Question 1

Suppose an industry is made up of four firms, all with equal sales. The four-firm concentration ratio of that industry is

Accepted Answer

A) 0.125. 
B) 0.50. 
C) 1.00. 
D) This cannot be determined without more information. 
A) 0.125. 
B) 0.50. 
C) 1.00. 
D) This cannot be determined without more information.

Question 2

Some economists contend that a monopolistic competitor tends to produce too __________ output, charges a price that is too __________ and __________ its present plant size.

Accepted Answer

A) little; low; underutilizes 
B) little; high; underutilizes 
C) much; low; overutilizes 
D) much; high; overutilizes 
E) much; low; underutilizes 
A) little; low; underutilizes 
B) little; high; underutilizes 
C) much; low; overutilizes 
D) much; high; overutilizes 
E) much; low; underutilizes

Question 3

List and describe the three defining assumptions of the theory of monopolistic competition.

Accepted Answer

The three assumptions upon which the the

Question 4

One of the key characteristics of oligopoly is that

Accepted Answer

A) firms are independent of each other. 
B) firms face different cost conditions. 
C) each firm is aware that its actions will influence other firms and that the actions of the other firms affect it. 
D) it is easy to enter the industry. 
E) none of the above 
A) firms are independent of each other. 
B) firms face different cost conditions. 
C) each firm is aware that its actions will influence other firms and that the actions of the other firms affect it. 
D) it is easy to enter the industry. 
E) none of the above

Question 5

Concentration ratios are often used to determine the degree of oligopoly in an industry.

Accepted Answer

A) True 
 B)False

Question 6

Why can't an economist say for certain that a monopolistic competitive firm will always earn zero economic profits in the long run?

Accepted Answer

A) Barriers to entry are significant in monopolistic competition. 
B) The very large number of buyers indicates that there will always be demand for the firm's product. 
C) The firms in the industry do not produce identical products. 
D) The firms practice price competition, so at least some firms will always be charging a lower price than other firms and will sell more as a result. 
E) The firms face a horizontal demand curve. 
A) Barriers to entry are significant in monopolistic competition. 
B) The very large number of buyers indicates that there will always be demand for the firm's product. 
C) The firms in the industry do not produce identical products. 
D) The firms practice price competition, so at least some firms will always be charging a lower price than other firms and will sell more as a result. 
E) The firms face a horizontal demand curve.

Question 7

The assumption that precludes economic profits in monopolistic competition in the long run is that

Accepted Answer

A) there are many buyers and sellers. 
B) the firms produce a homogeneous product. 
C) there is easy entry and exit in this market structure. 
D) buyers and sellers have all relevant information. 
A) there are many buyers and sellers. 
B) the firms produce a homogeneous product. 
C) there is easy entry and exit in this market structure. 
D) buyers and sellers have all relevant information.

Question 8

If a market is contestable, then

Accepted Answer

A) a cartel will form in the industry. 
B) economic profits are small or zero. 
C) firms face a vertical demand curve. 
D) there is a dominant firm in the market. 
E) none of the above 
A) a cartel will form in the industry. 
B) economic profits are small or zero. 
C) firms face a vertical demand curve. 
D) there is a dominant firm in the market. 
E) none of the above

Question 9

If two firms that form a cartel agreement are in a prisoner's dilemma game, then

Accepted Answer

A) both firms will have an incentive to break the agreement. 
B) only one firm will have an incentive to break the agreement. 
C) both firms will be better off if they hold to the agreement than if they break it. 
D) a and c 
E) b and c 
A) both firms will have an incentive to break the agreement. 
B) only one firm will have an incentive to break the agreement. 
C) both firms will be better off if they hold to the agreement than if they break it. 
D) a and c 
E) b and c

Question 10

Cartels often dissolve because

Accepted Answer

A) their members often set a time limit as to how long the cartel should exist. 
B) their members often cheat on the cartel agreements because they have incentive to. 
C) their members often find that they do not earn as high profits from the cartel as they had hoped to. 
D) firms in a cartel face different costs than firms outside a cartel. 
E) none of the above 
A) their members often set a time limit as to how long the cartel should exist. 
B) their members often cheat on the cartel agreements because they have incentive to. 
C) their members often find that they do not earn as high profits from the cartel as they had hoped to. 
D) firms in a cartel face different costs than firms outside a cartel. 
E) none of the above

Question 11

In long-run equilibrium, a monopolistic competitive firm will most likely produce a level of output for which price equals average total cost.

Accepted Answer

A) True 
 B)False

Question 12

In long run equilibrium, a monopolistic competitive firm's price will

Accepted Answer

A) exceed ATC, but equal MC. 
B) exceed both MC and ATC. 
C) be less than both MC and ATC. 
D) exceed MC, but equal ATC. 
A) exceed ATC, but equal MC. 
B) exceed both MC and ATC. 
C) be less than both MC and ATC. 
D) exceed MC, but equal ATC.

Question 13

The excess capacity theorem states that a monopolistic competitor

Accepted Answer

A) will produce an output level smaller than the one that would minimize its unit costs. 
B) will produce an output level where MR > MC. 
C) generally does not attain long run equilibrium, and thus charges a higher price than it should. 
D) typically produces too much of a good at too low a quality. 
A) will produce an output level smaller than the one that would minimize its unit costs. 
B) will produce an output level where MR > MC. 
C) generally does not attain long run equilibrium, and thus charges a higher price than it should. 
D) typically produces too much of a good at too low a quality.

