Deck 13: Monopolistic Competition and Oligopoly

Question 1

Product differentiation in monopolistically competitive markets:

A)can reflect real or perceived differences in the product.
B)cannot be done on the basis of a simple difference in packaging.
C)is not easily identifiable.
D)reduces each firm's ability to control prices.

Answer 1

A

Question 2

Which of the following conditions holds for a monopolistically competitive firm that is in equilibrium in the long run?

A)Price equal to marginal cost
B)Marginal cost equal to average cost
C)Price equal to average cost
D)Marginal cost equal to average revenue

Answer 2

C

Question 3

Which of the following is not true of a monopolistically competitive firm in long run equilibrium?

A)Price exceeds marginal cost
B)The average total cost curve lies above the demand curve
C)Marginal revenue equals marginal cost
D)The price elasticity of demand is zero

Answer 3

D

Question 4

Which of the following is true of product differentiation?

A)Product differentiation ensures that firms face a horizontal market demand curve.
B)Product differentiation allows monopolistically competitive firms to make positive economic profits in the long run.
C)Prices of differentiated products have to vary substantially for product differentiation to be successful.
D)Successful product differentiation can be based on differences that are perceived by consumers.

Question 5

ABC Inc. ,is a leading consumer goods conglomerate.ABC launched a new variant of their existing brand of toothpaste that claimed not only to whiten teeth within 4 weeks but also fight cavities.In other words,ABC was practicing _____.

A)market segmentation
B)product differentiation
C)product customization
D)price skimming

Question 6

Which of the following is a characteristic of monopolistic competition?

A)Inelastic demand
B)Free entry and exit
C)Homogeneous products
D)A small number of buyers

Question 7

The markup of price over marginal cost of a profit-maximizing firm in the long run is _____.

A)higher in a perfectly competitive market than in a monopoly market
B)higher in a monopoly market than in a monopolistically competitive market
C)higher in a perfectly competitive market than in an oligopoly
D)higher in a monopolistically competitive market than in a competitive market

Question 8

When a monopolistically competitive firm is maximizing its profit: A)marginal revenue is also maximized.
B)average revenue exceeds marginal revenue.
C)total revenue declines to zero.
D)marginal revenue equals average revenue.

Question 9

Unlike a perfectly competitive firm,a monopolistically competitive firm:

A)makes zero economic profits in the short run.
B)caters to a large portion of the market.
C)does not face barriers to entry and exit.
D)sells a differentiated product.

Question 10

Unlike a monopolistically competitive market,firms in a perfectly competitive market:

A)equate marginal cost and marginal revenue.
B)set price at a level that is greater than marginal cost.
C)do not have any entry or exit barriers.
D)produce homogeneous goods.

Question 11

A monopolistically competitive firm differs from a perfectly competitive firm in that:

A)the monopolistically competitive firm faces a downward-sloping demand curve.
B)the demand for the monopolistically competitive firm's product is fairly inelastic.
C)entry into a monopolistic market is restricted while entry is free in a perfectly competitive market.
D)a monopolistically competitive firm is a price taker in the market.

Question 12

The demand curve that a monopolistically competitive firm faces is _____.

A)relatively elastic compared to a monopoly
B)perfectly elastic at the equilibrium price
C)relatively elastic compared to a perfectly competitive firm
D)perfectly inelastic at the equilibrium output

Question 13

A monopolistically competitive firm that is maximizing profit will choose to produce at the level where:

A)total revenue is maximized.
B)average total cost exceeds average revenue.
C)marginal revenue equals marginal cost.
D)marginal revenue exceeds average revenue.

Question 14

From the shape of the monopolistically competitive firm's demand curve,you can imply that:

A)the firm has some degree of market power.
B)the firm sells a homogeneous good.
C)the firm's product has no substitutes.
D)the firm's level of output is efficient.

Question 15

The demand curve facing a monopolistically competitive firm is downward-sloping because:

A)substitutes for the good are easily available.
B)the firm produces homogeneous products.
C)there is only one seller in the market.
D)the price/marginal-cost markup is zero.

Question 16

A monopolistically competitive firm is similar to a monopoly in that the firm:

A)has no rivals that produce close substitutes.
B)is very large relative to the market.
C)produces on the inelastic portion of its demand curve.
D)faces a downward-sloping demand curve.

Question 17

A monopolistically competitive industry is similar to a perfectly competitive industry in that:

A)there is free entry and exit in both markets.
B)products are differentiated in both markets.
C)firms in both markets decide output and prices on the basis of strategic interaction.
D)the demand curves in both markets are downward-sloping.

