3.4.3 Monopolistic competition
1 The diagram below shows the long-run position of a firm operating in monopolistic competition.
Which of the following correctly describes the performance of this firm?
A The firm is earning normal profit and operating at its minimum efficient scale
B The firm is earning supernormal profit and fully exploiting all economies of scale
C The firm is earning normal profit and is allocatively efficient
D The firm is earning normal profit and not fully exploiting all economies of scale
2 Which of the following is the BEST description of the characteristics of a monopolistically competitive market?
A Many firms, differentiated products, high barriers to entry and exit
B Few large firms, differentiated products, non-price competition
C Few large firms, differentiated products, price competition
D Many firms, differentiated products, low barriers to entry and exit
3 Firms in a monopolistically competitive market can have a small degree of monopoly power over their competitors because
A there are a large number of firms.
B their products are differentiated.
C the firms are similar in size.
4 The diagram below shows a monopolistically competitive firm in the hairdressing industry.
Which of the statements below is correct?
A In the long run, the firm makes an economic loss
B In the long run, the firm makes supernormal profit
C In the short run, the firm makes normal profit
D In the short run, the firm makes supernormal profit
5 A firm in a monopolistically competitive market is
A allocatively efficient and productively efficient.
B only allocatively efficient.
C neither allocatively efficient nor productively efficient.
D only productively efficient.
6 The diagram below shows a firm in monopolistic competition.
How much supernormal profit is being made by this firm?
A $1,000 B $800 C $500 D $200 Costs and revenues AR = D AC MR 0 Output MC Costs and revenues AR = D ATC MR 0 Output (units) MC 10 8 5 100
7 Which of the following is NOT a similarity between a monopolistically competitive firm and a perfectly competitive firm?
A Both firms are productively efficient
B Both firms make normal profits in the long run
C Both firms are profit maximising and produce when MC = MR
D Both firms can make abnormal profits in the short run
8 The diagram below represents ‘I’ve Got My Pie On You‘, a firm selling snack food at a large sports event,
Which area shows the firm’s total costs?
A OAEJ
B OBFK
C OCHJ
D ODGJ
9 A pizza firm operating in the monopolistically competitive restaurant industry has the following total cost curve:
Which ONE of the following can be correctly inferred about costs over output between A and B?
A Total costs are steadily increasing
B Average costs are constant
C Marginal costs are zero
10 A diagram representing a small, family-owned Chinese restaurant is shown below.
The owners hire new managers, who wish to change the business objective from sales volume maximisation to profit maximisation. The result of this decision will be to
A lower output and raise prices.
B lower output and reduce prices.
C raise output and raise prices.
D raise output and reduce prices.
11 In long run equilibrium, a monopolistically competitive firm would be most likely to operate at the output at which
A MC=MR and AC=AR
B MC=MR and MC=AC
C MC=MR and AR>AC
D MC=AC and AC=AR
12 A downwards sloping demand curve, such as that faced by a firm in monopolistic competition
A illustrates the impact of rising income on quantity demanded.
B has constant price elasticity of demand along its length.
C can be derived using the concept of diminishing marginal returns.
13 The four tables below give the market share data for different industries.
Which of those market structures is closest to the model of monopolistic competition?
A Desktop Operating Systems
B UK energy firms
C US Clothing
D Mobile handsets
14 The table below gives cost and revenue data for a business.
Output (units) Total costs (£) Total revenue (£) 1 15 40 2 32 60 3 52 78 4 77 94 5 107 106
Which of the following can be correctly inferred from this data? (The blank column is provided for your own calculations.)
A The business is in monopolistic competition with decreasing marginal costs
B The business is in monopolistic competition with increasing marginal costs
C The business is in perfect competition with decreasing marginal costs
15 This diagram shows a pizza delivery firm in monopolistic competition, in the short run.
Which of the following statements can be correctly inferred from this diagram?
A New firms will enter the industry in the long run
B Demand for the firm’s products will increase in the long run
C Collusion will occur in the industry
D The supernormal profit is NKLM
16 Soul Food, a firm selling vegan take-away food at a music festival, is operating under
monopolistically competitive market conditions. All things being equal, this firm is MOST likely to be
A both allocatively and productively efficient in the long run.
B allocatively efficient but not productively efficient in the long run.
C productively efficient but not allocatively efficient in the long run.
17 Soul Food decides to open a vegan café in a busy high street. It aims to profit maximise, but with several other cafes in the same street, it is never full. The following diagram represents the café’s costs and revenues.
It could be correctly inferred from this diagram that
A it is productively inefficient in the long run.
B it is making supernormal profit.
C there is evidence of collusion.
D it is allocatively efficient in the long run.
18 A sandwich shop is operating in the business district of a busy town. It makes only normal profits and faces a great deal of competition. Which of the following strategies is it MOST likely to adopt in order to increase its market share and profits?
A It could reduce its prices
B It could cut wages for its staff
C It could offer a loyalty card to customers
D It could move to a cheaper location away from the main business district
19 The following four sentences all describe conditions faced by a firm in monopolistic competition. 1. Firms may try to overcome this by engaging in non-price competition
2. This means that firms are likely to offer lower prices in order to attract and retain customers
3. There are many firms in the market and the barriers to entry are low
4. Intense competition between suppliers means that demand is likely to be price elastic What is the BEST order for these sentences, to explain why firms in this market structure can only make normal profit in the long run?
A 2, 1, 4, 3
B 3, 4, ,2, 1
C 4, 3, 2, 1
D 3, 2, 1, 4
20 Which ONE of the following is NOT an example of non-price competition?
A An online retail business aims to offer better customer service with specified delivery times for orders
B A high street coffee shop offers vouchers with every purchase which can be collected and used for a free pastry after ten visits
C A pizza delivery business offers a buy-one-get-one-free promotion
