Deck 11: Imperfect Competition and Strategic Behaviour

Question 1

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.What quantity of output will this profit- maximizing firm choose to sell?

A)120 units
B)80 units
C)150 units
D)100 units
E)140 units

Answer 1

D

Question 2

The diagram below shows demand and cost curves for a monopolistically competitive firm.
FIGURE 11- 3
The following statements describe a cooperative equilibrium in an oligopoly where the firms are jointly maximizing profits by restricting output.Which statement is false?

A)MR > MC for each individual firm.
B)No individual firm will have an incentive to change output.
C)An individual firm could increase profits by cheating.
D)The firms in the industry will jointly be earning monopoly profits.
E)P > MC for each individual firm.

Answer 2

B

Question 3

FIGURE 11- 2
Refer to Figure 11- 2.Diagram C depicts a typical firm in long- run equilibrium in

A)monopolistically competitive industry.
B)monopolistic industry.
C)an imperfectly competitive industry
D)a perfectly competitive industry.
E)oligopolistic industry.

Answer 3

D

Question 4

One prediction about monopolistic competition is that it has higher unit costs than perfect competition.But it is unreasonable to conclude that monopolistic competition is therefore bad for consumers because

A)consumers benefit from products becoming more homogeneous.
B)consumers benefit because of an increase in quantity available.
C)higher production costs means more employment.
D)consumers benefit from lower prices.
E)consumers benefit from an increased variety of products.

Question 5

The diagram below shows demand and cost curves for a monopolistically competitive firm.
FIGURE 11- 3
Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a contract and each firm is allowed to bid either $100 or $180.If both firms bid the same price,the job is shared equally and each firm earns half the value of its bid.Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero).The non- cooperative outcome in this situation is

A)both firms bid $50.
B)both firms bid $100.
C)one firm bids $100,the other firm bids $180.
D)both firms bid $90.
E)both firms bid $180.

Question 6

In a monopolistically competitive industry,the freedom of entry and exit leads to

A)zero profits in long- run equilibrium.
B)deficient capacity in the industry.
C)a negatively sloped demand curve for the industry.
D)brand proliferation.
E)strategic behaviour with regard to other firms in the industry.

Question 7

Suppose there are many independent dry cleaners in your city,each of which is earning economic profits.According to the theory of monopolistic competition,

A)existing dry cleaners will engage in non- price competition and maintain their profits in the long run.
B)existing dry cleaners will cooperate and maximize their joint profits.
C)existing dry cleaners will cooperate and restrict entry of new firms.
D)new dry cleaners will enter this market until each firm is earning zero profits.
E)existing dry cleaners will expand until they reach the quantity associated with minimum long- run average cost.

Question 8

A characteristic of a monopolistically competitive market is that

A)the firms in the industry engage in strategic,non- price competition.
B)each firm's marginal revenue curve lies above its demand curve.
C)each firm faces a downward- sloping demand curve.
D)the firms sell an identical product.
E)entry into the industry is difficult.

Question 9

FIGURE 11- 2
Monopolistic competition is similar to perfect competition in that

A)strategic behaviour is common to both market structures.
B)firms in both types of market structures produce a standardized product.
C)firms in both types of market structure engage in non- price competition.
D)each firm faces a horizontal demand curve.
E)neither has significant barriers to entry.

Question 10

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.
$\begin{array}{c}&\text { Allstom (A) }\\\text { bombardier (B) }&\begin{array}{|l|l|l|}\hline & \begin{array}{l}\text { A bids } \\\$ 50 \text { million }\end{array} & \begin{array}{l}\text { A bids } \\\$ 35 \text { million }\end{array} \\\hline \begin{array}{l}\text { B bids } \\\$ 50 \mathrm{million}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 10 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 10 \mathrm{~m}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 5 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 0 \mathrm{~m}\end{array} \\\hline \begin{array}{l}\text { B bids } \\\$ 35 \mathrm{million}\end{array} & \begin{array}{l}\text { Profit to } \mathrm{A}: \$ 0 \\\text { Profit to } \mathrm{B}: \$ 5 \mathrm{~m}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 2.5 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 2.5 \mathrm{~m}\end{array} \\\hline\end{array}\end{array}$ FIGURE 11- 4

-Refer to Figure 11- 4.Given the information provided in the figure,what is the cost to either firm of completing this project on its own?

