Question : 11.3   What Happens to Profits in the Long Run? 1) A : 1266878

11.3   What Happens to Profits in the Long Run?

1) A monopolistically competitive industry that earns economic profits in the short run will

A) continue to earn economic profits in the long run.

B) experience the entry of new rival firms into the industry in the long run.

C) experience the exit of existing firms out of the industry in the long run.

D) experience a rise in demand in the long run.

2) In the long run, if price is less than average cost,

A) there is an incentive for firms to exit the market.

B) there is profit incentive for firms to enter the market.

C) the market must be in long-run equilibrium.

D) there is no incentive for the number of firms in the market to change.

3) A monopolistically competitive firm that is earning profits will, in the long run, experience all of the following except

A) new rivals entering the market.

B) a decrease in demand for its product.

C) demand for the firm’s product becomes more elastic.

D) a decrease in the number of rival products.

4) Assuming that the total market size remains constant, a monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing in the long run because

A) new entrants into the market are more likely to have cutting edge products.

B) as the firm raises its price in the long run, it will lose some customers to new entrants in the market.

C) some of its customers have switched to purchasing the products of new entrants in the market. 

D) its costs of production rises.

5) You are planning to open a new Italian restaurant in your hometown where there are three other Italian restaurants. You plan to distinguish your restaurant from your competitors by offering northern Italian cuisine and using locally grown organic produce. What is likely to happen in the restaurant market in your hometown after you open?

A) Your competitors are likely to change their menus to make their products more similar to yours.

B) The demand curve facing each restaurant owner shifts to the right.

C) The demand curve facing each restaurant owner becomes more elastic.

D) While the demand curves facing your competitors becomes more elastic, your demand curve will be inelastic.

6) You have just opened a new Italian restaurant in your hometown where there are three other Italian restaurants. Your restaurant is doing a brisk business and you attribute your success to your distinctive northern Italian cuisine using locally grown organic produce. What is likely to happen to your business in the long run?

A) Your competitors are likely to change their menus to make their products more similar to yours.

B) Your success will invite others to open competing restaurants and ultimately your profits will be driven to zero.

C) If your success continues, you will be likely to establish a franchise and expand your market size.

D) If you continue to maintain consistent quality, you will be able to earn profits indefinitely.

7) A monopolistically competitive firm earning profits in the short run will find the demand for its product decreasing and becoming more elastic in the long run as new firms move into the industry until

A) the original firm is driven into bankruptcy.

B) the firm’s demand curve is perfectly elastic.

C) the firm’s demand curve is tangent to its average total cost curve.

D) the firm exits the market.

8) In the long run, what happens to the demand curve facing a monopolistically competitive firm that is earning short-run profits? 

A) The demand curve will shift to the left and became more elastic.

B) The demand curve will shift to the left and became less elastic.

C) The demand curve will shift to the right and became more elastic.

D) The demand curve will shift to the right and became less elastic.

9) If a typical monopolistically competitive firm is making short-run losses, then

A) other more competitive firms will enter the market.

B) as some firms leave, the remaining firms will experience an increase in the demand for their products.

C) as some firms leave, the demand for the products of the remaining firms will become more elastic.

D) the industry will eventually cease to exist.

Figure 11-6

10) Refer to Figure 11-6. What is the monopolistic competitor’s profit maximizing output?

A) Q1 units

B) Q2 units

C) Q3 units

D) Q4 units