Economic Concepts

Question 1

The equation for the graphic plot of a linear economic variable is D = b + m(a). Which of the following represents the value of the "intercept"?
	A.  	D
	B.  	b
	C.  	m
	D.  	a

Answer 1

B. b

In the equation, “b” is a constant and is the value of the intercept, i.e., where the plotted graph intersects the Y axis.

Question 2

Graphs are a means of depicting the relationship between two variables. These variables are usually identified as
	A.  	positive and negative.
	B.  	horizontal and vertical.
	C.  	dependent and independent.
	D.  	qualitative and quantitative.

Answer 2

C. dependent and independent.

The variables depicted in graphs are identified as dependent and independent. The relationship between the two variables (usually the change in the dependent variable as a result of a change in the independent variable) is shown as the graphed line or curve plotted along the horizontal and vertical axes.

Question 3

Which of the following statements regarding the use of graphs to depict economic relationships is not correct?
A. When the dependent variable moves in the same manner or direction as the independent variable, then the relationship between the variables is positive.
B. When the dependent variable does not change as the independent variable changes, the relationship between the variables is neutral.
C. The plotted relationship between variables shown in graph form can be negative, as well as positive.
D. The vertical axis of an economic graph is referred to as the X axis.

Answer 3

D. The vertical axis of an economic graph is referred to as the X axis.

This statement is not correct. The vertical axis of an economic graph is not referred to as the X axis, but rather as the Y axis. The horizontal axis is referred to as the X axis. (Remember: The letter Y has a vertical stem to it (vertical axis); the letter X has no vertical element.)

Question 4

Measures of the economic activity of an entire nation would be included in the study of
	A.  	Microeconomics.
	B.  	Macroeconomics.
	C.  	International economics.
	D.  	Governmental economics.

Answer 4

B. Macroeconomics.

Macroeconomics is concerned with the study of the economic activities of an entire nation (or major sectors of a national economy). It is concerned with such matters as demand/supply, employment/unemployment, inflation/deflation, etc. for an entire country.

Question 5

Which of the following is not a characteristic of a free-market economy?
A. Economic decisions are made by individual decision makers.
B. There is an interdependent relationship between individual consumers and business firms.
C. Economic resources are unlimited.
D. What gets produced depends on the preferences of end-use consumers.

Answer 5

C. Economic resources are unlimited.

Under any economic system, economic resources–labor, capital, and natural resources–are scarce.

Question 6

In a free-market economy, which of the following should be the least significant factor in determining resource allocation and use?
A. Preferences of individuals.
B. Availability of economic resources.
C. Government regulation of commerce.
D. Level of technological development.

Answer 6

C. Government regulation of commerce.

In a free-market economy, government regulation of commerce should be the least significant factor (of those listed) in determining resource allocation and use.

Question 7

The free-market economy flow model depicts four major interrelated flows:

I . Individuals provide economic resources to business firms.

II. Firms provide payment to individuals for economic resources.

III. Firms provide goods and services to individuals.

IV. Individuals provide payment to firms for goods and services.

If financial institutions and businesses suddenly and severely restrict the availability of consumer credit, which one of the above flows would be most likely to be the first to be impacted adversely?
	A.  	I.
	B.  	II.
	C.  	III.
	D.  	IV.

Answer 7

D. IV.

Initially, a sudden and severe restriction in the availability of consumer credit likely would adversely impact the ability of individuals to provide payment to firms for goods and services. The lack of credit likely would reduce consumer demand, which would then begin to impact other flows.

Question 8

Which of the following are considered economic resources?
Labor Capital Natural resources
Yes Yes Yes
Yes Yes No
Yes No No
No Yes Yes

Answer 8

Labor Capital Natural resources
Yes Yes Yes

Labor (human work, etc.), capital (financial and man-made), and natural resources (land, minerals, etc.) are all economic resources and they are scarce.

Question 9

The free-market economy flow model depicts four major interrelated flows:

I . Individuals provide economic resources to business firms.

II. Firms provide payment to individuals for economic resources.

III. Firms provide goods and services to individuals.

IV. Individuals provide payment to firms for goods and services.

If the cost of imported oil declined suddenly and significantly, which one of the above flows would be most likely to be the first impacted?
	A.  	I.
	B.  	II.
	C.  	III.
	D.  	IV.

