Deck 6: Imperfect Competition

Question 1

In a monopolistically competitive industry:

A) there is only one firm
B) firms can either be large or small relative to the total market
C) firms are large relative to the total market
D) firms are small relative to the total market

Answer 1

D

Question 2

As new firms enter a monopolistically competitive industry, the demand curve facing each existing firm:

A) will shift to the left, but the firm's market share is not affected
B) will shift to the right and become elastic because there are now more substitutes for its product
C) will shift to the left, and the firm's market share falls
D) will not be affected because the new firms do not produce a perfect substitute for its product

Answer 2

C

Question 3

To maximise profit, a monopolistically competitive firm will produce where:

A) price equals average variable cost
B) marginal revenue equals price
C) marginal revenue equals marginal cost
D) price equals marginal cost

Answer 3

C

Question 4

The market structure in which the behaviour of any given firm depends on the behaviour of the other firms in the industry is:

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

Question 5

In Melbourne there are a large number of retail clothing stores. Each store is slightly different from every other store. Retail clothing stores are an example of what market structure?

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

Question 6

If one firm raises its price in an industry characterised by firms that are facing kinked demand curves, it is likely that other firms in the industry will:

A) increase their prices also
B) reduce their expenditure on advertising
C) not change their prices
D) reduce their prices to increase their market share

Question 7

In using diagrams to compare monopolistic competition to perfect competition and monopoly we find the demand curve for the firm in monopolistic competition is elastic than that for monopoly and elastic than that for the firm in perfect competition.

A) less; less
B) less; more
C) more; more
D) more; less

Question 8

We call a game in which players can only choose strategies which are better for themselves if they are allowed to collude, the:

A) maximin strategy
B) dominant strategy
C) fallacy of composition
D) prisoner's dilemma

Question 9

When firms act as if they had an agreement this is called:

A) explicit quotas
B) tacit collusion
C) a cartel
D) oligopoly

Question 10

Differences between products sold by firms in monopolistic competition can be real or perceived. Which of the following is not a real difference?

A) improved safety features in a new Porsche
B) a free three- year emergency breakdown service with the purchase of a new Porsche
C) an advertising campaign that suggests to men they can become more attractive by driving a Porsche
D) free repairs for the first three years with the purchase of a new Porsche

Question 11

For situations where firms face competition but have some control over price, economists use the term:

A) perfect competition
B) monopoly
C) natural monopoly
D) imperfect competition

Question 12

The optimal quantity of advertising is:

A) the quantity where the marginal revenue from one additional unit of advertising is equal to the marginal cost of that unit
B) the quantity that maximises revenue from advertising
C) the quantity that reaches the greatest number of people
D) the quantity that minimises advertising costs

Question 13

If a game player chooses a strategy in which the worst outcome is better than the worst outcome of other strategies this is called:

A) minimum
B) maximax
C) minimax
D) maximin

Question 14

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

A) new firms producing the exact same product will enter the industry and this entry will continue until economic profits are eliminated
B) new firms producing close substitutes will enter the industry and this entry will continue until economic profits are eliminated
C) these firms can continue earning economic profits since there are barriers to entry into the industry
D) the government will most likely regulate firms in this industry to reduce these economic profits

Question 15

For monopolistically competitive firms in long- run equilibrium:

A) the demand curve must be tangent to the average total cost curve at the profit- maximising quantity
B) the demand curve must intersect the average total cost curve at its minimum
C) the demand curve must be tangent to the average total cost curve at its minimum
D) the demand curve must intersect the average total cost curve at the profit- maximising quantity

Question 16

In monopolistic competition the costs of less than optimal production may be counteracted by:

A) the gain in economic welfare that results from production differentiation
B) the fact that what is produced is sold at a price that is equal to marginal cost
C) the fact that what is produced is sold at a price that is greater than marginal cost
D) the economic profit that producers can make in the long run

Question 17

In the long run in monopolistic competition there can be:

A) no economic profits or losses
B) no economic profits
C) economic profits, but not losses
D) economic profits or losses

Question 18

If a monopolistically competitive firm its price, quantity demanded fall to zero.

A) increases; will
B) increases; will not
C) decreases; will
D) None of the above answers are correct as firms in monopolistic competition are price takers.

Question 19

When firms collude on price they also often have to agree on:

A) legal payments
B) illegal payments
C) quotas
D) tariffs

Question 20

You are given the following information about an oligopolistic industry: Which combination of these features is likely to encourage collusion between the firms in the industry?

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

Question 21

Which of the following defines the Nash equilibrium?

A) where the output chosen by each firm are consistent with each other
B) the position resulting from everyone making their optimal decision based on their assumptions about their rivals' decisions
C) where two or more firms (or people) by attempting independently to choose the best strategy for whatever the other(s) are likely to do, end up in a worse position than if they had co- operated in the first place.
D) where neither firm is able to earn supernormal profits.

