Deck 8: Monopolistic Competition,oligopoly,and Antitrust Policy

Question 1

The following questions are based on the following diagram for a monopolistically competitive firm:

In the short run,the profit-maximizing producer will sell output at a price of

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

Answer 1

E

Question 2

At the national level,the brewing industry can be considered to best reflect the characteristics of which market structure?

A) monopoly
B) pure oligopoly
C) perfect competition
D) differentiated oligopoly
E) a cartel

Answer 2

D

Question 3

Pure oligopoly differs from differentiated oligopoly in that

A) the products of pure oligopolists are identical.
B) the pure oligopolist has greater power over price.
C) pure oligopolists are more likely to advertise.
D) entry into the product group is relatively easy for the pure oligopolist.
E) only the pure oligopolist faces a downward-sloping demand curve.

Answer 3

A

Question 4

An industry that contains a large number of firms selling goods that are similar but not identical and into which entry of new sellers is relatively easy would be an example of

A) perfect competition.
B) pure monopoly.
C) regulated monopoly.
D) oligopoly.
E) monopolistic competition.

Question 5

Which of the following markets is the best example of differentiated oligopoly?

A) steel
B) cement
C) automobiles
D) electricity
E) agriculture

Question 6

From society's viewpoint one benefit of a monopolistically competitive market is the likelihood of

A) prices that are lower than in perfectly competitive markets.
B) less advertising and product promotion outlays.
C) significant economies of scale.
D) no economic waste or inefficiencies.
E) greater product diversity.

Question 7

The large number of firms in a monopolistically competitive market ensures that

A) there is no room for new competitive entrants.
B) all firms charge identical prices.
C) product differentiation will disappear and output becomes homogeneous.
D) pricing and production actions by a single firm do not lead to retaliatory actions by rival firms.
E) collusion among producers become commonplace.

Question 8

Monopolistically competitive markets tend to be characterized by

A) excessive economic profits in the long run.
B) interdependence among sellers.
C) overcrowding and excess capacity.
D) perfectly elastic demand curves.
E) homogeneous products.

Question 9

A group of firms that produce similar goods is called a ________ group.

A) monopolistic
B) product
C) market
D) retail
E) homogeneous

Question 10

The two basic conditions for long-run equilibrium in monopolistically competitive markets are that

A) all firms maximize profits and that economic profits are zero.
B) price exceeds average cost for all firms and that they have no additional production capacity.
C) firms constantly enter and leave the market because of the existence of economic profits.
D) all firms cover their average variable costs and that marginal revenue equals total revenue.
E) all firms maximize output while minimizing unit costs.

Question 11

The downward-sloping demand curve of the monopolistic competitor

A) becomes horizontal in the long run.
B) results from the absence of any competition.
C) reflects product differentiation.
D) ensures the firm produces at minimum average cost in the long run.
E) indicates collusion among the members of the product group.

Question 12

The long-run equilibrium price charged by the monopolistic competitor

A) tends to equal marginal cost.
B) tends toward average cost.
C) is the same for all variants of a product within a product group.
D) is generally lower than the perfectly competitive price.
E) is expected to be higher than that of the monopolist.

Question 13

Retail clothing stores provide a good example of monopolistic competition because

A) there are few firms in the industry.
B) there are significant barriers to entry in the industry.
C) each firm possesses somewhat unique attributes in the form of location, service, and variety of merchandise.
D) profit margins are generally quite large for retail establishments.
E) firms in the industry face horizontal demand curves for their products.

Question 14

Which of the following markets best exemplifies pure oligopoly?

A) automobiles
B) petroleum
C) machinery
D) air transportation
E) retail trade

Question 15

Product differentiation often gives a producer only a small amount of monopoly power because

A) there can be little or no substitution between product groups.
B) the monopolistic competitor faces a downward-sloping demand curve.
C) the presence of excess capacity gives the producer some freedom to vary output.
D) the product may be unique, but close substitutes are available.
E) the industry is difficult to define and hence cannot be regulated.