A)$30 million
B)$2.5 million
C)$20 million
D)$10 million
E)$5 million

Question 11

FIGURE 11- 2
Refer to Figure 11- 2.In diagram B,the firm's short- run supply curve is

A)AR.
B)MC.
C)MC above AVC.
D)ATC above AVC.
E)MC above ATC.

Question 12

When the firms in an oligopoly are in a cooperative equilibrium and are maximizing their joint profits,which of the following statements is true?

A)The firms in the industry will jointly be earning monopoly profits.
B)An individual firm could increase profits by cheating.
C)P > MC for each individual firm.
D)MR > MC for each individual firm.
E)All of the above statements are true.

Question 13

Which of the following are characteristic of a monopolistically competitive market?

A)Firms engage in strategic behaviour.
B)Each firm faces a horizontal demand curve.
C)All firms are price takers.
D)Economic profits are often positive in the long run.
E)There are many small firms in the industry.

Question 14

"Brand proliferation" in an oligopolistic industry

A)allows easier entry to a new entrant with small sales.
B)allows firms to cooperate to maximize their joint profits.
C)will generally reduce the expected market share of new entrants to the industry.
D)allows new entrants to the industry to gain significant market share.
E)can shift the average total cost curve down and raise the overall minimum scale of operation.

Question 15

$\begin{array}{c}&\text { Firm B }\\\text { Firm A }&\begin{array}{l|cc} & \text { Cooperate } & \text { Cheat } \\\hline \text { Cooperat } & (30,30) & (10, x) \\\text { Cheat }& (x, 10) & (20,20) \\\end{array}\end{array}$
$\text { TABLE 11-2 }$ $\begin{array}{c}&\text { Firm B }\\\text { Firm A }&\begin{array}{l|cc} & \text { Cooperate } & \text { Cheat } \\\hline \text { Cooperat } & (30,30) & (10, x) \\\text { Cheat }& (x, 10) & (20,20) \\\end{array}\end{array}$
$\text { TABLE 11-2 }$

-Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a highway- construction contract and each firm is allowed to bid either $100 million or $120 million.If both firms bid the same price,the job is shared equally and each firm earns half the value of its bid.Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero).The non- cooperative outcome in this situation is

A)both firms bid $60 million.
B)both firms bid $100 million.
C)both firms bid $50 million.
D)one firm bids $100 million,the other firm bids $120 million.
E)both firms bid $120 million.

Question 16

$\begin{array}{c}&\text { Firm B }\\\text { Firm A }&\begin{array}{l|cc} & \text { Cooperate } & \text { Cheat } \\\hline \text { Cooperat } & (30,30) & (10, x) \\\text { Cheat }& (x, 10) & (20,20) \\\end{array}\end{array}$
$\text { TABLE 11-2 }$ $\begin{array}{c}&\text { Firm B }\\\text { Firm A }&\begin{array}{l|cc} & \text { Cooperate } & \text { Cheat } \\\hline \text { Cooperat } & (30,30) & (10, x) \\\text { Cheat }& (x, 10) & (20,20) \\\end{array}\end{array}$
$\text { TABLE 11-2 }$

-Refer to Table 11- 2.If Firm A is indifferent between cheating or cooperating when Firm B chooses to cooperate,x must be equal to

A)0.
B)10.
C)40.
D)20.
E)30.

Question 17

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.If this firm is maximizing its profits,does the diagram depict a long- run equilibrium situation?

A)Yes,because this firm is producing where MC = MR and is earning economic profits.
B)No,because this firm is suffering losses and firms will exit this market.
C)Yes,because this firm is producing where MC = MR and is earning zero profits.
D)No,because this firm is earning profits which will attract new firms to this market.
E)No,because this firm is a natural monopoly.

Question 18

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

A)produce Q1 at Price P2.
B)produce the output where AC is at its minimum.
C)produce Q2 at Price P1.
D)produce Q2 at Price P2.
E)produce Q1 at Price P1.

Question 19

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 firm's demand curve,and no change to the firm's costs,the typical firm would

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)decrease costs in order to break even at P1 and Q1 in the long run.
D)increase costs in order to break even at P1 and Q1 in the long run.
E)would expand its output in the long run.

