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CSCC Principles of Microeconomics ECON 2200

(Ch 11)Monopolistic Competition is characterized by:

Is characterized by: 1) A relatively large amount of sellers 2) Differentiated products (often promoted by heavy advertising and 3) Easy entry into and exit from the industry

(Ch 11)About how many firms In the market is Monopolistic Competition categorized by?

About 25 to under 100 sets of firms in the market

(Ch 11)Monopolistic Competition involves:

Small Market Shares, No Collusion, & Independent Action

(Ch 11)In Monopolistic Competition, Market Shares mean:

Each firm has a comparatively small percentage of the total market, and consequently, has limited control over market price.

(Ch 11)In Monopolistic Competition, No Collusion means:

The presence of a relatively large number of firms ensures that collusion by a group of firms to restrict output and set prices is unlikely.

(Ch 11)In Monopolistic Competition, Independent Action Means:

With numerous firms in an industry, there is no feeling of interdependence among them; each firm can determine its own pricing policy, without considering the possible reactions of rival firms.

(Ch 11)In contrast to Pure Competition, Monopolistic Competition is distinguished by:

Product Differentiation

(Ch 11)How Products Can Be Differentiated:

Product Attributes, Service, Location, Brand Names & Packaging, Some Control Over Price

(Ch 11)Non Price Competition & Its Goal:

Product differentiation and advertising, The goal is to make price less of a factor in consumer purchases and make product differences a greater factor.

(Ch 11)Four-Firm Concentration Ratio

expressed as a percentage, is the ratio of the output (sales) of the four largest firms in an industry relative to total industry sales.
Four Firm Concentration Ratio = (Output of Four Largest Firms) / (Total Output In the Industry)

(Ch 11)Four-Firm Concentration Ratios are very ___ in purely competitive industries in which there are hundreds or even thousands of firms, each with a tiny market share.

LOW

(Ch 11)Competition in local industries is often ___ in scope.

LOCAL

(Ch 11)Herfindahl Index

The sum of the squared percentage market shares of all firms in the industry.

(Ch 11)The Demand Curve faced by a Monopolistically Competitive seller is highly, but not perfectly ____.

ELASTIC

(Ch11)The feature that precisely distinguishes Monopolistic Competition from both Pure Monopoly and Pure Competition is:

The demand curve is highly, but not perfectly elastic.

(Ch 11)In the Short Run, Monopolistically Competitive firms maximize profit or minimize loss by producing the level of output at which marginal revenue = ______

Marginal Cost (MR=MC)

(Ch 11)MR=MC means:

Marginal Revenue = Marginal Cost

(Ch 11)In the Long Run, firms will enter a monopolisically competitive industry and leave:

An Unprofitable One

(Ch 11)In Monopolistic Competition, neither productive nor allocative, efficiency occurs in

Long- run efficiency

(Ch 11)Excess Capacity is:

Plant and equipment that are underused because firms are producing less than the minimum ATC output

(Ch 11)An Oligopoly can either be a _____ Oligopoly or a _____ Oligopoly.

Homogeneous/Differentiated

(Ch 11)In the long run, if a monopolistic competitive firm is earning normal profits (breaking even), then it should exit or stay in the industry, and why?

Not exit the industry because both explicit and implicit costs are covered.

(Ch 11)A ____ is a market dominated by a few large producers of homogeneous or differentiated product.

Oligopoly

(Ch 11)Two types of market models that closely approximate many markets in the real world are:

Monopolistic Competition and Oligopoly

(Ch 11)To achieve economic efficiency that reduces the number of resources used but increased the number of socially optimal outputs requires a triple equality. What are the 3 components that must be equal?

