Deck 6: Imperfect Competition

Question 1

Imperfectly competitive markets include monopolistic competition and oligopoly.

Answer 1

True

Question 2

When the Top 4 concentration ratio approaches zero, the market is generally regarded as monopolistic.

Answer 2

False

Question 3

Oligopoly is the market structure that is closest to perfect competition.

Answer 3

False

Question 4

Because a monopolistically competitive firm faces competition from substitute products sold by rivals, its demand curve is more elastic than the demand curve of a pure monopoly.

Question 5

A monopolistically competitive firm always realizes an economic profit in the short run, but realizes only a normal profit in the long run.

Question 6

The difference between the output corresponding to minimum average total cost and the output produced by a monopolistically competitive firm in the long run is called excess capacity.

Question 7

An objective of persuasive advertising is to increase the demand for a firm's product and make it more elastic.

Question 8

By informing potential customers about alternative sources of supply and pricing policies, advertising forces sellers to maintain relatively low prices.

Question 9

Price discrimination is the practice of charging some buyers a higher price than others for an identical good, even though there is no difference in the cost to the firm of supplying these buyers.

Question 10

A firm practicing price discrimination would charge a higher price to buyers with relatively elastic demand curves and a lower price to buyers with relatively inelastic demand curves.

Question 11

The Liberty Theater would engage in price discrimination by charging higher prices to nonstudents, who have less elastic demand curves, and lower prices to students, who have more elastic demand curves.

Question 12

A firm engaging in successful price discrimination can reduce its total cost without increasing total revenue, thereby increasing total profit.

Question 13

In oligopoly, a small number of firms compete with each other and each firm has significant price-making ability.

Question 14

The quantity sold by an oligopolist depends not only on that firm's product price, but also on the other firms' prices and quantities sold.

Question 15

Relatively low barriers to entry and modest economies of scale help explain why markets are oligopolistic.

Question 16

The merger of Miller and Anheuser-Busch in the beer industry would be an example of a conglomerate merger.

Question 17

The merger of Ford Motors and General Motors would be an example of a vertical merger.

Question 18

The products produced by oligopolies can be either differentiated or standardized.

Question 19

Diseconomies of scale is one explanation for why an oligopoly exists.

Question 20

By the 1980s, competition by foreign automakers reduced the market share and price-making abilities of the "Big Three" U.S. automakers.

Question 21

The purpose of a cartel is to increase output and reduce price in order to increase the group profits of its members.

Question 22

Among the obstacles that a cartel faces are a large number of sellers in the market and differences in cost and demand conditions among members of the cartel.

Question 23

The steel and pharmaceutical industries are generally regarded as momopolistic competition industries, rather than oligopolies.

Question 24

Federal regulators carefully scrutinize horizontal mergers because they result in the uniting of formerly competing firms and increase the monopoly power of the newly formed firm.

Question 25

According to the theory of contestable markets, a market can be dominated by a single firm without exhibiting the inefficiencies of monopoly.

Question 26

When the four largest firms control less than 40 percent of industry output, the industry is generally regarded as oligopolistic.

Question 27

Batteries are considered to be a high-concentration industry, while bakeries are a low-concentration industry.

Question 28

Product differentiation is a fundamental characteristic of perfect competition.

Question 29

A monopolistic competitive firm produces at the lowest point on its average total cost curve.

Question 30

In order for price discrimination to take place, the firm must be able to subdivide the market into groups of people with different price elasticities of demand.

Question 31

Based on the notes of one voyager, it's possible that the Pilgrims landed at Plymouth Rock because they were running out of beer.

Question 32

Sam Walton, the founder of Wal-Mart, earned his undergraduate degree in economics.

Question 33

Game theory is a field of economics that relates to the behavior of individual firms operating in perfectly competitive markets.

Question 34

Economic prosperity is an obstacle to the successful operation of a cartel.

Question 35

Grocery stores in a large city provide an example of

A) pure monopoly
B) perfect competition
C) oligopoly
D) monopolistic competition

Question 36

Which of the following is not a characteristic of oligopoly?

A) profit maximization according to the MR = MC rule
B) sizable barriers to entry
C) firm's horizontal demand curve
D) firms being price makers rather than price takers

Question 37

Cartels tend to encounter difficulties when

A) there is a relatively large number of sellers in the market
B) demand and cost conditions among sellers are similar
C) market demand is strong and profits are sizable
D) there are barriers that prevent potential competitors from entering the industry

Question 38

Successful persuasive advertising by Coca Cola

A) increases its demand and make it more elastic
B) increases its demand and makes it less elastic
C) decreases its demand and makes it more elastic
D) decreases its demand and makes it less elastic

Question 39

Which of the following industries is best described as an oligopoly?

