Deck 10: Monopolistic Competition and Oligopoly

Question 1

Monopolistic competitors are protected by barriers to entry.​

Answer 1

False

Question 2

In an oligopoly, a firm's minimum efficient scale is large relative to the market.​

Answer 2

True

Question 3

If a monopolistically competitive firm is in long-run equilibrium and average cost equals $150, then the market price must be $150.​

Answer 3

True

Question 4

Collusion is most likely to occur in those oligopolies in which firms have vastly different cost structures.​

Question 5

Product differentiation helps explain the slope of the demand curve facing a firm in monopolistic competition.​

Question 6

The incentives for oligopolists to cheat on collusive agreements are strongest during periods of increasing industry sales.​

Question 7

When there are barriers to entry, a profit-maximizing firm already in the industry can charge any price it wants, even in the long run.​

Question 8

In the long run, both perfectly competitive and monopolistically competitive firms produce at minimum average cost.​

Question 9

An oligopolist that cheats on a collusive agreement by reducing price will quickly be forced out of the industry by its competitors.​

Question 10

In the long run, firms in a monopolistically competitive market earn zero economic profit.​

Question 11

Oligopolists often sacrifice economies of scale as they expand product variety.​

Question 12

Firms may easily enter a monopolistically competitive market.​

Question 13

In the long run, in monopolistic competition, firms earn zero economic profit.​

Question 14

Firms in a monopolistically competitive market that earn economic profit in the short run will continue to earn profit in the long run.​

Question 15

Monopolistically competitive firms use product differentiation to increase the price elasticity of demand.​

Question 16

Cartels are inherently unstable.​

Question 17

A monopolistically competitive firm produces where demand is inelastic.​

Question 18

The defining characteristic of oligopoly is product differentiation.​

Question 19

Consensus becomes easier to achieve as the number of firms in a cartel grows.​

Question 20

Excess capacity is defined as the difference between a firm's maximum possible output and its actual output.​

Question 21

The concept of the prisoner's dilemma is applicable only when considering the illegal behavior that firms in a non-competitive market may pursue.​

Question 22

​Monopolistically competitive firms _____.

A)are price takers
B)are price makers​
C)produce homogeneous products​
D)face high barriers to entry​
E)act interdependently​

Question 23

Firms will always achieve dominant-strategy equilibrium if game theory is used to analyze oligopoly.​

Question 24

A payoff matrix is a table listing the expected economic profit resulting from different possible strategies.​

Question 25

A group of firms that agree to coordinate their production and pricing decisions to reap monopoly profit is called an oligopoly.​

Question 26

Monopolistically competitive firms ignore the effect of their decisions upon other firms in the industry because:​

A)each firm is large relative to the market.
B)each firm is small relative to the market.
C)there are few sellers in the market.
D)there is only one seller in the market.
E)all firms follow the same pricing rule.

Question 27

Game theory provides us with a general approach to understanding the behavior of firms when their choices are interdependent.​

Question 28

Table 10.2 depicts the payoff matrix facing Eagle Tobacco and Dan'l Boone Tobacco with respect to their decisions to advertise or not. Eagle Tobacco's dominant strategy is not to advertise.
​
Table 10.2

Question 29

Monopolistically competitive industries consist of:​

A)one firm selling several products.
B)one firm selling one product.
C)many firms, all selling identical products.
D)many firms, each selling a slightly different product.
E)many firms, each selling a completely different product.

Question 30

Collusion among firms to raise prices is rare in monopolistically competitive markets because:​

A)there are too many firms.
B)there are too few firms.
C)there is only one firm.
D)products are homogeneous.
E)there are price leaders.

Question 31

FlyHigh Travel Agency, a monopolistic competitor, offers services that are differentiated from the services of other producers in the industry. This implies that it:​

A)faces a perfectly elastic demand curve.
B)is a price taker.
C)has some control over the price it charges.
D)faces a perfectly inelastic demand curve.
E)produces a product with no close substitutes.

Question 32

The term "monopolistic competition":​

A)is an alternate expression for monopoly.
B)is used to describe perfect competition that has strong entry barriers.
C)denotes an industry characterized by one seller of many differentiated products.
D)denotes an industry characterized by many sellers of homogeneous products.
E)denotes an industry characterized by many sellers of differentiated products.

Question 33

Which of the following is most likely produced in a monopolistically competitive market?​

A)Soybeans
B)Autos​
C)Fast food​
D)Oil​
E)Local phone service​

Question 34

If a monopolistically competitive firm raises its price, it:​

A)earns a higher economic profit.
B)loses some, but not all, of its customers.
C)shuts down.
D)has to pay higher taxes.
E)gains customers.