Price, Marginal Cost and Minimum Average Total Cost
or P=MC=ATC

(Ch 11)Entry to and exit from monopolistic competitive industries is:

Relatively Easy

(Ch 11)Firms in oligopolistic industries are "price makers" because:

They are few in number

(Ch 11)3 Characteristics of Monopolistic Competition:

Independent, No collusion, Small Market Share

(Ch 11)Oligopolies are comprised of:

A Few Large Producers

(Ch 11)If a monopolistically competitive firm is producing where its marginal revenue is less than its marginal cost, then the firm should: 1)shut down in the long run, 2)shut down in the short run, 3)produce more output to increase profits, 4)produce less output to increase profits or reduce losses, or 5)is maximizing its profit? (Pick ONE)

Should produce less outputs to increase profits or reduce losses.

(Ch 11)When firms in an oligopoly ____, their payoffs will be greater than that if they did not.

Collude

(Ch 11)A monopolistically competitive firm's demand curve is:

Highly, but not perfectly elastic

(Ch 11)When measuring industry concentration, the four-firm concentration ratio is the percentage ratio of total ____(one word) for the four largest firms in an industry relative to total industry sales.

Output

(Ch 11)The goal of advertising a product to differentiate it from that of other competitor's products in order to make price less of a factor when a consumer makes a purchase is what is considered so-called :

Non-price competition

(Ch 11)When plant and equipment are underused because firms are producing less than minimum ATC output, this is known as having _____ and _____.

Excess capacity and productive inefficiency

(Ch 11)The study of how people behave in strategic situations is called ____ ____

Game Theory

(Ch 11)Game Theory

The study of how people behave in strategic situations

(Ch 11)In the short run, monopolistically competitive firms maximize profits or minimize losses by producing the output level where:

Marginal revenue = marginal cost or MR=MC

(Ch 11)By challenging their advertising and _____ strategies, firms competing in an oligopoly can affect profits and influence the profits of rivals.

Pricing

(Ch 11)Firms often merge, forming oligopolies, in order to (3 things):

Gain greater control over market supply, become a larger buyer of inputs, and increase control over price

(Ch 11)Allocative efficiency in monopolistically competitive markets does not occur in the long run because firms will set the price where:

ATC= demand to obtain normal profit because consumers demand more of that product and forgo other products reducing optimal societal output.

(Ch 11)Monopolistically competitive firms do not achieve allocative efficiency because:

Output produced is less than optimal and consumers pay a higher than competitive price, causing inefficient use of resources for society

(Ch 11)____ ____ is a market characterized by having many sellers, differentiated products, and with ease of entry and exit from the industry

Monopolistic Competitive

(Ch 11)The equality of price and minimum average total cost yields technical ____ efficiency; the equality of price and marginal cost yields ____ efficiency.

Productive, Allocative

(Ch 11)Allocative efficiency is achieved in the short run when equality of what occurs?

P=MC or Price equals Marginal Cost

(Ch 11)Which of the following represents the most significant benefits to society generated by monopolistic competitive markets: 1)allocative and productive efficiency, 2)low barriers to entry, 3)product differentiation, or 4)many sellers? (Pick ONE)

Product differentiation

(Ch 11)When firms differentiate their products so consumers are willing to pay more, firms do not ____ output capacity and do not produce at the _____ total cost.

Maximize, Lowest Average

(Ch 11)True or False: Firms in an oligopoly always produce a homogeneous product.

False

(Ch 11)In order for a monopolistically competitive firm to maximize profits, it must juggle which of the following factors: 1)the strategic business units needed, 2)the selling price of the product, 3)the level of advertising, 4)the variety of product, and/or 5)the channels of distribution? (Pick all that apply)

The selling price of the product, the level of advertising & the variety of product.

(Ch 11)Oligopolistic firms do which of the following when they change their pricing strategies: 1)affect costs and influence the products of rival firms, 2)affect profits and influence the profits of rival firms, 3)affect costs and influence the supply of rival firms, or 4)affect profits without influencing the profits of rival firms? (Pick ONE)

Affect profits and influence the profits of rival firms

(Ch 11)For a business to secure a convenient store location even if it means higher prices and less selection is a form of

Product Differentiation

(Ch 11)A ____ is present when the largest four firms in an industry control more than 40% or more of the market.

