Question 1

Suppose that a monopolistically competitive firm decides to raise its price.The theory of monopolistic competition predicts that

Accepted Answer

A) this firm would lose some,but not all of its customers. 
B) this firm would increase its profits. 
C) this firm would lose all of its customers. 
D) increasing the price has no effect on profits. 
E) a large loss of customers as the demand facing the firm is quite inelastic. 
A) this firm would lose some,but not all of its customers. 
B) this firm would increase its profits. 
C) this firm would lose all of its customers. 
D) increasing the price has no effect on profits. 
E) a large loss of customers as the demand facing the firm is quite inelastic. A

Question 2

Suppose there are many independent dry cleaners in your city,each of which provides essentially the same service.However,one offers local delivery,another offers free coffee in the shop,while another offers one -hour dry cleaning.Which of the following statements explains what is happening in this market?

Accepted Answer

A) These firms are perfectly competitive and are attempting to increase sales and maximize their profits. 
B) These firms are oligopolistic and are engaging in strategic behaviour. 
C) These firms are perfectly competitive and are engaging in non -price competition. 
D) These firms are monopolistically competitive and are attempting to differentiate their product. 
E) These firms are perfectly competitive and are engaging in strategic behaviour. 
A) These firms are perfectly competitive and are attempting to increase sales and maximize their profits. 
B) These firms are oligopolistic and are engaging in strategic behaviour. 
C) These firms are perfectly competitive and are engaging in non -price competition. 
D) These firms are monopolistically competitive and are attempting to differentiate their product. 
E) These firms are perfectly competitive and are engaging in strategic behaviour. D

Question 3

The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.
   FIGURE 11-1
-Refer to Figure 11-1.Which of the following statements best describes the long -run equilibrium for this firm?

Accepted Answer

A) New firms will enter,causing this firmʹs demand curve to shift to the left until its profits are eliminated. 
B) The firm will continue to earn its existing level of profits. 
C) The firm will continue to earn its existing level of profits because it can prevent the entry of new firms to the market. 
D) Firms with similar cost structures will exit the industry until profits are zero. 
E) The AC curve will shift down in the long run and profits for this particular firm will increase. 
A) New firms will enter,causing this firmʹs demand curve to shift to the left until its profits are eliminated. 
B) The firm will continue to earn its existing level of profits. 
C) The firm will continue to earn its existing level of profits because it can prevent the entry of new firms to the market. 
D) Firms with similar cost structures will exit the industry until profits are zero. 
E) The AC curve will shift down in the long run and profits for this particular firm will increase. A

Question 4

The excess-capacity theorem predicts that

Accepted Answer

A) when price-taking firms maximize their profits by setting price equal to marginal cost,each firm operates with some excess capacity. 
B) long-run equilibrium in a monopolistically competitive industry occurs with all firms producing at a lower output level than that which minimizes average total costs. 
C) profit-maximizing firms will always choose to operate with some degree of excess capacity,in order to be flexible in the face of shifts in demand. 
D) monopolistic firms will achieve positive economic profits by restricting output below the economically efficient level at which average total costs are minimized. 
E) all firms in a perfectly competitive industry will produce at a lower output level than that which minimizes average total costs. 
A) when price-taking firms maximize their profits by setting price equal to marginal cost,each firm operates with some excess capacity. 
B) long-run equilibrium in a monopolistically competitive industry occurs with all firms producing at a lower output level than that which minimizes average total costs. 
C) profit-maximizing firms will always choose to operate with some degree of excess capacity,in order to be flexible in the face of shifts in demand. 
D) monopolistic firms will achieve positive economic profits by restricting output below the economically efficient level at which average total costs are minimized. 
E) all firms in a perfectly competitive industry will produce at a lower output level than that which minimizes average total costs.

Question 5

Unlike perfectly competitive and monopolistically competitive firms,oligopolists

Accepted Answer

A) operate where MR = MC. 
B) take account of the likely reactions of their competitors to their actions. 
C) always make positive profits. 
D) always have differentiated products. 
E) earn zero profits in the long run. 
A) operate where MR = MC. 
B) take account of the likely reactions of their competitors to their actions. 
C) always make positive profits. 
D) always have differentiated products. 
E) earn zero profits in the long run.

Question 6

Consider the following characteristics of a particular industry: - there is freedom of entry and exit
- in long-run equilibrium,each firm is producing a level of output where there are increasing returns to scale This industry is likely to be

Accepted Answer

A) an oligopoly. 
B) highly concentrated. 
C) monopolistically competitive. 
D) perfectly competitive. 
E) a cartel. 
A) an oligopoly. 
B) highly concentrated. 
C) monopolistically competitive. 
D) perfectly competitive. 
E) a cartel.

Question 7

A Canadian industry composed of many small firms is

Accepted Answer

A) steel manufacturing. 
B) automobile production. 
C) gasoline retailing. 
D) restaurants. 
E) natural gas transmission. 
A) steel manufacturing. 
B) automobile production. 
C) gasoline retailing. 
D) restaurants. 
E) natural gas transmission.