Question 35

The demand curve facing a firm is likely to be relatively elastic if:​

A)the firm has few competing firms.
B)the firm sells more differentiated products.
C)there are many substitutes for its product.
D)the firm is a price maker.
E)the firm has control over the supply of a key resource.

Question 36

The outcome in the prisoner's dilemma is referred to as the profit-maximizing equilibrium.​

Question 37

As firms in an oligopoly are interdependent, they attempt to maximize revenues rather than profits.​

Question 38

Price wars occur more often in monopolistic competition than in other market structures.​

Question 39

Table 10.2 depicts the payoff matrix facing Eagle Tobacco and Dan'l Boone Tobacco with respect to their decisions to advertise or not. Eagle Tobacco has a dominant strategy.
​
Table 10.2
​
​

Question 40

A monopolistic competitor's demand curve is​

A)perfectly elastic.
B)less elastic than a monopolist's or oligopolist's but more elastic than a perfect competitor's demand curve.
C)as elastic as an oligopolist's demand curve.
D)more elastic than a monopolist's or oligopolist's but less elastic than a perfect competitor's demand curve.
E)perfectly inelastic.

Question 41

Table 10.1 shows the output, price, and total cost for a monopolistic competitor. At the profit-maximizing output, the monopolistically competitive firm is in:​ ​
Table 10.1.
​

A)long-run equilibrium and price equals average total cost.
B)long-run equilibrium and price is less than average total cost.
C)short-run equilibrium and price is greater than average total cost.
D)short-run equilibrium and incurs an economic loss.
E)short-run equilibrium and there is zero economic profit.

Question 42

Which of the following factors makes a monopolistically competitive firm a price maker?​

A)Product differentiation
B)Barriers to entry​
C)Product similarity​
D)Its homogeneous product​
E)High tariffs​

Question 43

Compared to regular grocery stores, convenience stores have:​

A)higher prices and a more limited selection of goods.
B)higher prices and a greater selection of goods.
C)lower prices and a more limited selection of goods.
D)lower prices and a greater selection of goods.
E)equal prices and an equal selection of goods.

Question 44

Figure 10.2 shows a firm that charges price P* for output q*. In order to minimize loss in the short run, the firm should:​ ​
Figure 10.2.
​

A)shut down because price is greater than average variable cost.
B)shut down because price is greater than marginal cost.
C)shut down because price is less than marginal revenue.
D)continue to produce because price is greater than average variable cost.
E)continue to produce because price is greater than marginal cost.

Question 45

A common feature of monopolistic competition, pure monopoly, and perfect competition is that _____.​

A)entry is free in each market structure
B)producers in each market structure earn economic profit in the long run​
C)producers in each market structure sell differentiated products​
D)firms in these market structures act as price takers​
E)the profit-maximizing condition in each market is the same​

Question 46

If firms in an industry produce differentiated products, they are likely to:​

A)earn zero economic profit in the long run.
B)earn positive economic profit in the short run.
C)face perfectly elastic demand curves.
D)face downward-sloping demand curves.
E)incur lower production costs.

Question 47

The demand curve facing Imelda's Shoe Boutique, a monopolistically competitive firm, _____.​

A)is horizontal because Imelda's is small relative to the market as a whole
B)is horizontal because Imelda's is large relative to the market as a whole​
C)slopes downward because Imelda's is small relative to the market as a whole​
D)slopes downward because Imelda's sells a differentiated product​
E)slopes downward because Imelda's products are identical to its rival's products.

Question 48

Figure 10.1 shows the demand, marginal revenue, and cost curves for a monopolistic competitor. The monopolistic competitor's total economic profit at the profit-maximizing level of output is:​ ​
Figure 10.1.
​

A)$0.
B)$4.
C)$600.
D)$6.
E)$750.

Question 49

In the short run, a monopolistically competitive firm is:​

A)likely to shut down.
B)likely to charge a price that is less than the average cost of production.
C)guaranteed to earn an economic loss.
D)guaranteed to earn either zero or positive economic profit.
E)not guaranteed any level of economic profit.

Question 50

Figure 10.1 shows the demand, marginal revenue, and cost curves for a monopolistic competitor. The monopolistic competitor is in:​ ​
Figure 10.1.
​

A)long-run equilibrium because price equals average total cost.
B)long-run equilibrium because marginal cost equals marginal revenue.
C)long-run equilibrium because price exceeds marginal cost.
D)short-run equilibrium because it is earning a positive economic profit.
E)short-run equilibrium because price equals average total cost.

Question 51

Economic analysis of product differentiation leads to all of the following conclusions except one. Which is the exception?​

A)Product differentiation makes it harder for firms to collude.
B)Product differentiation makes price leadership harder to maintain.
C)Product differentiation sometimes contributes to wasteful allocation of resources.
D)Product differentiation must be based on real, substantive differences among products.
E)Product differentiation makes it easier for firms to liquidate assets.

