Deck 11: Monopolistic Competition, Oligopoly, and Game Theory

Question 1

Grade inflation in colleges may possibly be a result of college professors being in a prisoner's dilemma setting.

Answer 1

True

Question 2

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

Answer 2

True

Question 3

In the prisoner's dilemma, each prisoner would be better off if neither one confesses.

Answer 3

True

Question 4

Cartels are easy to form and to maintain.

Question 5

One of the assumptions of the theory of monopolistic competition is that all firms in the industry produce and sell a homogenous product.

Question 6

The prisoner's dilemma can be used to help analyze such diverse topics as the arms race and the need for speed limit laws.

Question 7

The excess capacity theorem states that in equilibrium a monopolistic competitor will produce an output level larger than the one that would minimize its unit costs.

Question 8

A monopolistic competitive firm faces a horizontal demand curve for its product.

Question 9

In an oligopolistic market, the product being produced can be either homogeneous or differentiated.

Question 10

A monopolistic competitive firm is a price taker, while an oligopolist is a price searcher.

Question 11

Wikipedia is an example of a project that follows the pattern of unstructured collaboration.

Question 12

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

Question 13

The prisoner's dilemma game illustrates rational decisions made by individuals which lead to a jointly efficient outcome.

Question 14

One of the key assumptions of the theory of oligopoly is that firms act interdependently.

Question 15

One of the main criticisms of the theory of contestable markets is that the assumption of extremely free entry into (and costless exit from)the industry is unlikely to hold in the real world.

Question 16

One of the ways in which some monopolistic competitors try to become more like monopolists is through the use of designer labels.

Question 17

In recent years, industries with high four- and eight-firm concentration ratios include cars, cereal breakfast foods, and farm machinery.

Question 18

One of the necessary conditions for a contestable market is that new firms entering the market have a cost advantage over the existing firms.

Question 19

The cigarette industry is a good example of the oligopoly market structure.

Question 20

The profit-maximizing monopolistic competitive firm produces a level of output at which marginal revenue equals marginal cost.

Question 21

The profit-maximizing monopolistic competitive firm produces the level of output at which

A)price equals marginal cost.
B)marginal revenue equals marginal cost.
C)there is resource allocative efficiency.
D)average total cost is at a minimum.

Question 22

In a monopolistic competitive industry,

A)each firm in the industry produces a slightly differentiated product.
B)there are significant barriers to entry.
C)there are significant barriers to exit.
D)there are few sellers.

Question 23

Which of the following is not an assumption of the theory of monopolistic competition?

A)There are high barriers to entry.
B)There are many sellers and buyers.
C)Each firm in the industry produces and sells a differentiated product.
D)The firm is a price searcher.

Question 24

The demand curve facing a monopolistic competitor will be more elastic than the demand curve facing a monopolist because

A)there are barriers to exit for the monopolist, but not for the monopolistic competitor.
B)the monopolistic competitor attains resource-allocative efficiency, but the monopolist does not.
C)there are substitute goods for what the monopolistic competitor produces, but not for what the monopolist produces.
D)the monopolist is a price searcher, but the monopolistic competitor is not.

Question 25

Which of the following industries is the best real-world example of monopolistic competition?

A)soft drinks
B)electricity generation
C)automobiles
D)computer software

Question 26

One of the ways in which monopolistic competitors differ from perfect competitors is that

A)perfect competitors produce the quantity of output at which marginal revenue equals marginal cost and monopolistic competitors do not.
B)perfect competitors produce a homogeneous product and monopolistic competitors do not.
C)there is easy entry and exit for a perfect competitor, but not for a monopolistic competitor.
D)there are high barriers to entry and exit for a perfect competitor, but not for a monopolistic competitor.

Question 27

If a monopolistic competitive firm raises its price, then

A)it should expect to lose all of its customers because there are many other sellers of the product.
B)this is a trick question because the firm does not have the ability to change its price.
C)it should expect to lose some, but not all, of its customers.
D)it will be able to increase its profits.
E)it can sell all it wants because it faces a horizontal demand curve.

Question 28

Which of the following statements is false ?

A)The monopolistic competitor is a price searcher.
B)The monopolistic competitor produces an output at which price is greater than marginal cost.
C)The demand curve facing a monopolistic competitor is less elastic than the demand curve facing a monopolist.
D)There are many substitutes in a monopolistic competitive industry.