Question 18

The demand curve that a monopolistically competitive firm faces is _____.

A)downward-sloping but fairly elastic
B)upward-sloping but fairly inelastic
C)horizontal
D)vertical

Question 19

Long-run equilibrium in a monopolistically competitive market satisfies all of the following conditions,except:

A)zero economic profit.
B)excess capacity.
C)price equal to marginal cost.
D)marginal revenue equal to marginal cost.

Question 20

Product differentiation and a certain degree of monopoly power are characteristics of:

A)perfectly competitive firms.
B)monopolistically competitive firms.
C)monopoly markets.
D)monopsony markets.

Question 21

Unlike monopolistically competitive firms,oligopolistic firms:

A)face a downward-sloping demand curve.
B)exhibit a strong mutual interdependence.
C)produce at the point where price is equal to marginal cost.
D)do not have a supply curve.

Question 22

Long-run equilibrium under monopolistic competition is characterized by:

A)a positive deadweight loss.
B)a positive but small economic profit.
C)an equilibrium price that is equal to marginal cost.
D)an equilibrium price that is greater than average cost.

Question 23

In Cournot's duopoly model,a firm's profit-maximizing level of output:

A)depends on the market price of the good.
B)is based on the assumption that the other firm produces zero output.
C)based on the other firm's expected level of output,which is assumed to remain unchanged.
D)is equal to the other firm's expected level of output,which is assumed to remain unchanged.

Question 24

Assume that there are only three sellers in the aluminium industry each producing identical aluminium sheets.Given that these three firms own all the known sources of aluminium,the _____ model of the market is most applicable to the aluminium industry.

A)oligopoly
B)monopoly
C)dominant firm model
D)monopolistic competition

Question 25

Monopolistically competitive firms _____.

A)earn positive economic profit both in the short run and the long run
B)suffer an economic loss in the long run
C)earn positive economic profit in the long run
D)earn zero economic profit in the long run

Question 26

Which of the following is true of monopolistically competitive markets?

A)The economic profits of firms in a monopolistically competitive market are positive in the long run.
B)The cost of government regulation is small relative to the social losses from monopolistic competition.
C)Since the price and output combination in a monopolistically competitive market is efficient,there is no need for government regulation.
D)It is possible that the value created through product differentiation outweighs the efficiency loss from monopolistic competition.

Question 27

A monopolistically competitive industry is characterized by:

A)excess capacity.
B)an efficient level of output.
C)inelastic demand for its products.
D)positive economic profits in the long run.

Question 28

Government intervention in monopolistically competitive industries is probably not warranted because:

A)monopolistic firms produce the efficient level of output.
B)deadweight losses from monopolistic competition are hard to quantify.
C)the cost of regulation may be higher than the deadweight loss.
D)price regulation usually leads to a decline in total surplus .

Question 29

Which of the following is true of the Cournot duopoly model?

A)It shows how the interaction of uncoordinated output decisions of rival firms leads to equilibrium in the oligopoly market.
B)It explains how prices are determined in a market that has a large number of firms and a homogeneous product.
C)It shows how equilibrium is attained in a market where two firms collude to set output and price equal to the monopoly output and price.
D)It explains how prices are determined in a market with a single dominant firm and a large number of competitive fringe firms.

Question 30

A duopoly is defined as an industry with _____.

A)two distinct types of buyers
B)two sellers
C)multiple product lines
D)a homogeneous product

Question 31

Oligopoly cannot be explained using a single theoretical model because:

A)oligopolistic markets are not really found in the real world.
B)the assumptions of the oligopoly model are not realistic.
C)product differentiation makes the model too complex.
D)mutual interdependence makes it difficult to analyze strategic behavior.

Question 32

Which of the following is a defining characteristic of an oligopoly?

A)A large number of sellers
B)Mutual interdependence between firms
C)Economies of scale in production
D)A large number of buyers

Question 33

The output of a monopolistically competitive industry is inefficient because firms:

A)produce at the highest point on the average cost curve.
B)do not produce at the minimum point on their average cost curve.
C)produce at the highest point on the marginal cost curve.
D)do not produce at the minimum point on the marginal cost curve.

Question 34

Which of the following is a key element of the Cournot model?

A)The price in an oligopoly market increases proportionally for both firms.
B)The output of one firm is determined keeping the output of other firms fixed.
C)The output of both firms in an oligopoly market is kept fixed.
D)The price in an oligopoly market will not increase above a certain level.

Question 35

For a monopolistically competitive firm,excess capacity is the difference between the equilibrium level of output and the level of output where:

A)marginal cost is minimum.
B)average total cost is minimum.
C)marginal revenue is maximum.
D)total revenue is maximum.

