Deck 8: Market Entry, Monopolistic Competition, and Oligopoly

Question 1

The Motor Carrier Act of 1980 removed the government's restriction on

A) entry into the trucking industry.
B) the size of trucks used to transport goods and services.
C) entry into the industry that produces delivery trucks.
D) entry into parcel delivery.

Answer 1

entry into the trucking industry.

Question 2

When a second firm enters a monopolist's market

A) the former monopolist's average cost decreases as its output level decreases.
B) the demand curve the former monopolist faces shifts to the left.
C) the market price rises as the average cost increases.
D) none of the above

Answer 2

the demand curve the former monopolist faces shifts to the left.

Question 3

Empirical studies suggest that when a large number of firms are present in a market, prices are usually ________ and profits are usually ________ than when there are only a few firms in a market.

A) lower; higher
B) lower; lower
C) higher; higher
D) higher; lower

Answer 3

lower; lower

Question 4

The Motor Carrier Act of 1980 resulted in

A) lower freight prices.
B) more firms entering the trucking industry.
C) lower value of a trucking license.
D) All of the above are correct.

Question 5

When a second firm enters a monopolist's market, the initial demand curve facing the monopolist will

A) shift to the left.
B) shift to the right.
C) remain the same.
D) none of the above

Question 6

When the Motor Carrier Act of 1980 was made into law, new firms entered into the trucking industry. This action by new trucking firms confirms that

A) the trucking industry was earning profits in the long run prior to the entry of the new firms.
B) the trucking industry was earning losses in the long run prior to the entry of the new firms.
C) the trucking industry was earning profits as a result of the entry of the new firms.
D) the trucking industry was earning losses before and after the entry of the new firms.

Question 7

When a second firm enters a monopolist's market

A) the former monopolist's average cost increases as its output level decreases.
B) the demand curve facing the former monopolist shifts to the right.
C) the market price rises as the average cost increases.
D) none of the above

Question 8

When a second firm enters a monopolist's market

A) market price will drop.
B) sales for the first firm will rise.
C) the first firm's profits will increase.
D) All of the above will occur.

Question 9

After the U.S. government deregulated the trucking industry

A) profits rose.
B) freight prices rose.
C) freight prices fell.
D) the number of trucking companies decreased.

Question 10

When the government eliminates artificial barriers to entry

A) more firms will enter the market.
B) prices to consumers will likely increase.
C) competition in the market will decrease.
D) All of the above will occur.

Question 11

When a second firm enters a monopolist's market

A) market price will rise.
B) the quantity produced by the first firm will increase.
C) the first firm's profits will decrease.
D) All of the above will occur.

Question 12

Empirical studies indicate that entry

A) increases price and profits.
B) decreases price, but increases profits.
C) decreases price and profits.
D) increases price, but decreases profits.

Question 13

When the government eliminates artificial barriers to entry

A) firm profits will rise.
B) prices to consumers will likely decrease.
C) competition in the market will decrease.
D) All of the above will occur.

Question 14

European nations are currently deregulating many markets. They are expecting

A) the price of goods sold in these markets to increase.
B) the quality of goods sold in these markets to decrease.
C) the price of goods sold in these markets to decrease.
D) the profits of firms selling in these markets to increase.

Question 15

Studies of real world markets suggest that prices and the number of firms of comparable size in a market are

A) positively related.
B) negatively or inversely related.
C) not related.
D) sometimes negatively or inversely related, but usually positively related.

Question 16

When a second firm enters a monopolist's market

A) the former monopolist's average cost decreases as its output level decreases.
B) the demand curve facing the former monopolist shifts to the right.
C) the market price falls.
D) none of the above

Question 17

When a second firm enters a monopolist's market, the monopolist's marginal revenue curve will

A) shift to the left as its initial demand curve shifts to the left.
B) shift to the right as its initial demand curve shifts to the right.
C) remain the same.
D) none of the above

Question 18

When a second firm enters a market, the original firm's profits decline because

A) the original firm's price decreases.
B) the original firm's ATC increases.
C) the original firm's quantity decreases.
D) All of the above are correct.

Question 19

Recall the Application about the price competition between satellite and cable TV services to answer the following question(s).
Recall the Application. In most cases where satellite TV service is introduced in an area with cable TV service, the price of the cable TV service usually

A) increases.
B) decreases.
C) initially increases, then decreases.
D) is unaffected.

Question 20

When a second firm enters a monopolist's market

A) market price will rise.
B) the quantity produced by the first firm will decrease.
C) the first firm's profits increase.
D) All of the above will occur.

Question 21

Recall the Application about the price competition between satellite and cable TV services to answer the following question(s).
Recall the Application. In most cases where satellite TV service is introduced in an area with cable TV service, if the price of cable TV increases, then consumer surplus

A) increases.
B) decreases.
C) drops to zero.
D) becomes negative.