Question 29

The demand curve facing a monopolistic competitive firm will be __________ than the demand curve facing a perfectly competitive firm because the price elasticity of demand for the monopolistic competitive firm's product is __________ than that for the perfectly competitive firm.

A)steeper; higher
B)flatter; higher
C)steeper; lower
D)flatter; lower

Question 30

The monopolistic competitive firm faces a __________ demand curve and therefore is a price __________.

A)downward-sloping; searcher
B)horizontal; taker
C)downward-sloping; taker
D)horizontal; searcher

Question 31

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

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 32

Compared to a monopolistic competitor, a monopolist produces a good with __________ substitutes and so has a __________ elastic demand curve.

A)fewer; more
B)fewer; less
C)more; more
D)more; less

Question 33

The monopolistic competitive firm faces a(n)__________ demand curve.

A)horizontal
B)vertical
C)downward-sloping
D)upward-sloping

Question 34

In a monopolistic competitive market, which of the following factors probably does not give rise to product differentiation?

A)packaging of the product
B)brand names
C)loyalty of customers to a particular producer
D)quality difference
E)the small number of sellers

Question 35

Which of the following is an example of a monopolistic competitor?

A)General Motors
B)a wheat farmer in Iowa
C)a long-distance telephone company
D)a family-owned Italian restaurant

Question 36

Does the monopolistic competitive firm exhibit resource-allocative efficiency?

A)No, because at its chosen quantity of output, price does not equal the lowest possible average total cost.
B)Yes, because at its chosen quantity of output, price equals marginal cost.
C)No, because at its chosen quantity of output, price is greater than marginal cost.
D)Yes, because at its chosen quantity of output, price is less than marginal cost.

Question 37

Which of the following statements is false ?

A)The monopolistic competitor is a price searcher.
B)The monopolistic competitor produces a product that differs slightly from the products of the other firms in the industry.
C)The monopolistic competitor faces a horizontal demand curve.
D)The monopolistic competitor produces an output at which price is greater than marginal cost.

Question 38

The profit-maximizing perfectly competitive firm charges a price equal to __________ while the profit-maximizing monopolistic competitive firm charges a price __________.

A)marginal revenue; equal to marginal cost
B)marginal cost; greater than marginal cost
C)marginal revenue; less than marginal revenue
D)average fixed cost; greater than average total cost

Question 39

Which of the following is one of the assumptions upon which the theory of monopolistic competition is built?

A)There are many sellers.
B)There are few buyers.
C)It is difficult to enter the industry.
D)Each firm in the industry produces a homogeneous product.

Question 40

Some monopolistic competitive firms earn positive economic profits in the long run because

A)there are high barriers to entry in monopolistic competition.
B)they have successfully differentiated their products from their competitors' products.
C)there is easy entry and exit.
D)each firm produces and sells a homogeneous product.

Question 41

In which market structure is the interdependence of firms a key characteristic?

A)perfect competition
B)monopolistic competition
C)oligopoly
D)monopoly

Question 42

Which of the following statements is true?

A)Monopolistic competitive firms will earn economic profits in the long run because of their ability to control the price of the product.
B)Monopolistic competitive firms that earn economic profits in the short run commonly will find their profits competed away in the long run.
C)Monopolistic competitive firms will earn zero economic profits in both the short and the long run.
D)Monopolistic competitive firms must earn economic profits in the long run, or they will shut down.
E)Monopolistic competitive firms must earn economic profits in the short run, or they will shut down.

Question 43

The percentage of sales accounted for by X number of firms in the industry is called the

A)concentration ratio.
B)oligopoly rate.
C)interdependence rate.
D)market power index.

Question 44

There are few sellers and many buyers in the

A)perfectly competitive market structure.
B)monopolistic competitive market structure.
C)oligopoly market structure.
D)monopoly market structure.

Question 45

A concentration ratio indicates the

A)number of firms in an industry.
B)number of large firms in an industry compared to the number of large firms in another related industry.
C)percentage of total sales accounted for by the (for example)four largest firms.
D)percentage of sellers in an industry relative to the number of buyers.
E)percentage of sellers in an industry protected by barriers to entry relative to the number of sellers that wish to enter.

