Deck 13: Monopolistic Competition and Oligopoly

Question 1

Monopolistic competition is characterized by:

A) homogeneous products.
B) barriers to entry and exit.
C) perfect dissemination of information.
D) few buyers and sellers.

Answer 1

C

Question 2

In both monopolistic competition and oligopoly markets:

A) there is easy entry and exit.
B) consumers perceive differences among the products of various competitors.
C) economic profits may be earned in the long run.
D) there are many sellers.

Answer 2

B

Question 3

A perfectly functioning cartel leads to a price/output combination identical to an industry that is:

A) monopolistic.
B) monopolistically competitive.
C) oligopolistic.
D) perfectly competitive.

Answer 3

A

Question 4

A successfully exploited niche market involves elements of:

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

Question 5

The demand curve faced by a firm in a monopolistically competitive industry is:

A) the downward sloping industry demand curve.
B) downward sloping.
C) more elastic than the perfectly competitive firm's demand curve.
D) horizontal.

Question 6

When prices in monopolistically competitive markets exceed those in a perfectly competitive equilibrium, this difference is the cost of:

A) information.
B) market power.
C) inefficiency.
D) product differentiation.

Question 7

For a firm in monopolistically competitive market equilibrium:

A) MC ³ AC
B) MR £ AR
C) MR = MC
D) P ³ AC

Question 8

The kinked demand curve theory of oligopoly assumes that rival firms:

A) react to price increases.
B) react to price increases and decreases.
C) do not react to price changes.
D) react to price decreases.

Question 9

The industry supply curve is derived through the horizontal summation of firm:

A) average cost curves.
B) marginal revenue curves.
C) marginal cost curves.
D) demand curves.

Question 10

An formal agreement to set prices and output is called:

A) collusion.
B) monopolistic competition.
C) kinked demand.
D) a cartel.

Question 11

In long-run equilibrium, the monopolistically competitive firm will set a price equal to:

A) average cost.
B) average variable cost.
C) marginal cost.
D) minimum long run average cost.

Question 12

Equilibrium in oligopoly markets is characterized by:

A) P > AC and MR = MC
B) P = MR and AC = MC
C) P < MR and AC < MC
D) P = AC and MR = MC

Question 13

A firm should increase advertising if the net marginal revenue derived is:

A) equal to the marginal cost of advertising.
B) greater than the marginal cost of advertising.
C) greater than zero.
D) less than the marginal cost of advertising.

Question 14

The four-firm concentration ratio will rise following:

A) a rise in imports.
B) a fall in imports.
C) a merger between the two largest firms in the industry.
D) small firm entry.

Question 15

In oligopoly equilibrium:

A) MC = AC
B) MC > AC
C) MR = MC
D) MC < AC

Question 16

Monopolistic competition always entails:

A) declining LRAC.
B) vigorous price competition.
C) increasing LRAC.
D) constant LRAC.

Question 17

In a monopolistically competitive industry, firms:

A) offer products that are not perfect substitutes.
B) make decisions in light of expected reactions from other firms.
C) set price equal to marginal cost.
D) are price takers.

Question 18

A perfectly functioning cartel results in a:

A) monopoly equilibrium.
B) oligopoly equilibrium.
C) perfectly competitive equilibrium.
D) monopolistically competitive equilibrium.

Question 19

The demand faced by an industry price leader is:

A) market demand.
B) market demand plus the demand for output by follower firms.
C) market demand less the supply of output by follower firms.
D) kinked.

Question 20

The vigor of competition always decreases with a fall in:

A) product differentiation.
B) barriers to entry.
C) the level of available information.
D) the number of competitors.

Question 21

Cartel Pricing. An illegal cartel has been formed by three leading residential sanitation (trash pick-up) service companies in Honolulu, Hawaii. Total production costs at various levels of service per month are as follows:

Question 22

In monopolistically competitive markets, the firm demand curve is:

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

Question 23

Price/Output Equilibrium. Osteopathic Devices, Inc., makes products used in the surgical replacement of degenerated bone material. During recent years, its unique hip joint replacement product has successfully exploited a small but profitable niche in the market. The company's monopoly position in this market niche is now threatened by a competitor's announcement of a new device with capabilities similar to those of the Osteopathic product.