Answer 9

C. III.

Initially, a sudden and significant decline in the cost of imported oil likely would impact a firm’s ability to provide goods and, to a lesser extent, services to individuals. A decline in the cost of imported oil will decrease the cost of inputs to the production process, both for goods produced with oil and its by-products and for the cost of transportation of all goods and services. A decrease in the cost of inputs would be likely to result in more goods and services provided at lower prices.

Question 10

An increase in taxes on cigarette production would cause which one of the following to occur?
A. The supply curve will shift outward.
B. The demand curve will shift outward.
C. The supply curve will shift inward.
D. The demand curve will shift inward.

Answer 10

C. The supply curve will shift inward.

An increase in taxes on cigarette production effectively causes an increase in the cost of cigarette production and would cause the supply curve to shift inward.

Question 11

When a demand schedule is plotted on a graph, the resulting demand curve will be
	A.  	positively sloped.
	B.  	negatively sloped.
	C.  	completely vertical.
	D.  	completely horizontal.

Answer 11

The demand schedule of an individual or of the market shows that more units of a commodity are demanded as the price decreases. Therefore, the demand curve would be negatively sloped; the quantity demanded would be lower at higher gprices and would increase as price decreases. The quantity demanded varies inversely with price along a given demand curve:

Thus, a demand curve has a negative slope; quantity is inversely related to price.

Question 12

The demand for a commodity would increase when the price of a

	 Substitute Commodity 	 Complementary Commodity 
	 Increases 	 Increases 
	 Increases 	 Decreases 
	 Decreases 	 Increases 
	 Decreases 	 Decreases

Answer 12

Increases Decreases

A substitute commodity is one which satisfies the same basic need or want as another commodity. When the price of a substitute commodity increases, consumers will shift demand away from that commodity to other commodities which satisfy the same basic purpose. For example, as the price of cable TV increases customers shift to satellite-based TV, a substitute commodity for cable.

A complementary commodity is one which is used together with another commodity. When the price of a complementary commodity decreases, the demand for that commodity increases and so does the demand for the commodity for which it is complementary. For example, automobiles and tires are complementary.

As the price of automobiles decrease, the demand for automobiles and for tires increases.

Question 13

The demand curve for a product reflects which of the following?
A. The impact of prices on the amount of product offered.
B. The willingness of producers to offer a product at alternative prices.
C. The impact that price has on the amount of a product purchased.
D. The impact that price has on the purchase amount of two related products.

Answer 13

C. The impact that price has on the amount of a product purchased.

The demand curve reflects the impact that price has on the amount of a product purchased. A demand curve (or schedule) for a product shows the quantity of a commodity that will be demanded at various prices during a specified time, ceteris paribus (holding variables other than price constant).

Question 14

An increase in taxes on cigarette production would cause which one of the following to occur?
A. The supply curve will shift outward.
B. The demand curve will shift outward.
C. The supply curve will shift inward.
D. The demand curve will shift inward.

Answer 14

C. The supply curve will shift inward.

An increase in taxes on cigarette production effectively causes an increase in the cost of cigarette production and would cause the supply curve to shift inward.

Question 15

When the cost of input factors to the production process increases, which one of the following will occur?
A. The demand curve will shift outward.
B. The supply curve will shift outward.
C. The demand curve will shift inward.
D. The supply curve will shift inward.

Answer 15

D. The supply curve will shift inward.

An increase in the cost of input factors to the production process will cause the supply curve to shift inward. An increase in input costs will cause the per-unit cost to increase and the supply curve will shift upward and to the left (inward).

Question 16

If the price for a good is fixed by government fiat below market equilibrium price, which one of the following will occur?
A. Excess supply.
B. Demand shortage.
C. Excess demand.
D. Actual price will be greater than equilibrium price.

Answer 16

C. Excess demand.

If the price for a good is fixed by government fiat below market equilibrium price, an excess demand will result. Because the price that can be charged is limited (price ceiling), less supply will be provided, such that demand will exceed supply. There will be an excess demand.

Question 17

If both demand and supply have traditional curves, a higher equilibrium price may be caused by which one of the following?
A.  	A decrease in demand.
B.  	An increase in demand.
C.  	An increase in supply.
D.  	A production technology innovation.

Answer 17

B. An increase in demand.

A higher equilibrium price (and quantity) would be caused by an increase in demand.

Question 18

Which one of the following would not be a purpose of the General Agreement on Tariffs and Trade (GATT)?
A. Eliminating import quotas.
B. Harmonizing intellectual property laws.
C. Eliminating subsidies to export industries.
D. Establishing procedures for collection of international debt.

