Monopolistic Competition: Product Differentiation, Non-Price Competition, Short-Run/Long-Run Equilibrium, Excess Capacity

1. In monopolistic competition, firms have some price-making power mainly because

A products are perfectly identical
B products are differentiated
C there is only one seller
D firms are unable to advertise

2. Which feature is most likely found in monopolistic competition?

A one firm with complete control of supply
B many firms selling differentiated products
C many firms selling identical products with no branding
D a few firms colluding formally

3. A monopolistically competitive firm faces a downward-sloping demand curve because

A it sells a differentiated product
B it is a price taker
C there are no substitutes
D it produces a public good

4. In monopolistic competition, demand for an individual firm is likely to be more elastic than monopoly because

A there are many close substitutes
B there are no substitutes
C there is one dominant supplier
D entry is completely blocked

5. Product differentiation means

A firms sell products consumers see as different from rivals’ products
B all firms sell identical products
C firms cannot advertise
D firms produce only public goods

6. Which is an example of product differentiation?

A identical wheat sold by hundreds of farmers
B branded coffee shops offering different atmosphere and recipes
C one national electricity grid with no rival
D a government defence service

7. Non-price competition is best shown by

A lowering price from $10 to $8
B improving packaging, branding and customer service
C selling below average variable cost
D charging a price equal to marginal cost

8. Which is most likely an example of non-price competition?

A advertising a brand image
B cutting price by 20%
C imposing an indirect tax
D producing where MR = MC

9. In monopolistic competition, firms use advertising mainly to

A make demand for their product more inelastic
B make their products completely identical
C remove all consumer choice
D become price takers

10. Which market is most likely to be monopolistically competitive?

A local restaurants
B national defence
C wheat farming with identical wheat
D local water supply network

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. A monopolistically competitive firm maximises profit where

A MR = MC
B AR = AC
C MR = 0
D MC = AC only

12. In the short run, a monopolistically competitive firm can earn supernormal profit because

A products are differentiated and firms have some market power
B entry has already eliminated all profit
C products are perfectly identical
D firms face perfectly elastic demand

13. In the long run, supernormal profit in monopolistic competition is eliminated mainly by

A new firms entering with close substitutes
B government nationalising every firm
C firms becoming perfectly identical
D all consumers leaving the market

14. In long-run monopolistic competition, firms usually earn

A supernormal profit
B normal profit
C permanent loss
D zero revenue

15. In long-run equilibrium under monopolistic competition,

A AR = AC
B AR > AC
C AR < AC
D MR = 0 necessarily

16. A monopolistically competitive firm is producing where MR = MC, AR = $30 and AC = $22. What is its short-run position?

A normal profit
B supernormal profit
C loss
D shutdown immediately

17. A monopolistically competitive firm is producing where MR = MC, AR = $18 and AC = $24. What is its short-run position?

A supernormal profit
B normal profit
C loss
D revenue maximisation

18. A monopolistically competitive firm is producing where MR = MC and AR = AC. What profit is earned?

A normal profit
B supernormal profit
C abnormal loss
D monopoly profit necessarily

19. If monopolistically competitive firms earn supernormal profits, what happens in the long run?

A entry shifts each existing firm’s demand curve left
B exit shifts each existing firm’s demand curve right
C market demand becomes perfectly inelastic
D each firm becomes a pure monopoly

20. If monopolistically competitive firms are making losses, what happens in the long run?

A firms leave and remaining firms’ demand curves shift right
B firms enter and existing firms’ demand curves shift left
C products become identical immediately
D price becomes zero

21. In monopolistic competition, long-run equilibrium occurs where the firm’s demand curve is

A tangent to the average cost curve
B below the average variable cost curve at every output
C perfectly horizontal at market price
D equal to marginal cost at all outputs

22. Monopolistic competition is usually allocatively inefficient because

A P > MC
B P = MC
C P < MC
D P = AVC always

23. Monopolistic competition is usually productively inefficient in long-run equilibrium because

A firms do not produce at minimum average cost
B firms always produce at minimum average cost
C firms produce where price equals marginal cost
D firms have no fixed costs

24. Excess capacity means

A firms produce less than the output where average cost is minimised
B firms produce beyond full capacity
C firms produce where price equals marginal cost
D firms produce zero output

25. In long-run monopolistic competition, excess capacity exists because

A the tangency between AR and AC occurs before minimum AC
B firms produce at minimum AC
C demand is perfectly elastic
D products are homogeneous

