Deck 10: Monopolistic Competition and Oligopoly

Question 1

In monopolistic competition, ease of entry and exit means:

A) it is easy to make a profit.
B) it is free.
C) eventually the industry resembles a perfectly competitive market.
D) there are no extraordinary barriers to entry as there are in monopoly.

Answer 1

D

Question 2

In monopolistic competition, a firm:

A) produces exactly the same product as its rival firms.
B) cannot set the prices higher than those of rival firms without fear of losing all
Its customers.
C) is not able to influence the market price.
D) is not interested in advertising.

Answer 2

C

Question 3

Which of the following is true about advertising by a firm?

A) It is always successful in increasing demand for a firm's product.
B) It attempts to increase demand and to make demand more elastic.
C) It can attract severe penalties if firms are engaged in false or misleading advertising.
D) It allows large firms to become monopolists.

Answer 3

C

Question 4

Product differentiation:

A) refers to the attempt by firms to make their products look like those of the other firms in the industry.
B) refers to the attempt by firms to make essentially substitutable products look different in the minds of the consumers.
C) refers to the advantage big firms have in research and development.
D) is a common characteristic of a perfectly competitive market structure.

Question 5

In monopolistic competition, a firm:

A) enjoys its monopoly status.
B) does not compete with other firms.
C) can only compete on price.
D) can use non-price competition.

Question 6

A characteristic of monopolistic competition is:

A) that there are substantial barriers to entry.
B) that they produce a differentiated product.
C) that there are few firms in the industry.
D) that they face a perfectly elastic demand curve.

Question 7

The key difference(s) between perfect competition and monopolistic competition is:

A) that a monopolistically competitive firm is a price taker, whereas a perfectly competitive firm is a price maker.
B) that a monopolistically competitive firm is a price maker, the same as a perfectly competitive firm is a price maker.
C) that a monopolistically competitive firm can raise its price and still retain some
Customers.
D) that if a monopolistically competitive firm raises its price it will lose all customers.

Question 8

The monopolistic competition market structure is characterised by:

A) many small firms and an easy market entry and exit.
B) many firms and consumers with differentiated products.
C) many small firms and a homogeneous product.
D) few firms and a homogeneous product.

Question 9

Monopolistic competition has the following characteristics:

A) one large buyer.
B) many firms and consumers with differentiated products.
C) a homogeneous product.
D) difficult entry and exit.

Question 10

A monopolistically competitive market is characterised by:

A) many firms and consumers with differentiated products.
B) a single seller of a product that has few suitable substitutes.
C) very strong barriers to entry.
D) mutual interdependence in pricing decisions.

Question 11

Defenders of advertising argue that it:

A) informs potential buyers about the properties of goods and services.
B) leads to economic inefficiency.
C) enables small firms to become monopolists.
D) allows lower prices than in a perfectly competitive market.

Question 12

A characteristic of monopolistic competition is that:

A) there are many large firms in the industry.
B) firms produce a homogeneous product.
C) there are few firms in the industry.
D) firms are price makers.

Question 13

Product differentiation makes the demand for a monopolistically competitive firm's product:

A) perfectly elastic.
B) more elastic than for a monopoly.
C) more inelastic than for a monopoly.
D) perfectly inelastic.

Question 14

Supporters of advertising claim that it:

A) increases price to benefit fewer customers.
B) leads to resource misallocation.
C) does not allow new firms to compete.
D) informs consumers about the products and their advantages.

Question 15

Firms in a monopolistically competitive industry produce:

A) homogeneous goods and services.
B) differentiated products.
C) competitive goods only.
D) normal goods only.

Question 16

Which of the following is a characteristic of the monopolistic competition market structure?

A) Many firms and a homogeneous product.
B) Few firms and differentiated products.
C) Few firms and similar products.
D) Many firms and consumers with differentiated products.

Question 17

Because monopolistically competitive firms each produce a differentiated product, they will:

A) never need advertising.
B) be unable to create any degree of product loyalty.
C) face a perfectly elastic demand curve.
D) face a downward-sloping demand curve.

Question 18

In monopolistic competition, firms:

A) do not have market power.
B) have a degree of market power.
C) are price takers.
D) do not compete with other firms.

Question 19

Supporters of advertising claim that it:

A) promotes the public interest.
B) is a barrier to entry.
C) allows small firms to compete.
D) misleads consumers.

Question 20

The monopolistic competition market structure helps explain:

A) why a monopoly market structure is superior to other market structures.
B) why firms do not advertise.
C) why firms try to win customers through advertising.
D) why firms cannot raise prices without losing all of their customers.

Question 21

In the long run, a monopolistically competitive firm will operate:

A) at the level of output that allows the firm to earn zero economic profit.
B) at the level of output that allows the firm to earn economic profit.
C) at the level of output that allows the firm to earn negative economic profit.
D) at any level of output.

