Chapter 10—Monopolistic Competition and Oligopoly

MULTIPLE CHOICE

	1.	Which of the following most closely approximates the conditions of a monopolistically competitive market?
a.	The market for Grade A eggs, which is characterized by a large number of firms producing a homogeneous product.
b.	The restaurant industry, which is characterized by firms producing a differentiated product in a market with low entry barriers.
c.	Local cable television service, where a licensed supplier competes with firms offering satellite service.
d.	The market for jumbo aircraft, where one major domestic firm competes with one major foreign firm.


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	2.	Which of the following is the best example of a firm operating in a monopolistically competitive market?
a.	A Kansas wheat farmer.
b.	TGI Fridays, a family restaurant.
c.	U.S. Postal Service.
d.	Boeing, an aircraft manufacturer


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	3.	Which of the following is characteristic of a monopolistically competitive firm?
a.	The firm faces an upward-sloping demand curve.
b.	The firm faces an inelastic demand curve.
c.	The firm faces a horizontal demand curve.
d.	The firm produces a differentiated product.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	4.	The marginal revenue curve of a monopolistically competitive firm will always lie:
a.	below the firm's demand curve.
b.	parallel to the firm's demand curve.
c.	parallel to the firm's quantity axis.
d.	above the firm's demand curve.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	5.	A profit-maximizing monopolistically competitive firm will expand output to the point where:
a.	total revenue equals total cost.
b.	marginal revenue equals marginal cost.
c.	price equals average total cost.
d.	price equals marginal cost.


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	6.	The monopolistic competition market structure is characterized by:
a.	few firms and similar products.
b.	many firms and differentiated products.
c.	many firms and a homogeneous product.
d.	few firms and a homogeneous product.


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	7.	Video rental stores in cities are an illustration of:
a.	perfect competition.
b.	monopoly.
c.	monopolistic competition.
d.	oligopoly.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	8.	Which of the following is the best example of a monopolistic competitor?
a.	Wheat farmers.
b.	Diet centers.
c.	American Telephone and Telegraph.
d.	General Motors.


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	9.	Firms in a monopolistically competitive industry produce:
a.	homogeneous goods and services.
b.	differentiated products.
c.	competitive goods only.
d.	consumption goods only.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	10.	Which of the following is the best example of a monopolistically competitive market?
a.	Wheat.
b.	Automobiles.
c.	Diamonds.
d.	Retail sales.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	11.	Which of the following is a characteristic of the monopolistic competition market structure?
a.	Many firms and a homogeneous product.
b.	Few firms and differentiated products.
c.	Few firms and similar products.
d.	Few firms and a homogeneous product.
e.	Many firms and differentiated products.


ANS:	E	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	12.	In the long run, both monopolistic competition and perfect competition result in:
a.	a wide variety of brand-name choices for consumers.
b.	an efficient allocation of resources.
c.	zero economic profit for firms.
d.	excess capacity.


ANS:	C	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolist competition	TYP:	RE

	13.	Product differentiation makes the demand for a monopolistically competitive firm's product:
a.	perfectly elastic.
b.	more elastic than for a monopoly.
c.	more inelastic than for a monopoly.
d.	perfectly inelastic.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	14.	In the long run, monopolistically competitive firms have:
a.	excess capacity.
b.	positive profits.
c.	minimal average costs.
d.	homogeneous production.


ANS:	A	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	15.	A monopolistically competitive market is characterized by:
a.	many small sellers selling a differentiated product.
b.	a single seller of a product that has few suitable substitutes.
c.	very strong barriers to entry.
d.	mutual interdependence in pricing decisions.


ANS:	A	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	16.	A monopolistically competitive firm will:
a.	maximize profits by producing where MR = MC.
b.	not likely earn an economic profit in the long run.
c.	shut down if price is less than average variable cost.
d.	all of these.


ANS:	D	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	17.	The theory of monopolistic competition predicts that in long-run equilibrium a monopolistically competitive firm will:
a.	produce the output level at which price equals long-run marginal cost.
b.	operate at minimum long-run average cost.
c.	overutilize its insufficient capacity.
d.	produce the output level at which price equals long-run average cost.


