Question 1

The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.
  FIGURE 11- 1
-Refer to Figure 11- 1.What quantity of output will this profit- maximizing firm choose to sell?

Accepted Answer

The profit-maximizing output is where MR=MC. From the diagram, we can see that at output level 100 units, MR=MC. At this point, the price is $25 and the total revenue is $2500, while the total cost is $2000. Therefore, the profit is $500 which is the maximum for this firm.

Question 2

The diagram below shows demand and cost curves for a monopolistically competitive firm.
  FIGURE 11- 3
-The following statements describe a cooperative equilibrium in an oligopoly where the firms are jointly maximizing profits by restricting output.Which statement is false?

Accepted Answer

B

Question 3

FIGURE 11- 2 
-Refer to Figure 11- 2.Diagram C depicts a typical firm in long- run equilibrium in

Accepted Answer

In long-run equilibrium, a perfectly competitive firm produces at the point where price equals marginal cost and average total cost, resulting in zero economic profit. Diagram C likely shows this scenario.

Question 4

One prediction about monopolistic competition is that it has higher unit costs than perfect competition.But it is unreasonable to conclude that monopolistic competition is therefore bad for consumers because

Accepted Answer

Monopolistic competition may have higher unit costs than perfect competition, but it also allows for greater product differentiation and a wider variety of products for consumers to choose from. This increased variety may be beneficial to consumers' preferences and satisfaction, even if it leads to slightly higher prices.

Question 5

The diagram below shows demand and cost curves for a monopolistically competitive firm.
  FIGURE 11- 3
-Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a contract and each firm is allowed to bid either $100 or $180.If both firms bid the same price,the job is shared equally and each firm earns half the value of its bid.Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero).The non- cooperative outcome in this situation is

Accepted Answer

Both firms bidding $100 is the non-cooperative outcome because it is the Nash equilibrium. In a Nash equilibrium, neither firm can improve its payoff by unilaterally changing its strategy, given the strategy of the other firm. In this case, if one firm bids $100 and the other firm bids $180, the first firm will earn $0. If both firms bid $100, each firm will earn $50. Therefore, neither firm can improve its payoff by unilaterally changing its strategy, given the strategy of the other firm.

Question 6

In a monopolistically competitive industry,the freedom of entry and exit leads to

Accepted Answer

The freedom of entry and exit in a monopolistically competitive industry will lead to firms entering and leaving the industry until there are zero profits in the long-run equilibrium. This is because if profits exist, new firms will enter thus increasing competition and reducing profits. Likewise, if there are losses, some firms will exit the industry which reduces competition and increases profits. Eventually, the industry will stabilize at a point where each firm has zero economic profit.

Question 7

Suppose there are many independent dry cleaners in your city,each of which is earning economic profits.According to the theory of monopolistic competition,

Accepted Answer

According to the theory of monopolistic competition, in the long run, new firms will enter the market until each firm is earning zero economic profits. This is because there are no significant barriers to entry in the market, allowing new firms to easily enter and compete with existing firms. As new firms enter and compete for customers, the market becomes more competitive and prices are driven down, reducing economic profits for all firms to zero. Therefore, the best choice is D.

Question 8

A characteristic of a monopolistically competitive market is that

Accepted Answer

In a monopolistically competitive market, each firm faces a downward-sloping demand curve because they are selling differentiated products. This makes it easier for consumers to switch from one firm's product to another's. A and B are incorrect because firms in this type of market do engage in non-price competition, but they also compete on price. Each firm's marginal revenue curve lies below its demand curve because they must lower their price to sell more of their product. D is incorrect because firms in this market sell differentiated products, not identical ones. E is incorrect because entry into this type of market is relatively easy compared to a monopoly.

Question 9

FIGURE 11- 2 
-Monopolistic competition is similar to perfect competition in that

Accepted Answer

Both monopolistic competition and perfect competition have low barriers to entry, allowing firms to enter and exit the market freely.