Question 22

In order to practice price discrimination:

A) there must be a large number of firms in the market
B) resale between markets must be preventable
C) the elasticity of demand for the product must be the same in each market
D) consumers must have no knowledge that price discrimination is occurring

Question 23

If the industry is an oligopoly, the price charged and the quantity produced would be the same as if the industry was a monopoly if:

A) the oligopolists enter a formal collusive agreement
B) one of the oligopolists acts as a dominant price leader
C) the oligopolist faces a kinked demand curve
D) there is cosmetic price leadership

Question 24

Degree's, a frozen food producer, is a monopolistically competitive firm. Degree's is currently selling frozen chips at a price of $3. Degree's marginal cost is 50 cents and marginal revenue is 50 cents. This firm should _ _ to maximise profits.

A) decrease output so that marginal revenue exceeds marginal cost
B) increase output until price equals marginal cost
C) decrease output until price equals marginal cost
D) continue to produce the same output level

Question 25

Game theory is applied to:

A) any type of game
B) the types of rules that cartels adopt
C) co- operative situations
D) strategic behaviour based on assumptions about rivals' behaviour

Question 26

A formal agreement between firms operating in a 'collusive oligopoly' is called a/an:

A) monopoly
B) cartel
C) oligopoly
D) trust

Question 27

The long- run equilibrium outcomes in monopolistic competition and monopoly are similar because in both market structures:

A) firms earn economic profits
B) firms produce at a point where price is less than marginal revenue
C) firms realise all economies of scale
D) firms produce at a point where price is greater than marginal cost

Question 28

The banking sector in Australia is an oligopoly because the four largest firms account for:

A) approximately 85 percent of all deposits
B) approximately 75 percent of all deposits
C) approximately 90 percent of all deposits
D) 100 percent of all deposits

Question 29

Which of the statements below is true?

A) An oligopolist is likely to spend more on advertising than a monopolist.
B) A monopolist is likely to spend more on advertising than an oligopolist.
C) Oligopolists that collude spend money on advertising than other firms.
D) A perfectly competitive firm will spend more on advertising than a monopoly or oligopoly.

Question 30

The long- run equilibrium outcomes in monopolistic competition and perfect competition are similar, because in both market structures:

A) firms will only earn a normal profit
B) the efficient output level will be produced in the long run
C) firms realise all economies of scale
D) firms will be producing at minimum average cost

Question 31

Third- degree price discrimination can be used by firms who able to:

A) divide the market into different segments, and charge each segment a different price
B) charge every buyer of their product the maximum price that the buyer is willing to pay
C) discriminate between sellers on the basis of quantity purchased
D) discriminate between buyers on the basis of quantity purchased

Question 32

Which of the following is a characteristic of monopolistic competition?

A) product differentiation
B) a small number of firms operate in the market
C) mutual interdependence between firms
D) firms face a perfectly elastic demand curve

Question 33

A method of pricing that is commonly used by an oligopoly is called:

A) marginal cost pricing
B) cost- plus pricing
C) benchmark pricing
D) common pricing

Question 34

Monopolistic competition differs from perfect competition primarily because:

A) in monopolistic competition, firms can differentiate their products
B) in monopolistic competition there are barriers to entry into the industry
C) in monopolistic competition, there are relatively few barriers to entry
D) in perfect competition, firms can differentiate their products

Question 35

Which of the following is NOT an assumption of the model of monopolistic competition model?

A) there is freedom of exit and entry into the industry
B) many small firms
C) each firm produces a product which is identical to that of its competitors
D) each firm is independent in its decision making

Question 36

The two key characteristics of oligopoly are:

A) barriers to entry and product differentiation
B) firm interdependence and barriers to entry
C) firm interdependence and product differentiation
D) barriers to entry and many small firms

Question 37

If a firm charges all young people one price and all old people another price this is called:

A) second- degree price discrimination
B) predatory pricing
C) first- degree price discrimination
D) third- degree price discrimination

Question 38

In oligopoly, firms:

A) are able to influence price only if the products produced by the oligopolists are standardised
B) have no influence over price regardless of whether or not the product is differentiated or standardised
C) are able to influence price only if the products produced by oligopolists are differentiated
D) by virtue of their size are able to influence price regardless of whether or not the product is differentiated or standardised

Question 39

The firm's price in monopolistic competition:

A) is equal to average variable cost
B) is equal to marginal revenue
C) is found by reference to the demand curve
D) is equal to marginal cost

Question 40

Countervailing power is a term used to describe:

A) consumer organisations
B) dominant firm price leadership
C) regulatory bodies set up by government
D) powerful buyers who keep down the prices of powerful producers

Question 41

Can firms in monopolistic competition earn an economic profit in the long run? Why or why not?