ANS:	D	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	18.	A monopolistic competitive firm is inefficient because the firm:
a.	earns positive economic profit in the long run.
b.	is producing at an output corresponding to the condition that marginal cost equals price.
c.	is not maximizing its profit.
d.	produces an output where average total cost is not minimum.


ANS:	D	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	19.	Firms in a monopolistically competitive market structure maximize their profit by producing an output where:
a.	price equals average total cost.
b.	marginal cost equals average total cost.
c.	marginal cost equals price.
d.	marginal revenue equals marginal cost.


ANS:	D	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	20.	Which of the following statements best describes firms under monopolistic competition?
a.	There is little price or quality competition.
b.	The firms compete, using quality, location, advertising, and price.
c.	Firms do not compete using advertising.
d.	There is little competition between firms.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	21.	Monopolistic competitive firms in the long run earn:
a.	positive economic profits.
b.	zero pure economic profits.
c.	negative economic profits.
d.	none of these.


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	22.	In the long-run, surviving firms in monopolistic competition earn:
a.	higher pure economic profits.
b.	zero pure economic profits.
c.	below-normal profits.
d.	substantial economic losses.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	23.	The theory of monopolistic competition predicts that in long-run equilibrium a monopolistically competitive firm will:
a.	produce at the level in which price equals long-run average cost.
b.	operate at minimum long-run average cost.
c.	overutilize its insufficient capacity.
d.	none of these.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	24.	Which of the following statements best describes the price, output, and profit conditions of monopolistic competition?
a.	Price will equal marginal cost at the profit-maximizing level of output; profits will be positive in the long-run.
b.	Price will always equal average variable cost in the short run and either profits or losses may result in the long run.
c.	Marginal revenue will equal marginal cost at the short run, profit-maximizing level of output; in the long run, economic profit will be zero.
d.	Marginal revenue will equal average total cost in the short run; long-run economic profits will be zero.


ANS:	C	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	25.	In the long run, a monopolistic competitive firm will operate at a price which:
a.	is higher than minimum long-run average cost.
b.	equals minimum long-run average cost.
c.	equals marginal cost.
d.	none of these.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	26.	Which of the following statements best describes firms under monopolistic competition?
a.	Profits will be positive in the long run.
b.	Price always equals average variable cost.
c.	In the long run, positive economic profit will be eliminated.
d.	Marginal revenue equals minimum average total cost in the short run.


ANS:	C	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	27.	A monopolistic competitive firm is inefficient because the firm:
a.	is not maximizing its profit.
b.	is producing at an output where average total cost is not minimum.
c.	earns positive economic profit in the long run.
d.	none of these.


ANS:	B	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	28.	Monopolistic competition is inefficient because:
a.	firms earn positive economic profits.
b.	the firms' marginal costs and marginal revenues are not equal.
c.	firms have excess capacity in the long run.
d.	entry is difficult.


ANS:	C	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	29.	Which of the following is true in long-run equilibrium for both perfect competition and monopolistic competition?
a.	Accounting profit is zero.
b.	Marginal cost equals price.
c.	Long-run average cost is at a minimum.
d.	Economic profit is zero.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	30.	Which of the following is true for a firm operating under perfect competition, monopolistic competition, and monopoly?
a.	Firms earn positive economic profits in the long run.
b.	Firms earn zero economic profits in the long run.
c.	Profits are maximized when marginal cost equals marginal revenue.
d.	Price equals marginal cost.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	31.	In monopolistic competition if there is profit, there is:
a.	a signal for new firms to enter.
b.	a motive for existing firms to increase prices.
c.	proof that advertising works.
d.	a motive for existing firms to decrease prices.
e.	product differentiation.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	32.	Which of the following is always associated with monopolistic competition?
a.	Identical products
b.	Economic profits in the short run
c.	MR lies above the demand curve
d.	Demand curves become more inelastic as new entry occurs
e.	Product differentiation


ANS:	E	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	33.	We can represent the entry of new firms into a monopolistically competitive market by shifting the existing firms':
a.	demand curves downward.
b.	demand curves upward.
c.	demand curves more inelastic.
d.	cost curves upward.
e.	cost curves downward.


ANS:	A	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	34.	Compared to monopoly, the market results with monopolistic competition are usually expected to be:
a.	worse because consumers get fewer choices.
b.	worse because consumers pay a higher price.
c.	the same.
d.	better because consumers get less output.
e.	better because consumers pay a lower price.