Question 20

The diagram below shows demand and cost curves for a monopolistically competitive firm.
FIGURE 11- 3
Refer to Figure 11- 3.A monopolistically competitive firm is said to be inefficient because in the long- run equilibrium

A)price is greater than MC at Q1.
B)price is greater than LRAC at Q1.
C)LRAC at Q1 is not at its minimum.
D)MC is greater than LRAC.
E)MC is greater than price.

Question 21

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

Question 22

The sugar industry in Canada is effectively a duopoly with two large firms competing with each other for market share.Suppose the two firms collude and successfully restrict joint output to that of a profit- maximizing monopolist.As a result,they each realize an increase in their profits.Why would this collusive agreement be difficult to sustain?

A)Because each firm has an incentive to break the agreement by increasing output in order to increase their own profits.
B)Because a non- cooperative outcome is inevitable in which output is further restricted and each firm's profit is reduced.
C)Because each firm has an incentive to break the agreement by further restricting output in order to increase the price,thereby increasing their own profits.
D)Because the firm with the lower long- run average costs will be able to capture all sales,driving the second firm out of the market.

Question 23

The table below shows the market shares for the only firms in a domestic cement market. $$\begin{array} { | l | l | } \hline & \text { Market Sh are } \\\hline \text { Firm A } & 45 \% \\\hline \text { Firm B } & 22 \% \\\hline \text { Firm C } & 10 \% \\\hline \text { Firm D } & 8 \% \\\hline \text { Firm E } & 7 \% \\\hline \text { Firm F } & 5 \% \\\hline \text { Firm G } & 2 \% \\\hline \text { Firm H } & 1 \% \\\hline\end{array}$$ TABLE 11- 1

-Refer to Table 11- 1.The four- firm concentration ratio in this industry is %.

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

Question 24

With respect to imperfectly competitive markets,an "administered" price is a price determined by

A)international competition.
B)the government.
C)the conscious decision of the firm.
D)solely by market forces.
E)a regulatory agency.

Question 25

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.
$\begin{array}{c}&\text { Allstom (A) }\\\text { bombardier (B) }&\begin{array}{|l|l|l|}\hline & \begin{array}{l}\text { A bids } \\\$ 50 \text { million }\end{array} & \begin{array}{l}\text { A bids } \\\$ 35 \text { million }\end{array} \\\hline \begin{array}{l}\text { B bids } \\\$ 50 \mathrm{million}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 10 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 10 \mathrm{~m}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 5 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 0 \mathrm{~m}\end{array} \\\hline \begin{array}{l}\text { B bids } \\\$ 35 \mathrm{million}\end{array} & \begin{array}{l}\text { Profit to } \mathrm{A}: \$ 0 \\\text { Profit to } \mathrm{B}: \$ 5 \mathrm{~m}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 2.5 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 2.5 \mathrm{~m}\end{array} \\\hline\end{array}\end{array}$ FIGURE 11- 4

-If a monopolistically competitive industry is in long- run equilibrium,then for each firm

A)price equals MC at the minimum level of the firm's LRAC curve.
B)the demand curve cuts the MC curve at the minimum level of the LRAC curve.
C)the MC curve intersects MR at the minimum level of its LRAC curve.
D)positive profits are being earned.
E)the demand curve is tangent to its LRAC curve.

Question 26

In imperfectly competitive markets,"administered" prices usually change than prices in perfectly competitive markets,because _ .

A)less often; changing prices is costly
B)more often; perfectly competitive firms are price takers
C)more often; price becomes a strategic choice
D)more often; they are more flexible
E)less often; changing prices is costless

Question 27

In what way can an oligopolistic market structure be beneficial to society?

A)An oligopolistic market structure is most adaptive to today's rapid rate of technological change.
B)Oligopolistic firms are able to exploit all existing economies of scale and operate at the minimum of long- run average costs,and thereby reduce the use of society's resources.
C)An oligopolistic market structure is most conducive to non- competitive behaviour which leads to lower prices for consumers in the long run.
D)Oligopolistic firms compete through advertising,which increases economic efficiency.
E)Oligopolistic firms compete through innovation,which is a driving force of economic growth and increasing living standards.

Question 28

Which of the following are products that differ from each other enough that they can be sold at different prices,but are similar enough that they can be considered the same product?