Question 22

Compared to monopoly, the market results with monopolistic competition are usually expected to be:

A) worse because consumers get fewer choices.
B) worse because consumers pay a higher price.
C) the same.
D) better because consumers pay a lower price.

Question 23

In monopolistic competition, profit:

A) is proof that advertising works.
B) motivates existing firms to increase prices.
C) signals for new firms to enter.
D) provides a motive for existing firms to decrease prices.

Question 24

In the long run, the economic profits of Hoot's Chicken'n'Ribs, a monopolistic competitor, are:

A) not eliminated, because competition is not perfect.
B) not eliminated, because the demand curve slopes downward.
C) eliminated due to firms entering the industry.
D) eliminated due to firms leaving the industry.

Question 25

In a monopolistically competitive market, sellers sell a differentiated product because:

A) there is a very low cross-price elasticity of demand between the products.
B) there is a valuable difference between sellers' products.
C) sellers' products are not close substitutes.
D) sellers cannot influence the market price.

Question 26

The monopolistically competitive firm:

A) (like a firm in a competitive market) will earn an economic profit in the long run.
B) (unlike a monopolist) will not earn an economic profit in the long run.
C) (like a monopolist) will not earn an economic profit in the long run.
D) (unlike a firm in a competitive market) will not earn an economic profit in the long run.

Question 27

We can represent the entry of new firms into a monopolistically competitive market by making the existing firms':

A) demand curves shift downward.
B) demand curves shift upward.
C) cost curves shift downward.
D) cost curves shift upward.

Question 28

Which of the following statements best describes the price, output and profit conditions of monopolistic competition?

A) Price will equal marginal cost at the profit-maximising level of output; and profits will be positive in the long run.
B) Price will always equal average variable cost in the short run and either profits or losses may result in the long run.
C) Marginal revenue will equal marginal cost in the short run, profit-maximising level of output; and in the long run, economic profit will be zero.
D) Marginal revenue will equal average total cost in the short run; and long-run economic profits will be zero.

Question 29

Critics of advertising argue that:

A) its main purpose is to explain the best characteristics of rival products.
B) its main purpose is to provide consumers with much needed information.
C) its main purpose is to persuade consumers into buying something they do not need.
D) it saves consumers time and money.

Question 30

Firms enter the monopolistically competitive industry if:

A) other firms exit the industry.
B) there are profits.
C) they have enough fixed inputs.
D) there are scarce resources.

Question 31

A firm in a monopolistically competitive industry can:

A) raise price and lose all customers.
B) raise price and sell more units of a product.
C) lower price and sell the same quantity of a product.
D) lower price and sell more units of a product.

Question 32

A picture frame company operates in a monopolistically competitive market. Its short-run equilibrium price is $80 and its ATC is $65. It sells 100 picture frames a week. From this we can tell:

A) this firm is making a normal profit.
B) other picture-frame companies will want to exit the market.
C) there are no other picture-frame companies in the area.
D) economic profits are $1500.
E) total profits are being maximised.

Question 33

The monopolistically competitive firm maximises short-run profit by following which of these rules?

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

Question 34

Which of the following statements best describes firms under monopolistic competition?

A) Profits will be positive in the long run.
B) Price always equals average variable cost.
C) In the long run, excessive level of economic profit will be eliminated.
D) Marginal revenue equals minimum average total cost in the short run.

Question 35

Costume jewellery is produced in a monopolistically competitive market. One producer finds that MR = MC = $3 when output is 700 necklaces. An economist studying this information can conclude that:

A) the producer is charging a price of $3.
B) economic profit is $2100.
C) the producer charges a price greater than $3.
D) new firms will want to enter.

Question 36

The entry of new firms into a monopolistically competitive industry will shift the:

A) market demand curve to the right.
B) market demand curve to the left.
C) existing firm's demand curve to the right.
D) existing firm's demand curve to the left.

Question 37

Which of the following statements best describes firms under monopolistic competition?

A) There is little price or quality competition.
B) Firms compete using quality, location, advertising and price.
C) Firms do not compete using advertising.
D) There is little competition between firms.

Question 38

In the long run in monopolistic competition:

A) economic profits are zero.
B) P = MC.
C) P = minimum ATC.
D) firms have an incentive to leave.

Question 39

The short-run equilibrium for a monopolistically competitive firm is at P = $28.47, ATC = $22.13 and MC = MR = $17.47. Which of the following is true?

A) Per-unit profit is $11.
B) Additional firms will be attracted into the industry.
C) The firm could raise price and increase profits.
D) The firm could lower price and increase profits.