Answer 18

D. Establishing procedures for collection of international debt.

Establishing procedures for collection of international debt is not a purpose of the General Agreement on Tariffs and Trade (GATT). GATT has as its primary purposes the liberalizing and encouraging international trade by eliminating tariffs, subsidies, import quotas, and other trade barriers, to harmonize intellectual property laws and to reduce transportation costs.

Question 19

Over the past 50 years, how has the share of total U.S. purchases and output represented by imports and exports, respectively, changed?

	 Imports as Share of Purchases  	 Exports as Share of Output  
	 Increased 	 Increased 
	 Increased 	 Decreased 
	 Decreased 	 Increased 
	 Decreased 	 Decreased

Answer 19

Imports as Share of Purchases Exports as Share of Output
A. Increased Increased

Over the past 50 years, U.S. imports as a share of GDP and exports as a share of GDP have both increased. B

Question 20

Outco, Inc., a U.S. firm, has a contract to acquire spare parts from a foreign supplier. The contract provides that the parts are to be manufactured to Outco’s specifications and Outco is to pay in U.S. dollars. Which of the following risks will Outco encounter as a direct result of the contract?

	 Currency Exchange Risk  	 Quality Risk  
	 Yes 	 Yes 
	 Yes 	 No 
	 No 	 Yes 
	 No 	 No

Answer 20

Currency Exchange Risk Quality Risk
No Yes

Outco will not face currency exchange risk because payment is to be made in U.S. dollars. Any change in exchange rate will be a risk for the foreign supplier. Outco will face quality risk, i.e., the risk that the quality of the spare parts does not meet Outco’s specifications.

Question 21

Which of the following, if either, would serve to mitigate risks associated with outsourcing?

I. Negotiate for payment to the foreign supplier be made in the foreign currency.

II. Include an arbitration clause in the contract with the foreign supplier.
	A.  	I only.
	B.  	II only.
	C.  	Both I and II.
	D.  	Neither I nor II.

Answer 21

B. II only.

Including an arbitration clause in the contract with the foreign supplier would mitigate the risk associated with outsourcing by providing a predetermined mechanism for resolving differences between the buyer and the supplier (Statement II). Negotiating for payment to the foreign supplier to be made in the foreign currency would not mitigate the risk because it would subject the domestic buyer to foreign currency exchange risk, i.e., the risk that changes in the exchange rate between the currencies will increase the cost of acquiring goods (Statement I).

Question 22

Which one of the following is least likely an advantage associated with the acquisition of a pre-existing foreign entity?
A. It may block competition from entering the foreign market in which the acquired entity operates.
B. Provides quicker entry into a market than developing a new entity in the foreign market.
C. Assures synergies between the acquiring entity and the acquired entity.
D. Provides historical financial information that is useful to the acquiring entity.

Answer 22

C. Assures synergies between the acquiring entity and the acquired entity.

Acquiring a pre-existing foreign entity does not assure synergies between the acquiring entity and the acquired entity. Studies have shown that most mergers and acquisitions to not result in creating value for the acquiring entity.

Question 23

Which of the following statements regarding importing and exporting, if any, is/are correct?

I. Goods with a low value-to-weight ratio are less likely to be suitable for importing than goods with a high value-to-weight ratio.

II. In the exporting of goods, one may encounter import restrictions imposed by the country of destination.
	A.  	I only.
	B.  	II only.
	C.  	Both I and II.
	D.  	Neither I nor II.

Answer 23

C. Both I and II.

Both statements are correct. Goods with a low value-to-weight ratio are less likely to be suitable for importing than goods with a high value-to-weight ratio (Statement I) and when exporting goods, one may encounter import restrictions imposed by the country of destination (Statement II).

Question 24

Which of the following statements regarding foreign licensing and foreign franchising, if any, is/are correct?

I. Licensors typically remain more involved with a licensee than a franchisor remains involved with a franchisee.

II. Franchising typically provides greater quality control than does simple licensing.
	A.  	I only.
	B.  	II only.
	C.  	Both I and II.
	D.  	Neither I nor II.

Answer 24

B. II only.

Franchising is a special form of licensing in which the franchisor sells intangible assets to a franchisee and mandates strict operating requirements of the franchisee. Thus, franchising does typically provide greater quality control than simple licensing (Statement II). Licensors typically do not remain more involved with a licensee than a franchisor does with a franchisee (Statement I).

