McGraw-Hill Ryerson

Chapter 12. Monopolistic Competition and Oligopoly


1. Which would be most characteristic of monopolistic competition?
A. collusion among firms
B. firms selling a homogeneous product
C. a relatively large number of firms
D. difficult entry into and exit from the industry



2. The attention that monopolistically competitive firms pay to product attributes, services to customers, or brand names are aspects of
A. allocative efficiency in the industry
B. collusion in the industry
C. product differentiation
D. concentration ratios



3. The demand curve a monopolistically competitive firm faces is
A. perfectly elastic
B. perfectly inelastic
C. highly, but not perfectly inelastic
D. highly, but not perfectly elastic



4. In the short run, a typical monopolistically competitive firm will earn
A. only a normal profit
B. only an economic profit
C. only an economic or normal profit
D. an economic or normal profit or suffer an economic loss



5. A monopolistically competitive firm is producing at an output level in the short run where average total cost is $3.50, price is $3.00, marginal revenue is $1.50, and marginal cost is $1.50. This firm is operating
A. with an economic loss in the short run
B. with an economic profit in the short run
C. at the break-even level of output in the short run
D. at an inefficient level of output in the short run



6. If firms enter a monopolistically competitive industry, then we would expect the typical firm's demand curve to
A. increase and the firm's price to increase
B. decrease and the firm's price to decrease
C. remain the same but the firm's price to increase
D. remain the same and the firm's price to remain the same



7.

The diagram is for a monopolistically competitive firm in short-run equilibrium.
R-1 25a

The firm's profit-maximizing price will be

A. $9
B. $12
C. $15
D. $18



8.

The diagram is for a monopolistically competitive firm in short-run equilibrium.
R-1 25a

The equilibrium output for this firm will be

A. 50
B. 85
C. 115
D. 135



9.

The diagram is for a monopolistically competitive firm in short-run equilibrium.
R-1 25a

This firm will realize an economic profit of

A. $510
B. $765
C. $1,021
D. $1,170



10.

The diagram is for a monopolistically competitive firm in short-run equilibrium.
R-1 25a

If firms enter this industry in the long run,

A. demand will decrease
B. demand will increase
C. the marginal revenue curve will shift upward
D. economic profits will increase



11. Given a representative firm in a typical monopolistically competitive industry, in the long run
A. the firm will produce that output at which marginal cost and price are equal
B. the elasticity of demand for the firm's product will be less than it was in the short run
C. the number of competitors the firm faces will be greater than it was in the short run
D. the economic profits being earned by the firm will tend to equal zero



12. Productive efficiency is not realized in monopolistic competition because production occurs where
A. MR is greater than MC
B. MR is less than MC
C. ATC is greater than minimum ATC
D. ATC is less than MR and greater than MC



13. The underallocation of resources in monopolistic competition means that at the profit-maximizing level of output, price is
A. greater than MC
B. less than MC
C. less than MR
D. greater than minimum ATC



14. Excess capacity occurs in a monopolistically competitive industry because firms
A. advertise and promote their product
B. charge a price that is less than marginal cost
C. produce at an output level short of the least-cost output
D. have a perfectly elastic demand for the products that they produce



15. Were a monopolistically competitive industry in long-run equilibrium, a firm in that industry might be able to increase its economic profits by
A. increasing the price of its product
B. increasing the amounts it spends to advertise its product
C. decreasing the price of its product
D. decreasing the output of its product



16. Which would be most characteristic of oligopoly?
A. easy entry into the industry
B. a few large producers
C. product standardization
D. no control over price



17. Mutual interdependence means that
A. each firm produces a product similar but not identical to the products produced by its rivals
B. each firm produces a product identical to the products produced by its rivals
C. each firm must consider the reactions of its rivals when it determines its price policy
D. each firm faces a perfectly elastic demand for its product



18. Which of the following contributes to the existence of oligopoly in an industry?
A. low barriers to entry
B. standardized products
C. economies of scale
D. elastic demand



19. One major problem with concentration ratios is that they fail to take into account
A. the national market for products
B. competition from imported products
C. excess capacity in production
D. mutual interdependence



20. Industry A is composed of four large firms that hold market shares of 40, 30, 20, and 10. The Herfindahl index for this industry is
A. 100
B. 1,000
C. 3,000
D. 4,500



