mankiw chapter 16 answer key

Advanced Placement MicroeconomicsMs. 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 PTS: 1 DIF: 2 REF: 16-0NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competitionMSC: Analytical

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 REF: 16-1NAT: Analytic LOC: Monopolistic competitionTOP: Monopolistic competition | Monopoly 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) oligopoly

a. (i) onlyb. (ii) onlyc. (i) and (ii) onlyd. (ii) and (iii) onlye. (i), (ii), and (iii)

ANS: C PTS: 1 DIF: 1 REF: 16-1NAT: Analytic LOC: Monopolistic competitionTOP: Monopolistic competition | Perfect competition 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. (i) and (ii) onlyb. (ii) and (iii) onlyc. (iii) onlyd. (ii) onlye. (i) only

ANS: E PTS: 1 DIF: 2 REF: 16-1NAT: Analytic LOC: Monopolistic competition TOP: Perfect competitionMSC: Interpretive

5. Monopolistic competition is characterized by which of the following attributes?(i) free entry

(ii) product differentiation(iii) many sellers

a. (ii) onlyb. (i) and (ii) onlyc. (i) and (iii) onlyd. (ii) and (iii) onlye. (i), (ii), and (iii)

ANS: E PTS: 1 DIF: 1 REF: 16-1NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competitionMSC: Definitional

6. One key difference between an oligopoly market and a competitive market is that oligopolistic firmsa. 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 REF: 16-1NAT: Analytic LOC: Monopolistic competitionTOP: Monopolistic competition | Oligopoly MSC: Interpretive

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. (i) and (ii) onlyb. (ii) and (iii) onlyc. (i) and (iii) onlyd. (ii) onlye. (iii) only

ANS: C PTS: 1 DIF: 2 REF: 16-1NAT: Analytic LOC: Monopolistic competition TOP: OligopolyMSC: Interpretive

8. An oligopoly is a market in whicha. 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: 16-1NAT: Analytic LOC: Monopolistic competition TOP: OligopolyMSC: Definitional

9. Monopolistic competition is characterized by (i) efficient scale

(ii) markup pricing over marginal cost(iii) deadweight loss(iv) excess capacity

a. (i) and (ii) onlyb. (ii) and (iv) onlyc. (i), (ii), and (iii) onlyd. (ii), (iii), and (iv) onlye. (i), (ii), (iii), and (iv)

ANS: D PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competitionTOP: Deadweight loss | Excess capacity MSC: Analytical

10. Monopolistic competition is ana. 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 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Welfare | Deadweight lossMSC: Interpretive

11. The deadweight loss that is associated with a monopolistically competitive market is a result ofa. 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 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: WelfareMSC: Interpretive

12. Both monopolistic competition and oligopoly are market structuresa. that fail to achieve the total surplus achieved by perfect competition.b. that feature only a few firms in each market.c. to which the concept of Nash equilibrium is frequently applied by economists.d. in which firms earn zero economic profit in the long run.

e. in which firms earn positive economic profit in the long run.

ANS: A PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competitionTOP: Monopolistic competition | Welfare MSC: Interpretive

13. A monopolistically competitive firma. 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 REF: 16-2NAT: Analytic LOC: Monopolistic competitionTOP: Deadweight loss | Excess capacity MSC: Interpretive

14. A monopolistically competitive firm has the following cost structure:

Output 1 2 3 4 5 6 7Total Cost($) 30 32 36 42 50 63 77

The firm faces the following demand curve:

Price ($) 20 18 15 12 9 7 4Quantity 1 2 3 4 5 6 7

If the government forces this firm to produce at its efficient scale, it willa. 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 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Efficient scaleMSC: Applicative

Figure 16-4

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 onlyb. panel b onlyc. panel c onlyd. panel d onlye. panel a and panel b

ANS: C PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibriumMSC: Interpretive

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 onlyb. panel b onlyc. panel c onlyd. panel d onlye. panel a and panel b

ANS: B PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibriumMSC: 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 onlyb. panel b onlyc. panel c onlyd. panel d onlye. panel a and panel b

ANS: A PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Short-run equilibriumMSC: 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 onlyb. panel b onlyc. panel c onlyd. panel d onlye. panel b and panel c

ANS: C PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competitionMSC: 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 ab. panel bc. panel cd. All of the above are correct.e. None of the above is correct.

ANS: D PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competitionMSC: Interpretive

Table 16-5Traci’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 REVENUESQuantityProduced

TotalCost

MarginalCost

QuantityDemanded Price

TotalRevenue

MarginalRevenue

0 $10 -- 0 $50 --

1 $15 1 $45 2 $21 2 $40 3 $28 3 $35 4 $36 4 $30 5 $45 5 $25 6 $55 6 $20 7 $66 7 $15 8 $78 8 $10

20. Refer to Table 16-5. What is the profit-maximizing output for Traci’s Hair Styling?a. three haircutsb. four haircutsc. five haircutsd. six haircutse. eight haircuts

ANS: B PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Profit maximizationMSC: Applicative

21. Refer to Table 16-5. When maximizing profit, what price does Traci’s charge for a haircut?a. $10b. $20c. $25d. $30e. $35

ANS: D PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Profit maximizationMSC: Applicative

22. Refer to Table 16-5. At the profit-maximizing quantity, what is Traci’s total profit?a. $30b. $59c. $68d. $77e. $84

ANS: E PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Profit maximizationMSC: Applicative

23. Refer to Table 16-5. Given the cost and revenue data, Traci’s isa. 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 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibriumMSC: Interpretive

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 fourb. either four or fivec. either five or sixd. either six or sevene. either seven or eight

ANS: B PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Efficient scaleMSC: 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. $68b. $77c. $80d. $84e. $96

ANS: D PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Efficient scaleMSC: Applicative

26. Consider a monopolistically competitive firm in a market in long-run equilibrium. This firm is likely earninga. 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 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibriumMSC: 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.