Question 46

The excess capacity theorem states that a monopolistic competitor

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 47

____________________ constitute(s)perhaps the most significant barrier to entry into an oligopolistic market.

A)Patent rights
B)Exclusive ownership of essential resources
C)Legal barriers
D)Economies of scale
E)Copyrights

Question 48

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

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

Question 49

Total industry sales are $130 million. The top four firms (A, B, C, and D)account for sales of $38 million, $21 million, $13 million and $8 million, respectively. What is the approximate four-firm concentration ratio?

A)0.80
B)0.62
C)0.38
D)0.40

Question 50

If a perfectly competitive firm and a monopolistic competitive firm face the same demand and cost curves, then

A)the perfectly competitive firm will attain resource-allocative efficiency, but the monopolistic competitive firm will not.
B)the perfectly competitive firm will attain resource-allocative efficiency, but the monopolistic competitive firm may or may not, depending upon the demand for its product.
C)the perfectly competitive firm will not attain resource-allocative efficiency, but the monopolistic competitive firm will.
D)both the perfectly competitive firm and the monopolistic competitive firm will attain resource-allocative efficiency.
E)neither the perfectly competitive firm nor the monopolistic competitive firm will attain resource-allocative efficiency.

Question 51

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

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 52

Which of the following is an assumption of the theory of oligopoly?

A)There no significant barriers to entry.
B)There are many sellers and many buyers.
C)Firms produce and sell either homogeneous or differentiated products.
D)There is a single seller in the market.

Question 53

"In equilibrium, a monopolistic competitor will produce an output level that is less than the level that would minimize its average total costs." This is a statement of the

A)law of diminishing returns.
B)law of second best.
C)law of variable proportions.
D)excess capacity theorem.

Question 54

A firm in a monopolistic competitive market will produce a level of output at which

A)P
B)P = MR.
C)P > MR.
D)P = MC.

Question 55

If a perfectly competitive firm and a monopolistic competitor in long run equilibrium face exactly the same demand and cost curves, then there is high probability that

A)the former will earn zero economic profits, but the latter will earn positive economic profits.
B)both will earn zero economic profits, but the former will attain lower unit costs than the latter.
C)both will earn zero economic profits, but the latter will attain lower unit costs than the former.
D)both firms will earn zero economic profits, and attain the lowest possible unit costs.
E)neither firm will earn zero economic profits, but both will attain the lowest possible unit costs.

Question 56

Generally, the monopolistic competitor is in long run equilibrium when

A)MR = MC and P = ATC.
B)P = MC = ATC.
C)P = MC and P > ATC.
D)MR = MC = ATC.

Question 57

Interdependence implies that each firm in an industry

A)is independent of one another and are essentially price takers.
B)is aware that its actions influence the others and that the actions of the other firms affect it.
C)is so large and powerful that they do not need to consider how their actions will affect their rivals.
D)must depend on the other firms to maintain consumers' interest in their "mutual" product.

Question 58

If a perfectly competitive firm and a monopolistic competitor in long run equilibrium face the same demand and cost curves, then the competitive firm will produce a

A)greater output and charge a lower price than the monopolistic competitor.
B)greater output, but charge the same price as the monopolistic competitor.
C)greater output and charge a higher price than the monopolistic competitor.
D)smaller output and charge a lower price than the monopolistic competitor.
E)smaller output and charge a higher price than the monopolistic competitor.

Question 59

Total industry sales are $100 billion. The four largest firms have sales of $35 billion, $17 billion, $6.8 billion, and $2.2 billion. The industry's approximate four-firm concentration ratio is

A)0.61.
B)0.88.
C)0.39.
D)0.06.

Question 60

In long run equilibrium, the monopolistic competitor will most likely

A)be earning zero economic profit.
B)be operating at the lowest point on its average total cost curve.
C)charge a price that is equal to marginal revenue.
D)charge a price that is equal to marginal cost.

Question 61

According to the contestable markets theory,

A)even if an industry is comprised of a small number of firms, this is not sufficient evidence that the firms perform in a noncompetitive way.
B)profits cannot be zero in an industry if the number of sellers in the industry is small.
C)if a market is contestable, inefficient producers are more likely to survive than if the market is not contestable.
D)profits cannot be zero in an industry if the number of sellers in the industry is large.

Question 62

Which of the following statements is false ?