ANS:	E	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	35.	A picture frame company operates in a monopolistically competitive market. Its short-run equilibrium price is $80 and its ATC is $65. It sells 100 picture frames a week. From this we can tell:
a.	this firm is making a normal profit.
b.	other picture frame companies will want to exit the market.
c.	there are no other picture frame companies in the area.
d.	economic profits are $1,500.
e.	total profits are being maximized.


ANS:	D	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	36.	Tombstones are produced in a monopolistic competitive market. One producer, Rolling Stones, sells 20 tombstones a week at a price of $500 each. Its average total cost is $600. From this information, we can tell:
a.	new tombstone firms will want to enter.
b.	this producer is losing $2,000 a week.
c.	this producer is making an economic profit of $400.
d.	this producer is setting MR = MC.
e.	this producer should increase production.


ANS:	B	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	37.	Costume jewelry is produced in a monopolistically competitive market. One producer finds that MR = MC = $3 when output is 700 necklaces. An economist studying this information can conclude that:
a.	the producer is charging a price of $3.
b.	economic profit is $2,100.
c.	the producer charges a price greater than $3.
d.	new firms will want to enter.
e.	this producer should produce more than 700 necklaces.


ANS:	C	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	38.	In the long run in monopolistic competition,
a.	economic profits are zero.
b.	P = MC.
c.	P = minimum ATC.
d.	firms have an incentive to leave.
e.	the demand curve is tangent to the MC curve.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	39.	When a perfectly competitive firm or a monopolistically competitive firm is making zero economic profit,
a.	no firms will want to enter or exit.
b.	some firms will want to leave.
c.	some firms will want to enter.
d.	market demand shifts to the left.
e.	the price of the output will rise in the long run.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	40.	The demand curve in monopolistic competition slopes downward because of:
a.	strong barriers to entry.
b.	product differentiation.
c.	the small number of firms.
d.	government regulation.
e.	the similarities of the businesses.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	41.	The short-run equilibrium for a monopolistically competitive firm is at P = $28.47, ATC = $22.13, and MC = MR = $17.47. Which of the following is true?
a.	Per-unit profit is $11.
b.	Additional firms will be attracted into the industry.
c.	The firm could raise price and increase profits.
d.	The firm could lower price and increase profits.
e.	Average cost must be rising.


ANS:	B	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	42.	Perfect competition and monopolistic competition are similar because under both market structures,
a.	there are zero economic profits in the long run.
b.	production takes place at the least-cost combination.
c.	there are few firms.
d.	entry is difficult.
e.	differentiated products are produced.


ANS:	A	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	43.	If a monopolistically competitive firm can earn a profit, it will increase production until:
a.	MR > AVC.
b.	MR = ATC.
c.	MC > MR.
d.	MR = AR.
e.	MR = MC.


ANS:	E	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	44.	In the long run, the economic profits of Hoot's Chicken 'n' Ribs, a monopolistic competitor, are:
a.	not eliminated, because competition is not perfect.
b.	not eliminated, because the demand curve slopes downward.
c.	eliminated due to firms entering the industry.
d.	eliminated due to firms leaving the industry.
e.	not eliminated, because firms cannot enter the industry.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	45.	For both a monopolist and a monopolistically competitive firm:
a.	price equals average total cost.
b.	price is above marginal revenue.
c.	marginal revenue equals zero.
d.	marginal cost equals zero.


ANS:	B	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	46.	The entry of new firms into a monopolistic competitive industry will shift the:
a.	market demand curve to the right.
b.	market demand curve to the left.
c.	existing firm's demand curve to the right.
d.	existing firm's demand curve to the left.
e.	market supply curve to the left.


ANS:	D	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	47.	As new firms enter a monopolistic competitive industry, it can be expected that:
a.	market price will increase.
b.	the output of existing firms will increase.
c.	profits of existing firms will increase.
d.	market demand should decrease.
e.	profits of existing firms will decrease.


ANS:	E	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	48.	Entry of new firms will occur in a monopolistic competitive industry until:
a.	marginal cost equals zero.
b.	marginal revenue equals zero.
c.	marginal revenue equals marginal cost.
d.	economic profit equals zero.
e.	economic profit is negative.


