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Microeconomics: Principles, Applications, & Tools, 7e (O'Sullivan) – Testbank 1 Chapter 11 Market Entry and Monopolistic Competition 11.1 Effects of Market Entry 1) When a second firm enters a monopolist's market: A) market price will drop. B) sales for the first firm will rise. C) the first firm's profits will increase. D) All of the above will occur. Answer: A Diff: 1 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking 2) When a second firm enters a monopolist's market: A) market price will rise. B) the quantity produced by the first firm will decrease. C) the first firm's profits increase. D) All of the above will occur. Answer: B Diff: 1 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking 3) When a second firm enters a monopolist's market: A) market price will rise. B) the quantity produced by the first firm will increase. C) the first firm's profits will decrease. D) All of the above will occur. Answer: C Diff: 1 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking 4) When a second firm enters a market, the original firm's profits decline because: A) the original firm's price decreases. B) the original firm's ATC increases. C) the original firm's quantity decreases. D) All of the above are correct. Answer: D Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking 1 Copyright © 2012 Pearson Education, Inc.

5) When a second firm enters a monopolist's market, the initial demand curve facing the monopolist will: A) shift to the left. B) shift to the right. C) remain the same. D) none of the above Answer: A Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Analytical AACSB: Analytic Skills 6) When a second firm enters a monopolist's market, the monopolist's marginal revenue curve will: A) shift to the left as its initial demand curve shifts to the left. B) shift to the right as its initial demand curve shifts to the right. C) remain the same. D) none of the above Answer: A Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Analytical AACSB: Analytic Skills 7) When a second firm enters a monopolist's market, A) the former monopolist's average cost decreases as its output level decreases. B) the demand curve the former monopolist faces shifts to the left. C) the market price rises as the average cost increases. D) none of the above Answer: B Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking 8) When a second firm enters a monopolist's market, A) the former monopolist's average cost increases as its output level decreases. B) the demand curve facing the former monopolist shifts to the right. C) the market price rises as the average cost increases. D) none of the above Answer: A Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking

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9) When a second firm enters a monopolist's market, A) the former monopolist's average cost decreases as its output level decreases. B) the demand curve facing the former monopolist shifts to the right. C) the market price falls. D) none of the above Answer: C Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking 10) When the government eliminates artificial barriers to entry: A) more firms will enter the market. B) prices to consumers will likely increase. C) competition in the market will decrease. D) All of the above will occur. Answer: A Diff: 2 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Conceptual AACSB: Reflective Thinking 11) When the government eliminates artificial barriers to entry: A) firm profits will rise. B) prices to consumers will likely decrease. C) competition in the market will decrease. D) All of the above will occur. Answer: B Diff: 1 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Conceptual AACSB: Reflective Thinking 12) Empirical studies indicate that entry: A) increases price and profits. B) decreases price, but increases profits. C) decreases price and profits. D) increases price, but decreases profits. Answer: C Diff: 1 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Fact

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13) Empirical studies suggest that when a large number of firms are present in a market, prices are usually ________ and profits are usually ________ than when there are only a few firms in a market. A) lower; higher B) lower; lower C) higher; higher D) higher; lower Answer: B Diff: 2 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Fact 14) Studies of real world markets suggest that prices and the number of firms of comparable size in a market are: A) positively related. B) negatively or inversely related. C) not related. D) sometimes negatively or inversely related, but usually positively related. Answer: B Diff: 2 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Fact 15) After the U.S. government deregulated the trucking industry: A) profits rose. B) freight prices rose. C) freight prices fell. D) the number of trucking companies decreased. Answer: C Diff: 1 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Fact 16) European nations are currently deregulating many markets. They are expecting: A) the price of goods sold in these markets to increase. B) the quality of goods sold in these markets to decrease. C) the price of goods sold in these markets to decrease. D) the profits of firms selling in these markets to increase. Answer: C Diff: 1 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Conceptual AACSB: Reflective Thinking

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17) The Motor Carrier Act of 1980 removed the government's restriction on: A) entry into the trucking industry. B) the size of trucks used to transport goods and services. C) entry into the industry that produces delivery trucks. D) entry into parcel delivery. Answer: A Diff: 1 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Fact 18) The Motor Carrier Act of 1980 resulted in: A) lower freight prices. B) more firms entering the trucking industry. C) lower value of a trucking license. D) All of the above are correct. Answer: D Diff: 1 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Fact 19) When the Motor Carrier Act of 1980 was made into law, new firms entered into the trucking industry. This action by new trucking firms confirm that: A) the trucking industry was earning profits in the long run prior to the entry of the new firms. B) the trucking industry was earning losses in the long run prior to the entry of the new firms. C) the trucking industry was earning profits as a result of the entry of the new firms. D) the trucking industry was earning losses before and after the entry of the new firms. Answer: A Diff: 2 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Conceptual AACSB: Reflective Thinking Recall the Application about the price competition between name brands and store brands to answer the following question(s). 20) Recall the Application. In stores that introduce store brands at a lower price, usually the price of the name brand: A) fell below that of the store brand substitute. B) fell, but stayed above the price of the store brand. C) rose. D) was unaffected. Answer: B Diff: 1 Topic: Application 1, Name Brands versus Store Bands Skill: Fact