A) commercial fishing
B) grocery stores
C) automobiles
D) agriculture

Question 40

The merger of Boeing and McDonnell Douglas in the commercial jetliner industry is an example of a(n)

A) vertical merger
B) horizontal merger
C) conglomerate merger
D) integrative merger

Question 41

The merger of Pizza Hut and General Motors would be an example of a(n)

A) vertical merger
B) horizontal merger
C) conglomerate merger
D) integrative merger

Question 42

The merger of Johnson's Dairy Farm and Peterman's Milk Store would be an example of a(n)

A) vertical merger
B) horizontal merger
C) conglomerate merger
D) integrative merger

Question 43

Informative advertising tends to

A) shift a firm's average total cost curve downward
B) shift a firm's total cost curve downward
C) make a firm's demand curve more elastic
D) make a firm's demand curve more inelastic

Question 44

Persuasive advertising tends to

A) shift a firm's average total cost curve downward
B) shift a firm's total cost curve downward
C) make a firm's demand curve more elastic
D) make a firm's demand curve more inelastic

Question 45

Monopolistically competitive firms tend to realize normal profits in the long run because

A) barriers to entry into the industry are relatively low
B) firms produce under conditions of diseconomies of scale
C) advertising increases the firm's costs and thus decreases profits
D) sales promotion makes the firm's demand curve more inelastic

Question 46

The two broad categories of imperfect competition are

A) perfect competition and monopolistic competition
B) monopolistic competition and oligopoly
C) oligopoly and monopoly
D) perfect competition and monopoly

Question 47

A payoff matrix is used to analyze the behavior of firms operating in

A) perfect competition
B) monopolistic competition
C) oligopoly
D) pure monopoly

Question 48

If Southwest Airlines engages in successful price discrimination, it will charge

A) a relatively high price to travelers with more elastic demand curves
B) a relatively high price to travelers with more inelastic demand curves
C) the same price to all travelers regardless of their elasticities of demand
D) a higher price in markets in markets where costs are higher

Question 49

By practicing successful price discrimination, Northwest Airlines will realize

A) lower unit costs and thus increased profit
B) higher revenue and thus increased profit
C) a rightward shift in its demand curve and thus increased profit
D) a leftward shift in its demand curve and thus increased profit

Question 50

What is true of cooperative price-fixing agreements in the long run?

A) they work well when the number of members is large
B) they only work in perfectly competitive markets
C) they get stronger over time and result in even higher profits for members
D) they tend to break down as members cheat

Question 51

If Microsoft is in a(n)_____ market for computer software, it will not behave as though it is a monopoly even though it is the only firm in the market.

A) oligopolistic
B) monopolistically competitive
C) contestable
D) industrial

Question 52

If the Liberty Movie Theater operates in a monopolistically competitive market, in the long run the firm will

A) always operate at output levels associated with diseconomies of scale
B) always operate at output levels associated with economies of scale
C) realize an economic profit
D) realize a normal profit

Question 53

A low concentration ratio in an industry suggests that the

A) industry is oligopolistic
B) industry is monopolistic
C) dominant firms in the industry have modest price-making ability
D) dominant firms in the industry have sizable price-making ability

Question 54

Which of the following is not a characteristic of monopolistically competitive markets?

A) only normal profits in the long run
B) price-taking firms
C) excess productive capacity in the long run
D) many firms of relatively small size

Question 55

Proponents of advertising maintain that advertising can eventually result in decreased unit costs of production by

A) increasing the level of output, thus enabling firms to take advantage of economies of scale
B) increasing the level of output, which results in a downward shift in a firm's long-run average total cost curve
C) reducing sales, thus enabling firms to avoid diseconomies of scale
D) reducing sales, thus allowing firms to downsize their production operations

Question 56

Because there is significant freedom of entry and exit of firms in the retail sale of gasoline,

A) firms tend to realize normal profits in the long run
B) firms engage in wasteful advertising expenditures
C) firms always operate at the low point on their average total cost curves
D) consumers receive low-quality gasoline and are charged high prices

Question 57

The demand curve and marginal revenue curve of a monopolistically competitive firm are downward sloping because

A) the firm is a price taker rather than a price maker
B) high barriers prevent potential competitors from entering the industry
C) the firm's product is differentiated
D) all consumers have identical tastes and preferences

Question 58

A monopolistically competitive firm hopes to

A) make an economic profit, but realizes economic losses in the long run
B) make an economic profit, but realizes normal profits in the long run
C) minimize its losses in the short run, but realizes economic profits in the long run
D) minimize its losses in the short run, but realizes economic losses in the long run

Question 59

If existing fast-food firms realize sizable economic profits in the short run, which of the following will take place in the long run?