A)complementary products
B)standardized products
C)differentiated products
D)inferior products
E)necessary products

Question 29

FIGURE 11- 2
If joint profits are to be maximized in an oligopolistic industry with a homogeneous product,the firms

A)must form a cartel in order to be legal.
B)need to determine the share of output each firm will produce.
C)can produce whatever output they want at the agreed- upon price.
D)have no individual incentive to cheat on the agreement.
E)None of the above - differentiated products are required for joint- profit maximization in oligopoly.

Question 30

Suppose the 2- firm concentration ratio (measuring output)in a Canadian manufacturing industry is over 90%.Why might the market power of these 2 firms be less than the concentration ratio suggests?

A)A high concentration ratio usually indicates low degrees of market power.
B)A 2- firm concentration ratio does not provide enough information.
C)The product is purely domestic and there is no international trade.
D)The product is traded internationally and the two Canadian firms compete with many global rivals.
E)The relevant market is regional and so the concentration ratio is not relevant.

Question 31

Advertising by existing firms in an oligopolistic industry

A)only exists where natural entry barriers are weak.
B)maximizes joint profits for firms in the industry.
C)can be an effective entry barrier to potential entrants to the industry.
D)will increase the expected market share of new entrants to the industry.
E)allows easy entry to a new entrant with small sales.

Question 32

In long- run equilibrium,a monopolistically competitive industry operates where

A)LRAC > minimum average cost.
B)LRAC = MC.
C)P > LRAC.
D)LRAC is increasing.
E)MR > MC.

Question 33

In an imperfectly competitive market,changes in market conditions are often signalled to the individual firms by a change in the

A)firm's sales.
B)price of the product.
C)cost conditions.
D)elasticity of supply.
E)government policy.

Question 34

The table below shows the market shares for the only firms in a domestic cement market. $$\begin{array} { | l | l | } \hline & \text { Market Sh are } \\\hline \text { Firm A } & 45 \% \\\hline \text { Firm B } & 22 \% \\\hline \text { Firm C } & 10 \% \\\hline \text { Firm D } & 8 \% \\\hline \text { Firm E } & 7 \% \\\hline \text { Firm F } & 5 \% \\\hline \text { Firm G } & 2 \% \\\hline \text { Firm H } & 1 \% \\\hline\end{array}$$ TABLE 11- 1

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

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

Question 35

An ineffective means of discouraging the entry of new firms by existing firms in an oligopolistic industry is

A)seeking greater patent protection.
B)producing a wide range of brands of their products.
C)carrying out industrial sabotage.
D)spending heavily on advertising.
E)raising their prices.

Question 36

"Brand proliferation" is an example of

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

Question 37

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?

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

Question 38

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.
$\begin{array}{c}&\text { Allstom (A) }\\\text { bombardier (B) }&\begin{array}{|l|l|l|}\hline & \begin{array}{l}\text { A bids } \\\$ 50 \text { million }\end{array} & \begin{array}{l}\text { A bids } \\\$ 35 \text { million }\end{array} \\\hline \begin{array}{l}\text { B bids } \\\$ 50 \mathrm{million}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 10 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 10 \mathrm{~m}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 5 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 0 \mathrm{~m}\end{array} \\\hline \begin{array}{l}\text { B bids } \\\$ 35 \mathrm{million}\end{array} & \begin{array}{l}\text { Profit to } \mathrm{A}: \$ 0 \\\text { Profit to } \mathrm{B}: \$ 5 \mathrm{~m}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 2.5 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 2.5 \mathrm{~m}\end{array} \\\hline\end{array}\end{array}$ FIGURE 11- 4

-Refer to Figure 11- 4.If Allstom and Bombardier co- operated with each other when bidding on the contract,then the likely outcome is that

A)Bombardier bids $35 million,and earns profit of $5 million,while Allstom bids $50 million and earns profit of $0.
B)Bombardier bids $50 million,and earns profit of $0,while Allstom bids $35 million and earns profit of $5 million.
C)each firm bids $50 million,and earns profit of $10 million.
D)each firm bids $35 million,and earns profit of $2.5 million.

Question 39

One characteristic of oligopolistic markets is

A)a large number of firms in the industry.
B)ease of entry and exit.
C)zero profits in the long run.
D)a horizontal demand curve facing each individual firm.
E)mutual interdependence between firms.