Question 14

In the prisoner's dilemma, each prisoner would be best off if

Accepted Answer

A) both confess. 
B) one confesses but the other does not. 
C) one confesses, regardless of what the other does. 
D) neither confesses. 
A) both confess. 
B) one confesses but the other does not. 
C) one confesses, regardless of what the other does. 
D) neither confesses.

Question 15

Unlike a perfectly competitive firm, a monopolistic competitor operates in the long run at a point at which

Accepted Answer

A) P = ATC. 
B) MR = MC. 
C) unit costs are not minimized. 
D) profits are zero. 
A) P = ATC. 
B) MR = MC. 
C) unit costs are not minimized. 
D) profits are zero.

Question 16

A significant difference between perfect competition and monopolistic competition is that

Accepted Answer

A) a perfectly competitive firm is a price searcher, while a monopolistic competitive firm is a price taker. 
B) a perfectly competitive firm faces a downward-sloping demand curve, while a monopolistic competitive firm faces a perfectly elastic demand curve. 
C) a perfectly competitive firm sells a homogeneous product, while a monopolistic competitive firm sells a differentiated product. 
D) a perfectly competitive firm sets price above marginal cost, while a monopolistic competitive firm sets price equal to marginal cost. 
A) a perfectly competitive firm is a price searcher, while a monopolistic competitive firm is a price taker. 
B) a perfectly competitive firm faces a downward-sloping demand curve, while a monopolistic competitive firm faces a perfectly elastic demand curve. 
C) a perfectly competitive firm sells a homogeneous product, while a monopolistic competitive firm sells a differentiated product. 
D) a perfectly competitive firm sets price above marginal cost, while a monopolistic competitive firm sets price equal to marginal cost.

Question 17

The relationship between a monopolistic competitive firm's marginal revenue curve and its demand curve is that the

Accepted Answer

A) two curves coincide and are horizontal at the market price. 
B) marginal revenue curve lies above the demand curve and the demand curve is horizontal at the market price. 
C) marginal revenue curve lies below the demand curve and both are downward sloping. 
D) two curves coincide and are downward sloping to the right. 
E) marginal revenue curve lies above the demand curve and both are downward sloping. 
A) two curves coincide and are horizontal at the market price. 
B) marginal revenue curve lies above the demand curve and the demand curve is horizontal at the market price. 
C) marginal revenue curve lies below the demand curve and both are downward sloping. 
D) two curves coincide and are downward sloping to the right. 
E) marginal revenue curve lies above the demand curve and both are downward sloping.

Question 18

If a contestable market does not satisfy all of the conditions of a perfectly competitive market, that contestable market _______________ achieve resource allocative efficiency.

Accepted Answer

A) will not 
B) will definitely 
C) could possibly 
D) This is a trick question since only monopolies achieve resource allocative efficiency. 
A) will not 
B) will definitely 
C) could possibly 
D) This is a trick question since only monopolies achieve resource allocative efficiency.

Question 19

The key behavioral assumption of the cartel theory is that oligopolists in the industry act as if

Accepted Answer

A) all firms in the industry are the same size. 
B) all firms in the industry are price takers. 
C) there is a dominant firm in the industry and many fringe firms. 
D) there is only one firm in the industry. 
E) none of the above 
A) all firms in the industry are the same size. 
B) all firms in the industry are price takers. 
C) there is a dominant firm in the industry and many fringe firms. 
D) there is only one firm in the industry. 
E) none of the above

Question 20

The key behavioral assumption of the cartel theory is that oligopolists in an industry

Accepted Answer

A) try to maximize sales instead of profits. 
B) act as if they are perfect competitors. 
C) act in a manner consistent with there being only one firm in the industry. 
D) try to create a demand for their products by way of advertising. 
E) none of the above 
A) try to maximize sales instead of profits. 
B) act as if they are perfect competitors. 
C) act in a manner consistent with there being only one firm in the industry. 
D) try to create a demand for their products by way of advertising. 
E) none of the above

Exam 24: Monopolistic Competition Oligopoly and Game Theory

Suppose an industry is made up of four firms, all with equal sales. The four-firm concentration ratio of that industry is

Some economists contend that a monopolistic competitor tends to produce too __________ output, charges a price that is too __________ and __________ its present plant size.

List and describe the three defining assumptions of the theory of monopolistic competition.

One of the key characteristics of oligopoly is that

Concentration ratios are often used to determine the degree of oligopoly in an industry.

Why can't an economist say for certain that a monopolistic competitive firm will always earn zero economic profits in the long run?

The assumption that precludes economic profits in monopolistic competition in the long run is that

If a market is contestable, then

If two firms that form a cartel agreement are in a prisoner's dilemma game, then

Cartels often dissolve because

In long-run equilibrium, a monopolistic competitive firm will most likely produce a level of output for which price equals average total cost.

In long run equilibrium, a monopolistic competitive firm's price will

The excess capacity theorem states that a monopolistic competitor

In the prisoner's dilemma, each prisoner would be best off if

Unlike a perfectly competitive firm, a monopolistic competitor operates in the long run at a point at which

A significant difference between perfect competition and monopolistic competition is that

The relationship between a monopolistic competitive firm's marginal revenue curve and its demand curve is that the

If a contestable market does not satisfy all of the conditions of a perfectly competitive market, that contestable market _______________ achieve resource allocative efficiency.

The key behavioral assumption of the cartel theory is that oligopolists in the industry act as if

The key behavioral assumption of the cartel theory is that oligopolists in an industry

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Some economists contend that a monopolistic competitor tends to produce too output, charges a price that is too and __ its present plant size.