Question 22

The entry of an additional firm into a market decreases the profit per unit of output because entry decreases the price.

Question 23

Empirical studies show that entry into markets increases both price and quantity of goods supplied.

Question 24

What are the effects on a market when there is entry?

Question 25

Recall the Application about the price competition between satellite and cable TV services to answer the following question(s).
Recall the Application. The introduction of satellite TV service is a form of

A) price gouging.
B) profiteering.
C) market entry.
D) all of the above.

Question 26

Why does entry into markets decrease firm profits?

Question 27

Why does the government work to eliminate artificial barriers to entry?

Question 28

Entry of a second firm will result in a downward shift in the ATC curve.

Question 29

Recall the Application about the price competition between satellite and cable TV services to answer the following question(s).
Recall the Application. In most cases where satellite TV service is introduced in an area with cable TV service, if the price of cable TV decreases, then consumer surplus

A) increases.
B) decreases.
C) drops to zero.
D) becomes negative.

Question 30

Which of the following is NOT a characteristic of a monopolistically competitive market?

A) There are many firms.
B) Firms sell differentiated products.
C) Firms have control over price.
D) There are substantial barriers to entry.

Question 31

Which of the following is NOT a characteristic of a monopolistically competitive market?

A) Firms hold patents on their products.
B) The products that firms sell are slightly different.
C) Firms have some control over price.
D) There are no artificial barriers to entry.

Question 32

A market in which there are many firms each selling differentiated products is most likely a ________ market.

A) perfectly competitive
B) monopoly
C) monopolistically competitive
D) natural monopoly

Question 33

Entry leads to higher prices and profits in an industry.

Question 34

What entices a second firm to enter a market that was previously a single price monopoly?

Question 35

Recall the Application about the price competition between satellite and cable TV services to answer the following question(s).
Recall the Application. In most cases where satellite TV service is introduced in an area with cable TV service, the quality of the cable TV service usually

A) increases.
B) decreases.
C) initially increases, then decreases.
D) is unaffected.

Question 36

Which of the following is NOT a characteristic of a monopolistically competitive market?

A) There are many firms.
B) Firms sell products that are similar but not identical.
C) Firms must take the market price as given.
D) There are no artificial barriers to entry.

Question 37

The entry of an additional firm into a market shifts the demand curve for the original firm to the left.

Question 38

Which of the following is NOT a characteristic of a monopolistically competitive market?

A) There is only one firm selling a product.
B) There are many firms selling products that are similar but not identical.
C) There are many firms that have some control over price.
D) There are no artificial barriers to entry.

Question 39

Entry leads to reduced firm profits because it leads to a lower price.

Question 40

Recall the Application about the price competition between satellite and cable TV services to answer the following question(s).
Recall the Application. In most cases where satellite TV service is introduced in an area with cable TV service, if the quality of cable TV service increases, then consumer surplus

A) increases.
B) decreases.
C) drops to zero.
D) becomes negative.

Question 41

In a monopolistically competitive market, there

A) are many firms selling an identical product.
B) is only one firm that sells many similar yet slightly different products.
C) are many firms that have slight control over the price they charge for their product.
D) are substantial barriers to entry.

Question 42

Which of the following is an example of a monopolistically competitive firm?

A) Farmer Smith's corn farm
B) Tino's Italian eatery, a local restaurant
C) TCI Cablevision, a supplier of cable television services
D) Northwest Electricity, a supplier of electricity in the Northwest U.S.

Question 43

A monopolistically competitive market is one in which

A) only one firm sells a product.
B) all firms sell an identical product.
C) many firms sell similar yet slightly different products.
D) firms have no control over the price they charge for their product.

Question 44

Monopolistically competitive firms differentiate their products by

A) selling products with slightly different physical characteristics.
B) selling products at different locations.
C) creating a special aura or image for the product with advertising.
D) all of the above

Question 45

Which of the following is a characteristic of a monopolistically competitive market? I. There are many sellers.
II) Firms sell slightly differentiated products.
III) Each firm faces a downward-sloping demand curve.

A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question 46

Which of the following is the reason why pharmaceutical firms are NOT monopolistically competitive?

A) Pharmaceutical firms sell differentiated products.
B) There are many buyers in the market.
C) There are many sellers in the market.
D) There are barriers to entry in the market, like patents.

Question 47

Which of the following is a characteristic of a monopolistically competitive market? I. Each firm is a price-taker.
II) Firms sell slightly differentiated products.
III) Each firm faces a downward-sloping demand curve.

A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question 48

When a credit card company offers different services with its card, like travel insurance for air travel tickets purchased with the credit card or product insurance for items purchased with the card, the credit card company is trying to

A) create a barrier to entry for competing firms.
B) create a perfectly competitive market in which to sell its credit card.
C) differentiate its credit card from those offered by other companies.
D) shift the demand curve for competing firms to the right.

