Multiple Choice Questions For Monopolistic Competition

Multiple Choice Questions for Monopolistic Competition

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Suppose local taverns (bars) and the legal profession are both characterized as monopolistic competition with free entry, so in long run equilibrium economic profits will be the same in the two industries. Suppose a study shows that, even in this setting, on average, lawyers have much higher incomes than tavern owners. How can we explain this seeming inconsistency?
1. lawyers define profit differently than tavern owners do.
2. lawyers are better at investing money than tavern owners so the forgone interest on their investment is higher than it is for tavern owners.
3. Attorneys don't have to pay for liquor licenses and deal with health inspectors and so their costs of doing business will always be lower.
4. Being a tavern owner is more fun than being a lawyer,and tavern owners don't need to pay themselves as large a salary since their opportunity costs are zero.
5. Due to the higher level of education of the typical attorney relative to the typical bar owner, their forgone salary is higher. Thus, to make zero profit a lawyer must have a higher income than a tavern owner.
Answer for 1
Consider a monopolistically competitive firm. From the point of view of remaining firms, as firms leave the industry we can think of this as a:
1. shift out in each individual firm's demand curve.
2. shift back in each individual firm's MC curve.
3. shift up in each individual firm's AC curve.
4. shift back in each individual firm's supply curve.
5. shift back in each individual firm's MR curve.
Answer for 2
Which of the following describes long run equilibrium for a firm in monopolistic competition with free entry?
1. Marginal Revenue = Average Total Cost, Price > Marginal Cost.
2. Price > Average Total Cost, Price = Marginal Cost.
3. Price > Average Total Cost, Marginal Revenue = Marginal Cost.
4. Price = Average Total Cost, Marginal Revenue > Marginal Cost.
5. Price = Average Total Cost, Price > Marginal Cost.
Answer for 3
Figure 1
For the monopolistically competitive firm depicted in Figure 1 the profit maximizing quantity and price are:
1. Q = 19, P = 30
2. Q = 15, P = 27
3. Q = 15, P = 20
4. Q = 25, P = 15
5. Q = 25, P = 18
Answer for 4
As depicted, this firm is earning an economic profit of:
1. 105
2. 75
3. zero
4. -105
5. -75
Answer for 5
Compared with the results in Figure 1, in the long run, in a market with free entry, the firm will:
1. Charge a higher price and produce a larger quantity
2. Charge a higher price and produce a smaller quantity
3. Charge a lower price and produce a smaller quantity
4. Charge a lower price and produce a larger quantity
5. The long run result is the same as original result
Answer for 6
Suppose bars in the town of Chapel Arbor can be thought of as a monopolistically competitive industry. Suppose that a group of well meaning citizens is campaigning to have no more new liquor licenses issued in Chapel Arbor, meaning that no new bars can be opened unless a license is purchased from an existing bar. Suppose also that demand has increased such that, if there are no new licenses, the typical bar owner can expect to earn $5,000 profit per year. If the interest rate is 5% what is the most money the typical bar owner would be willing to contribute to make certain that the group is successful in making sure no new licenses are issued. (Hint: they would be willing to contribute an amount almost as large as the value of a license).
1. just under $50,000.
2. just under $25,000.
3. just under $500,000.
4. just under $20,000.
5. just under $100,000.
Answer for 7
Suppose we imagine that bars in Madistin can be characterized as a monopolistically competitive industry with free entry. Suppose that the legal drinking age is lowered to 19. Our best short run prediction is that: (Unfortunately there seems to be evidence that such changes lead to increased numbers of alcohol related highway deaths)
1. bars will increase prices to keep out the new drinkers.
2. bars will experience a reduction in profit due to the increased costs of serving more patrons.
3. bars will become more profitable due to the increase in demand.
4. more bars will be opened.
5. many bars will close.
Answer for 8
Again, consider the lowering of the drinking age as stated in the prior problem. Our best long run prediction for such an industry is that:
1. due to the reduction in profitability, bars will start to close reducing demand for the remaining bars.
2. due to the increase in profitability more bars will be opened reducing demand for remaining bars.
3. due to the reduction in profitability, bars will start to close increasing demand for the remaining bars.
4. due to the increase in profitability more bars will be opened increasing demand for remaining bars.
5. there will be no change in the number of bars in the long run.
Answer for 9
Once more considering the effect of a reduction in the drinking age on the bar business. Comparing a new long run equilibrium with the old we expect:
1. More bars, but profits are back to zero.
2. Fewer bars but profits are back to zero.
3. The same number of bars but profits are higher.
4. Fewer bars but profits are higher.
5. More bars, but with positive profits.
Answer for 10
Suppose that lowering the drinking age is accompanied with a strict limit on liquor licenses in Madistin so that no more liquor licenses can be had in the Madistin area. However, if a bar owners choose to go out of business she may sell her license. Suppose the typical bar owner could earn $35,000 annually in her next best job but earns $55,000 as a bar owner after the drinking age change. If typical investments pays 10% roughly what would a liquor license sell for?
1. 550,000.
2. $5.5 million.
3. $200,000.
4. $2 million.
5. $20,000.
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