Question 42

When economists discuss oligopoly, what do they mean by 'interdependence'?

Question 43

Complete the following sentences from the answers below.
Statement
a() Dominant firm price leadership is where:
b() Tacit collusion is where:
c() Barometric firm price leadership is where:
Answer

Question 44

In the kinked demand curve model of oligopoly, each firm believes its demand curve is above the kink, and below the kink.

A) inelastic; elastic
B) elastic; inelastic
C) elastic; elastic
D) inelastic; inelastic

Question 45

Economists would expect to find excess production capacity under conditions of:

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

Question 46

In the dominant firm price leadership model, the dominant firm will produce where:

A) price equals marginal revenue
B) marginal revenue equals total cost
C) price equals marginal cost
D) marginal revenue equals marginal cost

Question 47

Complete the following sentences from the answers below.
Statement
a() The individual firm in monopolistic competition has a:
b() In the long run firms in monopolistic competition earn:
c() Firms in monopolistic competition compete through:
Answer

Question 48

In the short run, a monopolistic competitor:

A) makes zero economic profits
B) makes negative economic profits
C) may make either positive, negative, or zero economic profits
D) makes positive economic profits

Question 49

If a monopolist produces output in more than one plant, output should be distributed among those plants so that:

A) the total costs of production are the same in each plant
B) the marginal revenue of producing the last unit of output in each plant is the same for all plants
C) the average total cost of producing the last unit of output in each plant is the same for all plants
D) the average revenue of producing the last unit of output in each plant is the same for all plants

Question 50

What are the main forms of price leadership?

Question 51

If firms follow the prices of a firm that is thought to be typical of the industry, this is called:

A) a cartel
B) barometric firm price leadership
C) tacit collusion
D) strategic dominance

Question 52

Explain the benefits of price discrimination for cinemas.

Question 53

If a game player chooses a strategy in which the best outcome is better than the best outcome of other strategies this is called:

A) minimax
B) minimum
C) maximin
D) maximax

Question 54

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

A) either exit from or entry into the industry
B) the entry of new firms into the industry
C) the firm to continue making positive profits
D) the exit of some firms from the industry

Question 55

Do firms in a monopolistically competitive market have any control over the price that they can charge?

Question 56

In each of the two cases below, why and how does the firm choose to separate its customers into two markets?
a) A hotel in the city centre offers weekend room discounts.
b) Plastic surgeons charge their lower- income patients less than their rich patients for similar operations.

Question 57

The condition for the long- run equilibrium in a monopolistically competitive industry is:

A) price equals average total cost
B) price equals marginal cost
C) price equals marginal revenue
D) marginal cost equals average total cost

Question 58

The pizza delivery industry is monopolistically competitive. Gino's pizzeria raises its prices by 10% but all the other pizzerias in town keep their prices the same. Which of the following is the most likely to occur?

A) Gino's pizzeria profits will increase.
B) Gino's pizzeria will not be able to sell any pizza, since it was the only firm to raise its price.
C) Gino's pizzeria will lose some of its customers.
D) The number of customers served by Gino's pizzeria will increase.

Question 59

Explain the concept of a 'Nash equilibrium'.

Question 60

What is predatory pricing?

Question 61

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

Question 62

A colluding oligopoly will face inelastic market demand and produce up to the point at which marginal revenue equals marginal cost and will set price equal to marginal cost.

Question 63

Due to market power, firms in an oligopoly do not have to be interdependent.

Question 64

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 65

As price discrimination enables firms to increase profits, it always disadvantages consumers.

Question 66

The kinked demand curve is inelastic to the left of the kink and elastic to the right of the kink.

Question 67

A Nash equilibrium is a dominant strategy equilibrium.

Question 68

Collusive oligopolists may sometimes agree to set production quotas.

Question 69

In monopolistic competition each firm is a price taker.

Question 70

Why is a monopolistically competitive market not as efficient as the model of perfect competition?

Question 71

The prisoners' dilemma occurs when firms choose to collude but become 'prisoners' to the decision making of other firms.

Question 72

In Australia, cartels are illegal.

Question 73

Firms in a monopolistically competitive industry are small relative to the total market.

Question 74

Tacit collusion is a formal agreement between firms not to engage in price competition.

Question 75

A monopolistically competitive firm maximises profit by producing where marginal revenue equals marginal cost.

Question 76

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 77

If a firm can discriminate, it will charge the higher price in the market with the least elastic demand.

Question 78

Due to ease of entry and exit, the monopolistic competitor will always make normal profits in the long run.

Question 79

When a firm sets its prices below average cost in order to drive out competitors this is called 3rd degree price discrimination.

Question 80

OPEC was formed in 1973.