Deck 9: Monopolistic Competition and Oligopoly

Question 1

Monopolistic competition is a market structure characterized by few sellers and interfirm rivalry.

Answer 1

False

Question 2

Under monopolistic competition, each seller firm attempts to retain or increase its market share by engaging in fierce price competition with the other firms.

Answer 2

False

Question 3

Becky's Bookshelves currently sells 50 bookshelves a month for $160.00. Becky is going to begin a series of advertisements in order to boost her sales. With a market share curve described by Q_M = 150-.5P, Becky will be able to sell 100 bookshelves at her current price.

Answer 3

False

Question 4

Oligopoly is a market structure characterized by few sellers and interfirm rivalry.

Question 5

When the monopolistically competitive firm is in equilibrium, short run marginal cost curve is equal to marginal revenue and the firm's demand curve intersects its market share curve.

Question 6

Monopolistic competition is the name applied to a market structure with numerous firms that sell slightly differentiated products.

Question 7

You believe that you have a costless monopoly. Given your estimate of the demand for mushrooms: Q_m = 1500 - 200P_m, where Q_m = servings of fried mushroom and gravy, a price of $3.75 and a quantity of 750 would yield you a maximum total revenue.

Question 8

Under monopolistic competition, each seller firm is usually very concerned about the relationship between its individual actions and those of other firms in the industry.

Question 9

When the monopolistically competitive firm is adjusting to equilibrium, it will always change price, the estimate of demand, and increase product differentiation.

Question 10

A market share curve is the market demand curve for monopolistic firms.

Question 11

The monopolistically competitive firm understands that the relevant portion of its demand curve is highly elastic.

Question 12

A market share curve describes the amounts the firm can actually sell at various prices as all firms in the industry adjust price together.

Question 13

Under monopolistic competition, each seller firm attempts to retain or increase its market share by differentiating its product from the output of other firms.

Question 14

Product differentiation is the term economists have settled on to describe a market structure with numerous firms that sell slightly differentiated products.

Question 15

With a market share demand curve of Q_M = 150-.5P, Becky's Bookshelves can sell more than her current 50 bookshelves at $160.00 each. Once Becky found the amount she could sell given her market share, she revised her firms demand curve to be Q = 200 - P. With her new output, she has a marginal cost of $100 and assuming AVC is covered, she is currently maximizing profit.

Question 16

Under monopolistic competition, each seller firm is not particularly concerned about the relationship between its individual actions and those of other firms in the industry.

Question 17

A duopoly is a market characterized by just two sellers of a specific product.

Question 18

Product differentiation refers to a wide variety of activities, such as design changes and advertising, that rival firms employ to attract consumers to their products.

Question 19

In the long run, a firm in monopolistic competition will have only normal profit and will operate a plant slightly smaller than it would have under perfect competition.

Question 20

Oligopoly is the term economists have settled on to describe a market structure with numerous firms that sell slightly differentiated products.

Question 21

Price rigidity refers to the inability for firms to change price because of consumer reaction.

Question 22

Price leadership occurs when specific firms in an oligopolistic group perhaps even one firm) sets a price that subsequently determines what other members of the group will charge.

Question 23

The kinked demand curve model assumes that an oligopolistic firm recognizes its mutual interdependence with other firms and, collusive agreements in the industry lead to the tendency for all firms in an industry to charge approximately the same price for a specific product over long periods of time.

Question 24

A large firm that is a price leader in an industry characterized also by many small competing firms estimates that the market demand for its product to be as follows: Q_m = 40,700 - 100P, where Q_m is units per month.
It expects small firms in the industry to supply output according to the following function: Q_s = 700 + 25P.
The quantity that the large firm will sell is 7750.

Question 25

You believe that you have a costless monopoly. Given your estimate of the demand for mushrooms: Q_m = 700 - 100P_m, where Q_m = servings of fried mushroom and gravy, you would have a maximum possible total revenue of $1500.00.

Question 26

Price rigidity is the tendency for all firms in an industry to charge approximately the same price for a specific product over long periods of time.

Question 27

Entry limit pricing is a barrier to entry because it is the practice of setting a price lower than the one that maximizes profit.

Question 28

Price rigidity can be an indication of collusive agreements in an industry.