Question 40

Because a monopolistically competitive firm is usually in competition with other firms producing similar goods, we generally say:

A) their demand curve is perfectly elastic.
B) their demand curve is less elastic than that for a monopolist.
C) their demand curve is more elastic than that for a monopolist.
D) their demand curve is more elastic than that for a perfectly competitive firm.

Question 41

Monopolistic competition is inefficient because:

A) firms earn positive economic profits.
B) the firms' marginal costs and marginal revenues are not equal.
C) firms have excess capacity in the long run.
D) entry is difficult.

Question 42

Narrbegin Exhibit 9.1 A monopolistic competitive firm

-As presented in Exhibit 9.1, in the short-run the monopolistically competitive firm will charge a price per unit of:

A) $0.
B) just below $5.
C) just below $10.
D) just below $15.

Question 43

A monopolistically competitive firm is inefficient because the firm:

A) earns positive economic profit in the long run.
B) is not producing at an output where marginal cost equals price.
C) is not maximising its profit.
D) produces an output where average total cost is at minimum.

Question 44

Which of the following is true in monopolistic competition?

A) In the long run, the monopolistically competitive firm earns positive economic profit.
B) In the long run, monopolistic competition produces the output that would minimise average total cost.
C) In the long run, monopolistic competition produces less than the output that would minimise average total cost.
D) In the long run, the monopolistically competitive firm charges the same price as
A monopoly.

Question 45

The fact that a monopolistically competitive firm is not as efficient as a perfectly competitive firm may be outweighed by which of the following?

A) The price charged is still equal to marginal revenue.
B) Goods in a monopolistically competitive market are usually cheaper.
C) There are still many perfect substitutes.
D) Consumers are given more choice.

Question 46

Which of the following is true in long-run equilibrium for both perfect competition and monopolistic competition?

A) Accounting profit is zero.
B) Marginal cost equals price.
C) Long-run average cost is at a minimum.
D) Economic profit is zero in the long-run.

Question 47

Narrbegin Exhibit 9.1 A monopolistic competitive firm

-In the long run, the demand curve for the monopolistically competitive firm shown in Exhibit 9.1:

A) shifts leftward.
B) remains the same.
C) shifts rightward.
D) is not possible to predict.

Question 48

Narrbegin Exhibit 9.1 A monopolistic competitive firm

-As presented in Exhibit 9.1, the short-run profit per unit of output for the monopolistically competitive firm is:

A) zero.
B) $5.
C) $10.
D) $15.

Question 49

In monopolistically competitive industry, the long-run outcome is:

A) zero accounting profit.
B) zero economic profit.
C) positive economic profit.
D) negative economic profit.

Question 50

An oligopoly is a market structure in which:

A) one firm has 100 per cent of a market.
B) there are many small firms.
C) there are many small firms with no control over price.
D) there are few firms selling either a homogeneous or differentiated product.

Question 51

Which of the following statements is true:

A) The analysis of monopolistic competition in the short run is the same as monopoly.
B) The analysis of monopolistic competition in the short run is like monopoly but with entry and exit in the long run.
C) Monopolistically competitive firms produce more than competitive firms.
D) Monopolistically competitive firms charge prices lower than competitive firms.

Question 52

A monopolistically competitive firm misallocates resources because:

A) the firm is not maximising its profit.
B) the firm is producing too little output at inflated prices.
C) the firm earns positive economic profit in the long run.
D) the firm passes the standard efficiency test.

Question 53

In the long run, profitability of the existing firms encourages:

A) the exit of existing firms and therefore the demand for existing firms will increase.
B) the entry of new firms and therefore the demand for existing firms will decrease.
C) the entry of new firms and therefore the demand for existing firms will increase.
D) the entry of new firms and therefore the demand for existing firms will stay the same.

Question 54

Narrbegin Exhibit 9.1 A monopolistic competitive firm

-As represented in Exhibit 9.1, the maximum long-run economic profit earned by this monopolistically competitive firm per day is:

A) zero.
B) $200.
C) $1000.
D) $20 000.

Question 55

Which of the following is true for a firm operating under perfect competition, monopolistic competition and monopoly?

A) Firms earn positive economic profits in the long run.
B) Firms earn zero economic profits in the long run.
C) Profits are maximised when marginal cost equals marginal revenue.
D) Price equals marginal cost.

Question 56

Narrbegin Exhibit 9.2 A monopolistically competitive firm

-As presented in Exhibit 9.2, the long-run profit-maximising output for the monopolistically competitive firm is:

A) zero units per week.
B) 100 units per week.
C) 200 units per week.
D) 300 units per week.

Question 57

To maximise long-run profits, the monopolistically competitive firm shown in Exhibit 9.2 will charge a price per unit of:

A) $0.
B) $5.
C) $10.
D) $15.

Question 58

The model of monopolistic competition is:

A) a combination of monopoly and competition.
B) the same as a model of monopoly.
C) the same as a model of perfect competition.
D) unlike other models.

