Question 1

When one firm sets a positive output level in a two-firm market with a linear demand curve, this choice

Accepted Answer

Setting a positive output level would lead to a smaller market share for the other firm, meaning a decrease in demand for the other firm. This would shift the remaining demand curve to the left, decreasing the quantity demanded for the other firm at any given price level.

Question 2

In the entry-prevention game, the incumbent firm makes an implicit threat in period 0

Accepted Answer

The incumbent firm makes an implicit threat in period 0 to prevent entry by a new firm. However, it may choose not to carry out the threat in period 1 if the cost of doing so is too high or if it can achieve a better outcome by allowing entry. Therefore, the threat may not be carried out in period 1 depending on the circumstances.

Question 3

A strategy in which the established firms in an oligopolistic market can deter entry by setting their output at such a level that the remaining demand in the market is too low for a potential entrant to earn a profit at any price it can charge is called limit pricing.

Accepted Answer

This is the correct definition of limit pricing as a deterrent strategy in an oligopoly market.

Question 4

The price an incumbent monopolist sets that enables it to impede entry into the market is called the

Accepted Answer

A limit price is the price set by an incumbent monopolist that is low enough to deter potential entrants from entering the market due to the inability to earn profits. This strategy allows the incumbent monopolist to maintain its market power and prevent competition, which is against the interests of consumers. The monopolist price is simply the price set by the monopolist to maximize profits and may not necessarily impede entry. The welfare-optimizing price is the price that maximizes social welfare, which takes into account both consumer and producer surplus and is generally lower than the monopolist price.

Question 5

If you are a monopolist who sets the monopoly price, a potential entrant

Accepted Answer

A monopolist setting monopoly prices may deter entry by potential competitors, but it doesn't guarantee that a new entrant cannot earn extra-normal profits. Market conditions, innovation, or changes in consumer preferences could allow an entrant to succeed and earn extra-normal profits.

Question 6

A limit price is the price an incumbent monopolist sets that enables entry into the market.

Accepted Answer

A limit price is the price set by an incumbent monopolist that makes it unprofitable for potential entrants to enter the market. It is a barrier to entry, not an enabling factor.

Question 7

A market in which there are many firms, each of which has an insubstantial share of the market; there is free entry into the market and no barriers exist to prevent entry; there is a homogeneous product and all firms in the industry produce exactly the same product; there is perfect factor mobility and the factors of production are free to move between industries; and there is perfect information in the sense that all participants in the market are fully informed about its price and about its profit opportunities is a perfectly competitive market.

Accepted Answer

This is a description of a perfectly competitive market, and therefore the statement is true.

Question 8

A limit quantity is the quantity an incumbent monopolist sets that enables it to impede entry into the market.

Accepted Answer

A limit quantity is a quantity set by a monopolist to limit entry into the market by potential competitors. By setting a limit quantity, the monopolist ensures that there is not enough market share left for new firms to be profitable, effectively blocking entry and maintaining their monopoly power.

Question 9

Other firms will be attracted to a monopolist's market because of extra-normal profits. The monopolist, therefore, must be prepared to develop a strategy that will

Accepted Answer

Preventing the entry of potential rivals is the best choice in this scenario. If the monopolist colludes with potential rivals, it could be considered illegal and face legal consequences. In a perfectly competitive market, the monopolist would lose its monopoly power and its extra-normal profits. Thus, the best option is to prevent entry by creating barriers to entry that will discourage other firms from entering the market. This could be achieved through patents, economies of scale, exclusive contracts, or other strategies.

Question 10

Blockaded entry occurs when the incumbent firm is able to deter entry by simply pursuing a policy that is best for

Accepted Answer

Blockaded entry occurs when the incumbent firm is able to use its dominant position to deter entry by potential competitors. The incumbent firm pursues a policy that is best for itself as a monopolist, not for potential entrants or for social welfare. Therefore, the best choice is A.

Question 11

A residual demand curve is the demand curve that describes the demand remaining for the potential entrant after the incumbent firm has set its output level.

Accepted Answer

A residual demand curve reflects the demand that remains for a product or service that has already been produced by other firms. In the case of a potential entrant, it reflects the demand that is left after the incumbent firm has already set its output level. The residual demand curve is thus a useful tool for analyzing market dynamics, competition, and potential market entry strategies.

Question 12

A Cournot model is a model where an incumbent firm uses a pricing strategy to make it unprofitable for any potential competitor to enter a market.

Accepted Answer

A Cournot model is a model of oligopoly where firms make production decisions based on the decisions of their competitors, assuming they will hold their output constant. It does not involve pricing strategies aimed at deterring potential entrants.

Question 13

Which of the following assumptions is critical to the Bain, Modigliani, Sylos-Labini model?

Accepted Answer

The critical assumption of the Bain, Modigliani, Sylos-Labini model is that the potential entrant believes the incumbent firm will continue to produce at its pre-entry level of output regardless of any actions the entrant takes and regardless of the prevailing market price. This assumption forms the basis of the model's analysis of strategic behavior and market entry. The other choices are also important assumptions, but they are not critical to the model's core analysis.

Question 14

A model where an incumbent firm uses a pricing strategy to make it unprofitable for any potential competitor to enter a market is called the

Accepted Answer

The Bain, Modigliani, Sylos-Labini model is known for describing a situation where an incumbent firm sets prices low enough to deter entry by making it unprofitable for potential competitors.

Question 15

A model of entry prevention where the strategy of the incumbent monopolist is to overinvest in production capacity in order to make entry unprofitable is called the Bain, Modigliani, Sylos-Labini model.

Accepted Answer

This model is known as the Limit Pricing model, primarily associated with Bain. The strategy involves setting prices low enough to deter entry, not specifically overinvesting in production capacity.

Question 16

As additional firms enter a market, it moves from monopoly through oligopoly to perfect competition, in which case the profits of the former monopolist

Accepted Answer

As additional firms enter the market, competition increases and the monopolist now faces competition from numerous firms, resulting in a decrease in market power and profits. This is because firms now have to lower their price in order to remain competitive, reducing their profit margins.

Question 17

An overinvestment strategy is an entry-prevention strategy for an incumbent firm in which the incumbent monopolist overinvests in production capacity to make a credible threat to increase its output beyond the limit quantity (and thereby sell the goods at a price below the limit price) if any competitor enters the market.

Accepted Answer

This statement accurately describes the overinvestment strategy. The incumbent firm invests in excess capacity in order to discourage potential competitors from entering the market by threatening to flood the market with its own supply and drive down prices.

Question 18

Impeded entry occurs when the incumbent firm is able to deter entry by simply pursuing a policy that is best for itself as a monopolist.

Accepted Answer

The answer of Impeded entry occurs when the incumbent firm...

Question 19

A situation where the monopolist must choose a less advantageous level of output in order to deter entry is known as impeded entry.

Accepted Answer

This statement is true. A monopolist may choose to limit their output in order to make it less attractive for potential competitors to enter the market. This is known as impeded entry.

Question 20

In the entry-prevention game, the incumbent firm will continue to earn the profits associated with the quantity set in period 0 if the potential entrant chooses to

Accepted Answer

By staying out, the potential entrant is not entering the market and therefore not competing with the incumbent firm. This allows the incumbent firm to continue earning profits associated with the quantity set in period 0. Choosing B or C would result in the potential entrant entering the market and potentially decreasing the profits of the incumbent firm.

Quiz 20: Market Entry and the Emergence of Perfect Competition