Question 24

Price/Output Equilibrium. The domestic sewing machine manufacturing industry is highly concentrated with only three active firms. Annual output and the marginal cost of production for "free arm" models produced by each company are as follows:

Competition from low-priced imports has been effectively limited by import tariffs (taxes). Given this import protection, domestic firms are able to sell as much output as they wish at the current wholesale market price of $750. However, industry prices haven't risen above $750 because this price triggers a flood of foreign competition.

Question 25

A theory used to explain rigid or "sticky" in oligopoly markets is proposed in the:

A) Cournot model.
B) Stackelberg model.
C) Bertrand model.
D) Sweezy model.

Question 26

In oligopoly markets, the market demand curve is:

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

Question 27

Monopolistic Competition. Paintless Dent Removal, Inc., was an early innovator in the noninvasive removal of dents, dings, and hail damage from cars, trucks and SUVs. Imitation by traditional auto body repair shops and a host of new rivals is poised to eliminate the company's early lead.

Question 28

A perfectly functioning cartel results in:

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

Question 29

Monopolistic Competition. Merck & Co. markets a product called ZOCOR that treats people who suffer from high cholesterol and heart disease. ZOCOR works by reducing the amount of cholesterol in your blood. ZOCOR can dramatically lower LDL ("bad") responsible for depositing cholesterol in artery walls and elevate HDL ("good") cholesterol, which helps return LDL cholesterol to the bloodstream, thus preventing buildup of cholesterol in the artery walls. Elevated LDL cholesterol is associated with a greater risk of heart disease, and heart disease is the leading cause of death for people in the United States.

Question 30

Price/Output Equilibrium. Sears markets an innovative two-step carpet cleaning process. Because leftover carpet cleaning solutions can act as a magnet for dirt, Sears exclusive two-step carpet cleaning system includes a specially formulated pH-balancing fiber rinse that removes carpet cleaning solution residue right along with deep-down dirt. According to Sear's, all that's left behind is cleaner, softer, more beautiful carpet.

Question 31

Monopolistic Competition. Soft Lens, Inc., has enjoyed rapid growth in sales and high operating profits on its innovative extended-wear soft contact lenses. However, the company faces potentially fierce competition from a host of new competitors as some important basic patents expire during the coming year. Unless the company is able to thwart such competition, severe downward pressure on prices and profit margins is anticipated.

Question 32

Monopolistic Competition. Asian Imports, Inc., markets electronic devices imported from Asian producers. The company recently introduced an innovative and enormously successful 5 GB Joystick (computer memory device), but a flood of competitor entry and downward pressure on both prices and profits is expected during the coming year.

Question 33

Price/Output Equilibrium. Suppose Target Stores, Inc., sell RainAway, an innovative product with polymers used to coat the windshields of cars, planes, and boats. RainAway makes windshields and other such surfaces slick enough for rain to slide off easily. In the case of windshields, RainAway makes it possible to avoid the use of windshield wiper blades except during the most torrential downpours. During recent years, RainAway has used its unique windshield coating product to successfully exploited a small but profitable niche in the market. However, RainAway's monopoly position in this market niche is now threatened by a competitor's announcement of a new product with capabilities similar to those of the RainAway product.

Question 34

Pricing Discretion. Would the following factors increase or decrease the ability of domestic manufacturers to raise prices and profit margins? Why?
A. Elimination of uniform product safety standards.
B. Increased import tariffs (taxes).
C. Increase import quotas.
D. A rising value of the dollar that has the effect of lowering import prices.
E. A tax on price advertising.

Question 35

Cartel Pricing. The optical fiber manufacturing industry is highly concentrated with only three active firms. Annual output and the marginal cost of production for each company are as follows:

Competition from lower-priced imports has been effectively limited by import tariffs (taxes). Given this import protection, domestic firms are able to sell as much output as they wish at the current wholesale market price of $2,000. However, industry prices haven't risen above $2,000 because this price triggers a flood of foreign competition.