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Compared with perfect competition, monopolistic competition is likely to have

A higher price and lower output per firm
B lower price and higher output per firm always
C identical price and output
D zero advertising

27. Compared with monopoly, monopolistic competition usually has

A more substitutes and more competitive pressure
B fewer substitutes and stronger entry barriers
C only one seller
D no product differentiation

28. A firm in monopolistic competition charges price $16 while marginal cost is $10. This suggests

A allocative inefficiency
B allocative efficiency
C productive efficiency necessarily
D no market power

29. A firm in monopolistic competition produces 500 units. Its minimum AC occurs at 700 units. This suggests

A excess capacity
B productive efficiency
C perfect competition
D revenue maximisation

30. Which is a possible benefit of monopolistic competition?

A greater consumer choice due to product variety
B lowest possible average cost always
C price always equals marginal cost
D no advertising expenditure ever

31. Which is a possible cost of monopolistic competition?

A wasteful advertising and higher average cost
B absence of consumer choice
C zero product variety
D complete absence of substitutes

32. Which statement about advertising in monopolistic competition is most accurate?

A it may inform consumers but may also be persuasive and wasteful
B it always reduces costs to zero
C it always makes products identical
D it is impossible because firms are price takers

33. Branding can increase a firm’s market power by

A reducing perceived substitutability with rivals
B making demand perfectly elastic
C removing product differentiation
D making price equal to marginal cost

34. If successful advertising makes demand more inelastic, the firm may be able to

A charge a higher price
B become a price taker
C lose all customers after any price rise
D remove all fixed costs

35. Which is most likely to make a monopolistically competitive firm’s demand curve shift right?

A successful advertising
B entry of many close substitutes
C worsening product quality
D loss of brand loyalty

36. Which is most likely to make a monopolistically competitive firm’s demand curve shift left?

A new competitors entering with attractive substitutes
B improved customer service
C stronger brand loyalty
D successful product innovation

37. Which combination best fits monopolistic competition?

A differentiated products, many firms, low barriers to entry
B identical products, many firms, perfect knowledge, no market power
C one firm, very high barriers, unique product
D few firms, mutual interdependence, collusion

38. Which market structure has the closest similarity to monopolistic competition?

A perfect competition, because both usually have many firms and relatively low entry barriers
B monopoly, because both have only one firm
C oligopoly, because both always collude
D monopsony, because both involve one buyer

39. Which feature separates monopolistic competition from perfect competition?

A product differentiation
B many buyers and sellers
C freedom of entry and exit
D profit maximisation

40. Which feature separates monopolistic competition from monopoly?

A existence of many close substitutes
B downward-sloping demand curve
C ability to make short-run supernormal profit
D product differentiation

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A monopolistically competitive firm in long-run equilibrium is not productively efficient because

A it produces on the downward-sloping part of AC before minimum AC
B it produces at minimum AC
C it produces where MC = AC at the minimum point
D it faces no competition

42. In monopolistic competition, long-run normal profit occurs because

A entry and exit adjust demand for existing firms
B firms are protected by permanent barriers
C government sets price equal to average cost
D all firms collude to remove losses

43. If existing firms in monopolistic competition make losses, exit will tend to

A increase demand for remaining firms’ products
B reduce demand for remaining firms’ products
C increase the number of substitutes
D make each product identical

44. Which condition is most likely at long-run equilibrium in monopolistic competition?

A MR = MC and AR = AC
B MR = 0 and AR > AC
C P = MC and AC minimum
D AR < AVC permanently

45. Which condition is most likely at short-run supernormal profit equilibrium in monopolistic competition?

A MR = MC and AR > AC
B MR = 0 and AR = AC
C P = MC and AC minimum
D AR < AC and P < AVC

46. If a monopolistically competitive firm’s AR curve becomes more elastic, this is most likely due to

A stronger competition from close substitutes
B stronger brand loyalty
C fewer substitutes
D legal monopoly protection

47. If a monopolistically competitive firm improves quality without changing price, it is using

A non-price competition
B perfect price discrimination
C marginal cost pricing
D predatory pricing

48. Which statement about long-run efficiency in monopolistic competition is correct?

A it achieves neither allocative nor productive efficiency under standard assumptions
B it achieves both allocative and productive efficiency like perfect competition
C it always produces where P = MC
D it always produces at minimum AC