Question 36

Which of the following would weaken the argument that monopolistically competitive firms should be regulated by the government?

A)Monopolistically competitive firms and perfectly competitive firms are similar in that their equilibrium prices and quantities are efficient.
B)Monopolistically competitive firms earn zero economic profits in the short run just as perfectly competitive firms do.
C)The benefits of increased product variety produced by monopolistic competition offsets the relatively small welfare costs.
D)The cost of regulating a monopolistically competitive firm could possibly be lower than the deadweight loss from monopolistic competition.

Question 37

When a firm in a monopolistically competitive market is operating at excess capacity it implies that:

A)it is producing the efficient level of output.
B)it is producing more than the competitive level of output
C)it can produce output at a lower cost
D)it is facing an upward-sloping average cost curve

Question 38

Which of the following,if true,will be the best example of an oligopoly market?

A)The cigarette industry where a similar product is produced by a small number of sellers
B)Dine-in pizza outlets where a differentiated product is produced by a large number of sellers
C)The milk industry where a homogeneous product is provided by a large number of sellers
D)The market for electricity where a single firm can produce electricity at the lowest possible cost

Question 39

Which of the following is true of a firm in an oligopoly market?

A)Each firm faces a downward-sloping demand curve with a kink at the current price.
B)Firms in oligopoly markets are very small relative to the market.
C)Products in oligopoly markets could either be differentiated or homogeneous.
D)The profit-maximizing output is determined by equating price and marginal cost.

Question 40

A monopolistically competitive firm is considered to have excess capacity because it:

A)does not operate at the minimum point on its long-run average cost curve.
B)does not operate at the minimum point on its marginal cost curve.
C)operates at the point where average cost is greater than average revenue.
D)operates at the point where marginal cost is above average revenue.

Question 41

In the Stackelberg model,the leader firm's residual demand curve _____.

A)has a slope that is twice that of the market demand curve
B)has a slope that is half the slope of the market demand curve
C)is the same as the market demand curve
D)is more inelastic than the market demand curve

Question 42

Figure 13-1 shows the Stackelberg model of a duopoly.Both firms face constant marginal costs equal to OJ and the market demand curve is AD.The Stackelberg firm produces an output of OF and OF is equal to FL.
Refer to Figure 13-1.The output of the follower firm is represented by the distance _____.

A)OF
B)OK
C)KL
D)FK

Question 43

Figure 13-1 shows the Stackelberg model of a duopoly.Both firms face constant marginal costs equal to OJ and the market demand curve is AD.The Stackelberg firm produces an output of OF and OF is equal to FL.
Refer to Figure 13-1.In the Stackelberg equilibrium,the total industry output is _____.

A)OF
B)OK
C)OE
D)OL

Question 44

Compared to a Cournot equilibrium,the _____ in a Stackelberg equilibrium.

A)price paid by the consumers is higher
B)total industry output is higher
C)profit made by the leader firm is lower
D)output is closer to monopoly output

Question 45

Figure 13-1 shows the Stackelberg model of a duopoly.Both firms face constant marginal costs equal to OJ and the market demand curve is AD.The Stackelberg firm produces an output of OF and OF is equal to FL.
Refer to Figure 13-1.The Stackelberg firm's residual demand curve is given by:

A)AC
B)BCD
C)BE
D)JCD

Question 46

In _____,one firm uses its knowledge of the other firms' reaction functions to enhance its own profits.

A)the Cournot duopoly
B)a monopolistically competitive market
C)a perfectly competitive market
D)the Stackelberg model

Question 47

The Stackelberg model is different from the Cournot model because:

A)the Stackelberg model assumes that firms compete by varying their prices while the Cournot model assumes that firms compete by varying their output.
B)the Stackelberg model assumes that one firm selects its output on the basis of the other firm's reaction curve while the Cournot model assumes that both firms take each other's output as given.
C)the Stackelberg model assumes that both firms try to predict each other's reaction curves while the Cournot model assumes that the level of output of both firms is fixed.
D)the Stackelberg model assumes that one firm dominates the market through its market share while the Cournot model assumes that all firms are small relative to the market.

Question 48

A _____ shows the relationship between one firm's profit-maximizing output as a function of the output of a rival firm in a duopoly market.

A)demand curve
B)supply curve
C)joint output curve
D)reaction curve

Question 49

The main assumption of the Cournot model:

A)is more plausible the larger the number of firms in the industry.
B)is that each firm takes the other firm's price as given.
C)is not valid once equilibrium is established in the market.
D)takes into account the reactions of other firms.