Question 49

Nike has used Michael Jordan to create the impression that Air Jordan basketball shoes are superior to any other basketball shoe. Nike is attempting to

A) differentiate Air Jordan basketball shoes from other types of basketball shoe.
B) lower the marginal cost of producing Air Jordan basketball shoes.
C) sell fewer Air Jordan basketball shoes so they can raise the price.
D) convince consumers that Air Jordan basketball shoes are identical to other basketball shoes.

Question 50

In the mid 1990s, Coke introduced a new soda in the soft drink market. Coke then used a new advertising campaign to associate the new soda with youth and strength. Coke was trying to

A) shift the demand curve for competing soft drinks to the left.
B) create a perfectly competitive market for soft drinks.
C) maximize its per unit costs through advertising.
D) lower the market price of soft drinks.

Question 51

Monopolistically competitive firms do NOT differentiate their products by

A) changing the products' physical characteristics.
B) selling products at different locations.
C) offering different levels of service that come with a product.
D) charging different prices to different groups of consumers.

Question 52

Which of the following is a characteristic of a monopolistically competitive market? I. There are many sellers.
II) Firms sell slightly differentiated products.
III) The demand curve facing each individual firm is horizontal.

A) I and II only
B) I and III only
C) II and III only
D) I, II, and III

Question 53

Pepsi uses advertising to create the impression that Pepsi is superior to any other soft drink. Pepsi is attempting to

A) differentiate Pepsi from other types of soft drinks.
B) lower the marginal cost of producing for Pepsi.
C) sell less Pepsi so they can raise the price of Pepsi.
D) convince consumers that Pepsi is identical to other soft drinks.

Question 54

In Eugene, Oregon, there are several Italian restaurants, each offering slightly different items prepared in slightly different ways. It is likely that an Italian restaurant in Eugene, Oregon, operates in a

A) perfectly competitive market.
B) monopolistically competitive market.
C) monopoly market.
D) oligopoly market.

Question 55

Monopolistically competitive firms do NOT differentiate their products by

A) selling products at different locations.
B) selling a product with different levels of services accompanying the product.
C) convincing consumers that the product is identical to those sold by competitors.
D) using advertising to create a special aura or image for the product.

Question 56

The word "monopolistic" in the label "monopolistic competition" refers to the fact that

A) there is only one firm producing in the market.
B) firms have no control over the price they charge.
C) each firm produces a slightly different version of the product.
D) none of the above

Question 57

In Washington, D.C., there are many coffee shops, each offering nearly identical coffee but each shop is located in a different place around the city. It is likely a coffee shop in Washington, D.C., operates in a

A) perfectly competitive market.
B) monopolistically competitive market.
C) monopoly market.
D) oligopoly market.

Question 58

Which of the following is NOT an example of a monopolistically competitive firm?

A) Farmer Jones's wheat farm
B) the Post Cereal Company
C) Procter and Gamble, a large consumer products corporation
D) T.J.'s Clothes, a local retail clothing store

Question 59

In Sioux Falls, South Dakota, there are many pizza restaurants, each offering similar types of pizza but each restaurant is located in a different place around the city. It is likely a pizza restaurant in Sioux Falls, South Dakota, operates in a

A) perfectly competitive market.
B) monopolistically competitive market.
C) monopoly market.
D) oligopoly market.

Question 60

The word "competition" in the label "monopolistic competition" refers to the fact that

A) there are very few firms producing in the market.
B) firms have no control over the price they charge.
C) firms vie against each other to get customers to buy their version of the product.
D) none of the above

Question 61

Suppose you operate in a monopolistically competitive market. If you sell your good at a price of $10 and your average cost of production is $8

A) your market is in long-run equilibrium.
B) we can expect firms to enter your market and sell a similar good in the long run.
C) there will be no incentive for competing firms to enter your market in the long run.
D) you cannot be in short-run equilibrium.

Question 62

Suppose in the city of Blacksburg, music stores operate in a monopolistically competitive market. If the price of CDs in Blacksburg is currently equal to $20 per CD and the average cost of CDs is $15, in the long run we expect the price of CDs to

A) increase.
B) stay the same.
C) decrease, and the average cost of selling CDs to increase.
D) decrease, and the average cost of selling CDs to decrease.

Question 63

As firms enter a monopolistically competitive market in the long run

A) price increases, the market quantity demanded increases, and the quantity supplied by an individual firm increases.
B) price decreases, the market quantity demanded increases, and the quantity supplied by an individual firm decreases.
C) price decreases, but firm profits increase as average costs decrease.
D) price increases and firm profits increase.

