Deck 13: Oligopoly and Monopolistic Competition

Question 1

In the Bertrand model,

A)each firm takes the quantities produced by its rivals as given.
B)each firm takes the prices charged by its rivals as given.
C)one firm plays a leadership role and its rivals merely follow.
D)prices are higher and quantities are slightly less than we would see if the firms colluded to achieve the monopoly outcome.

Answer 1

B

Question 2

Excess capacity for a firm in an oligopoly situation

A)cannot contribute to long run profit for a firm.
B)encourages competitors to enter the market and build at optimal capacity.
C)is a deterrent to entry in the market by potential competitors.
D)will be temporary if the planning was done right.

Answer 2

C

Question 3

Stackelberg Leader-Follower duopolists face a market demand curve given by P = 90 - Q where Q is total market demand. Each firm can produce output at a constant marginal cost of 30 per unit. The equilibrium price and quantity for the total market will be

A)Q = 30, P = 60.
B)Q = 60, P = 30.
C)Q = 40, P = 50.
D)Q = 45, P = 45.

Answer 3

D

Question 4

Oligopoly is a market structure in which

A)firms are price takers.
B)there exist many firms, each producing a product that is a close, but imperfect, substitute for the products of other firms.
C)there are only a few sellers.
D)there is only one seller.

Question 5

The strategy for the shared monopoly is

A)to sell a marginally higher quantity of goods than the rival.
B)to sell at a marginally lower price than the rival.
C)collusion.
D)to take account of the effect of its own behavior on the rival firm's quantity choice.

Question 6

The basic idea of the theory of contestable markets is that when the cost of entry and exit is very low, the threat of entry can be sufficient to produce an allocation similar to the one we see under

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

Question 7

Cournot duopolists face a market demand curve given by P = 90 - Q where Q is total market demand. Each firm can produce output at a constant marginal cost of 30 per unit. The equilibrium price and quantity for the total market will be

A)Q = 30, P = 60.
B)Q = 60, P = 30.
C)Q = 40, P = 50.
D)Q = 45, P = 45.

Question 8

Bertrand duopolists face a market demand curve given by P = 90 - Q where Q is total market demand. Each firm can produce output at a constant marginal cost of 30 per unit. The equilibrium price and quantity for the total market will be

A)Q = 30, P = 60.
B)Q = 60, P = 30.
C)Q = 40, P = 50.
D)Q = 45, P = 45.

Question 9

Prices in the Bertrand model are

A)the same as prices under a shared monopoly.
B)slightly higher than prices would be under a shared monopoly.
C)the same as prices would be in the perfectly competitive case.
D)slightly higher than prices would be in the perfectly competitive case.

Question 10

Which of the duopoly models has the highest overall combined profit level?

A)The Cournot model
B)The Bertrand model
C)The Stackelberg Leader-Follower model
D)The shared monopoly model

Question 11

The strategy for the Stackelberg Leader is

A)to sell a marginally higher quantity of goods than the rival.
B)to sell at a marginally lower price than the rival.
C)collusion.
D)to take account of the effect of its own behavior on the rival firm's quantity choice.

Question 12

The strategy for the Bertrand model is

A)to sell a marginally higher quantity of goods than the rival.
B)to sell at a marginally lower price than the rival but not below marginal cost.
C)collusion.
D)to take account of the effect of its own behavior on the rival firm's quantity choice.

Question 13

When marginal cost is constant and zero, the interdependence between Cournot duopolists causes

A)price to be 1/3 higher and quantity to be 1/3 lower than the corresponding values in the monopoly case.
B)price to be 1/3 lower and quantity to be 1/3 higher than the corresponding values in the monopoly case.
C)prices and quantities to be the same as they would be in the monopoly case.
D)prices and quantities to be the same as they would be in the perfectly competitive case.

Question 14

The basic problem of a shared monopoly from the point of view of those involved is that

A)profits are lower than in the other oligopoly models.
B)the shared output is too high for the high price to be maintained.
C)collusive agreements are difficult to sustain.
D)revenue is lower than in the other oligopoly models.

Question 15

In the Cournot model,

A)each firm takes the quantities produced by its rivals as given.
B)each firm takes the prices charged by its rivals as given.
C)one firm plays a leadership role and its rivals merely follow.
D)prices are higher and quantities are slightly less than we would see if the firms colluded.