Question 59

In the short run the monopolistic firm's profit maximising decision:

A) is hard to determine.
B) is like that of the perfectly competitive firm.
C) is based on the horizontal market price.
D) is like that of the monopoly.

Question 60

Narrbegin Exhibit 9.1 A monopolistic competitive firm

-As presented in Exhibit 9.1, the short-run, profit-maximising output for the monopolistic competitive firm is:

A) zero units per day
B) 200 units per day.
C) 400 units per day.
D) 600 units per day.

Question 61

An oligopoly is characterised by having:

A) a low-concentration ratio and a few large independent firms.
B) a high-concentration ratio and a few large independent firms.
C) many small firms that cannot dominate the market.
D) a few large independent firms.

Question 62

Oligopolies are characterised by:

A) homogeneous products.
B) differentiated products.
C) independence.
D) mutual interdependence.

Question 63

Suppose Ford, GM and Dodge make the majority of pick-up trucks sold in the United States. If they all sell for approximately the same price, and Ford offers a $2000 rebate on new truck sales, what can Ford expect to see?

A) An unprecedented increase in truck sales.
B) An immediate response by GM and Dodge.
C) A visit from the antitrust authorities of the government.
D) A revolution from Ford stockholders.

Question 64

A major characteristic of the theory of oligopoly is:

A) that there are no real-world examples.
B) that the firms are interdependent in their decisions.
C) that, in reality, few oligopolies survive more than 10 years.
D) that the firms are independent in their decisions.

Question 65

Pricing and output determination under an oligopoly is more complicated than pricing and output determinations in other industries. The primary reason for the complication is the:

A) strategic interactions among the firms.
B) brand loyalty of consumers.
C) powerful effect of advertising.
D) variability of concentration ratios.

Question 66

Under oligopoly, firms produce:

A) only a homogeneous product.
B) only a differentiated product.
C) a homogeneous product or a differentiated product.
D) an identical product.

Question 67

Oligopoly is a market structure characterised by:

A) barriers to enter and mutual interdependence.
B) barriers to exit and independent pricing decisions.
C) lack of control over prices.
D) a differentiated product and independent decisions.

Question 68

A high-concentration ratio indicates the market structure is likely to be:

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

Question 69

According to the kinked demand theory, when one firm raises its price, other firms will:

A) also raise their prices.
B) refuse to follow.
C) increase their advertising expenditures.
D) exit the industry.

Question 70

A kinked demand curve reflects a tendency on the part of an oligopolist to do which of the following?

A) Follow price increases but not price reductions.
B) Follow price reductions but not price increases.
C) Be unconcerned with rivals' behaviour.
D) None of the above.

Question 71

A kinked demand curve is perceived by the firm as being:

A) more elastic to the right of the kink.
B) more inelastic to the right of the kink.
C) more inelastic to the left of the kink.
D) present when there is a monopoly.

Question 72

The oligopoly market structure does not have which of the following characteristics?

A) Few sellers.
B) Homogeneous product.
C) Differentiated product.
D) Many small sellers.

Question 73

In which of the following market structures must the price and output decisions of an individual firm include the possible price and output reactions of the firm's rivals?

A) Monopoly.
B) Oligopoly.
C) Perfect competition.
D) Cartel.

Question 74

As a result of a kinked demand curve, the price:

A) fluctuates.
B) falls below the kink.
C) rises above the kink.
D) settles at the kink.

Question 75

What does 'a few sellers' in oligopoly market structure mean?

A) It means that one to two firms are in the market.
B) It means that less than 10 firms are in the market.
C) It means that two to three firms are in the market.
D) It means that the concentration ratio is high.

Question 76

For an oligopolistic market, the most common barrier to entry is often:

A) the fact that there are no close substitutes.
B) patents.
C) ownership of a vital resource.
D) economies of scale.

Question 77

Which of the following statements is always true with respect to oligopolists?

A) They take into consideration how other firms might react to their actions.
B) They lower prices together.
C) They raise prices together.
D) They know with certainty what the other firms will do.

Question 78

Suppose an oligopoly has a dominant firm that sets the price for the entire industry. In this situation, the oligopoly has:

A) non-price competition.
B) a kinked demand curve.
C) price leadership with competitive fringes.
D) a cartel.

Question 79

Mutual interdependence means that:

A) firms always work together in an oligopoly.
B) firms need the help of other firms to make an economic profit.
C) firms in an oligopoly must consider the actions of the other firms when making strategic decisions.
D) collusion always occurs in an oligopoly.

Question 80

When Pepsi is considering a price hike, it needs to consider how Coke may react. This situation is called:

A) mutual interdependence.
B) price leadership.
C) collusion.
D) monopolistic competition.