Question 29

A large firm that is a price leader in an industry characterized also by many small competing firms estimates that the market demand for its product to be as follows: Q_m = 40,700 - 100P, where Q_m is units per month.
It expects small firms in the industry to supply output according to the following function: Q_s = 700 + 25P.
The demand function for the large firm is Q_L = 40,000 - 125P.

Question 30

In oligopoly, a firm facing a kinked demand curve will seldom wish to change prices.

Question 31

Contestable markets are based on three assumptions: entry is free and costless, new firms can enter with no price reaction and exit is free and costless.

Question 32

According to Chamberlin's approach to duopoly, he believed that the two firms would recognize that they are mutually interdependent on each other and the firms will work together to maximize joint profits.

Question 33

The kinked demand curve model assumes that an oligopolistic firm recognizes its mutual interdependence with other firms and, while it does not collude with them, each firm acting independently, has determined that it cannot gain by departing from the prevailing price.

Question 34

Barriers to entry are conditions that make it difficulty for new firms to enter an industry or market where existing firms have long run interests.

Question 35

Capital requirements are a barrier to entry because a new entrant may have to make huge investments in order to participate in the industry.

Question 36

In a market characterized by price leadership by a dominant firm, the dominant firm accepts the price determined by the larger number of smaller firms.

Question 37

A kinked demand curve consists of an elastic range for price increases and a less elastic range for price decreases.

Question 38

Two market situations in which there is a clear reason for a price leader's identity are the efficient firm case and the dominant firm case.

Question 39

In a market characterized by price leadership by a dominant firm, the smaller firms accept the price determined by the large firm.

Question 40

You believe that you have a costless monopoly. Given your estimate of the one day demand for mushrooms: Q_m = 1500 - 200P_m, where Q_m = servings of fried mushroom and gravy. If another booth opens next to yours also selling fried mushroom and gravy, but demand remains as above assume the product is undifferentiated), each of you would generate $1,250 in revenue under the Cournot assumption.

Question 41

The kinked demand curve model assumes that an oligopolistic firm recognizes its mutual interdependence with other firms and:

A) while it does not collude with them, each firm acting independently, has determined that it can not gain by departing from the prevailing price.
B) while it does not collude with them, each firm acting independently, has determined that it has much to be gained by departing from the prevailing price.
C) collusive agreements in the industry lead to the tendency for all firms in an industry to charge approximately the same price for a specific product over long periods of time.
D) collusive agreements in the industry lead to the tendency for all firms in an industry to charge approximately the same price for a specific product over a short period of time even though prices may vary widely over long periods of time.
E) while it does not collude with them, each firm acting independently, has determined that it can not gain by departing from the prevailing price set by the industry leader.

Question 42

The dominant firm case of price leadership is characterized by all of the following EXCEPT:

A) a firm with lower marginal and average costs
B) a firm which can sustain losses for a period of time
C) a firm which can establish a monopoly price based on the market demand curve
D) a firm which has the ability to drive smaller rival firms from the market.
E) the threat of action by the anti-trust division of the Justice Department under the predatory price cutting rules if it was felt that the dominant firm had cut its price to an unreasonably low level in order to eliminate competition.

Question 43

In a market characterized by price leadership,

A) the dominant firm accepts the price determined by the larger number of smaller firms.
B) the smaller firms accept the price determined by the dominant firm.
C) specific firms in an oligopolistic group perhaps even one firm) sets a price that subsequently influences but does not determine what other members of the group will charge.
D) the efficiency of the price leading firm is almost never an issue.
E) the dominance of the price leading firm is almost never an issue.

Question 44

A large firm that is a price leader in an industry characterized also by many small competing firms estimates that the market demand for its product to be as follows: Q_m = 20,700 - 75P, where Q_m is units per month.
It expects small firms in the industry to supply output according to the following function: Q_s = 700 + 25P. If the large firm's marginal cost is constant at $52, what quantity will it sell?

A) 14,800
B) 6,875
C) 6,625
D) 7,400
E) 8,550

Question 45

Price rigidity:

A) refers to the inability for firms to change price because of consumer reaction.
B) is usually an indication of collusive agreements in an industry.
C) is the tendency for all firms in an industry to charge approximately the same price for a specific product over long periods of time.
D) is the tendency for all firms in an industry to charge approximately the same price for a specific product over a short period of time even though prices may vary widely over long periods of time.
E) is almost never an indication of collusive agreements in an industry.