Question 25

Parco, Inc., a U.S. entity, has a 100% owned subsidiary, Subco, Inc., located in the country of Eastlaco. In which one of the following arrangements would there be no foreign currency exchange risk associated with borrowing by either Parco or its subsidiary, Subco, prior to consolidation?
A. Parco borrows in the currency of Eastlaco.
B. Subco borrows in the U.S. dollar.
C. Subco borrows in the currency of Eastlaco.
D. Parco borrows in the currency of a third country.

Answer 25

C. Subco borrows in the currency of Eastlaco.

If Subco borrows in the currency of Eastlaco, it will not face foreign currency exchange risk because Subco is located in Eastlaco and the currency of Eastlaco is its domestic currency.

Question 26

In which of the following circumstances, as the dollar changes against the foreign currency, would an investment in a foreign currency result in fewer dollars and a borrowing in a foreign currency cost more dollars?

 Investment in Foreign Currency  	 Borrowing in Foreign Currency  
 Dollar weakens 	 Dollar weakens 
 Dollar weakens 	 Dollar strengthens 
 Dollar strengthens 	 Dollar weakens 
 Dollar strengthens 	 Dollar strengthens

Answer 26

Ans: Investment in Foreign Currency Borrowing in Foreign Currency

 Dollar strengthens 	 Dollar weakens 

If the dollar strengthens against a foreign currency, an investment denominated in that currency would result in fewer dollars; if the dollar weakens against a foreign currency, borrowing in that currency would cost more dollars, as more dollars would be required to service and repay the debt.

Question 27

Which of the following statements regarding the Eurodollar market, if either, is/are correct?

I. Eurodollars can be either EEU Euros or U.S. dollars.

II. The Eurodollar market provides long-term loans.
	A. I only.
	B. II only.
	C. Both I and II.
	D. Neither I nor II.

Answer 27

D. Neither I nor II.

Question 28

PEST is an acronym for
A. Political, Environmental, Social, and Technological.
B. Policy, Environmental, Social, and Technological.
C. Political, Economic, Social, and Technological.

Answer 28

C. Political, Economic, Social, and Technological.

PEST is the acronym for “Political, Economic, Social, and Technological,” which are the characteristics of a nation or region considered in macro-environmental analysis.

Question 29

Vico, Inc., is considering a horizontal expansion of its business into a new industry. Vico is concerned that other businesses may be considering moving into the same industry in the near future. Which one of the following forms of analysis would Vico most likely use to assess whether the industry is likely to be highly competitive in the near future?
	A.  	PEST analysis.
	B.  	SWOT analysis.
	C.  	Five forces analysis.
	D.  	Focus analysis.

Answer 29

C. Five forces analysis.

Vico would most likely use five forces analysis to assess the competitive nature of the industry it is considering entering. Five forces analysis identifies factors that determine the operating attractiveness and likely long-run profitability of an industry by looking at five specific areas that impact industry competitiveness.

Question 30

Which one of the following features would not create a higher level of competitive threat posed by substitute goods or services in an industry?
A. Prices of substitutes are low relative to the price of an entity’s goods or services.
B. Substitutes are readily available.
C. Low cost to buyers to switch goods/services.
D. Customers have strong brand loyalty.

Answer 30

D. Customers have strong brand loyalty.

If customers have strong brand loyalty, the competitive threat in an industry would not be higher because customers would be less likely to switch to substitute goods or services.

Question 31

Which of the following SWOT matrix relationship categories (intersections) poses the greatest risk to an entity?
	A.  	S/O.
	B.  	S/T.
	C.  	W/T.
	D.  	W/O.

Answer 31

C. W/T.

SWOT analysis (alternatively SWOT matrix) is an acronym for strengths, weaknesses, opportunities, and threats

The W/T intersection in a SWOT matrix shows the relationship between an entity’s internal weaknesses and the threats in the external environment. The threats pose the greatest risk to the entity because its weaknesses are in the same areas as the threats.

Question 32

Which of the following types of analysis is directly concerned with the relationship between an entity and its environment?
	A.  	PEST analysis.
	B.  	SWOT analysis.
	C.  	Five forces analysis.
	D.  	PESTEL analysis.

Answer 32

B. SWOT analysis.

SWOT analysis is directly concerned with the relationship between an entity (its strengths and weaknesses) and its environment (the opportunities and threats).

Question 33

Which of the following is a characteristic of a cost leadership entity?

