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AP Microeconomics Practice Quiz: Monopolistic Competition

Written by AP Content Team, Verified for 2026 AP Exams, Last updated: May 2026

Test your understanding with short quizzes. This quiz has 7 questions to check your progress.

Question 1 of 7

In the short run, a firm operating in a monopolistically competitive market can earn which of the following?

All Questions (7)

In the short run, a firm operating in a monopolistically competitive market can earn which of the following?

A) Only positive economic profit.

B) Only zero economic profit.

C) Positive, negative, or zero economic profit.

D) Only positive or zero economic profit.

Correct Answer: C

The provided content explicitly states that in a monopolistically competitive market, 'firms producing differentiated products may earn positive, negative, or zero economic profit in the short run.'

If firms in a monopolistically competitive market are earning positive economic profits in the short run, what is the most likely outcome in the long run?

A) New firms will enter the market, increasing the demand for existing firms' products.

B) The government will regulate the market to eliminate the profits.

C) New firms will enter the market, decreasing the demand for existing firms' products until economic profits are zero.

D) Firms will exit the market, increasing the demand for the remaining firms' products.

Correct Answer: C

According to the text, 'Free entry and exit drive profits to zero in the long run.' Positive short-run profits attract new firms, which increases competition and reduces the demand for each individual firm's product until profits are eliminated.

Which of the following best describes the concept of 'excess capacity' for a firm in long-run monopolistic competition?

A) The firm produces at an output level where price equals marginal cost.

B) The firm's output level is greater than the output level that minimizes average total cost.

C) The firm's output level is less than the output level that minimizes average total cost.

D) The firm produces at the minimum point of its marginal cost curve.

Correct Answer: C

The text states, 'The output level, however, is smaller than the output level needed to minimize average total costs, creating excess capacity.' This means the firm is not producing enough to achieve minimum average cost, hence it has the capacity to produce more at a lower average cost.

A key feature of a monopolistically competitive market that leads to allocative inefficiency is that, for the profit-maximizing firm,

A) price is equal to marginal cost.

B) price is greater than marginal cost.

C) price is less than marginal cost.

D) price is equal to minimum average total cost.

Correct Answer: B

The provided content explicitly states that 'The price is greater than marginal cost, creating allocative inefficiency.' Allocative efficiency occurs where the price consumers are willing to pay equals the marginal cost of production (P=MC).

In a monopolistically competitive market, what is the primary purpose of advertising for a firm?

A) To encourage new firms to enter the market.

B) To reduce the firm's average total costs.

C) To make the market more perfectly competitive.

D) To differentiate its product from competitors' products.

Correct Answer: D

The text clearly states, 'Firms typically use advertising as a means of differentiating their product.' This helps them create a perceived difference and gain some market power over their specific version of the product.

On a graph for a monopolistically competitive firm earning a short-run economic profit, the area representing this profit is a rectangle with a height equal to the difference between price and

A) marginal revenue, and a width equal to the quantity.

B) marginal cost, and a width equal to the quantity.

C) average total cost, and a width equal to the quantity.

D) average fixed cost, and a width equal to the quantity.

Correct Answer: C

Economic profit is calculated as (Price - Average Total Cost) × Quantity. On a graph, this corresponds to a rectangle where the height is the per-unit profit (P - ATC) and the width is the quantity of output sold. This aligns with the requirement to be able to calculate the area of profit.

Suppose a typical firm in a monopolistically competitive industry is experiencing economic losses in the short run. Which of the following correctly describes the transition to the long-run equilibrium?

A) Firms will exit the industry, causing the demand curves of the remaining firms to shift to the right until profits are zero.

B) Firms will exit the industry, causing the demand curves of the remaining firms to shift to the left until losses are eliminated.

C) New firms will enter the industry, attracted by the losses, causing demand for existing firms to decrease.

D) The government will provide subsidies, shifting the firms' cost curves down until profits are zero.

Correct Answer: A

The content states that firms can earn negative profit in the short run and that 'Free entry and exit drive profits to zero in the long run.' Short-run losses will cause some firms to exit the market. This exit reduces competition, which increases the demand for the products of the remaining firms. Their individual demand curves will shift to the right, raising the price they can charge at each quantity, until economic profits become zero.