Question 16

The oligopoly model in which each firm assumes that rivals will continue to produce at their current output levels is called the:

A)Cournot model
B)Bertrand model
C)Stackelberg model
D)Chamberlin model

Question 17

Which of the following markets can most accurately be described as monopolistically competitive?

A)Toothpaste
B)Milk
C)Electricity
D)Apples

Question 18

Cournot duopolists face a market demand curve given by P = 90 - Q where Q is total market demand. Each firm can produce output at a constant marginal cost of 30 per unit. If the duopolists behave as a shared monopoly, the equilibrium price and total quantity of output will be

A)Q = 30, P = 60.
B)Q = 60, P = 30.
C)Q = 40, P = 50.
D)Q = 45, P = 45.

Question 19

The model of monopolistic competition differs from the model of perfect competition in which of the following assumptions?

A)Free entry and exit
B)Product homogeneity
C)Large number of firms
D)Perfect information

Question 20

In the Stackelberg model,

A)each firm takes the quantities produced by its rivals as given.
B)each firm takes the prices charged by its rivals as given.
C)one firm plays a leadership role and its rivals merely react to the leader's quantity.
D)prices are higher and quantities are slightly less than we would see if the firms colluded to achieve the monopoly outcome.

Question 21

Suppose that firms are located in a circle on an island. You are given transportation costs, fixed costs, variable costs, and demand (assume that customers are spread evenly along the circle). If the distance around the island is 50 miles and there are two restaurants equally spaced on the island and each of 100 people are equally spaced around the island and eat a meal a day at a restaurant, what will be the average distance traveled to and from restaurants in a day's time?

A)25 miles
B)50 miles
C)12.5 miles
D)125 miles

Question 22

The graph below shows the Chamberlin model. The dd curve is based on the assumption that

A)firms all follow each other when any one of them changes price.
B)market demand is more elastic than the demand for any one firm.
C)firms can gain market share by lowering their price below the price of the competition.
D)firms will follow any price increases of their competitors.

Question 23

Suppose that firms are located in a circle on an island. You are given transportation costs, fixed costs, variable costs, and demand (assume that customers are spread evenly along the circle). As transportation costs on the island rise,

A)the number of firms will rise in the long run.
B)the number of firms will fall in the long run.
C)the number of firms will stay the same in the long run.
D)It is impossible to tell from the information given.

Question 24

Suppose that firms are located in a circle on an island. You are given transportation costs, fixed costs, variable costs, and demand (assume that customers are spread evenly along the circle). In an example of restaurant location on an island, if the number of people on the island doubled, the number of restaurants

A)would stay the same.
B)would double.
C)would halve.
D)would increase by a factor of $\sqrt { 2 }$

Question 25

The demand curve shown below has four points depicting possible total market oligopoly outcomes of quantity and price. For the given demand and price coordinates labeled A-D, pick the matching oligopoly models that lead to these comparative outcomes.

A)A = Bertrand: B = Cournot: C = Stackelberg: D = Shared Monopoly
B)A = Cournot: B = Bertrand: C = Stackelberg: D = Shared Monopoly
C)A = Shared Monopoly: B = Cournot: C = Bertrand: D = Stackelberg
D)A = Shared Monopoly: B = Cournot: C = Stackelberg: D = Bertrand

Question 26

Which of the following is an application of the Hoteling model of monopolistic competition?

A)Politicians tend toward positions more extreme than what they actually believe
B)Stores of similar types tend to cluster
C)Efficiency requires that stores are spread equidistant from each other in a given space
D)As space increases between firms, each firm produces less

Question 27

The graph below shows the Chamberlin model. The profit-maximizing price is at

A)02.
B)03.
C)04.
D)05.

Question 28

Suppose that firms are located in a circle on an island. You are given transportation costs, fixed costs, variable costs, and demand (assume that customers are spread evenly along the circle). As the firm's variable costs rise,

A)the number of firms will rise in the long run.
B)the number of firms will fall in the long run.
C)the number of firms will stay the same in the long run.
D)It is impossible to tell from the information given.

Question 29

The graph below shows the Chamberlin model. If additional firms enter the market we would expect

A)the DD curve to shift right.
B)each individual firm to be worse off.
C)the dd curve to become steeper.
D)the MC and ATC curves to shift downward.