	 Significant Capital Invested  	 Efficient Distribution  
	 No 	 No 
	 No 	 Yes 
	 Yes 	 No 
	 Yes 	 Yes

Answer 33

Answer: Yes Yes

As strengths, a cost leadership entity typically has both significant capital invested in production and other assets and an efficient distribution system. These and other characteristics are necessary to maintain low cost and a cost competitive advantage.

Question 34

Which of the following forms of analysis, if either, is concerned only with analysis of the external environment of an entity?

	 PEST Analysis  	 SWOT Analysis  
	 Yes 	 Yes 
	 Yes 	 No 
	 No 	 Yes 
	 No 	 No

Answer 34

PEST Analysis SWOT Analysis

 Yes 	 No 

PEST analysis is concerned only with the analysis of the external macro-environment of an entity, including the political, economic, social, and technological characteristics. SWOT analysis is concerned with both the external environment (opportunities and threats) and the internal environment (strengths and weaknesses), as well as the relationship between the external and internal factors.

Question 35

A regulatory agency has been considering the imposition of stricter regulations on an industry. Under SWOT analysis, the possibility of this new regulation would be considered
	A.  	a strength.
	B.  	a threat.
	C.  	a weakness.
	D.  	an opportunity.

Answer 35

B. a threat.

The possibility of new regulations in the operating environment would be considered an external threat to the entity. New regulations may restrict or otherwise change the way an entity in the regulated industry operates and reduce its competitive position.

Question 36

Targeting a niche market always involves which of the following strategies, if either?

	 Cost Leadership  	 Focus  
	 Yes 	 Yes 
	 Yes 	 No 
	 No 	 Yes 
	 No 	 No

Answer 36

Cost Leadership Focus
No Yes

Targeting a niche market always involves following a focus strategy, but not always a cost leadership strategy. A niche or focus strategy attempts to serve a narrow segment of an industry, which may be targeted through seeking either cost advantage or differentiation.

Question 37

When an entity adopts a cost leadership strategy, which one of the following might it use to help carry out this strategy?

	Processing Efficiencies 	Outsourcing
	Yes	Yes
	Yes	No
	No	Yes
	No	No

Answer 37

Processing Efficiencies Outsourcing
Yes Yes

Question 38

Globalco, a U.S. parent, has subsidiaries in Germany (Gerco) and in England (Engco). Gerco produces products that are sent to Engco for final assembly and packaging. Engo then sends the goods to Globalco for retail sales in the U.S. The effective income tax rates faced by each of the companies is:

Globalco 22%
Engco 18%
Gerco 20%
If the objective of transfer prices is to minimize income taxes, which of the following policies, within legally acceptable ranges, should Globalco adopt with respect to the transfer prices?
A. Minimize transfer price from Gerco to Engco and minimize transfer price from Engco to Globalco.
B. Maximize transfer price from Gerco to Engco and maximize transfer price from Engco to Globalco.
C. Minimize transfer price from Gerco to Engco and maximize transfer price from Engco to Globalco.
D. Maximize transfer price from Gerco to Engco and minimize transfer price from Engco to Globalco.

Answer 38

C. Minimize transfer price from Gerco to Engco and maximize transfer price from Engco to Globalco.

Since Engco has the lowest tax rate, the lowest income tax would be achieved by the highest income reported by Engco. That would be achieved if Engco had the lowest cost (minimum transfer price from Gerco) and the highest sales price (maximum transfer price to Globalco). Therefore, a minimum transfer price to Engco and a maximum transfer price from Engco would be correct.

Question 39

Assume a U.S. company purchases shares of a French company for 1,000,000 euros on March 1, Year 1, when the exchange rate was 1 E = $1.10. The investment is classified as available-for-sale by the U.S. company. After holding the shares for eight months, it sold the entire investment in the foreign market for 1,200,000 euros when the exchange rate was 1 E = $1.23. What dollar amount of total investment gain or loss would the U.S. company recognize?
	A.  	$ 26,000
	B.  	$130,000
	C.  	$156,000
	D.  	$376,000

Answer 39

D. $376,000

The total gain recognized is the difference between the dollar value cost of the investment and the dollar value of the proceeds from sale of the investment. The calculation of the total gain would be:

Investment cost 	1,000,000 E x $1.10 	= $1,100,000
Investment proceeds 	1,200,000 E x $1.23 	= 1,476,000
Total Gain (in dollars) 		$376,000

Question 40

Which one of the following statements regarding periods of analysis is correct?
A. Short-run analysis assumes that all inputs can be varied.
B. Long-run analysis assumes that all inputs can be varied.
C. Short-run analysis assumes that all inputs are fixed.
D. Long-run analysis assumes that all inputs are fixed.