49. Which chain best explains long-run adjustment from supernormal profit?

A short-run supernormal profit → entry of new firms → demand for each existing firm falls → AR becomes tangent to AC → normal profit
B short-run supernormal profit → exit of firms → demand rises → permanent monopoly profit
C short-run loss → entry of firms → demand falls further → supernormal profit
D short-run profit → government sets price zero → productive efficiency

50. Which chain best explains excess capacity?

A product differentiation → downward-sloping demand → long-run tangency before minimum AC → output below efficient scale
B identical products → perfectly elastic demand → output at minimum AC → excess capacity
C monopoly barriers → no substitutes → output above minimum AC always → perfect efficiency
D price taking → P = MC → lowest AC → wasted advertising

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. Answer: B

A wrong: identical products create perfect competition, not monopolistic competition.
B correct: product differentiation gives each firm some brand loyalty and price-making power.
C wrong: one seller is monopoly.
D wrong: advertising is common in monopolistic competition.

2. Answer: B

A wrong: one firm with complete control is monopoly.
B correct: monopolistic competition has many firms selling differentiated products.
C wrong: identical products with no branding describe perfect competition.
D wrong: few firms and collusion describe oligopoly.

3. Answer: A

A correct: differentiation gives the firm some market power, so its demand curve slopes downward.
B wrong: price takers face perfectly elastic demand.
C wrong: there are substitutes, but they are not perfect substitutes.
D wrong: public goods are non-rival and non-excludable.

4. Answer: A

A correct: many close substitutes make demand more elastic than monopoly demand.
B wrong: no substitutes would make demand less elastic.
C wrong: one dominant supplier is monopoly.
D wrong: entry is not completely blocked.

5. Answer: A

A correct: product differentiation means consumers see the product as different through quality, branding, design, service or location.
B wrong: identical products mean no differentiation.
C wrong: advertising often creates or strengthens differentiation.
D wrong: public goods are unrelated.

6. Answer: B

A wrong: identical wheat is close to perfect competition.
B correct: branded coffee shops differ by taste, location, image and service.
C wrong: one national electricity grid is closer to monopoly/natural monopoly.
D wrong: defence is a public good.

7. Answer: B

A wrong: lowering price is price competition.
B correct: packaging, branding and service compete without changing price.
C wrong: selling below AVC may be predatory pricing, not non-price competition.
D wrong: marginal cost pricing is an efficiency/regulation rule.

8. Answer: A

A correct: advertising brand image is non-price competition.
B wrong: cutting price is price competition.
C wrong: tax is government intervention.
D wrong: MR = MC is profit maximisation.

9. Answer: A

A correct: advertising builds loyalty and reduces perceived substitutes, making demand less elastic.
B wrong: advertising makes products seem different, not identical.
C wrong: it does not remove all consumer choice.
D wrong: firms remain price makers, not price takers.

10. Answer: A

A correct: local restaurants often have many firms, differentiated products and low entry barriers.
B wrong: national defence is a public good.
C wrong: identical wheat is close to perfect competition.
D wrong: water supply networks are natural monopoly.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. Answer: A

A correct: like most firms, a monopolistically competitive firm maximises profit where MR = MC.
B wrong: AR = AC shows normal profit, not profit maximisation.
C wrong: MR = 0 shows revenue maximisation.
D wrong: MC = AC shows minimum AC, not necessarily profit maximisation.

12. Answer: A

A correct: differentiation gives firms some short-run market power, allowing supernormal profit.
B wrong: entry has not yet eliminated profit in the short run.
C wrong: products are not perfectly identical.
D wrong: demand is downward sloping, not perfectly elastic.

13. Answer: A

A correct: supernormal profit attracts new firms with close substitutes, reducing demand for existing firms.
B wrong: nationalisation is not the normal market adjustment.
C wrong: products remain differentiated.
D wrong: consumers do not all leave the market.

14. Answer: B

A wrong: supernormal profit is competed away in the long run.
B correct: long-run entry/exit leads to normal profit.
C wrong: permanent losses cause exit.
D wrong: firms still earn revenue.

15. Answer: A

A correct: long-run equilibrium occurs where the demand/AR curve is tangent to AC, so AR = AC.
B wrong: AR > AC means supernormal profit.
C wrong: AR < AC means losses.
D wrong: MR = 0 is revenue maximisation, not required.

