Multiple Choice Questions
1. Which of the following is not a source of product differentiation?
a. Physical differences in products
b. Differences in quantities that firms offer for sale
c. Differences in service provided by firms
d. Differences in location of sales outlets
2. Which of the following characteristics do monopolistic competition and perfect competition have in common?
a. Individual firms believe that they can influence market price.
b. Firms sell brand-name products.
c. Firms are able to earn long-run economic profits.
d. Competing firms can enter the industry easily.
3. Firms in monopolistically competitive industries cannot earn economic profits in the long run because
a. Government regulators, whose first interest is the public good, will impose regulations that limit economic profits.
b. The additional costs of product differentiation will eliminate long-run economic profits.
c. Economic profits will attract competitors whose presence will eliminate profits in the long run.
d. Whenever one firm in the industry begins making economic profits, others will lower their prices, thus eliminating long-run economic profits.
4. Maria’s West Side Bakery is the only bakery on the west side of the city. She is a monopolistic competitor and she is open for business. Which of the following cannot be true of Maria’s profits?
a. She is making an economic profit.
b. She is making neither an economic profit nor a loss.
c. She is making an economic loss that is less than her fixed cost.
d. She is making an economic loss that is greater than her fixed cost.
5. Claire is considering buying the only Hungarian restaurant in Boise, Idaho. The restaurant’s unique food means that it faces a negatively sloped demand curve and is currently earning an economic profit. Why shouldn’t Claire assume that the current profits will continue when she makes her decision?
a. Claire will not earn those profits right away because she doesn’t know much about cooking.
b. The firm is a monopolist, which attracts government regulation.
c. Current economic profits will be eliminated by the entry of competitors.
d. While economic profits are positive, accounting profits may be negative.