Question 46

All of the following are characteristics of monopolistic competition EXCEPT:

A) the use of advertising to differentiate products
B) a relatively large number of sellers
C) each seller firm is not particularly concerned about the relationship between its individual actions and those of other firms in the industry.
D) a few sellers.
E) each seller firm attempts to retain or increase its market share by differentiating its product from the output of other firms.

Question 47

The dominant firm case of price leadership is characterized by the following:

A) a firm which can sustain losses for a period of time
B) a firm which can establish a monopoly price based on the market demand curve
C) a firm which has the ability to drive smaller rival firms from the market.
D) the threat of action by the anti-trust division of the Justice Department under the predatory price cutting rules if it was felt that the dominant firm had cut its price to an unreasonably low level in order to eliminate competition.
E) all of the above.

Question 48

All of the following are characteristics of monopolistic competition EXCEPT:

A) the use of advertising to differentiate products
B) a relatively large number of sellers
C) each seller firm is not particularly concerned about the relationship between its individual actions and those of other firms in the industry.
D) collusive agreements which lead to the tendency for all firms in an industry to charge approximately the same price for a specific product over long periods of time.
E) each seller firm attempts to retain or increase its market share by differentiating its product from the output of other firms.

Question 49

A large firm that is a price leader in an industry characterized also by many small competing firms estimates that the market demand for its product to be as follows: Q_m = 20,700 - 75P, where Q_m is units per month.
It expects small firms in the industry to supply output according to the following function: Q_s = 700 + 25P. What is the demand function for the large firm?

A) Q_L = 20,000 - 100P.
B) Q_L = 20,000 + 100P
C) Q_L = 20,700 + 125P
D) Q_L = 21,400 - 100P
E) Q_L = 21,400 + 100P

Question 50

You believe that you have a costless monopoly. Given your estimate of the one day demand for mushrooms:
Q_m = 1050 - 150P_m
Where Q_m = servings of fried mushroom and gravy. What price and quantity would yield you the most revenue?

A) P = $3.50, Q = 525
B) P = $3.50, Q = 1050
C) P = $7.00, Q = 525
D) P = $7.00, Q = 1050
E) none of the above

Question 51

The efficient firm case of price leadership is characterized by which of the following?

A) a firm with lower marginal and average costs
B) a firm which can sustain losses for a period of time
C) a firm which can establish a monopoly price based on the market demand curve
D) a firm which has the ability to drive smaller rival firms from the market.
E) the threat of action by the anti-trust division of the Justice Department under the predatory price cutting rules if it was felt that the dominant firm had cut its price to an unreasonably low level in order to eliminate competition.

Question 52

A cartel exists when:

A) a number of firms get together and agree on a policy of managing operations in a way that will maximize the joint profits of the group.
B) a number of firms get together and agree on a policy of managing operations in a way that will maximize the profits of the dominant member of the group.
C) a group of firms have joined together to make agreements on pricing but not on market strategy.
D) a group of firms have joined together to make agreements on market strategy but not on pricing.
E) a number of firms get together and agree on a policy of managing operations in a way that will maximize the profits of the largest four of five members of the group.

Question 53

Two market situations in which there is a clear reason for a price leader's identity are:

A) the cartel case and the dominant firm case.
B) the efficient firm case and the collusive firm case.
C) the collusive firm case and the dominant firm case.
D) the efficient firm case and the dominant firm case.
E) the small firm case and the large firm case.

Question 54

You believe that you have a costless monopoly. Given your estimate of the one day demand for mushrooms:
Q_m = 900 - 100P_m
Where Q_m = servings of fried mushroom and gravy.
If another booth opens next to yours also selling fried mushroom and gravy, but demand remains as above assume the product is undifferentiated), how much revenue will each of you generate under the Cournot assumption?

A) $900
B) $1600
C) $1800
D) $1600
E) $800

Question 55

Perfect collusion is simply another label applied to a market situation where a number of firms get together and agree on a policy of managing operations in a way that will maximize the joint profits of the group.

Question 56

Becky's Bookshelves currently sells 50 bookshelves a month for $160.00. Becky is going to begin a series of advertisements in order to boost her sales. With a market share curve described by Q_M = 150-.5P, how many bookshelves will Becky be able to sell.