Question 8

A monopolistically competitive firm has some degree of market power because

Accepted Answer

A) it always makes positive profits. 
B) there are few firms in the industry. 
C) of natural barriers to entry. 
D) of legal barriers to entry. 
E) it sells a differentiated product. 
A) it always makes positive profits. 
B) there are few firms in the industry. 
C) of natural barriers to entry. 
D) of legal barriers to entry. 
E) it sells a differentiated product.

Question 9

The diagram below shows demand and cost curves for a monopolistically competitive firm.
   FIGURE 11-3
-Refer to Figure 11-3.If an increase in industry demand led to an outward shift in each firmʹs demand curve,and no change to the firmʹs costs,the typical firm would

Accepted Answer

A) be making profits and new firms would enter the industry in the long run. 
B) be making losses and some firms would exit the industry in the long run. 
C) would expand its output in the long run. 
D) increase costs in order to break even at P1 and Q1 in the long run. 
E) decrease costs in order to break even at P1 and Q1 in the long run. 
A) be making profits and new firms would enter the industry in the long run. 
B) be making losses and some firms would exit the industry in the long run. 
C) would expand its output in the long run. 
D) increase costs in order to break even at P1 and Q1 in the long run. 
E) decrease costs in order to break even at P1 and Q1 in the long run.

Question 10

When a monopolistically competitive industry is in long-run equilibrium,each firm will be operating where price is

Accepted Answer

A) greater than average total cost but equal to marginal cost. 
B) greater than average total cost and greater than marginal cost. 
C) equal to average total cost and to marginal cost. 
D) greater than marginal cost but equal to average total cost. 
E) less than marginal cost and equal to average total cost. 
A) greater than average total cost but equal to marginal cost. 
B) greater than average total cost and greater than marginal cost. 
C) equal to average total cost and to marginal cost. 
D) greater than marginal cost but equal to average total cost. 
E) less than marginal cost and equal to average total cost.

Question 11

Suppose two firms,Allstom from France,and Bombardier from Canada,are bidding on a contract to replace train cars for the subway system in Mexico City.If they bid the same amount,they share the contract-otherwise,the low bid wins.The figure below shows the payoff matrix for this contest.
   FIGURE 11-5
-Refer to Figure 11-5.What is the Nash equilibrium in this bidding contest between Allstom and Bombardier?

Accepted Answer

A) The two firms will co-operate and maximize their joint profits at $10 million each. 
B) Each firm will bid the high price,expecting a larger total profit. 
C) Each firm will bid the low price,and each will earn a profit of $2.5 million. 
D) There is no Nash equilibrium in this bidding contest,because each firm can expect to earn at least $5 million. 
E) both A and C are Nash equilibria. 
A) The two firms will co-operate and maximize their joint profits at $10 million each. 
B) Each firm will bid the high price,expecting a larger total profit. 
C) Each firm will bid the low price,and each will earn a profit of $2.5 million. 
D) There is no Nash equilibrium in this bidding contest,because each firm can expect to earn at least $5 million. 
E) both A and C are Nash equilibria.

Question 12

The diagram below shows demand and cost curves for a monopolistically competitive firm.
   FIGURE 11-3
-Refer to Figure 11-3.In the long run,a monopolistically competitive firm will

Accepted Answer

A) make profit by producing at Q2 and charging price P1. 
B) lose money by producing at Q1 and charging price P2. 
C) maximize profit and make positive profit by producing at Q1 and charging price P1. 
D) maximize profit but only break even by producing at Q1 and charging price P1. 
E) maximize profit by producing output level Q2,the minimum point of its LRAC curve. 
A) make profit by producing at Q2 and charging price P1. 
B) lose money by producing at Q1 and charging price P2. 
C) maximize profit and make positive profit by producing at Q1 and charging price P1. 
D) maximize profit but only break even by producing at Q1 and charging price P1. 
E) maximize profit by producing output level Q2,the minimum point of its LRAC curve.

Question 13

ʺBrand proliferationʺ is an example of

Accepted Answer

A) an economy of scale. 
B) a firm-created barrier to entry. 
C) an absolute cost advantage. 
D) collusive behaviour. 
E) predatory pricing. 
A) an economy of scale. 
B) a firm-created barrier to entry. 
C) an absolute cost advantage. 
D) collusive behaviour. 
E) predatory pricing.

Question 14

Suppose the market for gasoline retailing (gas stations)in an island economy has 12 firms.The two largest firms each account for 30% of sales,the third accounts for 15%,the fourth for 7%,the fifth for 4% and the remaining firms for 2% each.What is the four-firm concentration ratio?

Accepted Answer

A) 8% 
B) 60% 
C) 75% 
D) 82% 
E) 100% 
A) 8% 
B) 60% 
C) 75% 
D) 82% 
E) 100%

Question 15

The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.
   FIGURE 11-1
-Refer to Figure 11-1.Assuming that this firm is producing its profit -maximizing level of output,what are the profits or losses being earned by this firm?