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21) Recall the Application. The introduction of store brands is a form of: A) price gouging. B) profiteering. C) market entry. D) all of the above. Answer: C Diff: 2 Topic: Application 1, Name Brands versus Store Bands Skill: Conceptual AACSB: Reflective Thinking 22) Recall the Application. Which of the following is/ are examples of goods with name brands and store brands? A) light bulbs B) aspirin C) disposable diapers D) All of the above are correct. Answer: D Diff: 2 Topic: Application 1, Name Brands versus Store Bands Skill: Conceptual AACSB: Reflective Thinking 23) Recall the Application. Which of the following NOT an example of a good that has both name brands and store brands? A) light bulbs B) aspirin C) disposable diapers D) automobiles Answer: D Diff: 2 Topic: Application 1, Name Brands versus Store Bands Skill: Conceptual AACSB: Reflective Thinking

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Additional Application For many years North Carolina-based Krispy Kreme Doughnuts have been the choice of many Southerners. But now rival Dunkin' Donuts is working on changing the way Southerners expect a doughnut to taste. The Northeastern-based Dunkin' Donuts has plans to become a national brand in the next 15 years by tripling the number of stores in the USA. The difference is in the doughnut itself. Krispy Kreme offers a glazed, hot, lighter doughnut while the product of Dunkin' Donuts can be described as “thicker and cakier.” Do consumers notice the difference? Rosemary Evans from Alabama states, “Dunkin' Donuts just don't have much flavor.” And Jack Lehnhart from Ohio says Krispy Kremes are “wax doughnuts.” As the size of the industry grows the efforts to differentiate each product remain strong. Dunkin' Donuts focuses on coffee and baked goods as important components in its long term business plan. When discussing the two companies and their approaches to success, the brand officer at Dunkin' Donuts succinctly said, “We're very different.” Just take note of the different ways they spell the product they produce! Source: Beth Rucker, “Dunkin' Donuts Raids Krispy Kreme's Turf,” October 22, 2006, http://hosted.ap.org/dynamic/stories/D/DONUT_WARS, accessed10/30/2006. 24) What market structure best describes the doughnut industry discussed in the article above? A) monopolistic competition B) monopoly C) governmental D) perfect competition Answer: A Diff: 1 Topic: Additional Application Skill: Conceptual AACSB: Reflective Thinking 25) Why would Dunkin' Donuts want to keep their product different from Krispy Kreme? A) They do not want Southerners confusing the two doughnuts. B) They want to maintain a specific brand identity. C) They do not have the level of technology to produce a Krispy Kreme-like doughnut. D) They do not want customers to accuse them of stealing trade secrets. Answer: B Diff: 2 Topic: Additional Application Skill: Conceptual AACSB: Reflective Thinking

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26) As more Dunkin' Donuts outlets open in the areas where Krispy Kreme has been dominant, market prices will ________ and profits will ________. A) increase, increase B) increase, decrease C) decrease, increase D) decrease, decrease Answer: D Diff: 2 Topic: Additional Application Skill: Conceptual AACSB: Reflective Thinking 27) The entry of an additional firm into a market decreases the profit per unit of output because entry decreases the price. Answer: TRUE Diff: 1 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking 28) The entry of an additional firm into a market shifts the demand curve for the original firm to the left. Answer: TRUE Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking 29) Entry leads to higher prices and profits in an industry. Answer: FALSE Diff: 1 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking 30) Entry leads reduces firm profits because it leads to a lower price. Answer: TRUE Diff: 1 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking 31) Entry of a second firm will result in a downward shift in the ATC curve. Answer: FALSE Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking 8 Copyright © 2012 Pearson Education, Inc.

32) Empirical studies show that entry into markets increases both price and quantity of goods supplied. Answer: FALSE Diff: 1 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Conceptual AACSB: Reflective Thinking 33) Why does entry into markets decrease firm profits? Answer: Three reasons: 1) the market price drops; 2) the quantity produced by each firm decreases; and 3) entry may cause average cost per unit increases. Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking 34) What are the effects on a market when there is entry? Answer: Market price usually falls, economic profit is reduced and if there is a license required to entry the business its value usually falls. Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking 35) What entices a second firm to enter a market that was previously a single price monopoly? Answer: A firm will enter a market when the incumbent monopolist is earning positive profits in the short run and in the long run. This occurs when the price that the firm charges is higher than the ATC at the profit maximizing quantity. Diff: 2 Topic: Entry Squeezes Profits from Three Sides Skill: Conceptual AACSB: Reflective Thinking 36) Why does the government work to eliminate artificial barriers to entry? Answer: Because if there are economic profits being earned in the industry eliminating artificial barriers to entry will encourage more firms to enter the industry. The increase in competition is expected to decrease price to consumers and improve service. Diff: 2 Topic: Examples of Entry: Car Stereos, Trucking, and Tires Skill: Conceptual AACSB: Reflective Thinking