Question 50

For firms with constant and equal long-run marginal cost curves,the Cournot equilibrium occurs at:

A)the point of intersection of the firms' reaction curves.
B)the point where price equals marginal cost.
C)the point where the demand curve is tangent to the marginal cost curve.
D)the point of intersection of one firm's reaction curve and the demand curve.

Question 51

Figure 13-1 shows the Stackelberg model of a duopoly.Both firms face constant marginal costs equal to OJ and the market demand curve is AD.The Stackelberg firm produces an output of OF and OF is equal to FL.
Refer to Figure 13-1.The difference between the total industry output produced under a perfect competition model and a Stackelberg model is represented by the distance _____.

A)KF
B)KL
C)LE
D)FL

Question 52

In the Stackelberg model of oligopoly:

A)each firm takes the other firm's output as constant in deciding its own output level.
B)the leader firm's output is determined at the point where demand equals price.
C)the leader firm selects its output first,taking the reactions of follower firms into account.
D)each firm decides its output based on the interaction of demand and supply.

Question 53

The residual demand curve shows:

A)the quantity that the dominant firm sells at each price after accounting for the fringe firms' output.
B)the quantity that fringe firms sell at each price based on the output of the dominant firm.
C)the quantity that the dominant firm supplies at each price irrespective of the market output.
D)the combined quantity that is sold at each price in the market by the dominant and fringe firms.

Question 54

In the Cournot duopoly model,the reaction curve shows:

A)one firm's best possible price as a function of the profit of the other firm.
B)one firm's most possible profit as a function of the costs of the other firm.
C)one firm's best possible revenue as a function of the profit of the other firm.
D)one firm's most profitable output as a function of the output of the other firm.

Question 55

Given the same demand and cost conditions,_____ for a Stackelberg model as compared to a Cournot duopoly model.

A)total output is lower and price is higher
B)total output is higher and price is lower
C)total output and price are both lower
D)total output and price are both higher

Question 56

If,in the Cournot model of a duopoly,the firms colluded instead of behaving independently:

A)the outcome would be closer to the competitive equilibrium.
B)the outcome would be indeterminate.
C)firms could increase their combined profit.
D)the price will be below average cost.

Question 57

In the Stackelberg model of oligopoly,the dominant firm:

A)will equate marginal cost with the residual demand curve to maximize profits.
B)faces a perfectly elastic demand curve.
C)can maximize profits ignoring the actions of other firms in the industry.
D)faces a marginal revenue curve that lies under the residual demand curve.

Question 58

A significant criticism of the Cournot model is that:

A)markets do not operate according to the Cournot model in the real world.
B)its key assumption does not hold if the market is still adjusting toward equilibrium.
C)firms cannot estimate reaction curves of other firms.
D)the Cournot model cannot be applied to industries with more than two firms.

Question 59

Assume that there are only two full-service airline firms in a country.The service provided to the consumers by each of them is marginally different.Given that the full-service airline industry has high entry costs,the _____ model of the market is most applicable to this industry.

A)oligopoly
B)monopoly
C)dominant firm model
D)perfectly competitive

Question 60

In the Stackelberg model of oligopoly,the leader firm:

A)sets the price in the market which the follower firms take as given.
B)produces a larger quantity than follower firms and enhances its profits.
C)chooses output and prices irrespective of the other firms in the market.
D)produces a level of output which is equal to that of the follower firms.

Question 61

In the dominant firm model,if the elasticity of market demand is 0.75,the dominant firm's market share is 0.25,and the elasticity of supply of the competitive fringe is 2,then the dominant firm's elasticity of demand is _____.

A)3
B)5
C)7
D)9

Question 62

A single firm serves a large part of the market.The rest of the market is served by a large number of competitive firms.Which market model is best applicable to this type of industry?

A)Monopoly
B)Monopolistic competition
C)Dominant firm model
D)Cournot duopoly

Question 63

In the dominant firm model of oligopoly,the dominant firm assumes that the other firms in the market:

A)will charge a higher price than it does.
B)will together produce a lower quantity of output than it does.
C)behave like competitive firms.
D)behave like monopolistic firms.

Question 64

Which of the following will determine the elasticity of a dominant firm's demand curve?

A)The dominant firm's marginal cost of production
B)The demand elasticity of the fringe firms
C)The total output in the market
D)The supply elasticity of the fringe firms

Question 65

How does the Cournot model of oligopoly differ from the Stackelberg model?

A)The Cournot model cannot be extended to include more than two firms unlike the Stackelberg model.
B)The Cournot model explains the mutual interdependence of firms in an oligopoly market unlike the Stackelberg model.
C)The equilibrium output in the Stackelberg model is relatively higher than the Cournot model.
D)The Cournot model assumes that a single firm is the market leader while the Stackelberg model assumes no single firm has a large market share.

