Question 1

Entry of new firms into a monopolistically competitive market causes a(n)

Accepted Answer

A)  decrease in the existing firms' demand curves. 
B)  increase in the existing firms' demand curves. 
C)  decrease in the existing firms' cost curves. 
D)  increase in the existing firms' cost curves.

Question 2

Which of the following is characteristic of a monopolistically competitive firm?

Accepted Answer

A)  The firm faces an upward-sloping demand curve. 
B)  The firm faces an inelastic demand curve. 
C)  The firm faces a horizontal demand curve. 
D)  The firm produces a differentiated product.

Question 3

Suppose ABC Dairy is one firm competing in the perfectly competitive market for milk. Now suppose ABC Dairy decides to produce only organic milk. Which of the following best describes the effects of this change in the market?

Accepted Answer

A)  ABC Dairy is differentiating its product and will likely be able to charge a higher price than before. 
B)  ABC Dairy will still be a price taker because it is still operating in a perfectly competitive market. 
C)  ABC Dairy will have a monopoly on organic milk due to very high entry barriers. 
D)  The other dairy firms will produce with excess capacity, but ABC Dairy will be efficient.

Question 4

Which of the following is true about advertising?

Accepted Answer

A)  Firms spend money on advertising in an attempt to make the demand curve more elastic. 
B)  Advertising may be the only way that a new entrant can penetrate a market dominated by long-established firms. 
C)  Advertising has no impact on entry costs or market structure. 
D)    Firms consider advertising to be successful if it succeeds in lowering the long-run average cost.

Question 5

Because an oligopoly is characterized by

Accepted Answer

A)  few large sellers, each seller has some influence over the market price. 
B)  a single seller of a product that has few suitable substitutes, the seller is a price maker. 
C)  many small sellers, each firm must differentiate its product. 
D)  a few sellers selling a differentiated product, each seller makes its price and output decisions independently.

Question 6

Compare and contrast the four market models in terms of the profit-maximizing output level for each, the shut-down rule for each, the probability of long-run economic profits being earned, and their social desirability.

Accepted Answer

The answer of Compare and contrast the four market models...

Question 7

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

Accepted Answer

A)  Price will equal marginal cost at the profit-maximizing level of output; 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 at the short run, profit-maximizing level of output; in the long run, economic profit will be zero. 
D)  Marginal revenue will equal average total cost in the short run; long-run economic profits will be zero.

Question 8

Which of the following is true about the demand curve for a monopolistically competitive firm?​

Accepted Answer

A)  ​It is less elastic (steeper) than for monopoly, but more elastic (flatter) than for a perfectly competitive firm. 
B)  ​It is less elastic (steeper) than the demand curve for either a monopoly firm or a perfectly competitive firm. 
C)  ​It is more elastic (flatter) than the demand curves for either a monopoly firm or a perfectly competitive firm. 
D)  ​It is less elastic (steeper) than for a perfectly competitive firm, but more elastic (flatter) than for a monopoly firm.

Question 9

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 ?

Accepted Answer

A)  Average cost must be rising. 
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 10

Exhibit 10-1 A monopolistic competitive firm

As presented in Exhibit 10-1, the short-run profit-maximizing output for the monopolistic competitive firm is:

Accepted Answer

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

Question 11

Because a monopolistically competitive market is characterized by

Accepted Answer

A)  many small sellers selling a differentiated product, each seller has some influence over its own price. 
B)  a single seller of a product that has few suitable substitutes, the seller is a price maker. 
C)  many small sellers selling a differentiated product, one seller's change in price has a large effect on the market price. 
D)  a few sellers selling a differentiated product, each seller bases its decisions on the expected decisions of its rivals.

Question 12

Exhibit 10-6 Two-Firm Payoff Matrix

Assume costs are identical for the two firms in Exhibit 10-6. If both firms were allowed to form a cartel and agree on their prices, equilibrium would be established by:

Accepted Answer

A)  Widget Co. charging the low price and Ajax Co. charging the high price. 
B)  Widget Co. charging the high price and Ajax Co. charging the low price. 
C)  Widget Co. charging the low price and Ajax Co. charging the low price. 
D)  Widget Co. charging the high price and Ajax Co. charging the high price.

Question 13

Which of the following is the best example of an oligopoly?

Accepted Answer

A)  area restaurants 
B)  the automobile industry 
C)  agricultural markets free of government support 
D)  local utilities

Question 14

Compared to the perfectly competitive outcome, monopolistically competitive markets will result in:

Accepted Answer

A)  a wider variety of products and higher prices. 
B)  less product variety and higher prices. 
C)  a wider variety of products and lower prices. 
D)  less product variety and lower prices.

Question 15

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

Accepted Answer

A)  There is little price or quality competition. 
B)  The firms compete, using quality, location, advertising, and price. 
C)  Firms do not compete using advertising. 
D)  There is only one firm so there is no competition.

Question 16

How will the price and output of a monopolist compare with perfect competition?

Accepted Answer

A)  The output of the monopolist will be too large and the price too high. 
B)  The output of the monopolist will be too large and the price too low. 
C)  The output of the monopolist will be too small and the price too high. 
D)  The output of the monopolist will be too small and the price too low.

Question 17

Exhibit 10-6 Two-Firm Payoff Matrix

Suppose costs are identical for the two firms in Exhibit 10-6. Each firm assumes without formal agreement that if it sets the high price its rival will not charge a lower price. Under these "tit-for-tat" conditions, equilibrium will be established by:

Accepted Answer

A)  Widget Co. charging the high price and Ajax Co. charging the low price. 
B)  Widget Co. charging the high price and Ajax Co. charging the high price. 
C)  Widget Co. charging the low price and Ajax Co. charging the low price. 
D)  Widget Co. charging the low price and Ajax Co. charging the high price.

Question 18

The marginal revenue curve of a monopolistically competitive firm will always lie:

Accepted Answer

A)  below the firm's demand curve. 
B)  parallel to the firm's demand curve. 
C)  parallel to the firm's quantity axis. 
D)  above the firm's demand curve.

Question 19

A(n) ____ can be used to demonstrate why a competitive oligopoly tends to result in a low-price strategy that does not maximize mutual profits.

Accepted Answer

A)  interdependence index 
B)  gini coefficient 
C)  herfindahl index 
D)  payoff matrix

Question 20

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

Accepted Answer

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

Exam 10: Monopolistic Competition and Oligopoly