ANS:	D	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	49.	In the long run in a monopolistic competitive industry,
a.	economic profits will be positive.
b.	price will be driven to zero.
c.	the firm will not operate where MR = MC.
d.	economic profit will be zero.
e.	price will exceed average cost.


ANS:	D	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	50.	Supporters of advertising claim that it:
a.	increases the variety of products.
b.	attacks established brand loyalties.
c.	allows new firms to compete.
d.	all of these.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 270 | Mic: 270
TOP:	Advertising	TYP:	RE

	51.	Defenders of advertising argue that it:
a.	informs buyers and broadens the market for goods.
b.	enhances economic efficiency by lowering prices.
c.	enables small firms to compete more effectively with large ones.
d.	all of these.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 270 | Mic: 270
TOP:	Advertising	TYP:	RE

	52.	Critics of advertising argue that it:
a.	lowers price by increasing competition.
b.	results in more variety of products.
c.	establishes brand loyalty, which promotes competition.
d.	serves as a barrier to entry for new firms.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 270 | Mic: 270
TOP:	Advertising	TYP:	RE

	53.	Supporters of advertising claim that it:
a.	makes demand for a firm's product more elastic.
b.	is a barrier to entry.
c.	promotes better quality products.
d.	all of these.


ANS:	C	PTS:	1	DIF:	Easy	REF:	Full: 270 | Mic: 270
TOP:	Advertising	TYP:	RE

	54.	Which of the following is true about advertising by a firm?
a.	It is not always successful in increasing demand for a firm's product.
b.	It attempts to increase demand and to make demand more inelastic.
c.	It may reduce per unit costs of production when economies of scale are experienced.
d.	All of these.


ANS:	D	PTS:	1	DIF:	Medium	REF:	Full: 270 | Mic: 270
TOP:	Advertising	TYP:	CA

	55.	Product differentiation:
a.	refers to the attempt of firms to make their products look like those of the other firms in the industry.
b.	refers to the attempt of firms to make real or apparent differences in essentially substitutable products look different in the minds of the consumers.
c.	refers to the advantage big firms have in research and development.
d.	is a common characteristic of a perfectly competitive market structure.
e.	is only employed in a monopoly market structure.


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 270 | Mic: 270
TOP:	Advertising	TYP:	SA

Exhibit 10-1 A monopolistic competitive firm



	56.	As presented in Exhibit 10-1, the short-run profit-maximizing output for the monopolistic competitive firm is:
a.	zero units per day.
b.	200 units per day.
c.	400 units per day.
d.	600 units per day.
e.	800 units per day.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	57.	As presented in Exhibit 10-1, the short-run profit per unit of output for the monopolistic competitive firm is:
a.	zero.
b.	$5.
c.	$10.
d.	$15.
e.	$20.


ANS:	B	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	58.	As represented in Exhibit 10-1, the maximum long-run economic profit earned by this monopolistic competitive firm is:
a.	zero.
b.	$200 per day.
c.	$1,000 per day.
d.	$20,000 per day.


ANS:	A	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	59.	If all firms in the industry are the same as the monopolistic competitive firm shown in this Exhibit 10-1, firms in the long run will:
a.	leave the industry.
b.	earn positive economic profits.
c.	experience less competition because firms will exit the industry.
d.	experience competition from new firms that enter the industry.


ANS:	D	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	60.	In the long run, the demand curve for the monopolistic competitive firm shown in Exhibit 10-1:
a.	shifts leftward.
b.	remains the same.
c.	shifts rightward.
d.	none of these.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	61.	In the long run, which of the following is true for the firm shown in Exhibit 10-1?
a.	The firm's demand curve shifts leftward.
b.	The firm's average total cost curve shifts upward.
c.	Neither a nor b are possible.
d.	Both a and b are possible.


ANS:	D	PTS:	1	DIF:	Difficult	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

Exhibit 10-2 A monopolistic competitive firm



	62.	As presented in Exhibit 10-2, the long-run profit-maximizing output for the monopolistic competitive firm is:
a.	zero units per week.
b.	100 units per week.
c.	200 units per week.
d.	300 units per week.
e.	400 units per week.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	63.	To maximize long-run profits, the monopolistically competitive firm shown in Exhibit 10-2 will charge a price per unit of:
a.	zero.
b.	$5.
c.	$10.
d.	$15.
e.	$20.


