Page 708 - Krugmans Economics for AP Text Book_Neat

Module 67 AP Review

Solutions appear at the back of the book.
Check Your Understanding

1. Suppose a monopolistically competitive industry composed of 3. Indicate whether the following statements are true or false, and
firms with U-shaped average total cost curves is in long-run explain your answers.
equilibrium. For each of the following changes, explain how the a. Like a firm in a perfectly competitive industry, a firm in a
industry is affected in the short run and how it adjusts to a new monopolistically competitive industry is willing to sell a
long-run equilibrium. good at any price that equals or exceeds marginal cost.
a. a technological change that increases fixed cost for every b. Suppose there is a monopolistically competitive industry in
firm in the industry long-run equilibrium that possesses excess capacity. All the
b. a technological change that decreases marginal cost for every firms in the industry would be better off if they merged into
firm in the industry a single firm and produced a single product, but whether
consumers would be made better off by this is ambiguous.
2. Why is it impossible for firms in a monopolistically competitive
c. Fads and fashions are more likely to arise in industries
industry to join together to form a monopoly that is capable of
characterized by monopolistic competition or oligopoly
maintaining positive economic profit in the long run?
than in those characterized by perfect competition or
monopoly.

Tackle the Test: Multiple-Choice Questions

1. Which of the following is a characteristic of monopolistic 4. Which of the following best describes a monopolistic
competition? competitor’s demand curve?
a. a standardized product a. upward sloping
b. many sellers b. downward sloping
c. barriers to entry c. U-shaped
d. positive long-run profits d. horizontal
e. a perfectly elastic demand curve e. vertical
2. Which of the following results is possible for a monopolistic 5. The long-run outcome in a monopolistically competitive
competitor in the short run? industry results in
I. positive economic profit a. inefficiency because firms earn positive economic profits.
II. normal profit b. efficiency due to excess capacity.
III. loss c. inefficiency due to product diversity.
a. I only d. efficiency because price exceeds marginal cost.
b. II only e. a trade-off between higher average total cost and more
c. III only product diversity.
d. I and II only
e. I, II, and III
3. Which of the following results is possible for a monopolistic
competitor in the long run?
I. positive economic profit
II. normal profit
III. loss
a. I only
b. II only
c. III only
d. I and II only
e. I, II, and III

666 section 12 Market Structures: Imperfect Competition