Question 16

The basic distinction between perfect competition and monopolistic competition is that

A) in perfect competition there are many sellers; in monopolistic competition, there are few.
B) entry into a market is easy for a new seller in perfect competition, while it is difficult in monopolistic competition.
C) firms in perfect competition must advertise to sell their products, but since they have a monopoly, monopolistically competitive firms do not.
D) perfectly competitive firms produce an identical product; monopolistically competitive firms produce similar products.
E) a perfectly competitive firm produces with an excess capacity in the long run; a monopolistically competitive firm does not.

Question 17

An oligopolistic market is one with

A) firms having no power over price.
B) few sellers.
C) few buyers.
D) several monopolists operating simultaneously.
E) product groups.

Question 18

A monopolistically competitive firm may be more inefficient than a perfectly competitive one because

A) it sets its price below marginal cost.
B) it produces a smaller than minimum unit-cost output in the long run.
C) there are no barriers to its entry or exit from the market.
D) it produces a unique product for which no substitutes exist.
E) it cannot earn profits.

Question 19

A monopolistically competitive firm is likely to produce less and charge more than a perfectly competitive firm because

A) a monopolistically competitive firm faces a downward-sloping demand curve; therefore, price is greater than marginal revenue.
B) there is less demand for the monopolistically competitive firm's product.
C) both firms equate marginal cost with average cost.
D) a monopolistically competitive firm faces excessive competition.
E) a monopolistically competitive firm faces different cost conditions.

Question 20

The following questions are based on the following diagram for a monopolistically competitive firm:

This short-run equilibrium price

A) is also the long-run equilibrium price.
B) is not profitable for the monopolistic competitor.
C) requires the firm to advertise to avoid continuing to lose money.
D) equals marginal cost.
E) will not be sustained because there is an incentive for entry.

Question 21

A key characteristic of oligopoly is

A) a single firm producing a product with no close substitutes.
B) complete absence of entry barriers.
C) a demand curve much less elastic for price increases than for price decreases.
D) the tendency to spend less on product differentiation and advertising than a perfectly competitive firm.
E) actual and perceived interdependence among firms.

Question 22

In the United States,most collusive agreements were declared illegal by the ________ Act.

A) Sherman Antitrust
B) Clayton
C) Robinson-Patman
D) FTC
E) Celler-Kefauver

Question 23

In the theory of games,the optimal behavior for a decision-making unit,regardless of what the other players do,is called a

A) payoff matrix.
B) rule.
C) contingency plan.
D) dominant strategy.
E) primary path.

Question 24

Monopolistic competition and oligopoly are similar in that firms in both markets

A) face horizontal demand curves.
B) do not earn profits in the long run.
C) tend to charge higher prices than under perfect competition.
D) find that advertising and other types of selling expenses are unnecessary.
E) produce homogeneous products.

Question 25

A competitive situation where two or more persons pursue their own interests and no person can dictate the outcome is called a(n)

A) payoff.
B) externality.
C) contingency.
D) frolic.
E) game.

Question 26

Although a cartel may readily agree on a uniform price,problems nevertheless arise because

A) marginal cost is the same as marginal revenue.
B) consumer demand will increase as a result.
C) decisions must be made as to how to allocate production among cartel members.
D) the product is either homogeneous or differentiated.
E) all cartels are illegal.

Question 27

If firms' production functions are such as to achieve the lowest unit costs when each produces a substantial share of total market output,the industry is likely to exhibit the characteristics of

A) perfect competition.
B) monopolistic competition.
C) monopsony.
D) oligopoly.
E) monopoly.

Question 28

A cartel is

A) a formal collusive arrangement among firms.
B) found most of the time in monopolistic competition.
C) usually exempt from antitrust laws in the United States.
D) easier to maintain as the number of firms involved increases.
E) unlikely to occur in international markets.

Question 29

A profit-maximizing cartel should produce where

A) price equals average cost.
B) marginal cost equals average cost.
C) price equals marginal cost.
D) marginal revenue equals demand.
E) marginal cost equals marginal revenue.

Question 30

The rationale for using game theory to study oligopoly is that

A) game theory is an exceedingly simple tool.
B) each output produced by an oligopolist is determined by a linear program.
C) it enables the government to dictate the outcome of a competitive situation.
D) game theory allows consideration of the product transformation curve.
E) in oligopoly, each firm must take account of its rivals' actions.