ANS:	D	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	64.	As represented in Exhibit 10-2, the maximum long-run economic profit earned by this monopolistic competitive firm is:
a.	zero.
b.	$200 per week.
c.	$1,000 per week.
d.	$20,000 per week.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	65.	If all firms in a monopolistic competitive industry have demand and cost curves like those shown in Exhibit 10-2, we would expect that in the long run:
a.	all firms will leave the industry.
b.	some firms will leave the industry.
c.	firms in the industry earn zero economic profits.
d.	a number of new firms will enter the industry.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

Exhibit 10-3 A monopolistic competitive firm in the long run



	66.	As presented in Exhibit 10-3, the long-run profit-maximizing output for the monopolistic competitive firm is:
a.	zero units per week.
b.	200 units per week.
c.	400 units per week.
d.	600 units per week.
e.	800 units per week.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	67.	To maximize long-run profits, the monopolistically competitive firm shown in Exhibit 10-3 will charge a price per unit of:
a.	zero.
b.	$10
c.	$20.
d.	$30.
e.	$40.


ANS:	D	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	68.	As represented in Exhibit 10-3, the maximum long-run economic profit earned by this monopolistic competitive firm is:
a.	zero.
b.	$10 per week.
c.	$4,000 per week.
d.	$40,000 per week.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	69.	If all firms in a monopolistic competitive industry have demand and cost curves like those shown in Exhibit 10-3, we would expect that in the long run:
a.	a number of new firms will enter the industry.
b.	some firms will leave the industry.
c.	firms in the industry earn zero economic profits.
d.	all firms will leave the industry.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	SA

	70.	A market situation where a small number of sellers dominate the entire industry is called:
a.	monopolistic competition.
b.	monopsony.
c.	monopoly.
d.	oligopoly.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	71.	One key characteristic that is distinctive of an oligopoly market is that:
a.	the demand curve facing each firm is downward sloping, with a marginal revenue curve that lies below the firm's demand curve.
b.	the decisions of one seller often influences the price of products, the output, and the profits of rival firms.
c.	there is only one firm that produces a product for which there are no good substitutes.
d.	there are many sellers in the market and each is small relative to the total market.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	72.	The industry that most closely approximates the conditions of the oligopoly model is:
a.	Restaurant.
b.	Retail clothing.
c.	Home construction.
d.	Airlines.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	SA

	73.	An oligopoly is a market structure in which:
a.	one firm has 100 percent of a market.
b.	there are many small firms.
c.	there are many firms with no control over price.
d.	there are few firms selling either a homogeneous or differentiated product.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	74.	Excluding foreign competition, which of the following is an oligopoly in the United States?
a.	The computer industry.
b.	The automobile industry.
c.	The steel industry.
d.	All of these are oligopolies.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	SA

	75.	In which of the following market structures must the price and output decisions of an individual firm include the possible price and output reactions of the firm's rivals?
a.	Monopoly.
b.	Oligopoly.
c.	Perfect competition.
d.	Cartel.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	76.	A characteristic of an oligopoly is:
a.	mutual interdependence in pricing decisions.
b.	independent pricing decisions.
c.	lack of control over prices.
d.	none of these.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	77.	Mutual interdependence among firms in an oligopoly means that:
a.	firms never practice price leadership.
b.	firms never form a cartel.
c.	it is difficult to know how firms will react to decisions of rivals.
d.	no formal agreement is possible among firms.


ANS:	C	PTS:	1	DIF:	Difficult	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	78.	A common characteristic of oligopolies is:
a.	interdependence in pricing decisions.
b.	independent pricing decisions.
c.	low industry concentration.
d.	few or no plant-level economies of scale.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	79.	In an oligopoly industry, price:
a.	will be lower than the competitive price, due to cost savings.
b.	will exceed the monopoly price, due to the destructiveness of competitive forces.
c.	cannot be predicted exactly, because it is likely to lie between the competitive and monopoly prices.
d.	none of these.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	80.	A major characteristic of the theory of oligopoly is that:
a.	there are no real-world examples.
b.	the reactions of each firm depends on how the firm believes rivals will react.
c.	in reality few oligopolies survive more than 10 years.
d.	none of these.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	81.	The automobile, steel, and oil markets are all examples of:
a.	perfectly competitive markets.
b.	monopolies.
c.	monopolistically competitive markets.
d.	oligopolies.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	82.	What is the key feature shared by all oligopoly markets?
a.	A large number of sellers.
b.	Mutual interdependence.
c.	Product differentiation.
d.	Easy entry and exit.