Question 30

If a monopolistically competitive firm is making positive economic profits, we would expect

A)entry of other firms.
B)the firm to continue making the positive economic profits.
C)the firm to expand market share and the industry to move toward an oligopoly structure.
D)the firm to hire more labor.

Question 31

Suppose there are two firms in a market: firm A and firm B. Further, assume that they produce a homogenous product at a constant marginal cost of $10. In the Bertrand model solution, firm A will charge a price

A) greater than firm B.
B) smaller than firm B.
C) equal to $10.
D) greater than $10.

Question 32

The graph below shows the Chamberlin model. One would expect the demand curve facing a monopolistically competitive firm to be

A)more elastic than a monopoly in the same industry.
B)less elastic than a monopoly in the same industry.
C)more elastic than a perfectly competitive firm in the same industry.
D)as elastic as a monopoly in the same industry.

Question 33

The graph below shows the Chamberlin model. The profit maximization level of output for a monopolistically competitive firm is

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

Question 34

In the long run, a monopolistically competitive firm acting according to the Chamberlin model

A)will operate at the minimum point of the average cost curve.
B)will not operate at the minimum point of the average cost curve.
C)will earn positive economic profits.
D)will operate at the minimum point of the marginal cost curve.

Question 35

The graph below shows the Chamberlin model. At the profit maximizing price and output the firm is making

A)positive economic profit.
B)negative economic profit.
C)zero economic profit.
D)it is impossible to tell from the information given.

Question 36

Suppose that two firms are producers of spring water, which can be obtained at zero cost. The market demand curve for their combined output is p = 100 - Q where p is the price and Q is the amount of spring water sold by both together. If the two producers act in accord with the Cournot model, their combined output will be

A)33.33.
B)66.66.
C)50.
D)0.

Question 37

The variety that monopolistic competition provides is paid primarily by

A)the producer whose ability to pass on costs is limited by his demand curve.
B)all consumers whether they desire variety or not.
C)those customers who desire the variety.
D)no one because variety costs no more to produce than uniform products cost to produce.

Question 38

Suppose that firms are located in a circle on an island. You are given transportation costs, fixed costs, variable costs, and demand (assume that customers are spread evenly along the circle). As the number of customers increase,

A)the number of firms will rise in the long run.
B)the number of firms will fall in the long run.
C)the number of firms will stay the same in the long run.
D)It is impossible to tell from the information given

Question 39

Suppose that firms are located in a circle on an island. You are given transportation costs, fixed costs, variable costs, and demand (assume that customers are spread evenly along the circle). As the firm's fixed costs increase,

A)the number of firms will rise in the long run.
B)the number of firms will fall in the long run.
C)the number of firms will stay the same in the long run.
D)It is impossible to tell from the information given.

Question 40

Which of the duopoly models has the lowest overall combined profit level?

A)The Cournot model
B)The Bertrand model
C)The Stackelberg Leader-Follower model
D)The shared monopoly model

Question 41

The following question relate to a community that is circular in nature with a one mile circumference. There are 81 people evenly distributed around the lake where the town is built. The travel cost is $10 per mile, a restaurant costs $100 to set up, and the cost per meal is $2. If the town was one restaurant below its optimal number when you are brought in as a consultant to help decide some planning issues, and the city fathers want to know how much the town could save overall if it built another restaurant, what would you tell them?

Question 42

The following question relates to an oligopoly market where the industry demand curve is P = 100 - Q. What price will the two Stackelberg firms charge?

Question 43

Gasoline comes in octane levels from 87 to 93. Supposedly, higher octane leads to less engine repair, but it costs more to produce. Sketch a total cost function for each of these two factors and a vertically summed total for both costs. On your sketch graph, show the appropriate octane level that will be produced. (Do not use numerical values on the graph except for the octane levels.)

Question 44

Describe in words how the business department in your college decides how many majors to offer when the range is from one general major to perhaps a half dozen or more possibilities.

Question 45

The following question relates to an oligopoly market where the industry demand curve is P = 100 - Q. Derive the reaction curve for a Cournot duopolist where the industry demand curve is as stated above and the MC of production is zero.

Question 46

The following question relate to a community that is circular in nature with a one mile circumference. There are 81 people evenly distributed around the lake where the town is built. The travel cost is $10 per mile, a restaurant costs $100 to set up, and the cost per meal is $2. If the town projected a total population of 180 by the end of the decade, how many restaurants would the city planners project as optimal for the end of the decade? Round off small residuals to the nearest whole number.