Question 64

Suppose you operate in a monopolistically competitive market. If you sell your good at a price of $20 and your average cost of production is $15

A) your market may be in long-run equilibrium.
B) you cannot be in short-run equilibrium.
C) you should expect competing firms to enter your market and shift the demand curve for your good to the left.
D) you should expect competing firms to enter your market and shift the demand curve for your good to the right.

Question 65

If short-run economic profits are greater than zero for firms in a monopolistically competitive market, in the long run we expect

A) entry barriers to prevent competing firms from entering this market.
B) the demand curve for firms in the market to shift to the right.
C) competing firms to enter the market and sell similar products.
D) profits to increase.

Question 66

Which of the following is a characteristic of a monopolistically competitive market? I. Firms sell differentiated products.
II) Each firm earns a positive economic profit in the long run.
III) Firms freely enter and exit the market.

A) II only
B) I and II only
C) I and III only
D) I, II, and III

Question 67

In a monopolistically competitive market, if price is greater than average cost

A) firms will enter.
B) firms will exit.
C) there will be no change in the number of firms.
D) the market is in long-run equilibrium.

Question 68

Under the conditions of monopolistic competition

A) firm profits are higher in the long run than in the short run.
B) average costs of production are the same in the short run as they are in the long run.
C) economic profit is zero in the long run.
D) price equals marginal cost.

Question 69

Suppose that a monopolistically competitive market is in its long-run equilibrium. If the market demand curve shifts to the right due to changes in consumer preferences

A) the number of firms in the market will increase in the short run.
B) firms will earn positive economic profits in the short run.
C) firms' average costs of production will increase as they increase output levels in the short run.
D) none of the above.

Question 70

Suppose that a monopolistically competitive market is in its long-run equilibrium. If the market demand curve shifts to the left due to a recession

A) the number of firms in the market decreases in the short run.
B) some firms may earn negative profits in the short run.
C) firms' average costs of production decreases as they decrease output levels in the short run.
D) none of the above.

Question 71

If firms in a monopolistically competitive market are earning economic profits greater than zero in the short run, then in the long run

A) firms will exit this market.
B) profits will increase.
C) profits will decrease.
D) demand will not change.

Question 72

If short-run economic profits are greater than zero for firms in a monopolistically competitive market, in the long run we expect

A) entry barriers to prevent competing firms from entering this market.
B) the demand curve for firms in the market to shift to the right.
C) the average cost of production to decrease.
D) the average cost of production to increase.

Question 73

For a monopolistically competitive firm, the firm's demand curve is

A) downward sloping.
B) horizontal.
C) upward sloping.
D) none of the above

Question 74

Under the conditions of monopolistic competition

A) prices are always lower in the long run than in the short run.
B) firm profits are always higher in the long run than in the short run.
C) average costs of production are always higher in the short run than in the long run.
D) None of the above is correct.

Question 75

Suppose coffee is sold in a monopolistically competitive market, where coffee is differentiated by coffee shop location. As firms enter in the long run and the price of coffee falls

A) the market quantity of coffee demanded will increase, but the quantity of coffee supplied by any individual coffee shop declines.
B) the market quantity of coffee demanded will decrease as does the quantity supplied from any individual coffee shop.
C) the average costs of production decline.
D) the profits of individual coffee shops increase.

Question 76

If a firm is operating in a monopolistically competitive market, then in the long run

A) the firm will earn a zero economic profit.
B) the firm will maximize its profit by producing the output level at which the average cost is minimized.
C) the firm will maximize its profit by producing the output level at which the marginal revenue is minimized.
D) all of the above.

Question 77

Which of the following is a characteristic of a monopolistically competitive market? I. Firms sell differentiated products.
II) Each firm's product is a close substitute for other firms' products.
III) Firms freely enter and exit the market.

A) I only
B) I and III only
C) II and III only
D) I, II, and III

Question 78

Under the conditions of monopolistic competition, if a firm is earning economic profits in the short run

A) prices are higher in the long run than in the short run.
B) firm profits are higher in the long run than in the short run.
C) average costs of production are higher in the long run than in the short run.
D) long-run economic profits are positive.

Question 79

Which of the following is a characteristic of a monopolistically competitive market? I. Firms sell differentiated products.
II) Each firm is earning a zero economic profit in the long run.
III) Potential entrants face artificial barriers to entry.

A) I only
B) I and II only
C) II and III only
D) I, II, and III

Question 80

Suppose in the city of Smugsburg, DVD rental stores operate in a monopolistically competitive market. If the price of DVD rentals in Smugsburg is currently equal to $5 per tape and the average cost of renting videos is $1 per DVD, in the long run we expect the price of renting DVDs to

A) increase.
B) stay the same.
C) decrease, and the average cost of producing DVD rentals to increase.
D) decrease, and the average cost of producing DVD rentals to decrease.