A) 50
B) 70
C) 90
D) 110
E) 130

Question 57

A cartel is a group of firms that have joined together to make agreements on pricing and market strategy.

Question 58

A cartel exists when a number of firms get together and agree on a policy of managing operations in a way that will maximize the joint profits of the group.

Question 59

U.S. firms may form cartels for purposes of foreign trade.

Question 60

A large firm that is a price leader in an industry characterized also by many small competing firms estimates that the market demand for its product to be as follows: Q_m = 28,700 - 75P, where Q_m is units per month.
It expects small firms in the industry to supply output according to the following function: Q_s = 1,700 + 25P. What quantity and price will the large firm set?

A) Q = 1,350, P = 135
B) Q = 1,435, P = 143.5
C) Q = 1,350, P = 67.5
D) Q = 1,435, P = 71.75
E) None of the above

Question 61

A firm's research department has estimated that if other firms in the industry are indifferent to changes in the price of its product, its demand curve will be
P₁ = 60 - Q
However, if other firms always charge the same price it does, the firm's demand curve will be
P₂ = 80 - 3Q
a. If the firm's marginal cost equals $30,00, what output and price will maximize profit? Assume that the other firms will not follow a price rise above $50.00 but they will follow a price decrease below $50.00)
b. If the firm's marginal cost equals $8.00, what output and price will maximize profit?

Question 62

A firm's research department has estimated that if other firms in the industry are indifferent to changes in the price of its product, its demand curve will be
Q₁ = 1150 - 50P
However, if other firms always charge the same price it does, the firm's demand curve will be
Q₂ = 250 - 10P
a. If the firm's marginal cost equals $17.50, what output and price will maximize profit? Assume that the other firms will not follow a price rise above $22.50 but they will follow a price decrease below $22.50)
b. If the firm's marginal cost equals $22.09, what output and price will maximize profit?

Question 63

A firm's research department has estimated that if other firms in the industry are indifferent to changes in the price of its product, its demand curve will be
P₁ = 60 - Q
However, if other firms always charge the same price it does, the firm's demand curve will be
P₂ = 80 - 3Q
a. If the firm's marginal cost equals $30,00, what output and price will maximize profit?
b. If the firm's marginal cost equals $8.00, what output and price will maximize profit?

Question 64

The following is a demand curve for an oligopoly firm:
AR = P = 200 - Q
where Q is the quantity sold per month of Product A, and P is the price of Product A. The firm's total cost function is:
TC = 5000 + 20Q - 13Q² + 1/3 Q³
a. Determine the quantity sold that will maximize profit.Assume fractional quantities are acceptable.)
b. Indicate the dollar amount of profit for the firm at the above output per month.

Question 65

A large firm that is a price leader in an industry characterized also by many small competing firms estimates that the market demand for its product to be as follows:
Q_m = 40,700 - 100P
where Q_m is units per month.
It expects small firms in the industry to supply output according to the following function:
Q_s = 700 + 25P
The large firm's marginal cost function is
MC_L = 100 + .016Q
a. What quantity will the large firm sell?
b. What price will the large firm set?
c. What quantity will the small firms sell?

Question 66

A cartel is maximizing profit at a price of $56.50 per ton for its product. The demand curve for the members' product is given by the following equation:
Q = 83,000 - 1000P, so that MR = 83 - .002Q
Suppose that there are three firms in the cartel with the following respective marginal cost functions:
MC₁ = 5 + .002Q₁,
MC₂ = 3 + .003Q₂,
and
MC₃ = 2.5 + .0055Q₃
How much output should be allocated to each cartel member? Assume that Q is yearly output in tons and that MC is marginal cost per ton)

Question 67

Your neighborhood association is participating in a fund raising event at a street fair in the adjacent neighborhood. You are going to have the fried mushroom and gravy booth at this fair which will run from 10 A.M. to 6 P.M. on the second Saturday of a ten-day city-wide festival. This is the only fund-raiser you have all year and it is critical that you earn as much money as possible. You are the only fried mushroom with gravy booth in the entire fair, which covers about 10 square blocks. Even thought is takes almost 40 people to staff this booth for the 12 hours it takes to open, operate and close the booth, all of these people are volunteers from the neighborhood association. All food and related items; propane, plates, forks, etc are donated. Because it is the neighborhood next door, you don't even have to pay for the rental of the booth. Because of all these factors, you believe that you have a costless monopoly. Given your estimate of the one day demand for mushrooms:
Q_m = 1050 - 150P_m
where Q_m = servings of fried mushroom and gravy.
a. What price would yield you the most revenue?
b. If another charity opens a fried mushroom and gravy booth adjacent to yours, but demand remains as above assume the product is undifferentiated), what price will prevail and how much revenue will each of you generate under the Cournot assumption?
c. Could you improve the situation in part b through collusion? If not, why not. If so, how and what would be result in terms of revenue?