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11.2 Monopolistic Competition 1) Which of the following is NOT a characteristic of a monopolistically competitive market? A) Firms hold patents on their products. B) The products that firms sell are slightly different. C) Firms have some control over price. D) There are no artificial barriers to entry. Answer: A Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking 2) Which of the following is NOT a characteristic of a monopolistically competitive market? A) There are many firms. B) Firms sell products that are similar but not identical. C) Firms must take the market price as given. D) There are no artificial barriers to entry. Answer: C Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking 3) Which of the following is NOT a characteristic of a monopolistically competitive market? A) There is only one firm selling a product. B) There are many firms selling products that are similar but not identical. C) There are many firms that have some control over price. D) There are no artificial barriers to entry. Answer: A Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking 4) Which of the following is NOT a characteristic of a monopolistically competitive market? A) There are many firms. B) Firms sell differentiated products. C) Firms have control over price. D) There are substantial barriers to entry. Answer: D Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking

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5) A market in which there are many firms each selling differentiated products is most likely a ________ market. A) perfectly competitive B) monopoly C) monopolistically competitive D) natural monopoly Answer: C Diff: 1 Topic: Monopolistic Competition Skill: Definition 6) Which of the following is the reason why pharmaceutical firms are NOT monopolistically competitive? A) Pharmaceutical firms sell differentiated products B) There are many buyers in the market. C) There are many sellers in the market. D) There are barriers to entry in the market, like patents. Answer: D Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking 7) Which of the following is an example of a monopolistically competitive firm? A) Farmer Smith's corn farm B) Tino's Italian eatery, a local restaurant C) TCI Cablevision, a supplier of cable television services D) Northwest Electricity, a supplier of electricity in the Northwest U.S. Answer: B Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking 8) Which of the following is a characteristic of a monopolistically competitive market? I. There are many sellers. II. Firms sell slightly differentiated products. III. Each firm faces a downward-sloping demand curve. A) I only B) I and II only C) II and III only D) I, II, and III Answer: D Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking 11 Copyright © 2012 Pearson Education, Inc.

9) Which of the following is a characteristic of a monopolistically competitive market? I. Each firm is a price-taker. II. Firms sell slightly differentiated products. III. Each firm faces a downward-sloping demand curve. A) I only B) I and II only C) II and III only D) I, II, and III Answer: C Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking 10) Which of the following is a characteristic of a monopolistically competitive market? I. There are many sellers. II. Firms sell slightly differentiated products. III. The demand curve facing each individual firm is horizontal. A) I and II only B) I and III only C) II and III only D) I, II, and III Answer: A Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking 11) Which of the following is NOT an example of a monopolistically competitive firm? A) Farmer Jones's wheat farm B) the Post Cereal Company C) Procter and Gamble, a large consumer products corporation D) T.J.'s Clothes, a local retail clothing store Answer: A Diff: 2 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking

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12) Monopolistically competitive firms do NOT differentiate their products by: A) changing the products' physical characteristics. B) selling products at different locations. C) offering different levels of service that come with a product. D) charging different prices to different groups of consumers. Answer: D Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking 13) Monopolistically competitive firms differentiate their products by: A) selling products with slightly different physical characteristics. B) selling products at different locations. C) creating a special aura or image for the product with advertising. D) all of the above Answer: D Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking 14) Monopolistically competitive firms do NOT differentiate their products by: A) selling products at different locations. B) selling a product with different levels of services accompanying the product. C) convincing consumers that the product is identical to those sold by competitors. D) using advertising to create a special aura or image for the product. Answer: C Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking 15) In Eugene, Oregon, there are several Italian restaurants, each offering slightly different items prepared in slightly different ways. It is likely that an Italian restaurant in Eugene, Oregon, operates in a: A) perfectly competitive market. B) monopolistically competitive market. C) monopoly market. D) oligopoly market. Answer: B Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking

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16) In Washington, D.C., there are many coffee shops, each offering nearly identical coffee but each shop located in a different place around the city. It is likely a coffee shop in Washington, D.C., operates in a: A) perfectly competitive market. B) monopolistically competitive market. C) monopoly market. D) oligopoly market. Answer: B Diff: 1 Topic: Monopolistic Competition Skill: Conceptual AACSB: Reflective Thinking 17) In Sioux Falls, South Dakota, there are many pizza restaurants, each offering similar types of pizza but each restaurant located in a different place aro...