Question 66

Which of the following the best example of a cartel?

A)An association of tobacco companies that attempts to influence anti-tobacco legislation
B)A labor union that raises wages above competitive level by restricting the supply of labor
C)A group of countries that sign an agreement to lower trade barriers and exchange goods and services
D)Firms that register their headquarters in the Cayman Islands in order to evade corporate taxes

Question 67

In the dominant firm model of oligopoly,the rival firms will:

A)equate marginal cost with marginal revenue.
B)produce at the point where marginal cost is equal to residual demand.
C)produce on the inelastic portion of the demand curve.
D)equate marginal cost with the dominant firm's price.

Question 68

Consider a dominant firm model where the elasticity of market demand is 2,the elasticity of supply of the competitive fringe is 4,and the elasticity of the dominant firm's demand is 10.Calculate the dominant firm's market share.

A)2/3
B)2/5
C)3/5
D)3/7

Question 69

In an industry where one firm with a high market share uses the reaction curves of other firms to set output,the _____ model is most applicable.

A)Cournot duopoly
B)perfectly competitive
C)Stackelberg
D)dominant firm

Question 70

How is total output determined in the dominant firm model?

A)The dominant firm produces the highest level of output given its production function.
B)All firms in the market produce at the level where marginal cost equals marginal revenue.
C)The dominant firm produces at the level where marginal cost equals marginal revenue.
D)The fringe firms produce at the point where marginal revenue equals marginal cost.

Question 71

How does the Stackelberg model of oligopoly differ from the dominant firm model?

A)The Stackelberg model assumes a single leader firm unlike the dominant firm model where all firms share output equally.
B)In the dominant firm model,the fringe firms are competitive while in the Stackelberg model,the follower firms display Cournot behavior.
C)The dominant firm model is only applicable to a duopoly while the Stackelberg model can be applied to all oligopolistic markets.
D)The Stackelberg leader produces along the market demand curve while the dominant firm produces along the residual demand curve.

Question 72

Suppose ABC Concrete is the dominant firm in a market consisting of five firms.ABC's market share is 40% of the market.The elasticity of market demand is 0.8 and the elasticity of supply for the remaining firms is 6.What is the elasticity of demand for ABC's product?

A)6
B)8
C)11
D)13

Question 73

Consider a dominant firm model in which the elasticity of market demand is 1,the dominant firm's market share is 0.5,and the elasticity of supply of the competitive fringe firms is 4.What would be the dominant firm's elasticity of demand?

A)2
B)4
C)6
D)8

Question 74

The output of a cartel that maximizes profits is closest to the equilibrium output of:

A)a perfectly competitive firm.
B)a monopoly.
C)a monopolistically competitive firm.
D)an oligopoly.

Question 75

The Organization of the Petroleum Exporting Countries [OPEC] serves the global oil market.Suppose Saudi Arabia,an OPEC member country,produces 50% of the oil supplied to this market.The elasticity of market demand is 0.4 and the elasticity of supply for the other eleven OPEC countries is 1.What is the elasticity of demand for oil produced by Saudi Arabia?

A)0.4
B)2.4
C)1.8
D)3.4

Question 76

In an industry with a small number of equal-sized firms where none of the firms have superior knowledge,the _____ is most likely to apply.

A)Cournot model of oligopoly
B)perfectly competitive model
C)dominant firm model of oligopoly
D)Stackelberg model of oligopoly

Question 77

In the dominant firm model of oligopoly,the dominant firm maximizes profits by producing at the point where:

A)its marginal revenue is equal to its marginal cost.
B)the market demand equals the supply by the competitive fringe firms.
C)its marginal cost curve intersects the market demand curve.
D)its demand curve coincides with the market demand curve.

Question 78

In the dominant firm model,if the dominant firm's market share is 3/7,its elasticity of demand is 10 and the elasticity of supply of the competitive fringe firms is 4,then the elasticity of market demand must be _____.

A)4
B)3
C)2
D)1

Question 79

If the member of a cartel violates the cartel agreement and sells at a price below the cartel price:

A)the violator will not be able to sell the additional output at a price above his marginal cost.
B)the violator will make a smaller profit per unit that he sells.
C)the violator will face a more elastic demand curve for the additional output.
D)the violator's demand curve will be downward sloping for the additional output.

Question 80

The price that is set by a cartel is most likely to be:

A)lower than the marginal cost.
B)lower than the competitive price.
C)higher than average revenue.
D)equal to the monopoly price.