Question 31

If oligopolists can form a cartel,their profit-maximizing action is to

A) act like monopolists with a number of plants or divisions, each of which is a member firm.
B) have only the most efficient firm undertake production.
C) produce at minimum average cost.
D) allocate sales among the cartel members so that the average cost of each is the same.
E) dramatically increase production.

Question 32

When firms get together and agree on prices and output,it is called

A) price leadership.
B) the rule of reason.
C) monopolistic competition.
D) collusion.
E) intermediation.

Question 33

Game theory can most effectively be used to postulate behavior in ________ markets.

A) perfectly competitive
B) monopolistic
C) monopolistically competitive
D) oligopolistic
E) regulated

Question 34

An oligopoly market structure prevails in an industry in which there are

A) no barriers to entry.
B)demand curves that slope upward to the right.
C)few firms.
D)conditions that keep individual firms' sales low relative to the market.
E)no short- or long-run profits.

Question 35

Which of the following describes oligopolistic interdependence?

A) Each oligopolist makes price and output policies with their effect on other firms in mind.
B) There are important external diseconomies in an oligopolistic market.
C) No firm can change the price determined in the marketplace, except through advertising.
D) There is no likelihood of collusion among producers.
E) Within each product group, each oligopolist's product is identical.

Question 36

In game theory,the outcomes of various strategies for two players can be summarized in a(n)

A) payoff matrix.
B) balance sheet.
C) income statement.
D) T-accent.
E) pie chart.

Question 37

What will the price be if five firms that are the only producers of a product form a cartel and charge a uniform price,if marginal costs are constant at $36 and the demand for the product is as follows? (Hint: MR = 100 - 4Q.)

A) $70
B) $68
C) $66
D) $64
E) $62

Question 38

The possible outcomes of a two-firm nonrepeated promotional campaign are summarized as follows:

According to the information given,it would be best for firm B to

A) concentrate on local radio spots regardless of the promotional campaign chosen by firm A.
B) concentrate on mailbox flyers regardless of the promotion campaign chosen by firm A.
C) match A's strategy; that is, if A chooses radio advertising, B should do the same.
D) choose the opposite strategy from firm A; that is, if A chooses radio, B should choose mailbox flyers.
E) allocate one-half of its promotional budget to local radio advertising and one-half to mailbox flyers.

Question 39

The most frequently found barriers to entry in oligopoly include

A) the presence of large numbers of rival firms, firms that are price takers, and the likelihood of normal returns in the long run.
B) an inability to differentiate product, diseconomies of scale, and the need to advertise.
C) mutual interdependence, collusion, and the likelihood of government regulation.
D) the ambiguity of product groups and rising long-run average costs.
E) patents, large initial and continuing financial requirements, and access to basic inputs.

Question 40

The possible outcomes of a two-firm nonrepeated promotional campaign are summarized as follows:

According to the information given

A) firm A's dominant strategy is local radio spots.
B) firm A's dominant strategy is mailbox flyers.
C) firm B's dominant strategy is local radio spots.
D) firm B's dominant strategy is mailbox flyers.
E) neither firm has a dominant strategy.

Question 41

The ________ Act outlawed unjustified price discrimination and the use of tying contracts and mergers that substantially lessen competition.

A) Sherman
B) Federal Trade Commission
C) Clayton
D) Webb-Pomerene
E) Celler-Kefauver

Question 42

Oligopolistic nonprice competition focuses on

A) collusion and the formation of cartels.
B) vertical and horizontal mergers.
C) functional finance and target return rates.
D) output restrictions and resale maintenance agreements.
E) advertising and product development.

Question 43

The price leadership model that applies when the firm that changes price is regarded as an accurate interpreter of industry cost and demand conditions is the ________ model.

A) marginal firm
B) cartel
C) perceived interdependence
D) barometric firm
E) dominant firm

Question 44

In the United States collusive arrangements are difficult to accomplish and maintain for long periods because

A) most U.S. industries are perfectly competitive.
B) most large firms already have monopoly privileges by government franchise.
C) of the existence of antitrust laws.
D) of the inability of colluding firms to estimate relevant demand and cost conditions.
E) of the need to include firms from all over the world in any collusive arrangement.

