4.1.5.4 Monopolistic competition Quiz: AQA Economics, Unit 1

The 20 questions

1. The main characteristics of monopolistically competitive markets include:

   • Many firms, differentiated products and relatively easy entry and exit
   • One firm controlling all supply with no close substitutes, which allows the firm to restrict output and charge the price it chooses
   • Identical products, one seller and high barriers to entry
   • A few interdependent firms with no product differentiation

2. In the short run, a monopolistically competitive firm maximises profit where:

   • P = MC, on a perfectly elastic demand curve, so that the firm sells any quantity it likes at the single market price in every period
   • MR = MC, on a downward-sloping but relatively elastic demand curve
   • AR = AC at the minimum point of average cost, which is the level of output where the firm earns a normal profit in the short run
   • MC = AVC at the shutdown point, below which the firm stops producing because it cannot cover its variable costs in the period

3. In the long run, a monopolistically competitive firm earns:

   • Abnormal profit indefinitely
   • Losses permanently, since each firm faces a downward-sloping demand curve that never allows it to recover the full cost of its
   • Abnormal profit only if it was the first firm to enter the market
   • Normal profit only, because new entrants shift each firm's demand curve to the left

4. Non-price competition in monopolistic competition includes:

   • Setting a lower price than all rivals permanently
   • Charging different prices to different age groups
   • Colluding with rivals over output levels
   • Advertising, branding and product design

5. Why does a monopolistically competitive firm's demand curve slope downward?

   • Its product differs from rivals', so it can raise price slightly without losing all its customers
   • Demand for every brand is perfectly inelastic
   • Consumers buy only the cheapest product in the market
   • The firm is a price taker facing a horizontal demand curve

6. In long-run equilibrium of monopolistic competition, price is:

   • Above marginal cost but equal to average total cost
   • Below average total cost, causing losses
   • Equal to marginal cost, so allocative efficiency is achieved
   • Equal to minimum average total cost, so productive efficiency is achieved

7. A monopolistically competitive firm sells 500 units at £14, with average total cost of £12. Its profit per unit and total profit are:

   • £2 per unit and £1,000 in total
   • £2 per unit and £2,000 in total
   • £12 per unit and £6,000 in total
   • £14 per unit and £7,000 in total

8. Which is a difference between monopolistic competition and perfect competition in the long run?

   • Monopolistic competitors face a perfectly elastic demand curve for their product
   • Perfectly competitive firms are price makers in the long run
   • Monopolistic competitors produce below minimum average cost, while perfectly competitive firms produce at it
   • Perfectly competitive firms earn abnormal profit in the long run

9. Why is monopolistic competition often said to involve excess capacity?

   • Firms produce above the output at minimum average cost
   • Firms always operate at full capacity with zero fixed costs
   • Firms produce below the output at minimum average cost, leaving spare capacity in the long run
   • Excess capacity arises only when firms collude on output

10. A monopolistically competitive firm uses advertising to shift its demand curve to the right. What is the likely effect on profit?

    • Profit may rise in the short run, but rivals may respond with their own advertising
    • Profit is unaffected because demand curves cannot shift in response to any kind of promotional activity
    • Profit always falls because advertising raises price permanently
    • Profit rises permanently because rivals cannot respond to the firm's campaign

11. Brand loyalty in monopolistic competition is important because it:

    • Makes demand less elastic, allowing the firm to charge a higher price
    • Reduces average fixed costs to zero at every output
    • Makes demand perfectly elastic, forcing the firm to accept the market price
    • Eliminates all competition among firms in the market

12. Which statement best evaluates whether monopolistic competition is socially efficient?

    • It is socially efficient because price equals marginal cost in every period
    • It is not fully allocatively or productively efficient, but product variety may give consumers benefits
    • It is productively efficient but allocatively inefficient only in the short run
    • It is fully efficient because firms earn normal profit in the long run

13. A monopolistic competitor's demand curve is more elastic if:

    • Consumers see the product as unique with few alternatives
    • Many close substitutes are available from rivals
    • Advertising has made the brand name very well known
    • The firm has strong brand loyalty among its customers

14. Entry and exit in monopolistic competition are:

    • Blocked by patents and economies of scale, so that existing firms keep their share of the market for as long as they wish
    • Available only to firms that control key inputs, which means new firms cannot enter unless they buy the inputs from incumbents
    • Relatively easy, so abnormal profit is competed away in the long run
    • Impossible without government licences, which are issued only to firms that can show they will not compete on price with others

15. A café chain differentiates itself through location, decor and menu. This is an example of:

    • Pure monopoly, since the chain controls its own menu
    • Product differentiation in monopolistic competition
    • Collusion among oligopolists over prices
    • Perfect competition, since all cafés sell the same coffee

16. A rival launches a near-identical product. What happens to demand for the original brand?

    • Demand shifts right because the rival's marketing helps the original
    • Demand becomes more elastic and shifts to the left
    • Demand becomes perfectly inelastic, raising the original brand's sales
    • Demand is unaffected because brands cannot compete on price

17. Which feature distinguishes non-price competition from price competition?

    • It is used only by firms in perfectly competitive markets, where firms are unable to change the price of the goods they sell at all
    • It requires government approval for every change
    • It competes on quality, branding or service rather than on the headline price
    • It involves changes only in the price of substitute goods, so that firms compete by changing the prices of products sold by others

18. A monopolistically competitive firm's long-run equilibrium has price equal to average total cost. Why is productive efficiency not achieved?

    • The firm earns abnormal profit that prevents efficiency
    • Output is below the minimum point of average total cost, so the firm is not producing at lowest cost
    • Average total cost is rising as output increases, which means that the firm would have to cut output to reach its lowest possible cost
    • Output is at minimum average total cost but price exceeds marginal cost

19. Which is the best example of monopolistic competition?

    • Hairdressers in a town, each offering slightly different services at slightly different prices
    • Two mobile networks that set their prices jointly across the whole country, so that customers face the same tariff from either supplier
    • A single water company supplying an entire region under a long-term licence
    • Farmers selling identical wheat at the world price, with thousands of growers each selling a tiny share of the total world output

20. Why is a monopolistic competitor's price elasticity of demand higher than a monopolist's, but lower than a perfectly competitive firm's?

    • It has many close substitutes but its product is not identical, so demand is elastic but not perfectly elastic
    • Its demand is perfectly elastic because it is a price taker
    • Its demand is unit elastic at every level of output
    • It has no substitutes, so demand is perfectly inelastic and buyers must pay whatever price the firm chooses

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