Question 40

One reason an oligopolistic firm may have market power is that

A)the market may be "contestable."
B)there are many similar producers.
C)it produces a significant fraction of total industry output.
D)it has dis- economies of scale.
E)it always makes positive profits.

Question 41

Explicit collusion in an oligopolistic industry

A)occurs when firms achieve the cooperative outcome without an explicit agreement.
B)is a form of predatory pricing.
C)results in a non- cooperative equilibrium.
D)occurs when firms make an explicit agreement to cooperate.
E)results in competitive behaviour.

Question 42

Unlike perfectly competitive and monopolistically competitive firms,oligopolists

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

Question 43

The main difference between perfect competition and monopolistic competition is

A)there are more firms in perfect competition.
B)firms earn profits in the long run in monopolistic competition.
C)monopolistic competition has lower costs.
D)perfect competition has freedom of entry and exit.
E)monopolistic competition has product differentiation.

Question 44

Which of the following products is best considered a differentiated product?

A)topsoil
B)steel
C)sugar
D)soap
E)wheat

Question 45

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

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

Question 46

The diagram below shows demand and cost curves for a monopolistically competitive firm.
FIGURE 11- 3
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

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

Question 47

Tacit collusion in an oligopolistic industry

A)results in competitive behaviour.
B)occurs when firms achieve the cooperative outcome without an explicit agreement.
C)results in a non- cooperative equilibrium.
D)occurs when firms make an explicit agreement to cooperate.
E)is a form of predatory pricing.

Question 48

The diagram below shows demand and cost curves for a monopolistically competitive firm.
FIGURE 11- 3
Refer to Figure 11- 3.A monopolistically competitive firm is allocatively inefficient because in the long- run equilibrium

A)MC is greater than price.
B)LRAC is not at its minimum.
C)price is greater than LRAC at Q1.
D)price is greater than MC at Q1.
E)None of the above - the long- run equilibrium is allocatively efficient.

Question 49

The excess- capacity theorem predicts that

A)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.
B)when price- taking firms maximize their profits by setting price equal to marginal cost,each firm operates with some excess capacity.
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)all firms in a perfectly competitive industry will produce at a lower output level than that which minimizes average total costs.
E)monopolistic firms will achieve positive economic profits by restricting output below the economically efficient level at which average total costs are minimized.

Question 50

Suppose Proctor and Gamble introduces a new brand of laundry detergent.Brand proliferation is an example of

A)explicit collusion.
B)a firm- created barrier to entry.
C)tacit collusion.
D)a cooperative outcome.
E)a Nash equilibrium.

Question 51

If entry into a monopolistically competitive industry occurs because of positive profits earned by the existing firms,the

A)demand curve for each existing firm will shift to the right.
B)demand curve for each existing firm will shift to the left.
C)industry demand curve will shift to the left.
D)demand curves for the existing firms will remain unchanged.
E)industry demand curve will shift to the right.

Question 52

In Canada,concentration ratios are the highest in

A)petroleum and coal products.
B)mining.
C)clothing industries.
D)tobacco products.
E)machinery.

Question 53

A monopolistically competitive firm has some degree of market power because

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

Question 54

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.
$\begin{array}{c}&\text { Allstom (A) }\\\text { bombardier (B) }&\begin{array}{|l|l|l|}\hline & \begin{array}{l}\text { A bids } \\\$ 50 \text { million }\end{array} & \begin{array}{l}\text { A bids } \\\$ 35 \text { million }\end{array} \\\hline \begin{array}{l}\text { B bids } \\\$ 50 \mathrm{million}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 10 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 10 \mathrm{~m}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 5 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 0 \mathrm{~m}\end{array} \\\hline \begin{array}{l}\text { B bids } \\\$ 35 \mathrm{million}\end{array} & \begin{array}{l}\text { Profit to } \mathrm{A}: \$ 0 \\\text { Profit to } \mathrm{B}: \$ 5 \mathrm{~m}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 2.5 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 2.5 \mathrm{~m}\end{array} \\\hline\end{array}\end{array}$ FIGURE 11- 4

-Refer to Figure 11- 4.What is the Nash equilibrium in this bidding contest between Allstom and Bombardier?