16. Answer: B

A wrong: normal profit requires AR = AC.
B correct: AR $30 is greater than AC $22, so supernormal profit is earned.
C wrong: loss requires AR < AC.
D wrong: shutdown depends on AVC, not given.

17. Answer: C

A wrong: supernormal profit requires AR > AC.
B wrong: normal profit requires AR = AC.
C correct: AR $18 is below AC $24, so the firm makes a loss.
D wrong: revenue maximisation occurs where MR = 0.

18. Answer: A

A correct: AR = AC means the firm covers all costs including normal profit.
B wrong: supernormal profit requires AR > AC.
C wrong: loss requires AR < AC.
D wrong: monopoly profit is not necessary.

19. Answer: A

A correct: entry increases substitutes and takes customers away from existing firms, shifting each firm’s demand left.
B wrong: exit happens when losses occur.
C wrong: demand does not become perfectly inelastic.
D wrong: firms do not become pure monopolies.

20. Answer: A

A correct: losses cause exit, reducing substitutes and shifting remaining firms’ demand curves right.
B wrong: entry would worsen losses.
C wrong: products remain differentiated.
D wrong: price does not become zero.

21. Answer: A

A correct: in long-run equilibrium, the firm’s demand/AR curve is tangent to the AC curve.
B wrong: below AVC permanently would cause shutdown/exit.
C wrong: perfectly horizontal demand is perfect competition.
D wrong: demand is not equal to MC at all outputs.

22. Answer: A

A correct: monopolistic competition has downward-sloping demand, so at profit maximisation price is above MC.
B wrong: P = MC means allocative efficiency.
C wrong: P < MC would mean overproduction from society’s view.
D wrong: P = AVC is not typical long-run equilibrium.

23. Answer: A

A correct: firms produce before minimum AC, creating excess capacity.
B wrong: producing at minimum AC would be productive efficiency.
C wrong: P = MC is allocative efficiency.
D wrong: fixed costs can exist.

24. Answer: A

A correct: excess capacity means output is below the scale where average cost is minimised.
B wrong: it does not mean overusing capacity.
C wrong: P = MC is allocative efficiency.
D wrong: firms still produce positive output.

25. Answer: A

A correct: long-run tangency of AR and AC occurs on the falling part of AC, before minimum AC.
B wrong: firms do not produce at minimum AC.
C wrong: demand is downward sloping, not perfectly elastic.
D wrong: products are differentiated.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. Answer: A

A correct: compared with perfect competition, price tends to be higher and output lower because demand is downward sloping and P > MC.
B wrong: perfect competition usually has lower price and higher output.
C wrong: outcomes are not identical.
D wrong: advertising is common.

27. Answer: A

A correct: monopolistic competition has many firms and close substitutes, unlike monopoly.
B wrong: barriers are lower than monopoly.
C wrong: there is not only one seller.
D wrong: product differentiation is central.

28. Answer: A

A correct: price $16 exceeds MC $10, so P > MC and allocative inefficiency exists.
B wrong: allocative efficiency requires P = MC.
C wrong: productive efficiency depends on AC minimum, not given.
D wrong: P > MC suggests market power.

29. Answer: A

A correct: producing 500 when minimum AC is at 700 shows the firm has unused efficient scale, or excess capacity.
B wrong: productive efficiency requires output at minimum AC.
C wrong: perfect competition produces at minimum AC in the long run.
D wrong: revenue maximisation cannot be judged.

30. Answer: A

A correct: consumers gain variety, branding, location choice and differentiated services.
B wrong: firms do not always produce at lowest AC.
C wrong: price usually exceeds MC.
D wrong: advertising expenditure is common.

31. Answer: A

A correct: advertising can be excessive or persuasive, and firms may operate with higher average cost.
B wrong: consumer choice is usually greater.
C wrong: product variety exists.
D wrong: there are close substitutes.

32. Answer: A

A correct: advertising may provide useful information, but it can also manipulate preferences and waste resources.
B wrong: it does not reduce costs to zero.
C wrong: it differentiates products.
D wrong: firms are not price takers.

33. Answer: A

A correct: branding makes consumers see fewer close substitutes, increasing market power.
B wrong: perfect elasticity means no pricing power.
C wrong: branding increases differentiation.
D wrong: P = MC would remove allocative inefficiency.

