Question 1

Which of the following is a distinction between perfectly competitive and monopolistic competition?

Accepted Answer

The main distinction between perfectly competitive and monopolistically competitive markets is the shape of the demand curve faced by each. In a perfectly competitive market, firms face a perfectly elastic demand curve, meaning they must sell their product at the market price and cannot influence the price through their individual actions. In contrast, monopolistically competitive firms face a downward-sloping demand curve, meaning they have some market power to influence the price of their product. This allows them to raise their price to a certain extent without losing all their sales, but they still face competition from similar products. Choices A, B, and D are incorrect because they do not accurately describe the differences between the two market structures.

Question 2

Which of the following is true about the demand curve for a monopolistically competitive firm?​

Accepted Answer

Monopolistically competitive firms have a downward-sloping demand curve that is less elastic (steeper) than for a perfectly competitive firm since they have some degree of market power, but more elastic (flatter) than for a monopoly firm because there are close substitutes available. Therefore, the demand curve for a monopolistically competitive firm is less elastic (steeper) than for a perfectly competitive firm, but more elastic (flatter) than for a monopoly firm. Choice D matches this description.

Question 3

Suppose the firm or firms in the market for Good A face a downward-sloping demand curve, maximize profit by producing the quantity at which marginal revenue equals marginal cost, set the price higher than the marginal cost, and break even in long run equilibrium. Which one of the following market structures  most likely exists for Good A?

Accepted Answer

This scenario describes the behavior of firms in a monopolistic competition market structure, where firms have some market power to set prices above marginal cost, but face competition from other firms selling similar but not identical products. In the long run, firms will break even due to the entry and exit of firms in the market. Perfect competition and monopoly do not allow firms to set prices above marginal cost, and oligopoly involves interdependence among a small number of firms, so they are unlikely to produce the described behavior.

Question 4

Exhibit 10-6 Two-Firm Payoff Matrix

Assume costs are identical for the two firms in Exhibit 10-6. If both firms were allowed to form a cartel and agree on their prices, equilibrium would be established by:

Accepted Answer

If both firms form a cartel and agree on their prices, they would want to maximize their joint profits. In this case, the highest joint profit is achieved by charging the high price ($10) and sharing the market demand equally (50-50). If one firm charges the high price and the other charges the low price, the firm charging the low price would have a higher market share but lower profit, while the other firm charging the high price would have a lower market share but higher profit. Therefore, both firms would want to charge the high price to maximize their joint profit.

Question 5

Compare and contrast the four market models in terms of the profit-maximizing output level for each, the shut-down rule for each, the probability of long-run economic profits being earned, and their social desirability.

Accepted Answer

The answer of Compare and contrast the four market models...

Question 6

How will the price and output of a monopolist compare with perfect competition?

Accepted Answer

In perfect competition, the market is characterized by many small firms which cannot influence the market price. Thus, the price will be close to the minimum of the average total cost curve and output will be at the point where marginal cost equals price. On the other hand, a monopolist has market power and can set the price above marginal cost. As a result, the output will be lower than in perfect competition and the price will be higher. Therefore, the output of the monopolist will be too small and the price too high, making choice C the correct answer.

Question 7

Because an oligopoly is characterized by

Accepted Answer

An oligopoly is characterized by few large sellers who have some degree of influence over the market price. Each seller's actions can affect the prices of the others, creating interdependence among the firms. This is different from a monopoly, where there is only one seller, or perfect competition, where there are many small sellers without any influence over the market price. Choice B describes a monopoly, while Choice C describes perfect competition. Choice D describes a differentiated oligopoly, but misses the key aspect of interdependence that characterizes oligopoly markets.

Question 8

In long-run equilibrium, output is expanded to the minimum long-run average total cost by:

Accepted Answer

In long-run equilibrium, perfectly competitive firms expand output to the point where price equals the minimum long-run average total cost, ensuring efficiency and optimal resource allocation. Monopolistically competitive firms, however, face downward-sloping demand curves and typically do not produce at minimum long-run average total cost, leading to excess capacity.

Question 9

In the long run, a monopolistically competitive firm will set price:

Accepted Answer

A monopolistically competitive firm has some market power, allowing it to set prices higher than the competitive level. However, it still faces competition from other firms producing similar products, so it cannot charge the monopoly price. Therefore, the firm will set price somewhere between the competitive and monopoly levels, but generally closer to the competitive level.

Question 10

Which of the following is true for perfect competition, monopolistic competition, and monopoly?

Accepted Answer

Short-run profits are maximized when marginal cost equals marginal revenue across all types of market structures, including perfect competition, monopolistic competition, and monopoly. This principle is a fundamental rule for maximizing profits in microeconomics.

Question 11

Exhibit 10-7 Two-Firm Payoff Matrix

Suppose costs are identical for the two firms in Exhibit 10-7. If both firms assume the other will compete and charge a lower price, equilibrium will be established by:

Accepted Answer

The answer of Exhibit 10-7 Two-Firm Payoff Matrix

Suppose costs are...

Question 12

Some economists argue that monopolistically competitive markets are inefficient because:

Accepted Answer

In monopolistic competition, firms do not produce at the minimum point of their average total cost curve, leading to excess capacity and inefficiency.

Question 13

A(n) ____ can be used to demonstrate why a competitive oligopoly tends to result in a low-price strategy that does not maximize mutual profits.

Accepted Answer

A payoff matrix can illustrate how, in a competitive oligopoly, each firm's optimal strategy leads to a scenario where all firms choose a low-price strategy to avoid losing market share. This results in lower profits for all firms compared to if they had coordinated and jointly raised prices to maximize mutual profits. The other options (interdependence index, gini coefficient, and herfindahl index) do not specifically address the issue of a low-price strategy in a competitive oligopoly.

Question 14

A cartel maximizes industry profit by:

Accepted Answer

A cartel maximizes industry profit by producing where marginal revenue (MR) equals marginal cost (MC), similar to how a monopoly maximizes its profit. This is the point where producing one more unit doesn't add to overall profit.

Question 15

Exhibit 10-6 Two-Firm Payoff Matrix

Suppose costs are identical for the two firms in Exhibit 10-6. Each firm assumes without formal agreement that if it sets the high price its rival will not charge a lower price. Under these "tit-for-tat" conditions, equilibrium will be established by:

Accepted Answer

In a tit-for-tat situation, each firm assumes that its rival will respond in kind to its pricing strategy. Therefore, Widget Co. will charge the high price, anticipating that Ajax Co. will charge the high price in response. This results in an equilibrium where both firms charge the high price, as neither has an incentive to deviate from this strategy.

Question 16

Under which one of the following market structures are sellers most likely to consider the reaction of rival sellers when they set the price of their product?

Accepted Answer

In oligopoly, there are only a few large firms in the market, and each firm's pricing decision has a significant impact on the market. Therefore, sellers in an oligopoly are more likely to consider the reaction of rival sellers when setting the price of their product.

Question 17

Compared to the perfectly competitive outcome, monopolistically competitive markets will result in:

Accepted Answer

Monopolistically competitive markets have some level of market power, allowing firms to differentiate their products and charge higher prices than in a perfectly competitive market. However, there is still competition from other firms offering similar products, leading to a wider variety of products than in a monopoly and ultimately higher prices than in a perfectly competitive market.

Quiz 10: Monopolistic Competition and Oligopoly