Monopolistic Competition MCQ Practice

Assume there is a monopolistically competitive firm in long-run equilibrium. If this firm were to realize productive efficiency, it would:

• have more economic profit.

• have a loss.

• also achieve allocative efficiency.

• be under producing.

Answer explanation

In long-run equilibrium, a monopolistically competitive firm produces at a point where price equals average total cost, leading to zero economic profit. If it achieves productive efficiency, it may reduce costs but still incur a loss due to demand constraints.

Which of the following statements about a monopolistically competitive firm in long-run equilibrium is true?

• It has excess capacity, even though its long-run profit is zero and its output price equals its marginal cost.

• It has excess capacity and its long-run profit is positive, even though its marginal revenue equals its marginal cost.

• It has excess capacity and its output price exceeds its marginal cost, even though its long-run profit is zero.

• It has no excess capacity and its long-run profit is zero.

• It has no excess capacity and its marginal revenue equals its marginal cost.

Answer explanation

In long-run equilibrium, a monopolistically competitive firm has excess capacity, meaning it could produce more at a lower average cost. Its output price exceeds marginal cost, but it earns zero economic profit due to competition.

Within the range of market demand, which of the following is consistent with the conditions of a natural monopoly?

• Long-run total cost decreases as output increases.

• Long-run average total cost remains constant as output increases.

• Long-run average total cost decreases as output increases.

• Marginal cost exceeds average cost.

• Setting price equal to marginal cost will maximize profits.

Answer explanation

A natural monopoly occurs when long-run average total cost decreases as output increases, allowing one firm to supply the entire market more efficiently than multiple firms.

A profit-maximizing monopolist selects its output level in the

• inelastic region of its demand curve

• elastic region of its demand curve

• range of output where marginal revenue is rising

• range of output where total cost is falling

• range of output where marginal cost is falling

Answer explanation

A profit-maximizing monopolist operates in the elastic region of its demand curve, where lowering prices increases total revenue. In the inelastic region, increasing output would decrease total revenue, which is not profit-maximizing.

If the monopolist chooses to maximize total revenue rather than total profit, it will choose which combination of price and output?

• P1, Q5

• P2, Q4

• P3, Q3

• P4, Q4

• P5, Q5

Answer explanation

To maximize total revenue, the monopolist sets output where marginal revenue equals zero. At P3 and Q3, the price is optimal for maximizing revenue, as it balances quantity sold and price per unit effectively.

If the marginal cost curve of a monopolist shifts up, which of the following will occur to the monopolist’s price and output?

• Decrease, Increase

• Decrease, Decrease

• Increase, No change

• Increase, Increase

• Increase, Decrease

Answer explanation

When the marginal cost curve of a monopolist shifts up, the cost of producing each unit increases. This leads to a higher price for consumers and a decrease in output, as the monopolist maximizes profit at a new equilibrium.

From the point of view of economic efficiency, a monopolist produces

• too much of a good and charges too low a price

• too much of a good and charges too high a price

• too little of a good and charges too low a price

• too little of a good and charges too high a price

• the socially optimal amount of a good

Answer explanation

A monopolist restricts output to maximize profits, leading to too little production and higher prices compared to a competitive market. This results in inefficiency, as consumer demand is not fully met.

In a monopolistically competitive market, which of the following is true about the demand curve faced by an individual firm?

• It is perfectly elastic.

• It is perfectly inelastic.

• It is downward sloping.

• It is upward sloping.

Which of the following is a characteristic of a natural monopoly?

• High fixed costs and low marginal costs.

• Low fixed costs and high marginal costs.

• High fixed costs and high marginal costs.

• Low fixed costs and low marginal costs.

What happens to consumer surplus when a monopolist increases its price above the competitive level?

• Consumer surplus increases.

• Consumer surplus decreases.

• Consumer surplus remains unchanged.

• Consumer surplus becomes negative.