Deck 9: Monopolistic Competition and Oligopoly

Question 1

Which industry would be considered to be monopolistically competitive?

A) Fast food restaurants along rural interstate highways.
B) Agriculture products sold at farmers' market.
C) Locally owned restaurants in large cities.
D) Groceries in a small remote town.

Answer 1

Locally owned restaurants in large cities.

Question 2

Refer to the above graph. It represents a monopolistically competitive firm in a constant-cost industry. In long-run equilibrium this firm will:

A) continue to earn economic profits because it has monopolistic power to set its price.
B) become a perfectly competitive firm because there are no significant barriers to entry.
C) break even because average total cost (ATC) and marginal cost (MC) will increase as more firms enter the market.
D) break even because its demand curve will fall and become more elastic as it loses sales to other firms entering the market.

Answer 2

break even because its demand curve will fall and become more elastic as it loses sales to other firms entering the market.

Question 3

-Refer to the above graph of the representative firm in monopolistic competition. Excess capacity for this firm would be calculated by:

A) D - 0.
B) E - C.
C) E - D.
D) D - C.

Answer 3

E - D.

Question 4

-Refer to the above graph of the representative firm in monopolistic competition. The long-run equilibrium price and output for this firm will be:

A) A and C.
B) B and D.
C) A and D.
D) B and C.

Question 5

Refer to the above graph. Assume that in long-run equilibrium a purely competitive firm has the same cost curves as that of the monopolistically competitive firm shown. It can be concluded that the:

A) purely competitive firm would have lower economic profits.
B) purely competitive firm would have higher economic profits.
C) purely competitive producer would produce less at a higher ATC.
D) monopolistically competitive producer would produce less at a higher ATC.

Question 6

Which statement concerning monopolistic competition is false?

A) Long-run equilibrium under monopolistic competition is achieved where economic profits are zero.
B) Monopolistic competition is likely to result in a greater variety of product brands than pure competition.
C) The monopolistically competitive demand curve is more elastic than the demand curve facing a monopolistic firm.
D) Monopolistic competition does not lead to any economic inefficiency since firms in this industry cannot sustain economic profits.

Question 7

- Refer to the above payoff matrix. Assume that firm B adopts a low-price strategy while firm A maintains a high-price strategy. Compared to the results from a high-price strategy for both firms, firm B will now:

A) lose $75 million in profit and firm A will gain $50 million in profit.
B) gain $50 million in profit and firm A will lose $50 million in profit.
C) gain $75 million in profit and firm A will lose $50 million in profit.
D) gain $50 million in profit and firm A will lose $75 million in profit.

Question 8

- Refer to the above payoff matrix. Which of the following statements is most accurate?

A) If the two firms collude to price high, given the opportunity, firm B will cheat on the agreement and price low to increase profits.
B) The competitive equilibrium for this game is for both firms to price high.
C) There is no incentive for the firms in this industry to collude.
D) The most likely outcome of this game is that one firm will price high and the other will price low.

Question 9

Under oligopoly, if one firm in an industry significantly increases advertising expenditures in order to capture a greater market share, it is most likely that other firms in that industry will:

A) pursue a strategy to reduce advertising expenditures to maintain profits.
B) decide to increase advertising expenditures even if it means a reduction in profits.
C) make no changes in advertising expenditures because advertising is effective in the short run, but not the long run.
D) increase the price of the product to improve profits and then increase advertising expenditures.

Question 10

-On the above graph, if the oligopolist's MC curve shifts from MC₁ to MC₂, the firm will charge:

A) a higher price and total revenue will increase.
B) the same price and sell more output; total revenue will increase.
C) the same price and sell the same amount of output; total revenue will remain the same.
D) a higher price and sell less output; it can't be determined whether total revenue will increase.

Question 11

-The above graph represents a:

A) collusive oligopoly firm.
B) noncollusive oligopoly firm.
C) monopoly firm.
D) monopolistically competitive firm.

Question 12

- Based on the graph above, we would expect this firm to sell:

A) Q₁ units at a price of B.
B) Q₁ units at a price of C.
C) Q₂ units at a price of C.
D) Q₂ units at a price of B.

Question 13

The Organization of Petroleum Exporting Countries (OPEC) operates as an international cartel. If the cartel were to hire a consulting firm to monitor the production rates of member countries, the economic reason for this monitoring is to:

A) make sure that each member country is producing at an output level at which price equals marginal cost.
B) make sure all the member countries produce at least their quotas so that there will be no oil shortage.
C) detect those member countries that are depressing prices by producing more than their assigned quotas.
D) make sure that the marginal revenue for the last barrel of oil sold by each member country is less than its price.

Question 14

Among the various Internet and tech industries such as search, social networking, and operating systems:

A) firms like Google, Facebook, and Microsoft each dominate a particular market, yet remain active in the other markets to keep pressure on the dominant rivals in those markets.
B) government antitrust regulations keep these markets highly competitive.
C) firms such as Google, Facebook, Apple, and Microsoft have colluded so that each has a monopoly in its respective market.
D) competitive pressures keep prices and profits relatively low.

Question 15

Which of the following statements is most accurate about the Internet and tech companies?

A) The markets they operate in are monopolistically competitive.
B) Collusion among firms means that each industry is fully monopolized.
C) Firms that dominate one market will use large profits from that industry to put competitive pressure on rivals in other markets.
D) The most dominant firms in each market only hold about 30 percent of the market share.

Question 16

While oligopolies are generally inefficient, limit pricing may keep prices closer to competitive levels.