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

Question 55

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.
$\begin{array}{c}&\text { Allstom (A) }\\\text { bombardier (B) }&\begin{array}{|l|l|l|}\hline & \begin{array}{l}\text { A bids } \\\$ 50 \text { million }\end{array} & \begin{array}{l}\text { A bids } \\\$ 35 \text { million }\end{array} \\\hline \begin{array}{l}\text { B bids } \\\$ 50 \mathrm{million}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 10 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 10 \mathrm{~m}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 5 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 0 \mathrm{~m}\end{array} \\\hline \begin{array}{l}\text { B bids } \\\$ 35 \mathrm{million}\end{array} & \begin{array}{l}\text { Profit to } \mathrm{A}: \$ 0 \\\text { Profit to } \mathrm{B}: \$ 5 \mathrm{~m}\end{array} & \begin{array}{l}\text { Profit to } A: \$ 2.5 \mathrm{~m} \\\text { Profit to } \mathrm{B}: \$ 2.5 \mathrm{~m}\end{array} \\\hline\end{array}\end{array}$ FIGURE 11- 4

-If there are economic profits in a monopolistically competitive industry,they will generally be competed away through the

A)entry of new firms.
B)introduction of brand name products by existing firms.
C)increasing advertising budgets of existing firms.
D)manipulation of the demand curve.
E)exit of existing firms.

Question 56

What is a Nash equilibrium?

A)a situation where all players are maximizing their payoffs given the current behaviour of the other players
B)is an unstable equilibrium
C)will in general produce the greatest payoff for the players
D)an example of a cooperative equilibrium
E)a situation where all players are better off than they would be with any other combination of strategies

Question 57

The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.
FIGURE 11- 1
An imperfectly competitive industry is often allocatively inefficient when compared to the performance of a competitive industry,because imperfect competitors

A)make profits.
B)operate in the global economy.
C)set price above the marginal cost.
D)obtain economies of scale.
E)maximize profits.

Question 58

Which of the following is a characteristic of oligopoly?

A)Prices are usually above marginal costs.
B)The industry usually has a low concentration ratio.
C)The pricing policies of one firm have no impact on pricing policies of other firms.
D)Firms compete solely on the basis of price.
E)There are large numbers of significantly sized sellers.

Question 59

In long- run equilibrium,a monopolistically competitive industry is characterized by

A)all firms operating at the minimum point of their long- run average cost curves.
B)a perfectly elastic demand curve facing each firm in the industry.
C)positive profits for all firms in the industry.
D)zero profits for all firms in the industry.
E)positive profits as a result of barriers to entry.

Question 60

For firms in an oligopoly,the main advantage of explicit collusion is that it

A)eliminates the gains from cheating.
B)reduces the cost per unit of advertising.
C)leads to greater product differentiation.
D)removes much of the uncertainty about rivals' reactions.
E)makes all firms more productively efficient.

Question 61

In the long run,a monopolistically competitive firm will

A)produce where price exceeds the minimum of average costs.
B)earn positive economic profits.
C)lose money.
D)produce the output where average costs are minimized.
E)operate where price = marginal cost.

Question 62

FIGURE 11- 2
Refer to Figure 11- 2.Diagram D depicts the only possible long- run equilibrium for a typical firm in

A)a monopolistic industry.
B)a monopolistically competitive industry.
C)an oligopolistic industry.
D)a perfectly competitive industry.
E)None of the above - it is not a long- run equilibrium.

Question 63

FIGURE 11- 2
Refer to Figure 11- 2.In diagram A,the profit- maximizing output for a competitive firm is one where

A)AR = ATC.
B)ATC is at the minimum.
C)P > MC.
D)P = AR = MC.
E)P < MC.

Question 64

FIGURE 11- 2
Assume that the world's largest smart- phone producers (Apple,Nokia,Samsung,etc.)operate in an oligopolistic industry.In the long run,which of the following is the most important form of competition between these firms?

A)tacit collusion
B)brand proliferation
C)predatory pricing
D)advertising
E)product innovation

Question 65

A monopolistically competitive firm maximizes profits in the short run

A)when P = ATC.
B)by maximizing total revenue.
C)by equating MC with price.
D)when P = AVC.
E)by equating MC with MR.

