive


27. In a long-run equilibrium, a. only a perfectly competitive firm operates at its efficient scale. b. only a monopolistically competitive firm operates at its efficient scale. c. neither a competitive firm nor a monopolistically competitive firm charges a markup over marginal cost. d. both a perfectly competitive firm and a monopolistically competitive firm operate at their efficient scale of production. e. only in monopoly does a firm operate where MR = MC. ANS: A PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive


28. Suppose the point of tangency that characterizes long-run equilibrium for a monopolistically competitive firm occurs at Q1 units of output. This level of output, Q1, a. exceeds the level of output at which marginal revenue equals marginal cost. b. exceeds the level of output at which marginal cost equals average total cost. c. falls short of the level of output at which price equals marginal cost. d. exceeds the firm’s efficient scale of output. e. equals the level of output where average total cost is at a minimum. ANS: C NAT: Analytic MSC: Analytical



29. When a monopolistically competitive firm is in long-run equilibrium, a. price is equal to average total cost. b. price is equal to marginal cost. c. price is equal to marginal revenue. d. price is equal to average variable cost. e. the firm operates at its efficient scale. ANS: A NAT: Analytic



MSC: Interpretive 30. Which two curves are tangent to each other in a monopolistically competitive market with zero economic profit? a. demand and average variable cost b. demand and average total cost c. marginal revenue and average variable cost d. marginal revenue and average total cost e. marginal revenue and marginal cost. ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive


31. When a new firm enters a monopolistically competitive market, the individual demand curves faced by all existing firms in that market will a. shift to the left. b. shift to the right. c. shift in a direction that is unpredictable without further information. d. remain unchanged. It is the supply curve that will shift to the right. e. remain unchanged. It is the supply curve that will shift to the left. ANS: A PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition TOP: Demand curve | Long-run equilibrium

REF: 16-2 MSC: Analytical

32. When a firm's demand curve is tangent to its average total cost curve, the a. firm's economic profit is zero. b. firm must be earning economic profits. c. firm must be incurring economic losses. d. firm must be operating at its efficient scale. e. firm must be operating at the socially optimum level of output. ANS: A PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive


33. The free entry and exit of firms in a monopolistically competitive market guarantees that a. both economic profits and economic losses can persist in the long run. b. both economic profits and economic losses disappear in the long run. c. economic profits, but not economic losses, can persist in the long run. d. economic losses, but not economic profits, can persist in the long run. e. long-run equilibrium will be the same as short-run equilibrium.

ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive


34. In monopolistically competitive markets, economic losses a. suggest that some existing firms will exit the market. b. suggest that new firms will enter the market. c. are minimized through government-imposed barriers to entry. d. are never possible. e. are eliminated when firms maximize profits. ANS: A PTS: 1 DIF: 1 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive


35. In monopolistically competitive markets, positive economic profits a. suggest that some existing firms will exit the market. b. suggest that new firms will enter the market. c. suggest that the number of firms in the market has reached long-run equilibrium. d. are sustained through government-imposed barriers to entry. e. are never possible. ANS: B PTS: 1 DIF: 1 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive


36. In which of the following market structures does free entry and exit play an important role in the long-run equilibrium outcome? (i) perfect competition (ii) monopolistic competition (iii monopoly ) a. b. c. d. e.

(i) only (ii) only (i) and (ii) only (ii) and (iii) only (i), (ii), and (iii)

ANS: C NAT: Analytic



MSC: Interpretive 37. Which of the following conditions is characteristic of a monopolistically competitive firm in long-run equilibrium? a. P > MR and P = MC b. ATC = demand and MR = MC c. P < MC and demand = ATC d. P > ATC and demand > MR e. AVC = demand and MR = MC ANS: B NAT: Analytic MSC: Analytical



Figure 16-5

38. Refer to Figure 16-5. Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is earning a positive profit? a. panel a only b. panel b only c. panel c only d. panel d only e. panel c and panel d ANS: C

PTS: 1

DIF: 2

REF: 16-2

NAT: Analytic LOC: Monopolistic competition MSC: Interpretive

TOP: Monopolistic competition

39. Refer to Figure 16-5. Which of the graphs shown would be consistent with a firm in a monopolistically competitive market that is doing its best but still losing money? a. panel a only b. panel b only c. panel c only d. panel d only e. panel a and panel b ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive


40. Refer to Figure 16-5. Which of the graphs depicts a monopolistically competitive firm in longrun equilibrium? a. panel a b. panel b c. panel c d. panel d e. None of the above is correct. ANS: E PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive


Figure 16-3 1000

$

900 800

MC

700

ATC

600 500 400 300 200 100

D

MR 5

10

15

20

25

30

35

40

Quantity

41. Refer to Figure 16-3. The firm in this figure is monopolistically competitive. It illustrates

a. b. c. d. e.

the shut-down case. a long-run economic profit. a short-run economic profit. a short-run loss. break even.

ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Interpretive


42. Refer to Figure 16-3. Assume the firm in the figure is currently producing eight units of output and charging $400. The firm a. will increase its profits if it raises its price and reduces its production level. b. will increase its profits if it lowers its price and expands its production level. c. is maximizing profits. d. will increase its profits if it raises its prices and expands its production level. e. will increase its profits if it lowers its price and reduces its production level. ANS: D NAT: Analytic MSC: Analytical



Figure 16-1. The figure is drawn for a monopolistically competitive firm. 32

P

24

MC

18

16

12

Demand

8 MR 4

8

12

16

20

24

28

32 Q

43. Refer to Figure 16-1. The firm’s profit-maximizing level of output is a. eight units. b. twelve units. c. sixteen units. d. twenty-four units. e. greater than twenty-four units.

ANS: B PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Applicative


44. Refer to Figure 16-1. In order to maximize profit, the firm will charge a price of a. $8. b. $12. c. $16. d. $18. e. $24. ANS: D PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Applicative


45. Refer to Figure 16-1. Suppose that average total cost is $18 when Q=12. What is the profitmaximizing price and resulting profit? a. P=$12, profit=$0 b. P=$18, profit=$72 c. P=$18, profit=$24 d. P=$18, profit=$0 e. P=$12, profit=$24 ANS: D PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Applicative


46. Refer to Figure 16-1. If the average total cost is $15 at the profit-maximizing quantity, then the firm’s maximum profit is a. $18. b. $24. c. $36. d. $45. e. $60. ANS: C PTS: 1 DIF: 2 NAT: Analytic LOC: Monopolistic competition MSC: Applicative


47. Refer to Figure 16-1. If the average variable cost is $12 at the profit-maximizing quantity, and if the firm’s fixed costs amount to $30, then the firm’s maximum profit is a. $-30. b. $22.

c. $36. d. $42. e. $60. ANS: D PTS: 1 DIF: 3 NAT: Analytic LOC: Monopolistic competition MSC: Applicative


Figure 16-2 This figure depicts a situation in a monopolistically competitive market.

48. Refer to Figure 16-2. What are the profit-maximizing price, quantity, and resulting profit? a. P=$60, Q=20 units, profit=$200 b. P=$80, Q=20 units, profit=$200 c. P=$75, Q=25 units, profit=$100 d. P=$60, Q=40 units, profit=$0 e. P=$70, Q=20 units, profit=$200 ANS: B NAT: Analytic MSC: Analytical



49. Refer to Figure 16-2. How much consumer surplus will be derived from the purchase of this product at the monopolistically competitive price? a. $200.00 b. $312.50

c. $400.00 d. $600.00 e. $800.00 ANS: A NAT: Analytic MSC: Analytical



50. Refer to Figure 16-2. How much output will the monopolistically competitive firm produce in this situation? a. twenty units b. twenty-five units c. forty units d. eighty units e. one hundred units ANS: A NAT: Analytic MSC: Analytical



FREE RESPONSE 1. Use a correctly labeled graph to demonstrate a monopolistically competitive firm in long-run equilibrium. On your graph, draw a marginal revenue curve, a demand curve, a marginal cost curve, and an average total cost curve. Draw a dotted line to the axis to indicate the profitmaximizing level of output. ANS:

PTS: 1 DIF: 2 LOC: Monopolistic competition MSC: Analytical

REF: 16-2 NAT: Analytic TOP: Excess capacity

2. Professional organizations (for example, the American Medical Association and the American Bar Association) have been active advocates for regulation to restrict the right of professionals to advertise. Describe what economic incentives might exist for existing professionals to restrict advertising. ANS: If advertising increases information about prices and services, then providers of professional services will be required to compete with each other on the basis of price and service. As such, existing professionals will be subject to more competitive pressure in the markets they service, and individual profits are likely to fall. PTS: 1 DIF: 2 LOC: Monopolistic competition

REF: 16-3 NAT: Analytic TOP: Advertising MSC: Analytical

Mankiw Chapter 16 Answer Key

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