Question 10

Suppose two firms,Allstom from France,and Bombardier from Canada,are bidding on a contract to replace train cars for the subway system in Mexico City.If they bid the same amount,they share the contract-otherwise,the low bid wins.The figure below shows the payoff matrix for this contest.
 $\begin{array}{c}
&\text { Allstom (A) }\
\text { bombardier (B) }&
\begin{array}{|l|l|l|}
\hline & \begin{array}{l}
\text { A bids } \
\$ 50 \text { million }
\end{array} & \begin{array}{l}
\text { A bids } \
\$ 35 \text { million }
\end{array} \
\hline \begin{array}{l}
\text { B bids } \
\$ 50 \mathrm{million}
\end{array} & \begin{array}{l}
\text { Profit to } A: \$ 10 \mathrm{~m} \
\text { Profit to } \mathrm{B}: \$ 10 \mathrm{~m}
\end{array} & \begin{array}{l}
\text { Profit to } A: \$ 5 \mathrm{~m} \
\text { Profit to } \mathrm{B}: \$ 0 \mathrm{~m}
\end{array} \
\hline \begin{array}{l}
\text { B bids } \
\$ 35 \mathrm{million}
\end{array} & \begin{array}{l}
\text { Profit to } \mathrm{A}: \$ 0 \
\text { Profit to } \mathrm{B}: \$ 5 \mathrm{~m}
\end{array} & \begin{array}{l}
\text { Profit to } A: \$ 2.5 \mathrm{~m} \
\text { Profit to } \mathrm{B}: \$ 2.5 \mathrm{~m}
\end{array} \
\hline
\end{array}\end{array}$ FIGURE 11- 4
-Refer to Figure 11- 4.Given the information provided in the figure,what is the cost to either firm of completing this project on its own?

Accepted Answer

The cost to either firm of completing the project on its own is $30 million. This is derived from the fact that when either firm bids $50 million and wins, their profit is $10 million, implying a cost of $50 million - $10 million = $40 million. Similarly, when they bid $35 million and win, their profit is $5 million, implying a cost of $35 million - $5 million = $30 million.

Question 11

FIGURE 11- 2 
-Refer to Figure 11- 2.In diagram B,the firm's short- run supply curve is

Accepted Answer

In the short run, the firm's supply curve is determined by its MC curve above the minimum of the AVC curve. Therefore, the correct answer is C) MC above AVC.

Question 12

When the firms in an oligopoly are in a cooperative equilibrium and are maximizing their joint profits,which of the following statements is true?

Accepted Answer

In a cooperative equilibrium, firms in an oligopoly act like a monopoly, maximizing joint profits, leading to monopoly profits (A). An individual firm can increase its profits by cheating on the agreement (B). Price (P) is greater than marginal cost (MC) for each firm (C), and marginal revenue (MR) equals MC, not greater (D). Therefore, all statements are true.

Question 13

Which of the following are characteristic of a monopolistically competitive market?

Accepted Answer

Monopolistically competitive markets are characterized by many small firms, each with some market power due to product differentiation.

Question 14

"Brand proliferation" in an oligopolistic industry

Accepted Answer

Brand proliferation within an oligopolistic industry is when there are numerous brands within a small number of firms in the industry. This can create barriers to entry for new competitors as the market becomes saturated with brands. As a result, it will generally reduce the expected market share of new entrants to the industry. Therefore, option C is the correct answer. Options A, B, and D are incorrect because they imply that brand proliferation would make it easier for new entrants to compete, which is not the case. Option E is also incorrect as it does not directly relate to the effects of brand proliferation on new entrants.

Question 15

$\begin{array}{c}
&\text { Firm B }\
\text { Firm A }&
\begin{array}{l|cc} 
& \text { Cooperate } & \text { Cheat } \
\hline \text { Cooperat } & (30,30) & (10, x) \
\text { Cheat }& (x, 10) & (20,20) \
\end{array}\end{array}$
$\text { TABLE 11-2 }$ $\begin{array}{c}
&\text { Firm B }\
\text { Firm A }&
\begin{array}{l|cc} 
& \text { Cooperate } & \text { Cheat } \
\hline \text { Cooperat } & (30,30) & (10, x) \
\text { Cheat }& (x, 10) & (20,20) \
\end{array}\end{array}$
$\text { TABLE 11-2 }$
-Consider an example of the prisoner's dilemma where 2 firms are making sealed bids on a highway- construction contract and each firm is allowed to bid either $100 million or $120 million.If both firms bid the same price,the job is shared equally and each firm earns half the value of its bid.Otherwise the lowest bidder wins the contract and receives the full value of its bid (and the other bidder earns zero).The non- cooperative outcome in this situation is

Accepted Answer

Both firms bidding $100 million is the non-cooperative outcome because it is the Nash equilibrium.

Question 16

$\begin{array}{c}
&\text { Firm B }\
\text { Firm A }&
\begin{array}{l|cc} 
& \text { Cooperate } & \text { Cheat } \
\hline \text { Cooperat } & (30,30) & (10, x) \
\text { Cheat }& (x, 10) & (20,20) \
\end{array}\end{array}$
$\text { TABLE 11-2 }$ $\begin{array}{c}
&\text { Firm B }\
\text { Firm A }&
\begin{array}{l|cc} 
& \text { Cooperate } & \text { Cheat } \
\hline \text { Cooperat } & (30,30) & (10, x) \
\text { Cheat }& (x, 10) & (20,20) \
\end{array}\end{array}$
$\text { TABLE 11-2 }$
-Refer to Table 11- 2.If Firm A is indifferent between cheating or cooperating when Firm B chooses to cooperate,x must be equal to

Accepted Answer

For Firm A to be indifferent between cheating and cooperating when Firm B cooperates, the payoff from cheating (10) must equal the payoff from cooperating (30). Therefore, x must be 30 to make the payoffs equal.