Question 68

AUTHOR'S NOTE - Believe it or not, the following problem is only a slightly exaggerated version the situation, that until very recently, we saw depicted on the nightly news here in San Antonio. I thought your students might find the scenario amusing. It is a costless monopoly problem combined with a more or less standard monopolist becomes pure competitor situation and is a combination of material in both chapters eight and nine. Oh yes, they are probably too long to be put on an exam but might make a good take-home assignment.) I first write this note three editions ago and assumed that it would have been gone two editions ago - as of today June 3, 2000, the owner of the catfish farm was most recently in court two weeks ago and we are still fighting this out - and its not over yet.)

-In an area of South Texas lives the Elongated and Very Ugly Orange and Purple Spotted Salamander Salamanderis Elongatis Uglius Maximus). In addition to being ugly, it smells bad, and eats things that other animals need to survive. Because of the possibility of danger to its habitat, the water supply for the ninth largest city in the United States and the largest city in the world supplied entirely from underground water, San Antonio, has been restricted. However, because of a 14th century law about water rights, you, the owner of a catfish farm, have unrestricted use of water from the same place the city gets its water, namely the Edwards Aquifer. You and your catfish are currently using approximately 34,560,000 gallons per day; an amount equal to about 1/3 of the total water used by the rest of the 1,000,000 or so people and five or six catfish who live in San Antonio. Beyond your existing investment in equipment, this water cost you nothing. It just flows out of your two man-made artisan wells. Yes, your MC_w = 0. After your catfish are done bathing in the water, you have no use for it and are currently letting it flow into a nearby river. You have discovered that, even though you didn't pay for the water to begin with, the city of San Antonio will buy it and pay all the costs of pumping it to gathering lakes on the North side of town where it can drain back into the aquifer. That way, not only can the city use the water to keep the aquifer level high enough so that the Elongated and Very Ugly Orange and Purple Spotted Salamander's habitat will not be endangered, but, courtesy of the taxpayers of San Antonio, you get free use of the water again. Other people and businesses have also approached you about purchasing your slightly used water. Because the no-growth Neanderthals in the city have prevented the development of an alternate surface water supply, you believe that you have a costless monopoly. Given your estimate of the daily demand for water :
Q_w = 33 - .5P_w
where Q_w = acre feet of water.
a. What price would yield you the most revenue?
b. In the spring of 1997, after your operation has begun, the chairman of the Texas Water Commission decides that, because the aquifer under the city of San Antonio has fish in it blind fish I might add), the aquifer is actually a river, and therefore subject to the direct control of the state of Texas. As a result of this decision, the state of Texas takes over control of San Antonio's only source of water and begins charging you $8.00 per acre foot for your water. If demand remains as above, at what price and quantity will your slightly used water business operate if it is to maximize profit.
c. After this occurs, the San Antonio city council miraculously discovers that, since 1965, the Lower Woman Hollerin Creek Water Authority LWHCWA) has been trying to sell its surplus water to the city at very reasonable rates. This surplus water is currently being used to flood recreational areas so that they can not be used by the public, and to augment the flow of a local river that is a favorite of tubers and rafters. The LWHCWA will also sell its water to the other entities that have approached you about purchasing your water. As you qualify as a small start up business in a economically depressed area, a local CDBG federal government's Community Development Block Grant program) funded marketing consulting firm does a study of the situation and discovers that, for all intents and purposes, you and the LWHCWA operate in a purely competitive market structure. Assuming that demand and your current cost structure both remain the same, what will be your new price, output and profit.