A)On occasion, governments have helped to create and maintain cartels.
B)Once a cartel agreement has been made, cartel members have an incentive to cheat on the agreement.
C)A single cartel member may be better off with a cartel agreement that all members abide by (including itself)than with no cartel agreement at all.
D)Cartels are easy to form and to maintain.

Question 63

Concentration ratios are not perfect guides to industry concentration, because they

A)do not take into account foreign competition and competition from substitute goods.
B)take into account foreign competition and competition from substitute goods.
C)do not take into account advertising expenditures.
D)do not take into account tax payments.

Question 64

In the long run, new firms will enter a monopolistic competitive industry until

A)minimum average total cost is achieved.
B)all firms are incurring losses.
C)economic profits in the industry are zero.
D)maximum total revenue is achieved.

Question 65

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

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 66

The "prisoner's dilemma" game illustrates a case in which

A)individually rational behavior leads to a collectively inefficient outcome.
B)what is irrational individual behavior turns out to be ultra-irrational group behavior.
C)the whole is greater than the sum of the parts.
D)the sum of the parts is greater than the whole.

Question 67

The concentration ratio provides a measure of the extent to which an industry

A)produces a useful product.
B)is dominated by a small number of firms.
C)is earning economic profits.
D)is earning accounting profits.

Question 68

A cartel is an organization of firms

A)dominated by one firm, which is usually referred to as the price leader.
B)that attempts to increase total (or industry)demand for their product.
C)that reduces output and increases price in an effort to increase joint profits.
D)that deliberately attempts to disrupt the market for political reasons.

Question 69

Which of the following is not a condition of a contestable market?

A)There is easy entry into and costless exit from the market.
B)New firms entering the market can produce the product at the same cost as current firms.
C)Firms exiting the market can easily dispose of their fixed assets by selling them elsewhere.
D)New firms entering the market produce a higher-quality product than existing firms.

Question 70

Which of the following is not a necessary condition for the contestable market theory?

A)Entry into the market is easy.
B)Exit from an industry is costless.
C)All firms in the industry have different costs of production.
D)A new firm entering the market can produce the product at the same cost that current firms produce it.

Question 71

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

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.

Question 72

A monopolistic competitive firm maximizes profits by producing at the point where

A)total revenue is at a maximum.
B)marginal revenue equals average cost.
C)marginal revenue equals marginal cost.
D)price equals marginal revenue.

Question 73

The major economic objective of cartels is to

A)impose their political will on others.
B)restrict output, push up price, and increase profits.
C)reduce costs.
D)develop new ways of doing things.

Question 74

An industry is composed of 20 firms, all with equal sales. The eight-firm concentration ratio in this industry is

A)0.40.
B)0.32.
C)2.00.
D)This cannot be determined from the information given.

Question 75

If the firms of an industry form a cartel, their goal is to

A)collectively increase output and thereby earn higher profits.
B)cut back on output and raise the price of their product to earn higher profits.
C)maintain a constant level of output, but increase price to earn higher profits.
D)maintain a constant price level, but increase output to earn higher profits.

Question 76

How does contestable markets theory challenge orthodox market structure theory?

A)Contestable markets theory argues that firms do not maximize sales; orthodox market structure theory argues that they do.
B)Orthodox market structure theory places much greater weight than contestable markets theory on the number of firms in an industry as a major factor in determining a firm's behavior.
C)Contestable markets theory emphasizes product differentiation; orthodox market structure theory does not.
D)Contestable markets theory emphasizes nonprice competition; orthodox market structure theory does not.

Question 77

In the real-world, which of these industries is most clearly an oligopoly?

A)wheat
B)electricity generation
C)cereal breakfast foods
D)restaurants

Question 78

The demand curve facing a firm in monopolistic competition is downward sloping, because the firm

A)sells a differentiated product.
B)is the entire industry by itself.
C)is small relative to the market.
D)sells a homogeneous product.

Question 79

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

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 80

If you were to rank the four market structures in terms of lowest concentration ratio to highest concentration ratio, which of the following rankings would be correct?

A)oligopoly, monopoly, perfect competition, monopolistic competition
B)monopoly, oligopoly, monopolistic competition, perfect competition
C)perfect competition, monopolistic competition, oligopoly, monopoly
D)monopolistic competition, perfect competition, oligopoly, monopoly
E)monopolistic competition, oligopoly, perfect competition, monopoly