Oligopoly

(Ch 11)Monopolistically competitive firms are not productively efficient because:

Output is less than society's optimal level because a producer's average total cost per unit is not at its lowest possible cost

(Ch 11)____ means illegal cooperation with rivals.

Collusion

(Ch 11)A monopolistically competitive firm may be able to continue earning profit in the long run through:

Through further product differentiation

(Ch 11)Andrew and Robert understand that they are entering a monopolistically competitive industry because: 1)They will be able to offer unique, one-of-a-kind jewelry/ 2)Opening a retail jewelry store is relatively easy/ 3)Robert being a register jeweler will make it harder for others to open a jewelry store/ 4)The demand for custom jewelry will ensure they always make an economic profit/ 5)There are many places to buy jewelry (pick all that apply)

They will be able to offer unique, one-of-a-kind jewelry/ opening a retail jewelry store is relatively easy/ There are many places to buy jewelry

(Ch 11)What is the term called that is a measure of industry concentration that equals the sum of the squared percentage market shares of all firms in the industry?

Herfindahl Index

(Ch 11)When 4 or 5 auto part stores serve a medium size town, this can be considered:

Oligopoly

(Ch 11)A monopolistically competitive firm's demand curve is:

Downward-sloping like the demand curve for a monopoly, not horizontal like those in purely competitive markets.

(Ch 11)If the 4 largest firms in an industry 20, 10, 7, and 3 units of output, respectively, and the total industry output is 100, then the four-firm concentration equals ____%

40

(Ch 11)A major trade-off that occurs in monopolistically competitive industries as product differentiation increases is:

excess capacity increases.

(Ch 11)The ability of monopolistically competitive firms to engage in ____ competition makes the market more complex because of differentiated product differences and advertising.

nonprice

(Ch 11)Which of the following best exemplifies a firm with excess capacity? 1) Fast food restaurant where customers never have to wait to place an order 2) An auto plant running 3 full shifts a day to meet customer orders 3) A convenience store with all of its gas pumps in use and customers waiting to gas, 4) A hotel with no rooms for the night

1) A fast food restaurant where customers never have to wait to place an order

(Ch12) What is "Technological Advance"?

New or better goods or services or new or better ways of producing or distributing them.

(Ch12) What is the "very long run"?

A period in which technology can change and in which firms can develop and offer entirely new products.

(Ch12) What is a period in which technology can change and in which firms can develop and offer entirely new products called?

The Very Long Run

(Ch12) The basis for technological advance is _____.

Invention

(Ch12) What is "Diffusion"?

The spread of innovation to other products or processes through imitation or copying.

(Ch12) What is "Invention"

The discovery and first proof of workability.

(Ch12) What is "Innovation"

The first successful commercial introduction of a product, the first use of a new method, or the creation of a new form of business enterprise.

(Ch12) What is The first successful commercial introduction of a product, the first use of a new method, or the creation of a new form of business enterprise calledt

Innovation.

(Ch12)What is the discovery and first proof of workability called?

Invention.

(Ch12) What are the 2 types of innovation?

Product Innovation
Process Innovation

(Ch12) What is "Product Innovation"?

New or improved products or services.

(Ch12) What is "Process Innovation"?

New or improved methods of production or distribution.

(Ch12) Innovation is a major factor in ______.

Competition.

(Ch12) As related to business, the term "research and development" is is used loosely to include direct efforts to: (3 things)

Invention, Innovation and Diffusion

(Ch12) TRUE/FALSE: When MRP.L / P.L = MRP.C / P.C is equal to any number but 1, the profit maximizing rule has been achieved

FALSE

(Ch12)Marginal resource cost is the amount that each ____ unit of a resource contributes to the firm's total resource cost

Additional

(Ch12) The determinants of the elasticity of resource demand are:

Elasticity of Product Demand
Ratio of Resource Cost to Total Cost
Ease of Resource Substitutability

(Ch12) Ownership of property resources is highly ____.