Answer 40

B. Long-run analysis assumes that all inputs can be varied.

In the long run, it is assumed that all inputs to the production process can be varied, including the number and size of production facilities.

Question 41

According to the law of diminishing returns, which one of the following is correct?
A. The marginal product (output) falls as more units of a variable input are added to fixed inputs.
B. The marginal product (output) increases as more units of a variable input are added to fixed inputs.
C. The total product (output) falls as more units of a variable input are added to fixed inputs.
D. Marginal utility falls as more units of goods are consumed.

Answer 41

A. The marginal product (output) falls as more units of a variable input are added to fixed inputs.

According to the law of diminishing returns, as more units of a variable input are added to fixed inputs, a point is reached at which the continued addition of variable inputs results in decreasing output per unit of variable input. Generally, this diminishing return results when the increasing variable inputs overwhelm the fixed inputs, which results in inefficiencies.

Question 42

In perfect competition, which of the following is always correct?
	A.  	Price equals total revenue.
	B.  	Price equals average total cost.
	C.  	Price equals marginal cost.
	D.  	Price equals marginal revenue.

Answer 42

D. Price equals marginal revenue.

In perfect competition, price is always equal to (the same as) marginal revenue. In perfect competition, in the short run, each and every unit produced can be sold at the market price; therefore, price is also demand and marginal revenue.

Question 43

Which one of the following is the shape of the demand curve faced by a monopolistic firm?
	A.  	Horizontal.
	B.  	Positively sloped.
	C.  	Negatively sloped.
	D.  	Vertical.

Answer 43

C. Negatively sloped.

A monopolistic firm is the only firm in an industry and faces a conventional negatively sloped demand curve for its commodity. In order to sell more of its commodity, it must reduce its selling price.

Question 44

In a perfect monopoly, which of the following describes the relationship between the marginal revenue curve and the demand curve?
A. The marginal revenue curve is the demand curve.
B. The marginal revenue curve is above the demand curve and the curves diverge as the quantity increases.
C. The marginal revenue curve is below the demand curve and the curves diverge as the quantity increases.
D. The marginal revenue curve is below and parallel to the demand curve.

Answer 44

C. The marginal revenue curve is below the demand curve and the curves diverge as the quantity increases.

In a perfect monopoly market structure, the marginal revenue curve is below the demand curve and the curves diverge as the quantity increases. The basic reason for the relationship is that, facing a downward-sloping demand curve, the firm must continuously lower its selling price in order to sell more units; therefore, marginal revenue must be below demand.

Question 45

In a perfect monopoly market structure, which of the following is characteristic of a natural monopoly?

A.  	A firm has control of an essential input to the production process.
B.  	A firm has increasing returns to scale.
C.  	A firm owns a secret formula.
D.  	A firm has a government-granted exclusive franchise.

Answer 45

B. A firm has increasing returns to scale.

A natural monopoly results from conditions in which there are increasing returns to scale, such that a single firm can produce at a lower cost than two or more firms. Typically, fixed costs are extremely high, making it inefficient for a second firm to enter the market.

Question 46

Which of the following is the shape of the demand curve a firm faces in a perfectly competitive market?

A. Vertical
B. Horizontal
C. Negative

Answer 46

B. Horizontal

Question 47

Which of the following is a characteristic of monopolistic competition?

A.  	There are a very few sellers.
B.  	The product or service is only slightly differentiated.
C.  	There are no close substitutes for the product or service.
D.  	Firms cannot easily enter or leave the market.

Answer 47

B. The product or service is only slightly differentiated.

In monopolistic competition, firms sell a product or service that is only slightly differentiated; the product or service is similar to, but not identical with, other products or services.
In addition, monopolistic competition has the following characteristics:

1. A large number of sellers.
2. Close substitutes for the product or service.
3. Ease of entry into or exit from the market.

Question 48

In the short run, a firm in monopolistic competition will maximize profit by producing at which of the following levels?
A. Average revenue = Average total cost.
B. Marginal revenue = Average total cost.
C. Marginal revenue = Marginal cost.
D. Marginal revenue = Total cost.

Answer 48

C. Marginal revenue = Marginal cost.

In the short run, a firm in monopolistic competition will maximize profit by producing where marginal revenue equals marginal cost. At that level of production, the revenue from the last unit produced is exactly equal to the cost of producing that unit.