34. Answer: A

A correct: less elastic demand allows the firm to raise price with a smaller fall in quantity demanded.
B wrong: a price taker has no pricing power.
C wrong: inelastic demand means it does not lose all customers after a price rise.
D wrong: fixed costs are unaffected.

35. Answer: A

A correct: successful advertising increases demand for the firm’s product.
B wrong: entry of substitutes shifts demand left.
C wrong: poorer quality shifts demand left.
D wrong: weaker loyalty shifts demand left.

36. Answer: A

A correct: new attractive substitutes take customers away, shifting demand left.
B wrong: better service shifts demand right.
C wrong: loyalty shifts demand right or makes it less elastic.
D wrong: successful innovation shifts demand right.

37. Answer: A

A correct: monopolistic competition has many firms, differentiated products and low barriers.
B wrong: this is perfect competition.
C wrong: this is monopoly.
D wrong: this is oligopoly.

38. Answer: A

A correct: both perfect and monopolistic competition have many firms and relatively free entry/exit.
B wrong: monopoly has one firm.
C wrong: oligopoly has few firms and interdependence.
D wrong: monopsony is one buyer.

39. Answer: A

A correct: product differentiation separates monopolistic competition from perfect competition.
B wrong: both may have many buyers and sellers.
C wrong: both have relatively free entry and exit.
D wrong: firms may maximise profit in many structures.

40. Answer: A

A correct: monopolistic competition has many close substitutes; monopoly has no close substitutes.
B wrong: both can face downward-sloping demand.
C wrong: both can make short-run supernormal profit.
D wrong: monopoly products can also be unique/differentiated.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. Answer: A

A correct: long-run output is on the downward-sloping part of AC before the minimum point, so productive efficiency is not achieved.
B wrong: producing at minimum AC would be productive efficiency.
C wrong: MC = AC at minimum AC, which is not reached.
D wrong: firms do face competition from substitutes.

42. Answer: A

A correct: entry and exit shift demand for existing firms until only normal profit remains.
B wrong: barriers are low, not permanent.
C wrong: government does not set price in the standard model.
D wrong: collusion is oligopoly behaviour.

43. Answer: A

A correct: exit reduces the number of substitutes, increasing demand for remaining firms.
B wrong: demand for remaining firms rises, not falls.
C wrong: exit reduces substitutes.
D wrong: differentiation remains.

44. Answer: A

A correct: profit maximisation still requires MR = MC, and long-run normal profit requires AR = AC.
B wrong: MR = 0 is revenue maximisation.
C wrong: P = MC and AC minimum describe long-run perfect competition.
D wrong: AR < AVC permanently would cause shutdown.

45. Answer: A

A correct: short-run supernormal profit occurs where MR = MC and AR is above AC.
B wrong: MR = 0 is revenue maximisation.
C wrong: P = MC and minimum AC are perfect competition efficiency conditions.
D wrong: AR < AC means loss.

46. Answer: A

A correct: more close substitutes increase responsiveness to price changes, making demand more elastic.
B wrong: stronger loyalty makes demand less elastic.
C wrong: fewer substitutes make demand less elastic.
D wrong: monopoly protection makes demand less elastic.

47. Answer: A

A correct: improving quality is non-price competition because price is unchanged.
B wrong: price discrimination is charging different prices to different groups.
C wrong: marginal cost pricing sets P = MC.
D wrong: predatory pricing means setting very low prices to drive rivals out.

48. Answer: A

A correct: under standard assumptions, monopolistic competition has P > MC and output below minimum AC, so neither allocative nor productive efficiency is achieved.
B wrong: perfect competition achieves both in the long run, not monopolistic competition.
C wrong: P usually exceeds MC.
D wrong: firms do not produce at minimum AC.

49. Answer: A

A correct: supernormal profit attracts entry; more substitutes reduce each firm’s demand until AR is tangent to AC and normal profit remains.
B wrong: profit causes entry, not exit.
C wrong: losses cause exit, not entry.
D wrong: price zero is not the adjustment.

50. Answer: A

A correct: product differentiation creates downward-sloping demand; long-run tangency occurs before minimum AC, so firms produce below efficient scale.
B wrong: identical products and perfectly elastic demand describe perfect competition, not excess capacity.
C wrong: monopoly barriers/no substitutes do not explain monopolistic competition’s excess capacity.
D wrong: price taking and P = MC describe perfect competition.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.