Chapter 10 Practice Quiz Monopolistic Competition and Oligopoly

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Chapter 10 Practice Quiz Monopolistic
Competitionand Oligopoly
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• 1. An industry with many small sellers, a
  differentiated product, and easy entry would best
  be described as which of the following?
• a. Oligopoly.
• b. Monopolistic competition.
• c. Perfect competition.
• d. Monopoly.

B. An oligopoly has only a few sellers. A
monopoly only has one, and perfect competition
has homogeneous products.
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• 2. Which of the following industries is the best
  example of monopolistic competition?
• a. Wheat.
• b. Restaurant.
• c. Automobile.
• d. Water service.

B. Wheat would be in a perfectly competitive
market. Automobiles would be an oligopoly. And
the water service is an example of a regulated
monopoly.
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• 3. Which of the following is not a characteristic
  of monopolistic competition?
• a. A large number of small firms.
• b. A differentiated product.
• c. Easy market entry.
• d. A homogeneous product.

D. A characteristic of monopolistic competition
is differentiated products.
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• 4. A monopolistically competitive firm will
• a. maximize profits by producing where MR MC.
• b. not earn an economic profit in the long run.
• c. shut down if price is less than average
  variable cost.
• d. do all of the above.

D. Both a monopolistically competitive firm and
a perfectly competitive firm share these
characteristics.
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• 5. The theory of monopolistic competition
  predicts
• that in long-run equilibrium a
  monopolistically
• competitive firm will
• produce the output level at which price equals
  long-run marginal cost.
• b. operate at minimum long-run average cost.
• c. overutilize its insufficient capacity.
• d. produce the output level at which price
  equals long-run average cost.

D. In long-run equilirum, output occurs where the
price equals long-run average cost.
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• 6. A monopolistically competitive firm is
  inefficient because the firm
• a. earns positive economic profit in the long
  run.
• b. is producing at an output where marginal cost
  equals price.
• c. is not maximizing its profit.
• d. produces an output where average total cost is
  not minimum.

D. Output occurs where average cost is not at a
minimum.
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• 7. A monopolistically competitive firm in the
  long run earns the same economic profit as a
• a. perfectly competitive firm.
• b. monopolist.
• c. cartel.
• d. none of the above.

A. In the long-run, a normal profit is made
because of the ease of entry and exit. Once
economic profits are made, more firms will enter
the industry driving the price down. When losses
are made, firms leave the industry, driving the
price up, restoring profits.
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• 8. One possible effect of advertising on a firms
  long-run average cost curve is to
• a. raise the curve.
• b. lower the curve.
• c. shift the curve rightward.
• d. shift the curve leftward.

A. The ATC curve is raised because of the added
expense of the advertising.
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• 9. Monopolistic competition is an inefficient
  market structure because
• a. firms earn zero profit in the long-run.
• b. marginal cost is less than price in the
  long-run.
• c. a wider variety of products is available
  compared to perfect competition.
• d. all of the above.

B. In the long-run, marginal cost is less than
price because of the downward sloping demand
curve and a marginal revenue curve that is more
steeply sloped beneath the demand curve.
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• 10. The Big Three U.S. automobile industry is
  described as
• a. a monopoly.
• b. perfect competition.
• c. monopolistic competition.
• d. an oligopoly.

D. An oligopoly is a market form with only a few
sellers.
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• 11. The cigarette industry in the United States
  is described as
• a. a monopoly.
• b. perfect competition.
• c. monopolistic competition.
• d. an oligopoly.

D. The cigarette industry has only a few sellers.
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• 12. A characteristic of an oligopoly is
• a. mutual interdependence in pricing decisions.
• b. easy market entry.
• c. both (a) and (b).
• d. neither (a) nor (b).

A. The distinguishing feature of an oligopoly is
mutual interdependence. No one firm will make a
decision without first considering the reaction
of its competitors to its policy change.
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• 13. The kinked demand curve theory attempts to
• explain why an oligopolistic firm
• a. has relatively large advertising expenditures.
• b. fails to invest in research and development (R
  and D).
• c. infrequently changes its price.
• d. engages in excessive brand proliferation.

C. Everything else being equal, if firm A raises
its price, other firms will not raise theirs, and
A will experience a big decline in sales. If A
lowers its price, other firms will follow suit
and A will not gain many sales.
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• 14. According to the kinked demand curve 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.

B. They will refuse to follow firm A because they
can gain more by charging a lower price, their
sales will increase because fewer people will buy
from firm A.
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• 15. Which of the following is evidence that OPEC
  is a cartel?
• a. Agreement on price and output quotas by oil
  ministries.
• b. Ability to raise prices regardless of demand.
• c. Mutual interdependence in pricing and output
  decisions.
• d. Ability to completely control entry.

A. A cartel is characterized by collusion, the
coming together and agreeing to certain policies,
for example, the level of prices.
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Exhibit 10 A Two-Firm Payoff Matrix
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16. Assume costs are identical for the two firms
in Exhibit 10. If both firms were allowed
to form a cartel and agree on their
prices, equilibrium would be established by
a. Zeba Oil charging 100 and Tucker Oil charging
100. b. Zeba Oil charging 100 and Tucker
Oil charging 50. c. Zeba Oil charging 50
and Tucker Oil charging 50. d. Zeba Oil
charging 50 and Tucker Oil charging 100.
A. The collective interest is best served in cell
A where each firm charges the same high fare and
makes the maximum profit.
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17. Suppose costs are identical for the two firms
in Exhibit 10. If both firms assume the
other will compete and charge a lower
price, equilibrium will be established by
a. Zeba Oil charging 100 and Tucker Oil charging
100. b. Zeba Oil charging 100 and Tucker
Oil charging 50. c. Zebo Oil charging 50
and Tucker Oil charging 100. d. Zeba Oil
charging 50 and Tucker Oil charging 50.
D. Cell D is the result of each firm countering
with a low fare and both fear changing the price
and causing the other to counter.
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18. Suppose costs are identical for the two firms
in Exhibit 10. 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
a. Zeba Oil charging 100 and Tucker Oil charging
100. b. Zeba Oil charging 100 and Tucker
Oil charging 50. c. Zeba Oil charging 50
and Tucker Oil charging 50. d. Zeba Oil
charging 50 and Tucker Oil charging 100.
A. The low fare outcome in cell D is avoided
under a tit for tat belief that a rival will do
what the other rival did last time.
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19. Which of the following is a game theory
strategy for oligopolists to avoid a low-price
outcome? a. Tit for tat b.
Win-win c. Last-in-first-out d.
Second best
A. Under the tit for tat approach, a player will
do whatever the other player did last time.
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20. Which of the following is a game theory
strategy for oligopolists to avoid a low-price
outcome? a. Tit-for-tat b. Price
leadership c. Cartel d. All of the
above
D. The payoff matrix demonstrates why a
competitive oligopoly would use one of these
strategies to avoid a low-price outcome.