Q: Suppose Blue Bottle Coffee reduces the price of its cappuccinos from $$3.50 to 3.00 $$and sells one additional cup. What is the marginal revenue from selling this extra cup if it loses $0.50 on each of the 5 cups it would have sold at the higher price?

$$3.00 - (5 \times 0.50) = 0.50$$

Question 1

Which of the following best explains why a monopolistically competitive firm faces a downward-sloping demand curve?

Accepted Answer

Because the firm sells a differentiated product, so some customers are willing to pay more for its product than for competitors’ products.

Question 2

Suppose Blue Bottle Coffee reduces the price of its cappuccinos from $$3.50 to 3.00 $$and sells one additional cup. What is the marginal revenue from selling this extra cup if it loses $0.50 on each of the 5 cups it would have sold at the higher price?

Accepted Answer

$$3.00 - (5 	imes 0.50) = 0.50$$

Question 3

A monopolistically competitive firm maximizes profit in the short run by producing the quantity at which:

Accepted Answer

$$MR = MC$$

Question 4

In the long run, what happens to the economic profit of a monopolistically competitive firm if it does not innovate or further differentiate its product?

Accepted Answer

It will earn zero economic profit as new firms enter and demand for its product decreases.

Question 5

Which of the following is NOT a characteristic of monopolistic competition?

Accepted Answer

Identical products

Question 6

If a monopolistically competitive firm is earning a profit in the short run, what will likely happen in the market in the long run?

Accepted Answer

New firms will enter, decreasing the demand for the original firm's product.

Question 7

Which of the following equations represents the profit per unit for a monopolistically competitive firm?

Accepted Answer

$$Profit\ per\ unit = P - ATC$$

Question 8

In the long run, the demand curve for a monopolistically competitive firm becomes:

Accepted Answer

More elastic due to increased competition.

Question 9

Which of the following best describes productive efficiency?

Accepted Answer

Producing at the lowest possible average total cost

Question 10

Why does a monopolistically competitive firm have excess capacity in the long run?

Accepted Answer

Because it produces less than the output at which average total cost is minimized.

Question 11

Which of the following is a real-world example of product differentiation in monopolistic competition?

Accepted Answer

A coffee shop offering unique blends and ambiance compared to other coffee shops.

Question 12

Which of the following is a key function of advertising for a monopolistically competitive firm?

Accepted Answer

To increase demand and make the demand curve less elastic.

Question 13

Suppose a monopolistically competitive firm is able to lower its average total cost below that of its competitors. In the long run, this will:

Accepted Answer

Allow the firm to earn positive economic profit, at least temporarily.

Question 14

Which of the following statements about the long-run equilibrium in monopolistic competition is correct?

Accepted Answer

Firms break even, earning zero economic profit.

Question 15

Allocative efficiency is achieved when:

Accepted Answer

$$P = MC$$

Question 16

Which of the following is an example of brand management in monopolistic competition?

Accepted Answer

A firm investing in advertising to maintain the perception that its product is unique.

Question 17

Suppose a new coffeehouse enters the market and offers a similar product to Blue Bottle Coffee. What is the most likely effect on Blue Bottle’s demand curve?

Accepted Answer

The demand curve will shift to the left and become more elastic.

Question 18

Which of the following factors is NOT directly under a firm’s control but can affect its profitability?

Accepted Answer

Chance events and factors beyond the firm’s control

Question 19

Which of the following best describes the 'first-mover advantage' in monopolistic competition?

Accepted Answer

The first firm to enter a market may gain an initial advantage, but long-term success depends on providing value to customers.

Monopolistic Competition: The Competitive Model in a More Realistic Setting

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