Question 52

All of the following are examples of product differentiation except one. Which of the following is the exception?​

A)Developing a new video game or a computer program called "How to Teach Your New Dog Old Tricks"
B)Manufacturing a car that minimizes outside noise more than other cars do​
C)Lowering the price of a good for a special sale​
D)Providing movies and special meals on airline flights​
E)Making sodium-free, caffeine-free colas​

Question 53

Monopolistic competition is different from perfect competition because monopolistic competitors:​

A)produce homogeneous products
B)are price takers.
C)have high barriers to entry.
D)produce differentiated products.
E)act interdependently.

Question 54

Table 10.1 shows the output, price, and total cost for a monopolistic competitor. The profit-maximizing output for the monopolistic competitor is _____.​ ​
Table 10.1.
​

A)0 units
B)1 unit
C)3 units
D)5 units
E)2 units

Question 55

When firms differentiate their products, they:​

A)usually create barriers to entry into the market in which they operate
B)always increase their profits.
C)always increase product prices.
D)frequently create artificial or superficial differences among products, thus raising production costs.
E)usually strain the physical capacity of their plants.

Question 56

Table 10.1 shows the output, price, and total cost for a monopolistic competitor. The profit-maximizing price for the firm is:​ ​
Table 10.1.
​

A)$0.
B)$27.
C)$21.
D)$15.
E)$18.

Question 57

Which of the following is true of the relationship between price and marginal cost under monopolistic competition?​

A)Price equals marginal cost at all levels of output.
B)Price equals marginal cost only at the profit-maximizing quantity​
C)Price exceeds marginal cost at the profit-maximizing level of output​
D)Price is less than marginal cost at the profit-maximizing quantity​
E)Price is less than marginal cost at all levels of output​

Question 58

Figure 10.1 shows the demand, marginal revenue, and cost curves for a monopolistic competitor. The monopolistic competitor's profit-maximizing level of output is:​ ​
Figure 10.1.
​

A)75 units.
B)100 units.
C)125 units.
D)150 units.
E)137.5 units.

Question 59

Table 10.1 shows the output, price, and total cost for a monopolistic competitor. At the profit-maximizing output, the firm earns:​ ​
Table 10.1.

A)an economic profit of $31.
B)an economic profit, but the amount cannot be determined.
C)zero economic profit.
D)an economic profit of $32.
E)an economic loss.

Question 60

Figure 10.1 shows the demand, marginal revenue, and cost curves for a monopolistic competitor. The price that the monopolistic competitor will charge at the profit-maximizing level of output is _____.​ ​
Figure 10.1.
​

A)$2
B)$4​
C)$8​
D)$9​
E)$10​

Question 61

Figure 10.3 shows the demand, marginal revenue, and cost curves for a monopolistic competitor. In the short run, the firm will _____.​ ​
Figure 10.3.
​

A)produce 10 units at a price of $36 per unit
B)produce 10 units at a price of $24 per unit
C)produce 10 units at a price of $40 per unit
D)produce 15 units at a price of $32 per unit
E)produce 15 units at a price of $24 per unit

Question 62

Figure 10.4 shows the demand, marginal revenue, and cost curves for a monopolistic competitor. If the firm is producing at a profit-maximizing level of output, its total revenue is _____.​ ​
Figure 10.4

A)$5,320
B)$5,700​
C)$4,750​
D)$8,120​
E)$8,100​

Question 63

In long-run equilibrium, a monopolistically competitive firm will produce:​

A)at its minimum average cost.
B)at full capacity.
C)along the downward-sloping portion of its ATC curve.
D)along the upward-sloping portion of its ATC curve.
E)at the minimum point of its marginal cost curve.

Question 64

Bubba's Baby Boutique is a monopolistically competitive firm. In the long run, it earns:​

A)zero normal profit but positive economic profit.
B)normal profit but zero economic profit.
C)both normal and economic profit.
D)zero normal and economic profit.
E)less revenue than in the short run.

Question 65

Suppose a monopolistically competitive firm is producing at an output level where marginal revenue is less than marginal cost. This firm should _____quantity and _____ price to increase profit or reduce losses.​

A)increase, increase
B)increase; decrease​
C)decrease; increase​
D)decrease; decrease​
E)increase; not change​

Question 66

In the long run, economic profit earned by a monopolistically competitive firm:​

A)is zero due to the lack of barriers to entry.
B)is zero due to the production of homogenous goods.
C)may be positive due to strong barriers to entry.
D)may be positive due to product differentiation.
E)may be positive due to advertising and product promotion.