Question 69

Alpha Beta Corporation ABC) operates in a non-collusive oligopolistic market where firms tend to base their strategies on good old fashioned fear. ABC believes that at its current price its demand curve will be:
Q = 1150 - 50P
if it raised prices, since it expects that other firms will not follow a price increase. However, for price cuts, it believes its demand curve is:
Q' = 250 - 10P
since other firms are expected to follow a reduction in price.
a. With the above assumptions, what are ABC's current price and quantity sold?
b. Suppose that ABC's total cost function is:
STC = 50 + 5Q + .1Q² + .004Q³
Is ABC maximizing its profit at the quantity and price you found in part a? Explain why or why not. If not at what quantity and price is profit maximized. NOTE - Round fractional units of production UP to the next highest whole unit - Round price to dollars and cents)
c. Now suppose that ABC has made an error in the estimate of the total cost function so that the actual total cost function is:
STC = 50 + 5Q + .17Q² + .004Q³
Is ABC maximizing its profit at the quantity and price you found in part a? Explain why or why not. If not at what quantity and price is profit maximized. NOTE - Round fractional units of production UP to the next highest whole unit - Round price to dollars and cents)
d. Now suppose that ABC has made an another error in the estimate of the total cost function so that the actual total cost function is:
STC = 60 + 5Q + .25Q² + .004Q³
Is ABC maximizing its profit at the quantity and price you found in part a? Explain why or why not. If not at what quantity and price is profit maximized. NOTE - Round fractional units of production UP to the next highest whole unit - Round price to dollars and cents)

Question 70

A cartel is maximizing profit at a price of $56.50 per ton for its product. The demand curve for the members' product is given by the following equation: Q = 83,000 - 1000P, so that MR = 83 - .002Q
Suppose that there are three firms in the cartel with the following respective marginal cost functions: MC₁ = 5 + .002Q₁, MC₂ = 3 + .003Q₂, and MC₃ = 2.5 + .0055Q_3. How much output should be allocated to each cartel member? Assume that Q is yearly output in tons and that MC is marginal cost per ton)

A) Firm 1 = 5,000, Firm 2 = 12,500, Firm 3 = 9,000
B) Firm 1 = 5,000, Firm 2 = 9,000, Firm 3 = 12,500
C) Firm 1 = 9,000, Firm 2 = 5,000, Firm 3 = 12,500
D) Firm 1 = 12,500, Firm 2 = 9,000, Firm 3 = 5,000
E) Firm 1 = 12,500, Firm 2 = 9,000, Firm 3 = 5,000

Question 71

Suppose an oligopoly firm has the the following cost and revenue data.

a. Fill in the blank spaces in the table.
a. What output should the firm produce? Why?
b. What price should the firm charge, and what will be its economic profit.

Question 72

A cartel is maximizing profit at a price of $38.12 per ton for its product. The demand curve for the members' product is given by the following equation:
Q = 216,200 - 5000P, so that MR = 43.24 - .0004Q
Suppose that there are three firms in the cartel with the following respective marginal cost functions:
MC₁ = 3 + .003Q₁
MC₂ = 2 + .003875Q₂
and
MC₃ = 2.6 = .004Q₃
How much output should be allocated to each cartel member? Assume that Q is yearly output in tons and that MC is marginal cost per ton)

Question 73

The following is a demand curve for an oligopoly firm:
AR = P = 250 - 2.5Q
where Q is the quantity sold per month of Product A, and P is the price of Product A. The firm's total cost function is:
TC = 200 + 50Q - 7.5Q² + 1/3 Q³
a. Determine the quantity sold that will maximize profit. Assume fractional quantities are acceptable.)
b. Indicate the dollar amount of profit for the firm at the above output per month.

Question 74

A firm's research department has estimated that if other firms in the industry are indifferent to changes in the price of its product, its demand curve will be
Q₁ = 1150 - 50P
However, if other firms always charge the same price it does, the firm's demand curve will be
Q₂ = 250 - 10P
a. If the firm's marginal cost equals $17.50, what output and price will maximize profit?
b. If the firm's marginal cost equals $22.09, what output and price will maximize profit?

Question 75

To maximize profits, managers of a cartel must

A) set a price based on the largest member's marginal cost of production.
B) set a price based on the smallest member's marginal cost of production.
C) allocate production based on the average cost of all members taken as a whole.
D) allocate production based on the "rule of marginal cost."
E) allocate production based on the weighted average marginal cost of all members taken as a whole after adjusting for fluctuations in international currency exchange rates.