Deck 12: Profit Maximisation Under Imperfect Competition

Question 1

Imperfect competition occurs when

A) firms agree on prices or market shares.
B) there are only a few firms in the market, and they compete by advertising.
C) firms are neither monopolies nor perfect competitors.
D) firms produce identical products.

Answer 1

firms are neither monopolies nor perfect competitors.

Question 2

As more firms enter the market, we would expect a monopolistic competitor's demand curve to

A) stay the same.
B) become more elastic.
C) become less elastic.
D) we cannot tell

Answer 2

become more elastic.

Question 3

If a monopolistically competitive firm were making positive economic profits, we would expect

A) the market to become more like a monopoly.
B) the market to become an oligopoly.
C) the market to become more like perfect competition.
D) other firms to enter the market.
E) the firm to continue making positive profits.

Answer 3

other firms to enter the market.

Question 4

In monopolistic competition at the profit- maximising price

A) price is greater than marginal revenue.
B) price is less than marginal revenue.
C) price may be either greater than or less than marginal revenue.
D) price equals marginal revenue.

Question 5

Paul's bakery, a monopolistically competitive firm, is incurring a loss. This firm will continue to produce as long as

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

Question 6

If firms in a monopolistically competitive industry are earning economic profits, then in the long run

A) the government will probably regulate firms in this industry to reduce these economic profits.
B) new firms producing exactly the same product will enter the industry and this entry will continue until economic profits are eliminated.
C) these firms can continue earning economic profits since entry into the industry is blocked.
D) new firms producing close substitutes will enter the industry and this entry will continue until economic profits are eliminated.

Question 7

For a profit- maximising firm, the amount it should spend on promotions should be

A) that where the gap between the marginal revenue from the promotion and the marginal cost of the promotion is at its maximum.
B) that where the marginal revenue from the promotion equals the marginal cost of the promotion.
C) that where the average revenue from the promotion minus the average cost of the promotion is at a maximum.
D) as little as possible because all promotion costs money.
E) that where the average cost of promotion equals the average revenue earned from the promotion.

Question 8

A monopolistically competitive firm engaging in non- price competition should spend

A) sufficient such that the average costs of product development and advertising equal the average revenue earned.
B) sufficient such that the marginal costs of the product development and advertising equal the marginal revenue earned.
C) as much as possible on product development and advertising.
D) as little as possible on product development and advertising.

Question 9

The term 'collusive oligopoly' is now given to what used to be called

A) an oligopoly.
B) a cartel.
C) a formal agreement.
D) a monopoly.
E) a trust.

Question 10

You are given the following information about an oligopolistic industry:
(i) There are few firms in the industry.
(ii) There is no dominant supplier.
(iii) The firms' products are close substitutes for each other.
Which combination of these features is likely to encourage collusion between the firms in the industry?

A) (i) and (iii)
B) (i), (ii) and (iii)
C) (i) and (ii)
D) (ii) and (iii)
E) (ii) only

Question 11

Which of the following make collusion more likely?

A) There are significant barriers to entry.
B) They produce very different products.
C) The demand for the market fluctuates considerably.
D) There is no dominant firm.
E) They are many firms in the industry.

Question 12

Which of the following statements are applicable to the Cournot model?
(i) Firms choose price simultaneously.
(ii) Industry profits in the Cournot model will be less than under a monopoly or a cartel.
(iii) Profits in the Cournot model will be higher than under perfect competition.
(iv) Nash equilibrium in the model occurs where the outputs chosen by each firm are consistent with each other.
(v) Firms choose price and output in response to output set by rivals.
(vi) Firms will only be able to make normal profits in the short- run equilibrium.

A) (ii), (iii), (iv) and (v)
B) (i), (iv) and (v)
C) (i), (iv), (v) and (vi)
D) (ii), (iv), (v) and (vi)
E) (ii), (iii) and (vi)

Question 13

If firms in a duopoly make price and output decisions on the assumption that their rivals will produce a particular quantity, this is called the

A) Maxiquota model.
B) Stackelberg model.
C) Bertrand model.
D) Cournot model.
E) Quota model.

Question 14

In the Bertrand model firms make price and output decisions by making assumptions about their rivals'

A) efficiency.
B) advertising.
C) prices.
D) output.
E) wages.

Question 15

Which one of the following statements is not applicable to the Bertrand model?

A) Firms are likely to engage in price- cutting behaviour.
B) Firms make only a small amount of supernormal profit when the market is in equilibrium.
C) Firms choose price simultaneously.
D) In practice, firms have an incentive to collude.
E) Nash equilibrium (in the absence of collusion) is where price is equal to average cost.

Question 16

A________ is used to show how a firm's optimal output varies according to the output chosen by its rival.

A) reduction function
B) reaction function
C) regret function
D) real- time function
E) recurring function

Question 17

The kinked demand theory of oligopoly is not a price theory since

A) prices are never stable in oligopoly markets.
B) it assumes that firms contemplating price changes tend to ignore competitive reactions.
C) it assumes that firms never follow a competitor's price increases.
D) it does not explain how the market price is determined.

Question 18

Which of the following aspects of oligopoly is not in the public interest?

A) Prices are set collusively.
B) Customers have countervailing power.
C) The market is contestable.
D) Suppliers have countervailing power.

Question 19

Game theory is applied to

A) any situation which is like a game.
B) a monopoly.
C) games.
D) non co- operative situations.
E) an oligopoly.