Accepted Answer

A) -$500 
B) -$1000 
C) $2000 
D) $1000 
E) $500 
A) -$500 
B) -$1000 
C) $2000 
D) $1000 
E) $500

Question 16

Both empirical evidence and everyday observation suggest that oligopolies contribute to economic growth in the very-long-run by

Accepted Answer

A) achieving allocative efficiency. 
B) consistently producing at full-capacity output. 
C) achieving technological improvements and innovations through research and development. 
D) decreasing minimum efficient scale. 
E) rarely laying off workers. 
A) achieving allocative efficiency. 
B) consistently producing at full-capacity output. 
C) achieving technological improvements and innovations through research and development. 
D) decreasing minimum efficient scale. 
E) rarely laying off workers.

Question 17

One difference between a perfectly competitive market and a monopolistically competitive market is that

Accepted Answer

A) there are no barriers to entry in monopolistic competition. 
B) there are no barriers to exit in monopolistic competition. 
C) there is no product differentiation in perfect competition 
D) there is no product differentiation in monopolistic competition 
E) there is strategic interaction among firms in monopolistic competition. 
A) there are no barriers to entry in monopolistic competition. 
B) there are no barriers to exit in monopolistic competition. 
C) there is no product differentiation in perfect competition 
D) there is no product differentiation in monopolistic competition 
E) there is strategic interaction among firms in monopolistic competition.

Question 18

Consider the following characteristics of a particular industry: - each firm faces a demand curve with price elasticity greater than 10 000
- each firm produces at a minimum efficient scale in long-run equilibrium This industry is likely to be

Accepted Answer

A) an oligopoly. 
B) highly concentrated. 
C) monopolistically competitive. 
D) perfectly competitive. 
E) a cartel. 
A) an oligopoly. 
B) highly concentrated. 
C) monopolistically competitive. 
D) perfectly competitive. 
E) a cartel.

Question 19

Consider the following characteristics of a particular industry: - the firms in the industry are maximizing their joint profits
- entry of new firms is restricted This industry is likely to be

Accepted Answer

A) a monopoly. 
B) one where each firm has limited market power. 
C) monopolistically competitive. 
D) perfectly competitive. 
E) a cartel. 
A) a monopoly. 
B) one where each firm has limited market power. 
C) monopolistically competitive. 
D) perfectly competitive. 
E) a cartel.

Question 20

The table below shows the market shares for the only firms in a domestic cement market.   TABLE 11-1
-Refer to Table 11-1.The eight-firm concentration ratio in this industry is ________%.

Accepted Answer

A) 100 
B) 92 
C) 85 
D) 67 
E) 45 
A) 100 
B) 92 
C) 85 
D) 67 
E) 45

Exam 11: Imperfect Competition and Strategic Behaviour

Suppose that a monopolistically competitive firm decides to raise its price.The theory of monopolistic competition predicts that

The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry. FIGURE 11-1 -Refer to Figure 11-1.Which of the following statements best describes the long -run equilibrium for this firm?

The excess-capacity theorem predicts that

Unlike perfectly competitive and monopolistically competitive firms,oligopolists

Consider the following characteristics of a particular industry: - there is freedom of entry and exit - in long-run equilibrium,each firm is producing a level of output where there are increasing returns to scale This industry is likely to be

A Canadian industry composed of many small firms is

A monopolistically competitive firm has some degree of market power because

The diagram below shows demand and cost curves for a monopolistically competitive firm. FIGURE 11-3 -Refer to Figure 11-3.If an increase in industry demand led to an outward shift in each firmʹs demand curve,and no change to the firmʹs costs,the typical firm would

When a monopolistically competitive industry is in long-run equilibrium,each firm will be operating where price is

The diagram below shows demand and cost curves for a monopolistically competitive firm. FIGURE 11-3 -Refer to Figure 11-3.In the long run,a monopolistically competitive firm will

ʺBrand proliferationʺ is an example of

Suppose the market for gasoline retailing (gas stations)in an island economy has 12 firms.The two largest firms each account for 30% of sales,the third accounts for 15%,the fourth for 7%,the fifth for 4% and the remaining firms for 2% each.What is the four-firm concentration ratio?

The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry. FIGURE 11-1 -Refer to Figure 11-1.Assuming that this firm is producing its profit -maximizing level of output,what are the profits or losses being earned by this firm?

Both empirical evidence and everyday observation suggest that oligopolies contribute to economic growth in the very-long-run by

One difference between a perfectly competitive market and a monopolistically competitive market is that

Consider the following characteristics of a particular industry: - each firm faces a demand curve with price elasticity greater than 10 000 - each firm produces at a minimum efficient scale in long-run equilibrium This industry is likely to be

Consider the following characteristics of a particular industry: - the firms in the industry are maximizing their joint profits - entry of new firms is restricted This industry is likely to be

The table below shows the market shares for the only firms in a domestic cement market. TABLE 11-1 -Refer to Table 11-1.The eight-firm concentration ratio in this industry is ________%.

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