Question 45

The Clayton Act outlawed

A) horizontal mergers.
B) unjustified price discrimination.
C) the rule of reason.
D) deceptive advertising.
E) "cutthroat" competition.

Question 46

A force that tends to weaken collusive agreements is found when

A) the colluding firms number two or three rather than 10 or 12.
B) there are significant differences among the cost structures of the colluding firms.
C) the firms produce virtually identical products.
D) sales and profits in the industry are large and all the colluding firms experience high levels of capacity utilization.
E) there is a lack of government enforcement of antitrust laws.

Question 47

The price leadership model that applies when the largest firms set industry pricing patterns is the ________ model.

A) marginal firm
B) cartel
C) perceived interdependence
D) barometric firm
E) dominant firm

Question 48

The Federal Trade Commission Act declared that

A) tying contracts substantially lessen competition.
B) contracts and combinations in restraint of trade are illegal.
C) the rule of reason is reasonable.
D) perfect competition results in optimal efficiency and an optimal distribution of income.
E) unfair methods of competition in commerce are unlawful.

Question 49

The presence of a price leader in an oligopolistic industry

A) implies that one firm can consistently charge the highest price.
B) allows firms to coordinate their behavior short of outright collusion.
C) decreases the profits of all other firms.
D) is illegal according to the Sherman Antitrust Act.
E) leads naturally to cost-plus pricing by other firms in the industry.

Question 50

A process by which oligopolists coordinate their behavior without resorting to outright collusion is called price

A) discrimination.
B) escalation.
C) stabilization.
D) reform.
E) leadership.

Question 51

The ________ Act was designed to prevent undesirable and unfair competitive practices and was later used to outlaw deceptive advertising.

A) Sherman
B) Federal Trade Commission
C) Clayton
D) Webb-Pomerene
E) Celler-Kefauver

Question 52

Oligopolists prefer to compete through advertising and product differentiation because

A) the greater the degree of product differentiation in the mind of the consumer, the greater the degree of interdependence among rivals.
B) price wars are illegal according to existing antitrust statutes.
C) advertising and product development enable them to realize greater profits without increasing market share.
D) rivals may find it easier to respond to a price decrease than a style change or advertising campaign.
E) it doesn't pay to raise price when the demand curve is highly price inelastic.

Question 53

The Celler-Kefauver Anti-Merger Act

A) established the Antitrust Division of the Justice Department.
B) extended the antitrust laws to cover mergers of not-for-profit organizations.
C) made market conduct the basic test for allowing a merger to take place.
D) disallowed the purchase of a competitor's assets if the outcome would substantially lessen competition.
E) was ruled unconstitutional by the Supreme Court.

Question 54

One crucial difference between the oligopolists and perfect competitors is that

A) perfect competitors are not concerned with maximizing profits.
B) nonprice competition plays a central role in oligopoly.
C) the price charged by oligopolists is less than that charged by perfect competitors.
D) perfect competitors advertise more heavily.
E) oligopolies are less prone to collusion.

Question 55

The Sherman Act

A) outlawed conspiracy in restraint of trade.
B) outlawed the use of tying contracts.
C) established the rule of reason.
D) created the Federal Trade Commission.
E) allowed firms to meet to determine market prices.

Question 56

When firms compete aggressively through advertising and product development,it is called ________ competition.

A) perfect
B) nonprice
C) natural
D) foreign
E) attributive

Question 57

In 1961,major electrical equipment manufacturers were convicted of illegal practices undertaken during the 1950s,consisting primarily of

A) tying contracts.
B) collusive agreements.
C) horizontal mergers.
D) vertical mergers.
E) conglomerate mergers.

Question 58

There is a strong tendency for oligopolists to cheat on collusive agreements because

A) effective collusion rarely benefits any individual firm.
B) a cheater can benefit both when all the other parties abide by the agreement and when other parties also cheat.
C) when all firms abide by the agreement, the aggregate profits are reduced.
D) collusion is a form of marginal cost pricing, whereas most firms benefit when price is above marginal cost.
E) cheating is generally at the expense of the buyer and not the colluding sellers.