Question 36

Cartel Pricing. An illegal cartel has been formed by the three leading catering services companies in Colorado Springs, Colorado. Each are large enough to handle parties and food service for groups of over 100 persons. Total production costs for various group sizes are as follows:

Question 37

A kinked demand curve results from:

A) different competitor reactions .
B) competitor price reactions.
C) an absence of competitor price reactions.
D) supply imbalance.

Question 38

Price/Output Equilibrium. Dentists market a variety of tooth whitening products and services to a growing market of aging baby boomers. Until recently, tooth whitening services provided by dentists were a relatively small but highly profitable niche in the dental services market. Now, the position of dentists in the tooth whitening services market is threatened by a host of new product introductions by leading suppliers of toothpaste and mouth wash products.

Question 39

Competition Concepts. Indicate whether each of the following statements is true or false and why.
A. A high ratio of distribution cost to total cost tends to increase competition by widening the geographic area over which any individual producer can compete.
B. The price elasticity of demand will tend to fall as new competitors introduce substitute products.
C. Equilibrium in monopolistically competitive markets requires that firms be operating at the minimum point on the long-run average cost curve.
D. An increase in product differentiation will tend to decrease the slope of firm demand curves.
E. A perfectly functioning cartel would achieve the perfectly competitive industry price-output combination.

Question 40

Cartel Pricing. The domestic color separator manufacturing industry is highly concentrated with only three active firms. Color separators are used in the production of high-quality images used to produce glossy color, pamphlets, newspapers, etc. Annual output and the marginal cost of production for production grade models produced by each company are as follows:


Competition from low-priced imports has been effectively limited by import tariffs (taxes). Given this import protection, domestic firms are able to sell as much output as they wish at the current wholesale market price of $35,000. However, industry prices haven't risen above $35,000 because this price triggers a flood of foreign competition.

Question 41

Cartel Pricing. An illegal cartel has been formed by three leading ready-mix cement suppliers in the local market. Total costs at various levels of service per day are as follows:

Question 42

Cartel Pricing. An illegal cartel has been formed by three leading on-site tractor trailer fleet washing service companies in Harrisburg, Pennsylvania. Total costs at various levels of service per day are as follows:

Question 43

Firm Supply. Common Electric Products, Inc., and Lighthouse Manufacturing, Inc., are domestic suppliers of halogen gas light bulbs used in roadside lamps. Given the vigor of domestic and foreign competition, P = MR in this market. Marginal cost relations for each firm are:
where Q is output in units, and MC > AVC for each firm.

Question 44

Firm Supply. Wilson Fabricators, Inc., and Johnson City Metalworks, Ltd., are domestic suppliers of backyard basketball goals. Given the vigor of domestic competition, P = MR in this market. Marginal cost relations for each firm are:
where Q is output in units, and MC > AVC for each firm.

Question 45

Kinked Demand. VoIP Telephone, Inc., provides local and long distance telephone service in the Toledo, Ohio market. The company faces the following segmented demand and marginal revenue curves for its service:
Over the range of 0 to 25(000) customers per month:

When output exceeds 25(000) customers per month:


The company's total and marginal cost functions are as follows:

where P is price (in dollars), Q is output (in thousands), and TC is total cost (in thousands of dollars).

Question 46

Kinked Demand. Brooklyn Broadband, Inc., is a local provider of broadband access to the Internet in Brooklyn, New York. Brooklyn faces the following segmented demand and marginal revenue curves for its residential service:
Over the range of 0 to 50(000) customers per month:

When output exceeds 50(000) customers per month:

The company's total and marginal cost functions are as follows:

where P is price (in dollars), Q is output (in thousands), and TC is total cost (in thousands of dollars).

Question 47

Firm Supply. Iota Facsimile Products, Ltd., and JustheFax, Inc. are domestic suppliers of moderately-priced facsimile machines. Given the vigor of domestic and foreign competition, P = MR in this market. Marginal cost relations for each firm are:
where Q is output in units, and MC > AVC for each firm.

Question 48

Price Leadership. Biking Magazine is a dominant price leading firm in the popular bicycle magazine market. Wheel Deal and Free Wheel are competing magazines that address the same audience. Total and marginal cost relations for each magazine are:

and the industry demand curve is:

Assume throughout this problem that Wheel Deal and Free Wheel are perfect substitutes for Biking magazine.