21.
Question is based on the following payoff matrix for a duopoly in which the numbers indicate the profit in thousands of dollars for a high-price or a low-price strategy.
R-2 25b

If both firms collude to maximize joint profits, the total profits for the two firms will be

A. $400,000
B. $800,000
C. $850,000
D. $950,000



22.
Question is based on the following payoff matrix for a duopoly in which the numbers indicate the profit in thousands of dollars for a high-price or a low-price strategy.
R-2 25b

Assume that Firm B adopts a low-price strategy while Firm A maintains a high-price strategy. Compared to the results from a high-price strategy for both firms, Firm B will now

A. lose $150,000 in profit and Firm A will gain $150,000 in profit
B. gain $100,000 in profit and Firm A will lose $150,000 in profit
C. gain $150,000 in profit and Firm A will lose $100,000 in profit
D. gain $525,000 in profit and Firm A will lose $275,000 in profit



23.
Question is based on the following payoff matrix for a duopoly in which the numbers indicate the profit in thousands of dollars for a high-price or a low-price strategy.
R-2 25b

If both firms operate independently and do not collude, the most likely profit is

A. $300,000 for Firm A and $300,000 for Firm B
B. $525,000 for Firm A and $275,000 for Firm B
C. $275,000 for Firm A and $525,000 for Firm B
D. $425,000 for Firm A and $425,000 for Firm B



24. The prices of products produced by oligopolies tend to be
A. relatively flexible, and when firms change prices they are apt to change them at the same time
B. relatively inflexible, and when firms change prices they are not apt to change them at the same time
C. relatively inflexible, and when firms change prices they are apt to change them at the same time
D. relatively flexible, and when firms change prices they are not apt to change them at the same time



25. If an individual oligopolist's demand curve is kinked, it is necessarily
A. perfectly elastic at the going price
B. less elastic above the going price than below it
C. more elastic above the going price than below it
D. of unitary elasticity at the going price



26.
R-3 25c

The profit-maximizing price and output for this oligopolistic firm is

A. P5 and Q2
B. P4 and Q2
C. P3 and Q3
D. P2 and Q4



27. What is the situation called whenever firms in an industry reach an agreement to fix prices, divide up the market, or otherwise restrict competition?
A. interindustry competition
B. incentive to cheat
C. price leadership
D. collusion



28. When oligopolists collude the results are generally
A. greater output and higher price
B. greater output and lower price
C. smaller output and lower price
D. smaller output and higher price



29. Which of the following constitutes an obstacle to collusion among oligopolists?
A. a general business recession
B. a small number of firms in the industry
C. a homogeneous product
D. the patent laws



30. To be successful, collusion requires that oligopolists be able to
A. keep prices and profits as low as possible
B. block or restrict the entry of new producers
C. reduce legal obstacles that protect market power
D. keep the domestic economy from experiencing high inflation



31. Which is a typical tactic that has been used by the price leader in the price leadership model of oligopoly?
A. limit pricing
B. frequent price changes
C. starting a price war with competitors
D. giving no announcement of a price change



32. Market shares in oligopolistic industries are typically determined on the basis of
A. product development and advertising
B. covert collusion and cartels
C. tacit understandings
D. joint profit maximization



33.
R-4 25d

Those who make the argument that advertising is efficient think that it

A. lowers unit costs and increases the level of output (i.e., moves from point a to b)
B. increases cost curves from ATC1 to ATC2 and decreases output levels (i.e., moves from point b to point c)
C. lowers costs from ATC2 to ATC1, but leaves output unchanged (i.e., at point a)
D. lowers costs and increases output by moving downward along an existing cost curve (i.e., from point c to b)



34.
R-4 25d

Those who make the argument that advertising is inefficient think that it

A. has no effect on costs or output levels
B. decreases output and costs (i.e., moves from point d to a)
C. raises costs without affecting output because of the offsetting effect of competitor's ads (i.e., moves from point a to c)
D. raises costs and lowers output because it offends many potential customers (i.e., from point b to a)



35. Many economists would conclude that in a highly oligopolistic market there is
A. allocative efficiency, but not productive efficiency
B. productive efficiency, but not allocative efficiency
C. both allocative and productive efficiency
D. neither allocative nor productive efficiency




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