Question 17

The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry.
  FIGURE 11- 1
-Refer to Figure 11- 1.If this firm is maximizing its profits,does the diagram depict a long- run equilibrium situation?

Accepted Answer

In the long run, if a firm is earning profits, new firms will enter the market, driving profits to zero. Thus, the situation depicted is not a long-run equilibrium.

Question 18

The diagram below shows demand and cost curves for a monopolistically competitive firm.
  FIGURE 11- 3
-Refer to Figure 11- 3.In the long run,a monopolistically competitive firm will

Accepted Answer

The answer of The diagram below shows demand and cost...

Question 19

The diagram below shows demand and cost curves for a monopolistically competitive firm.
  FIGURE 11- 3
-Refer to Figure 11- 3.If an increase in industry demand led to an outward shift in each firm's demand curve,and no change to the firm's costs,the typical firm would

Accepted Answer

An outward shift in the demand curve indicates an increase in demand for the product, which means a higher equilibrium price and quantity. If costs do not change, the typical firm would be making profits in the short run. However, in the long run, new firms would enter the industry attracted by the profits, which would increase competition and shift the demand curve back to the left, resulting in a lower equilibrium price and the typical firm making only normal profits.

Question 20

The diagram below shows demand and cost curves for a monopolistically competitive firm.
  FIGURE 11- 3
-Refer to Figure 11- 3.A monopolistically competitive firm is said to be inefficient because in the long- run equilibrium

Accepted Answer

In monopolistically competitive markets, firms have some market power and can charge prices above marginal cost (MC). However, in the long-run, new firms can enter the market and offer similar products, eroding the market power of existing firms. In the long-run equilibrium, firms will produce at a level where price equals average total cost (LRAC) but this level of production may not be at the minimum point of the LRAC curve. This means that resources are not being allocated efficiently, as it is possible to produce the same quantity of output at a lower cost. Therefore, the best choice is C.

Quiz 11: Imperfect Competition and Strategic Behaviour

The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry. FIGURE 11- 1 -Refer to Figure 11- 1.What quantity of output will this profit- maximizing firm choose to sell?

The diagram below shows demand and cost curves for a monopolistically competitive firm. FIGURE 11- 3 -The following statements describe a cooperative equilibrium in an oligopoly where the firms are jointly maximizing profits by restricting output.Which statement is false?

FIGURE 11- 2 -Refer to Figure 11- 2.Diagram C depicts a typical firm in long- run equilibrium in

One prediction about monopolistic competition is that it has higher unit costs than perfect competition.But it is unreasonable to conclude that monopolistic competition is therefore bad for consumers because

In a monopolistically competitive industry,the freedom of entry and exit leads to

Suppose there are many independent dry cleaners in your city,each of which is earning economic profits.According to the theory of monopolistic competition,

A characteristic of a monopolistically competitive market is that

FIGURE 11- 2 -Monopolistic competition is similar to perfect competition in that

FIGURE 11- 2 -Refer to Figure 11- 2.In diagram B,the firm's short- run supply curve is

When the firms in an oligopoly are in a cooperative equilibrium and are maximizing their joint profits,which of the following statements is true?

Which of the following are characteristic of a monopolistically competitive market?

"Brand proliferation" in an oligopolistic industry

The diagram below shows selected cost and revenue curves for a firm in a monopolistically competitive industry. FIGURE 11- 1 -Refer to Figure 11- 1.If this firm is maximizing its profits,does the diagram depict a long- run equilibrium situation?

The diagram below shows demand and cost curves for a monopolistically competitive firm. FIGURE 11- 3 -Refer to Figure 11- 3.In the long run,a monopolistically competitive firm will

The diagram below shows demand and cost curves for a monopolistically competitive firm. FIGURE 11- 3 -Refer to Figure 11- 3.If an increase in industry demand led to an outward shift in each firm's demand curve,and no change to the firm's costs,the typical firm would

The diagram below shows demand and cost curves for a monopolistically competitive firm. FIGURE 11- 3 -Refer to Figure 11- 3.A monopolistically competitive firm is said to be inefficient because in the long- run equilibrium