Question 20

Which one of the following strategies chosen by an oligopolist would be classed as a maximin strategy?

A) Choosing the policy whose worst outcome is better than the worst outcomes of all alternative policies
B) Choosing the policy whose worst outcome is better than the best outcome of any alternative policy
C) Choosing the policy whose worst outcome is worse than the best outcome of any alternative policy
D) Choosing the policy whose best outcome is better than the worst outcomes of all alternative policies
E) Choosing the policy whose best outcome is better than the best outcome of any alternative policy

Question 21

Firms X and Y face the following payoffs in terms of profits, according to which of two prices - a high price or a low price - that each one charges. Each firm must choose whether to charge the high price or the low price, but does not know what the other will do.
In the absence of collusion, which combination of strategies is most likely to occur?

A) X sets the low price and Y sets the high price.
B) Both firms set the high price.
C) Both firms set the low price.
D) X sets the high price and Y sets the low price.
E) Any of the four combinations of strategies is likely, depending on what each firm predicts that its rival is most likely to do.

Question 22

Which of the following defines a first- mover advantage?

A) When a firm gains from being the first one to take action
B) When a firm is the first one to make supernormal profits
C) When a firm is the first to make a promise of a change in strategy
D) When a firm is the first to make a threat of a change in price

Question 23

When are threats and promises important?

A) In single- move games
B) When a firm has countervailing power
C) When firms are practising price discrimination
D) In multiple- move games

Question 24

Look at Table 12.1 in Sloman's Economics for Business (6e). The Nash equilibrium in this game is in cell

A) D
B) C
C) A
D) B

Question 25

A dominant strategy, as seen by a firm, is one that is

A) legally imposed by the government or a regulator.
B) always chosen.
C) decided by a dominant firm.
D) decided by the firm itself, because it is dominant in the industry.

Question 26

In a multiple- move game, firms will take account of

A) their rivals' anticipated reactions to the firm's next move.
B) their rivals' past actions.
C) both A and B.
D) neither A nor B.

Question 27

Since a monopolistically competitive firm has a monopoly over the particular product it produces, the firm is guaranteed a profit in the long run.

Question 28

In the long run, a firm operating under monopolistic competition will produce at minimum LRAC.

Question 29

In long- run equilibrium under monopolistic competition, a firm will charge more than the market price under perfect competition, assuming the same average cost curves.

Question 30

For a profit- maximising firm, the amount it should spend on advertising should be that where the average cost of the advertising equals the average revenue earned from it.

Question 31

A monopolistically competitive firm that engages in non- price competition is trying to shift its demand curve to the right and make it more elastic.

Question 32

Firms operating under monopolistic competition can make economic profits (supernormal profits) in the short and long run.

Question 33

A profit- maximising collusive oligopoly (cartel) is unlikely to produce an output where MC = MR.

Question 34

Oligopolists will try to compete in a way that does not involve price competition.

Question 35

Under oligopoly the price charged by one firm is likely to affect the price charged by other firms in the industry.

Question 36

In an oligopoly prices are set collusively, which is in the public's interest.

Question 37

In the barometric price- leader model, the price- leader is always the largest firm in the industry.

Question 38

According to the Cournot model, if a firm bases its price and output decisions on the assumption that its rival will produce a particular output, industry price and profit will be lower than if the industry were under monopoly.

Question 39

In the Bertrand model, firms make decisions on the assumption that the other firm will adopt a particular level of output.

Question 40

In the Cournot model, firms make decisions on the assumption that the other firm will adopt a particular price.

Question 41

The reaction function shows how a firm's optimal output varies according to the output chosen by its rival.

Question 42

The existence of a kinked demand curve in an oligopoly will make market prices unstable.

Question 43

If a buyer has a lot of market power and can offset the power of oligopolistic producers, they are said to have 'countervailing power'.

Question 44

In game theory, a dominant strategy implies that different assumptions about rivals' behaviour lead to the adoption of the same strategy.

Question 45

A Nash equilibrium is a situation where everyone makes an optimal decision based upon their assumptions about their rivals' decisions.

Question 46

The maximax strategy is where you choose the policy whose best outcome is better than the worst outcomes of all alternative policies.

Question 47

In a multiple- move game there is likely to be a first- mover advantage to the firm making the first decision, such as launching a new product.

Question 48

In a prisoner's dilemma game, it is better for firms not to collude (if such collusion were possible).

Question 49

What is monopolistic competition?

Question 50

Draw diagrams for a firm operating under monopolistic competition in both the short run and the long run

Question 51

In monopolistic competition, how are short- run supernormal profits competed away?

Question 52

What are the common features of oligopolistic markets?

Question 53

What are the main characteristics of oligopoly?

Question 54

Assume that a collusive oligopoly has agreed to fix prices, and that quotas have been allocated accordingly. Why do members of this cartel have an incentive to either produce more than their quota or to undercut the cartel's price?

Question 55

What is tacit collusion, and when is it likely to occur?

Question 56

What are the main forms of price leadership?

Question 57

Explain why the demand curve for an oligopolist may be kinked.

Question 58

Which factors make collusion less likely?

Question 59

Is an oligopoly in the interests of the public?

Question 60

Explain the concept of a Nash equilibrium.

Question 61

What is a first- mover advantage?

Question 62

Explain why, when an oligopolist market is contestable, profits will be lower than when the market is not contestable.