A) The demand curves of existing firms will decrease and become more elastic.
B) The demand curves of existing firms will decrease and become less elastic.
C) The demand curves of existing firms will increase and become more elastic.
D) The demand curves of existing firms will increase and become less elastic.

Question 60

In the long run, a monopolistically competitive firm produces an output where

A) average total cost is at a minimum
B) marginal cost is at a minimum
C) price equals average total cost
D) price equals marginal cost

Question 61

If a market's concentration ratio is near zero, the market tends to be

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

Question 62

There will be a tendency for cheating to take place with a cartel if

A) the number of firms in the market is relatively small
B) the firms produce standardized products
C) the costs of production differ among firms
D) economic profits are being earned by the cartel

Question 63

Table 6.1 Hypothetical Profit Matrix for Boeing and Airbus
(millions of dollars in profits for high-price and low-price strategies)
$\begin{array}{llcc}&&& \text { Boeing }&\\ \text { } & \text { } & \text {High price } & \text {} &\text { Low price } \\ \text { } & \text { High price } & \text { Airbus \( =\$ 500 \) } & \text { } &\text {Airbus \( =\$ 650 \) } \\ \text {Airbus } & \text { } & \text { Boeing \( =\$ 500 \) } & \text { } &\text { Boeing \( =\$ 400 \) } \\ \text { } & \text { } & \text { } & \text { } & \text { } \\ \text { } & \text {Low price } & \text { Airbus \( =\$ 400 \) } & \text { } & \text { Airbus \( =\$ 350 \)} \\ \text { } & \text { } & \text { Boeing \( =\$ 650 \) } & \text { } &\text { Boeing \( =\$ 350 \) } \\\end{array}$



-Refer to Table 6.1. If Boeing and Airbus behave competitively, the most likely profit is

A) $500 million for Boeing and $500 million for Airbus
B) $400 million for Boeing and $650 million for Airbus
C) $650 million for Boeing and $400 million for Airbus
D) $350 million for Boeing and $350 million for Airbus

Question 64

Table 6.1 Hypothetical Profit Matrix for Boeing and Airbus
(millions of dollars in profits for high-price and low-price strategies)
$\begin{array}{llcc}&&& \text { Boeing }&\\ \text { } & \text { } & \text {High price } & \text {} &\text { Low price } \\ \text { } & \text { High price } & \text { Airbus \( =\$ 500 \) } & \text { } &\text {Airbus \( =\$ 650 \) } \\ \text {Airbus } & \text { } & \text { Boeing \( =\$ 500 \) } & \text { } &\text { Boeing \( =\$ 400 \) } \\ \text { } & \text { } & \text { } & \text { } & \text { } \\ \text { } & \text {Low price } & \text { Airbus \( =\$ 400 \) } & \text { } & \text { Airbus \( =\$ 350 \)} \\ \text { } & \text { } & \text { Boeing \( =\$ 650 \) } & \text { } &\text { Boeing \( =\$ 350 \) } \\\end{array}$



-Refer to Table 6.1. If Boeing and Airbus form a collusive pact to maximize joint profits, the firms will realize profits totaling

A) $700 million
B) $900 million
C) $1,000 million
D) $1,050 million

Question 65

Table 6.1 Hypothetical Profit Matrix for Boeing and Airbus
(millions of dollars in profits for high-price and low-price strategies)
$\begin{array}{llcc}&&& \text { Boeing }&\\ \text { } & \text { } & \text {High price } & \text {} &\text { Low price } \\ \text { } & \text { High price } & \text { Airbus \( =\$ 500 \) } & \text { } &\text {Airbus \( =\$ 650 \) } \\ \text {Airbus } & \text { } & \text { Boeing \( =\$ 500 \) } & \text { } &\text { Boeing \( =\$ 400 \) } \\ \text { } & \text { } & \text { } & \text { } & \text { } \\ \text { } & \text {Low price } & \text { Airbus \( =\$ 400 \) } & \text { } & \text { Airbus \( =\$ 350 \)} \\ \text { } & \text { } & \text { Boeing \( =\$ 650 \) } & \text { } &\text { Boeing \( =\$ 350 \) } \\\end{array}$



-Refer to Table 6.1. Assume that Boeing adopts a low?price strategy and Airbus adopts a high?price strategy. Compared to what is realized when both firms adopt a high?price strategy,

A) Boeing's profits will rise by $100 and Airbus' profits will fall by $150
B) Boeing's profits will fall by $100 and Airbus' profits will rise by $150
C) Boeing's profits will rise by $100 and Airbus' profits will rise by $150
D) Boeing's profits will fall by $100 and Airbus' profits will fall by $150