Question 66

The payoff matrix below shows the payoffs for Firm A and Firm B,each of whom can either "cooperate" or "cheat." The numbers in parentheses are (payoff for A,payoff for B). $\begin{array}{c}&\text { Firm B }\\\text { Firm A }&\begin{array}{l|cr} & \text { Coop erate } & \text { Cheat } \\\hline \text { Cooperate } & (30,30) & (10, x) \\\text { Cheat } & (x, 10) & (20,20)\end{array}\end{array}$

-Refer to Table 11- 2.Of the choices provided below,what is the minimum value for x in order for both firms' cheating to be a Nash equilibrium?

A)25
B)60
C)70
D)40
E)80

Question 67

An example of a Canadian industry composed of a few large firms is

A)the accounting profession.
B)gasoline retailing.
C)clothing retailing.
D)hair dressers.
E)restaurants.

Question 68

FIGURE 11- 2
When a monopolistically competitive industry is in long- run equilibrium,each firm will be operating where price is

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

Question 69

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.What price will this profit- maximizing firm set?

A)$10
B)$15
C)$5
D)$20
E)$25

Question 70

A monopolistically competitive firm and a monopoly are similar because

A)both firms will earn zero profits in the long run.
B)each firm has a large number of small competitors.
C)both firms always operate at their point of minimum average total cost.
D)each firm can raise its price without losing all of its sales.
E)both firms must behave strategically toward other firms in the industry.

Question 71

By calculating a concentration ratio,economists measure the

A)fraction of total industry sales accounted for by the largest firms.
B)degree to which a monopolist's output is lower than in perfect competition.
C)concentration of firms in one geographic location.
D)control of a monopolist over its input prices.
E)degree to which firms in the industry use similar technologies.

Question 72

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?

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

Question 73

With regard to the long- run equilibrium in the two market structures,the higher unit costs in monopolistic competition relative to perfect competition implies that

A)resources are being used inefficiently in perfect competition.
B)there is a tradeoff between product variety and the ability to minimize cost per unit.
C)the government should force monopolistically competitive firms to behave like perfectly competitive firms.
D)society would be better off if there were fewer,and more homogeneous,goods produced at the scale at which average costs are minimized.
E)firms are restricting output to extract positive economic profits.

Question 74

Consider an industry that is monopolistically competitive.In such a market,

A)firms set prices without any threat of competition.
B)firms do not have any price- setting ability because the product is homogeneous.
C)only one firm is present in the industry.
D)firms can charge slightly different prices even though they produce identical goods.
E)firms set prices and are constrained by the existence of close substitutes for their product.

Question 75

A characteristic common to most imperfectly competitive markets is

A)inelastic market demand curves.
B)unexploited economies of scale.
C)a homogeneous product.
D)common pricing among firms.
E)non- price competition among firms.

Question 76

Consider the three largest cell- phone service providers in Canada - Bell,Telus,and Rogers.If we observe that all three companies increase their monthly service fees simultaneously,we might conclude that

A)they are engaged in predatory pricing.
B)these firms have monopolized the industry.
C)they are creating entry barriers to prevent entry by new firms.
D)they are perfect competitors and they are unable to set the price.
E)there is tacit collusion among these firms.

Question 77

Which of the following statements is the best description of a Nash equilibrium?

A)An outcome where each player's best strategy is to maintain its present behaviour given the present behaviour of the other players.
B)An equilibrium outcome that is achieved by collusion,and no party has an incentive to change their behaviour.
C)An outcome that is achieved when players in the game have jointly maximized profits and divided those profits according to market share of each player.
D)An equilibrium outcome achieved by cooperation between players in the game.
E)An outcome where each player's strategy depends on the behaviour of its opponents.

Question 78

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?

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

Question 79

In an oligopolistic industry,which of the following is an example of a firm- created entry barrier?

A)brand proliferation
B)LRAC curve negatively sloped over a large range of output
C)price competition
D)large set- up costs
E)decreasing demand for the product

Question 80

Compared with perfect competition,monopolistic competition results in

A)a wider variety of the good produced,but at higher unit costs.
B)a clearly more efficient social outcome.
C)the same degree of variety of the good,but higher unit costs.
D)fewer varieties of the good produced at lower unit costs.
E)fewer varieties of the good produced at higher unit costs.