Question 59

The main reason that Ford lost a large share of his market to General Motors is that

A) Ford misjudged the market and raised prices when he should not have.
B) General Motors' product offered more quality for the money.
C) Ford resisted the trend toward mass production.
D) General Motors offered product diversity.
E) Ford spent excessive amounts of money on advertising.

Question 60

The promotion of increased competition among U.S.businesses is the major reason for the existence of ________ laws.

A) capital gains tax
B) immigration
C) tariff
D) patent
E) antitrust

Question 61

The rule of reason concept

A) made conduct, rather than market structure, the test of illegality.
B) implied that merely having a large share of an industry's market constituted an offense.
C) gained importance after the ALCOA case.
D) was the Supreme Court interpretation of antitrust laws that prevailed before 1910.
E) was a procedural criterion adopted by the Antitrust Division of the Justice Department under Thurman Arnold.

Question 62

In the late 1930s,with the ALCOA case,the courts changed their former interpretation of antitrust laws to

A) reflect the rule of reason.
B) allow all but overt monopoly pricing behavior by a firm.
C) focus primarily on a firm's share of the market rather than its market conduct.
D) find that only those firms that behaved collusively were violating the antitrust laws.
E) reiterate that mere size was not an offense.

Question 63

The condition whereby firms aggressively undercut one another on price is known as

A) collusion.
B) perfect competition.
C) price warring.
D) profit sharing.
E) price leadership.

Question 64

One recent criticism of the airline industry deregulation that took place in the late 1970s and early 1980s is that it led to

A) higher airline fares.
B) a reduction in air travel by the general public.
C) reduced airline efficiency.
D) packed airplanes and overcrowded airports.
E) reduced worker productivity in the industry.

Question 65

The rule of reason doctrine prevailed during the

A) middle of the nineteenth century.
B) late nineteenth and early twentieth centuries.
C) 1920s and 1930s.
D) 1940s and 1950s.
E) 1960s and 1970s.

Question 66

U.S.antitrust laws and their enforcement

A) reflect the principle that free markets cannot remain competitive.
B) have led to government price setting in many industries.
C) attempt to maintain the status quo.
D) have led to the elimination of market concentration in the United States.
E) affect business judgment when courses of action are being considered.

Question 67

From the firm's point of view,the greatest advantage in collusion is

A) access to shared technology.
B) cheaper production costs.
C) higher-quality products.
D) a bigger market.
E) security.

Question 68

Antitrust action is the responsibility of the

A) president of the United States.
B) Supreme Court.
C) Federal Commerce Commission.
D) Department of Justice.
E) FBI.

Question 69

One of the first U.S.presidents to actively encourage the application of the antitrust laws was

A) Grover Cleveland.
B) Ronald Reagan.
C) Theodore Roosevelt.
D) Franklin D. Roosevelt.
E) Andrew Jackson.

Question 70

Antitrust action against the American Telephone and Telegraph Company,begun by the Justice Department in 1974

A) led to the 1982 Supreme Court decision to break up AT&T.
B) was an unsuccessful effort by the Justice Department to reestablish the rule of reason doctrine.
C) resulted in an out-of-court settlement in which AT&T divested itself of its 22 local telephone companies.
D) ensured that AT&T would continue to have a monopoly position in local but not long-distance telephone service.
E) resulted in a denial of the proposed conglomerate merger of AT&T and IBM.

Question 71

The notion advanced by the Supreme Court in the U.S.steel case that "the law does not make mere size an offense.It ...requires overt acts," exemplifies the application of the

A) golden rule.
B) rule of behavior.
C) rule of law.
D) rule of thumb.
E) rule of reason.

Question 72

This diagram is used to illustrate

A) why an oligopoly firm is unwilling to raise its price above P₀ to P₁ or lower it from P0 to PSubscript:
₂)
B) the "phases of the moon" pricing process used by the electrical industry.
C) the difference between dominant firm price leadership raising the price from P₀ to P₁ and barometric firm price leadership reducing the price from P₀3. to P₂.
D) long-run equilibrium in a perfectly competitive market.
E) the process by which a cartel sets prices and divides up the market among its members.

Question 73

The two approaches to antitrust policy are market

A) conduct and market structure.
B) size and market scope.
C) concentration and market disintegration.
D) power and market monopoly.
E) merger and market shares.