Unequal

(Ch12) The _____ of resource demand is the sensitivity of resource quantity to changes in resource prices.

Elasticity

(Ch12) The extra or additional output that is produced as a result of adding one more unit of labor or variable input is called.

The Marginal Product

(Ch12) Derived demand for a resource depends on:

The price or value it receives from the product it products,
The productivity contribution of the resource used to create a good or service

(Ch12)Just as product prices allocate finished goods and services to _____, resource prices allocate resources among industries and _____.

Consumer, Firms

(Ch12) As one more additional variable input, such as labor is applied to fixed capital such as plant and equipment, the marginal product, or additional output, will fall, describes the law of:

Diminishing returns.

(Ch12) The firm in a competitive product market is also a price taker or wage taker in the competitive _____ market.

Resource

(Ch12)The demand for _____ in the US is rapidly outpacing the demand for manufacturing, construction, and mining workers.

Service Workers

(Ch12)Other things equal, the increase in the demand for a product will _____ the demand for a resource used in its production, whereas a decrease in product demand will ____ the demand for that resource

Increase, Decrease

(Ch12)Price changes in other input product ____ may change the _____ for a specific resource.

Resources, Demand

(Ch12) The derived demand for an input will rise when:

It is highly productive in reducing the costs to produce a product and
It is highly productive in producing a highly valued commodity

(Ch12)Changes in ____ demand have considerable significance since they affect _____ rates and employment in specific occupations.

Labor, Wage

(Ch12)In the ____ run, firms can vary the amounts of all resources they use

Long

(Ch12) Other things equal, the demand for a non-labor resource is an inverse relationship between the _____ of the resource and the quantity of the resource _____.

Price, Demanded

(Ch12) What rule states that the cost of any product output is minimized when the ratios for each of the used inputs marginal product to price are equal for each resource?

The Least Cost Rule

(Ch12) A firm is producing a specific output with the least-cost combination of resources when the ____ dollar spent on each resource yields the _____ marginal product.

Last, Same

(Ch12) A firm's demand schedule for labor or any input to produce a good or service can also be known as its:

Marginal Revenue Product Schedule

(Ch12) In a purely competitive labor market, market supply and market demand establish:

The Wage Rate

(Ch12)The determinants of the elasticity of resource demand are:

Ratio of resource cost to total cost
Elasticity of product demand
Ease of resource subsitutability

(Ch12) In order to ___ profit, a firm will purchase or hire a resource in an amount at which the resource's marginal revenue product equals its marginal resource cost : MRP=MRC.

Maximize

(Ch12)In the long run, firms can:

vary the amounts of all resources they use.

(Ch12) IN an imperfectly competitive market, a _____ price accompanying each increase in output (total product) applies not only to the marginal _____, of each successive worker, but also to all prior output units that otherwise could have been sold at a(n) ____ price.

Lower, Product, Higher

(Ch12) The expenditures that firms incur in acquiring economic resources flow to households in the form of:

WAGES
RENT
PROFIT
INTEREST

(Ch12) The perfect change in resource quantity (divided) by the percent change in resource price measures:

Elasticity Of Resource Demand

(Ch12) In the resource market, the output effect means that the firm will purchase ____ of one particular input when the price of the other input falls, and ____ of that particular input, when the price of the other input rises.

More, Less

(Ch12) The imperfectly competitive seller produces ____ of a product than a purely competitive seller, and it does it demanding _______ resources.

Less, fewer

(Ch12) Resource demand and ____ are a major factor in determining the ____ of households

Price, Income

(Ch12) When the sale of a firm's total output of a product in a _____ competitive product market has no effect on the market price, this makes the firm a _____ _____.

Perfectly, Price Taker

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