Question 67

Due to the ease of entry of new firms into monopolistically competitive markets in the long run, existing firms in these markets:​

A)produce at the lowest average total cost.
B)charge a price equal to marginal cost.
C)earn no economic profit in the long run.
D)take advantage of economies of scope.
E)earn no economic profit in the short run.

Question 68

Suppose a monopolistically competitive firm is earning an economic profit. The marginal revenue from selling an additional unit is $30, and the marginal cost of producing that additional unit is $23. The firm should:​

A)change neither its price nor its output level.
B)reduce its price and increase its output level.
C)increase its price and reduce its output level.
D)reduce both its price and its output level.
E)increase both its price and its output level.

Question 69

A profit-maximizing firm in monopolistic competition should shut down in the short run if:​

A)marginal revenue is less than price.
B)price is more than average total cost.
C)price is less than average fixed cost.
D)price is less than average variable cost.
E)marginal revenue is equal to marginal cost.

Question 70

Monopolistically competitive firms do not achieve allocative efficiency in the long run because:​

A)marginal cost equals marginal revenue.
B)marginal cost is greater than marginal revenue.
C)marginal cost is less than marginal revenue.
D)price is less than marginal cost.
E)price is greater than marginal cost.

Question 71

If there is an increase in the demand for restaurant meals in an economy in the short run, _____.​

A)the losses incurred by each restaurant will increase
B)the price charged by each restaurant will fall​
C)there will be an increase in the number of restaurants in the economy​
D)there will be a decrease in the number of restaurants in the economy​
E)the profit incurred by each restaurant will increase​

Question 72

Figure 10.4 shows the demand, marginal revenue, and cost curves for a monopolistic competitor. At the profit-maximizing output level, the firm is: ​
Figure 10.4
​

A)earning an economic profit of $760.
B)earning an economic profit of $950.
C)earning zero economic profit.
D)earning an economic profit of $990.
E)suffering a loss of $1,000.

Question 73

Monopolistically competitive firms:​

A)are guaranteed to earn short-run economic profit.
B)may earn short-run economic profit, but long-run economic profit is typically zero.
C)may earn economic profit both in the short run and in the long run.
D)earn zero economic profit both in the short run and in the long run.
E)can earn an economic profit only if they operate along the inelastic portion of their demand curves.

Question 74

Figure 10.3 shows the demand, marginal revenue, and cost curves for a monopolistic competitor. In the long run, _____.​ ​
Figure 10.3.
​

A)new technology will lower average total costs and increase profits for the firm
B)firms will exit this market, causing economic profit to increase​
C)product differentiation will lead to an increase in profits earned by the firm​
D)new firms will enter the market, driving economic profit to zero​
E)firms will produce 15 units of output in the long run​

Question 75

In the short run, a monopolistically competitive firm continues to increase production _____ if it can at least cover its variable cost.​

A)as long as MR > AVC
B)until MR = ATC​
C)as long as MC > MR​
D)until MR = AR​
E)until MR = MC​

Question 76

A monopolistically competitive firm is producing at an output level where marginal revenue is greater than marginal cost. This firm should _____ quantity and _____ price to increase profit or reduce losses.​

A)increase, increase
B)increase; decrease​
C)decrease; increase​
D)decrease; decrease​
E)increase; not change​

Question 77

In both monopolistic competition and a non-price-discriminating monopoly, _____.​

A)the marginal revenue curve lies above the average revenue curve
B)the marginal revenue curve lies above the demand curve​
C)the marginal revenue curve lies below the demand curve​
D)marginal revenue is equal to average revenue​
E)marginal revenue is equal to price​

Question 78

Suppose a monopolistically competitive firm is in long-run equilibrium. The firm's demand curve is tangent to its average cost curve at Q = 25. Average cost is minimized at Q = 35, where average cost is $50. Which of the following is true?​

A)This firm maximizes profit at an output level of 25 units.
B)This firm maximizes profit at an output level of 35 units.
C)This firm maximizes profit at an output level less than 25 units.
D)This firm maximizes profit at an output level greater than 35 units.
E)This firm incurs economic loss in the long run.

Question 79

Figure 10.4 shows the demand, marginal revenue, and cost curves for a monopolistic competitor. At the profit-maximizing output level, the total cost incurred by the firm in is approximately _____.​ ​
Figure 10.4
​

A)$5,700
B)$5,320
C)$4,750
D)$4,940
E)$8,100

Question 80

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

A)produce a greater variety of goods than do firms in other market structures.
B)produce at a greater output level than a perfectly competitive firm.
C)produce where price equals average total cost.
D)earn an economic profit.
E)suffer a loss because of its advertising budget.