Question 47

The following question relate to a community that is circular in nature with a one mile circumference. There are 81 people evenly distributed around the lake where the town is built. The travel cost is $10 per mile, a restaurant costs $100 to set up, and the cost per meal is $2. What is the rate at which transportation costs are falling when the optimal number of restaurants is reached? Round off small residuals to the nearest whole number.

Question 48

Why do increasing returns to scale in an industry make it more likely that the industry will be oligopolistic rather than perfectly competitive?

Question 49

The following question relates to an oligopoly market where the industry demand curve is P = 100 - Q. What will industry output be at equilibrium in this model?

Question 50

Which statement is true about advertising?

A)If you are a tomato grower you will make more profit by advertising widely.
B)If John Kenneth Galbraith's "revised sequence" is correct, advertising is a waste of money.
C)It is best to spend advertising money on the products with the lowest quality and lowest consumer demand.
D)Advertising is most useful if it is spent on new products of good quality.

Question 51

The following question relates to an oligopoly market where the industry demand curve is P = 100 - Q. If firm 1 is a Stackelberg leader and firm 2 is a follower, what will each firm produce?

Question 52

The following question relate to a community that is circular in nature with a one mile circumference. There are 81 people evenly distributed around the lake where the town is built. The travel cost is $10 per mile, a restaurant costs $100 to set up, and the cost per meal is $2. Calculate the optimal number of restaurants without using the graph. Round off small residuals to the nearest whole number. Show your work.

Question 53

The following question relates to an oligopoly market where the industry demand curve is P = 100 - Q. Compare the models analyzed here with reference to the consumer and economic efficiency.

Question 54

The following question relate to a community that is circular in nature with a one mile circumference. There are 81 people evenly distributed around the lake where the town is built. The travel cost is $10 per mile, a restaurant costs $100 to set up, and the cost per meal is $2. Beginning from the initial population of 81, how high would the cost per mile have to go before the optimal number of restaurants would be one more than it was with transportation costs at $10 per mile? Round off small residuals to the nearest whole number.

Question 55

The following question relate to a community that is circular in nature with a one mile circumference. There are 81 people evenly distributed around the lake where the town is built. The travel cost is $10 per mile, a restaurant costs $100 to set up, and the cost per meal is $2. On your graph, vertically sum the two total cost curves and show what the optimal number of restaurants should be. Use the five points calculated to sum the total cost curves. Round off small residuals to the nearest whole number.

Question 56

When you go to a baseball game your ticket specifies your seat and section of the stadium where the seat is located. Assuming the seats all cost nearly the same to install and maintain, what pricing strategy would you expect the team officials to adopt if a full stadium with a maximum of satisfied customers and at least normal profit is the goal?

A)Price all seats at cost, which includes normal profit.
B)Price above cost for the seats with the best view and price at cost for the rest even if this means the stadium is not full.At least total cost with normal profit will be achieved.
C)Price above cost for seats with the best view and below cost for less desirable seats so the gain from those willing to pay more for the best seats offsets the loss on the cheap seats.
D)Price all seats above cost so if there are empty seats, at least total costs can hopefully be covered.

Question 57

The following question relates to an oligopoly market where the industry demand curve is P = 100 - Q. If the Bertrand model is assumed to be the appropriate one for analysis, what will be the price of the product and the quantity sold in this duopoly market?

Question 58

The following question relate to a community that is circular in nature with a one mile circumference. There are 81 people evenly distributed around the lake where the town is built. The travel cost is $10 per mile, a restaurant costs $100 to set up, and the cost per meal is $2. Sketch two total cost curves as functions of the number of restaurants. The first one is the total cost of meals per day and the second is the total cost of transportation per day. Plot five points for each curve. Round off small residuals to the nearest whole number.

Question 59

The Chamberlin model has been criticized for all but which one of the following reasons?

A)The concept of an industry group is ambiguous in the model.
B)The model adds little to the perfect competition conclusions.
C)Consumers are not as willing to switch from one product another for slight price changes.
D)The model predicts no long-run profits but does not account for entry and exit in markets.

Question 60

The following question relates to an oligopoly market where the industry demand curve is P = 100 - Q. What will be the price and quantity of this duopoly market if the duopolists act as shared monopolists?