Question 66

Table 6.1 Hypothetical Profit Matrix for Boeing and Airbus
(millions of dollars in profits for high-price and low-price strategies)
$\begin{array}{llcc}&&& \text { Boeing }&\\ \text { } & \text { } & \text {High price } & \text {} &\text { Low price } \\ \text { } & \text { High price } & \text { Airbus \( =\$ 500 \) } & \text { } &\text {Airbus \( =\$ 650 \) } \\ \text {Airbus } & \text { } & \text { Boeing \( =\$ 500 \) } & \text { } &\text { Boeing \( =\$ 400 \) } \\ \text { } & \text { } & \text { } & \text { } & \text { } \\ \text { } & \text {Low price } & \text { Airbus \( =\$ 400 \) } & \text { } & \text { Airbus \( =\$ 350 \)} \\ \text { } & \text { } & \text { Boeing \( =\$ 650 \) } & \text { } &\text { Boeing \( =\$ 350 \) } \\\end{array}$



-Refer Table 6.1. Assume that Boeing adopts a high?price strategy and Airbus adopts a low?price strategy. Compared to what is realized when both firms adopt a high?price strategy,

A) Boeing's profits will rise by $150 and Airbus' profits will fall by $100
B) Boeing's profits will fall by $100 and Airbus' profits will rise by $150
C) Boeing's profits will rise by $100 and Airbus' profits will rise by $150
D) Boeing's profits will fall by $100 and Airbus' profits will fall by $150

Question 67

A pure monopoly differs from a monopolistically competitive firm in that a monopoly

A) has a downward-sloping demand curve
B) has a downward-sloping marginal revenue curve
C) can earn economic profits in the short run
D) can earn economic profits in the long run

Question 68

In a long run, freedom of entry into a market forces a ______ to charge a price equal to average total cost, but average total cost exceeds its minimum level.

A) perfectly competitive firm
B) monopolistically competitive firm
C) oligopolistic firm
D) pure monopoly

Question 69

A fundamental characteristic of monopolistic competition is

A) strong barriers to entry
B) that each firm considers its rivals reactions
C) product differentiation
D) the existence of just a few firms producing all the output

Question 70

Figure 6.1 Demand and Cost Conditions for a Monopolistically Competitive Firm


-Refer to Figure 6.1. How much output should this monopolistic competitive firm produce in order to maximize profits?

A) 0
B) 3
C) 8
D) 12

Question 71

Figure 6.1 Demand and Cost Conditions for a Monopolistically Competitive Firm


-Refer to Figure 6.1. What price should this monopolistic competitive firm charge in order to maximize profits?

A) $10
B) $7
C) $5
D) $3

Question 72

Figure 6.1 Demand and Cost Conditions for a Monopolistically Competitive Firm


-Refer to Figure 6.1. When the firm does its best to maximize profits, it experiences

A) economic profits
B) economic losses
C) normal profits
D) breakeven profits

Question 73

Cartels could be present in which type of market structure?

A) monopoly
B) perfect competition
C) monopolistic competition
D) oligopoly

Question 74

Three of the following are types of mergers covered in the text. Which one is not a type of merger?

A) horizontal
B) contestable
C) vertical
D) conglomerate

Question 75

An oligopolist may be reluctant to lower its price because

A) its competitors may lower their prices, too
B) this will encourage the development of new technology
C) other firms will go out of business
D) it will keep other potential competitors from entering the market

Question 76

Which of the following is not a necessary condition for price discrimination?

A) The seller can prevent re-sale of products.
B) The market can be subdivided into groups with different sensitivities to price.
C) The seller has different costs of supplying the product to different customers.
D) The seller can control the price of the product.

Question 77

Barriers to entry for oligopolistic industries include all of the following except

A) ownership of key resources
B) patents
C) product differentiation and advertising
D) economic downturn and cheating

Question 78

When tickets to a rock concert are sold to students at half price, while the general public must pay full price for the same seats, this is an example of

A) price discrimination
B) game theory
C) collusion
D) monopolistic competition

Question 79

Suppose that a movie theater is practicing price discrimination. If students must show a college ID to get a discounted movie admission ticket, this is done in order to

A) charge a higher price to the group with more elastic demand
B) benefit the local colleges and universities
C) decrease its profit so as to prevent the entry of other movie theaters
D) prevent the resale of the movie tickets to nonstudents

Question 80

One major reason why airline profits are falling is because the airlines

A) are engaging in price discrimination and the passengers are angry about it
B) charge vacation travelers higher prices than business travelers
C) are experiencing a decline in business travelers as electronic communication increases
D) are no longer allowed to practice price discrimination because it has been declared illegal