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 PTS: 1 DIF: 3 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibriumMSC: 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.


30. Which two curves are tangent to each other in a monopolistically competitive market with zero economic profit?a. demand and average variable costb. demand and average total costc. marginal revenue and average variable costd. marginal revenue and average total coste. marginal revenue and marginal cost.

ANS: B PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibriumMSC: Interpretive

31. When a new firm enters a monopolistically competitive market, the individual demand curves faced by all existing firms in that market willa. 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 REF: 16-2NAT: Analytic LOC: Monopolistic competitionTOP: Demand curve | Long-run equilibrium MSC: Analytical

32. When a firm's demand curve is tangent to its average total cost curve, thea. 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.


33. The free entry and exit of firms in a monopolistically competitive market guarantees thata. 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.


34. In monopolistically competitive markets, economic lossesa. 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.


35. In monopolistically competitive markets, positive economic profitsa. 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.


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. (i) onlyb. (ii) onlyc. (i) and (ii) onlyd. (ii) and (iii) onlye. (i), (ii), and (iii)

ANS: C PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibriumMSC: Interpretive

37. Which of the following conditions is characteristic of a monopolistically competitive firm in long-run equilibrium?a. P > MR and P = MCb. ATC = demand and MR = MCc. P < MC and demand = ATCd. P > ATC and demand > MRe. AVC = demand and MR = MC

ANS: B PTS: 1 DIF: 3 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibriumMSC: 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 onlyb. panel b onlyc. panel c onlyd. panel d onlye. panel c and panel d


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 onlyb. panel b onlyc. panel c onlyd. panel d onlye. panel a and panel b

ANS: B PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competitionMSC: Interpretive

40. Refer to Figure 16-5. Which of the graphs depicts a monopolistically competitive firm in long-run equilibrium?a. panel ab. panel bc. panel cd. panel de. None of the above is correct.

ANS: E PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Long-run equilibriumMSC: Interpretive

Figure 16-3

MRD

MC

ATC

5 10 15 20 25 30 35 40 Quantity

100

200

300

400

500

600

700

800

900

1000$

41. Refer to Figure 16-3. The firm in this figure is monopolistically competitive. It illustratesa. the shut-down case.b. a long-run economic profit.

c. a short-run economic profit.d. a short-run loss.e. break even.


42. Refer to Figure 16-3. Assume the firm in the figure is currently producing eight units of output and charging $400. The firma. 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 PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Profit maximizationMSC: Analytical

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

MR

Demand

MC18

12

4 8 12 16 20 24 28 32 Q

8

16

24

32P

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

ANS: B PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization

MSC: Applicative

44. Refer to Figure 16-1. In order to maximize profit, the firm will charge a price ofa. $8.b. $12.c. $16.d. $18.e. $24.


45. Refer to Figure 16-1. Suppose that average total cost is $18 when Q=12. What is the profit-maximizing price and resulting profit?a. P=$12, profit=$0b. P=$18, profit=$72c. P=$18, profit=$24d. P=$18, profit=$0e. P=$12, profit=$24


46. Refer to Figure 16-1. If the average total cost is $15 at the profit-maximizing quantity, then the firm’s maximum profit isa. $18.b. $24.c. $36.d. $45.e. $60.

ANS: C PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Profit maximizationMSC: 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 isa. $-30.b. $22.c. $36.d. $42.

e. $60.


Figure 16-2This 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=$200b. P=$80, Q=20 units, profit=$200c. P=$75, Q=25 units, profit=$100d. P=$60, Q=40 units, profit=$0e. P=$70, Q=20 units, profit=$200

ANS: B PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Profit maximizationMSC: 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. $200.00b. $312.50c. $400.00d. $600.00

e. $800.00

ANS: A PTS: 1 DIF: 3 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Profit maximizationMSC: Analytical

50. Refer to Figure 16-2. How much output will the monopolistically competitive firm produce in this situation?a. twenty unitsb. twenty-five unitsc. forty unitsd. eighty unitse. one hundred units

ANS: A PTS: 1 DIF: 2 REF: 16-2NAT: Analytic LOC: Monopolistic competition TOP: Profit maximizationMSC: 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 profit-maximizing level of output.

ANS:

PTS: 1 DIF: 2 REF: 16-2 NAT: AnalyticLOC: Monopolistic competition TOP: Excess capacity

MSC: Analytical

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 REF: 16-3 NAT: AnalyticLOC: Monopolistic competition TOP: Advertising MSC: Analytical

mankiw chapter 16 answer key

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