3.4.3 Monopolistic competition Quiz: Pearson Edexcel Economics A, Unit 3

The 20 questions

1. Which set of characteristics describes monopolistic competition?

   • Many firms, differentiated products, low barriers to entry and some price-setting power
   • Identical goods sold by price-taking firms in the market
   • A few firms that collude to set a common price for all
   • A single seller with no close substitutes for its product

2. A firm in monopolistic competition faces a demand curve that is:

   • Downward sloping, and relatively elastic because of many close substitutes
   • Perfectly elastic at the market price, like a price taker
   • Perfectly inelastic, so the firm can raise price freely
   • Vertical, so the firm sells a fixed quantity regardless of price

3. In the short run, a monopolistically competitive firm produces where:

   • MC equals MR, with price set above MC from the demand curve, possibly giving supernormal profit
   • Output is always at the minimum point of ATC
   • AR equals AC at the output the firm chooses
   • Price is set equal to MC at every output level

4. In the long run in monopolistic competition, the equilibrium is reached where:

   • Firms exit until only one firm remains in the market
   • Entry drives demand down until AR is tangent to ATC, so firms earn normal profit only
   • Firms make permanent supernormal profit because they are differentiated
   • Demand rises to meet supply as new firms enter the market

5. Monopolistically competitive firms in long-run equilibrium typically operate with:

   • Zero fixed costs in all periods of production
   • Output where total revenue is maximised for the firm
   • Output at the minimum efficient scale in every case
   • Excess capacity, producing below the output that minimises average cost

6. Which is an example of monopolistic competition?

   • A national electricity grid with a single supplier in the country
   • A single water company supplying one region under a licence
   • Restaurants in a city offering different menus and styles
   • Wheat farming where every farmer sells an identical crop

7. Why do firms use product differentiation?

   • To create identical products that buyers cannot tell apart
   • To eliminate all competition from rival firms in the market
   • To make demand perfectly elastic and so match the price-taking firm
   • To make demand less elastic by creating brand loyalty and some pricing power

8. Which is a key difference between monopolistic competition and perfect competition?

   • Firms in monopolistic competition face downward sloping demand and set their own price
   • Firms in monopolistic competition are always price takers in the market
   • Firms in monopolistic competition sell identical products to all buyers
   • Firms in monopolistic competition face horizontal demand at the market price

9. Why is monopolistic competition less allocatively efficient than perfect competition?

   • Firms have no fixed costs, so efficiency is not affected
   • Price is above marginal cost because firms have some price-setting power
   • Output is always above minimum ATC in the long run
   • Price equals marginal cost in every case under monopolistic competition

10. A restaurant has price £20 and average total cost £15 at an output of 100 meals. What is its supernormal profit?

    • £500
    • £2,000
    • £100
    • £1,500

11. Why might a differentiated firm earn supernormal profit in the short run?

    • It is protected by a legal monopoly over its product
    • Its demand is perfectly elastic at every price it sets
    • Its differentiated offer gives it pricing power while demand is high
    • Its costs of production are zero in the short run

12. Which is a benefit of monopolistic competition to consumers?

    • The lowest possible price at all times in every market
    • Zero spending on advertising by any firm in the market
    • Productive efficiency always achieved in every market
    • Variety and choice among differentiated products

13. Why do firms in monopolistic competition advertise?

    • Because they are price takers with no control over price
    • To differentiate their products and make demand less elastic
    • Because advertising is required by law for every firm
    • Because their products are identical in every respect

14. In long-run equilibrium under monopolistic competition, which holds?

    • P is permanently above AC, so supernormal profit persists
    • MC equals zero for every firm at the equilibrium output
    • P is below AC, so firms make losses in the long run
    • P equals AC at the output where MR equals MC, so there is no supernormal profit

15. Evaluate: is monopolistic competition efficient?

    • No, it is inefficient only through X-inefficiency in every firm
    • Yes, because firms earn zero profit in the short run
    • Not fully: P > MC gives allocative inefficiency and excess capacity means productive inefficiency, though variety has benefits
    • Yes, fully efficient in every respect for consumers and firms

16. A firm faces demand P = 50 - Q and total cost TC = 100 + 10Q. What output maximises profit?

    • Q = 20
    • Q = 40
    • Q = 25
    • Q = 10

17. Using the same firm (P = 50 - Q, TC = 100 + 10Q) at Q = 20, what is supernormal profit?

    • £0
    • £200
    • £300
    • £600

18. Why does long-run entry reduce demand for each existing firm?

    • Entry raises marginal revenue for each existing firm in the market
    • New rivals increase demand for each existing firm's product
    • New differentiated rivals take market share, shifting each firm's demand curve to the left
    • Entry shifts demand to the right for every firm in the market

19. After entry, a firm's demand becomes more elastic. What is the effect?

    • The firm has less pricing power, so its profit-maximising price falls and profit may decline
    • Demand becomes perfectly inelastic, so the firm can raise price freely
    • Profit rises with more competitors in the same market
    • The firm gains more pricing power and sets a higher price

20. Excess capacity in long-run monopolistic competition means that:

    • Firms cannot sell any of their output at the market price
    • Firms produce at the minimum efficient scale in every case
    • Firms operate at minimum ATC in the long-run equilibrium
    • Firms operate where ATC is still falling, so output is below the cost-minimising level

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