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	83.	When Pepsi is considering a price hike, it needs to consider how Coke may react. This situation is called:
a.	mutual interdependence.
b.	price leadership.
c.	collusion.
d.	monopolistic competition.


ANS:	A	PTS:	1	DIF:	Easy	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	84.	Which of the following is a characteristic of an oligopoly?
a.	Mutual interdependence in pricing decisions.
b.	Independent pricing decisions.
c.	Lack of control over prices.
d.	All of these are true.


ANS:	A	PTS:	1	DIF:	Easy	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	85.	An oligopoly:
a.	and monopolistically competitive market produce less and charge higher prices than if their markets were perfectly competitive.
b.	is characterized by mutual interdependence of pricing decisions.
c.	may be characterized by a kinked demand curve.
d.	all of these.


ANS:	D	PTS:	1	DIF:	Medium	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	CA

	86.	Which of the following is the best example of an oligopoly?
a.	Area restaurants.
b.	The automobile industry.
c.	Agricultural markets free of government support.
d.	Local utilities.


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	SA

	87.	If a firm has substantial market power, it must be operating in an industry that would be classified as:
a.	a monopoly or oligopoly.
b.	perfectly competitive.
c.	monopolistically competitive.
d.	perfectly competitive or monopolistically competitive.
e.	perfectly competitive or a monopoly.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	SA

	88.	Nonprice competition, price leadership, and cartels are models in the ____ market structure(s).
a.	perfectly competitive
b.	monopolistically competitive
c.	oligopoly
d.	monopoly
e.	perfectly competitive and monopolistically competitive


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	CA

	89.	If a firm reacts to other firms' market decisions by anticipating how the other will then react, this is:
a.	not profit-maximizing behavior
b.	a monopolistic competitive market
c.	a market with a low concentration ratio
d.	mutual interdependence
e.	collusion by definition


ANS:	D	PTS:	1	DIF:	Medium	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	90.	Which of the following statements is always true with respect to oligopolists?
a.	They react slowly to actions taken by other firms
b.	They lower prices together
c.	They raise prices together
d.	They know with certainty what they other firms will do
e.	They take into consideration how other firms might react.


ANS:	E	PTS:	1	DIF:	Medium	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	91.	When oligopolists take into account their competitors' behavior, this situation is called:
a.	mutual interdependence.
b.	monopolistic competition.
c.	independent.
d.	price discrimination.
e.	loss minimization.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	92.	Mutual interdependence applies to actions of:
a.	monopolistic competitors.
b.	oligopolists.
c.	perfect competitors.
d.	monopolists.
e.	firms operating in different industries.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	93.	Pricing and output determination under an oligopoly is more complicated than pricing and output determinations in other industries. The primary reason for the complication is the:
a.	fewness of firms.
b.	brand loyalty of consumers.
c.	powerful effect of advertising.
d.	variability of concentration ratios.
e.	mutual interdependence of firms.


ANS:	E	PTS:	1	DIF:	Difficult	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	CA

	94.	Suppose Ford, GM, and Dodge make the majority of pick-up trucks sold in the United States If they all sell for approximately the same price, and Ford offers a $2,000 rebate on new truck sales, what can Ford expect to see?
a.	an unprecedented increase in truck sales
b.	an immediate response by GM and Dodge
c.	a visit from the antitrust authorities of the government
d.	a revolution from Ford stockholders
e.	announcements by GM and Dodge that plans are underway to produce a much cheaper pick-up truck in six years


ANS:	B	PTS:	1	DIF:	Difficult	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	CA

	95.	A "kinked" demand curve reflects a tendency on the part of an oligopolist to:
a.	follow price increases but not price reductions.
b.	following price reductions but not price increases.
c.	be unconcerned with rivals' behavior.
d.	None of these.


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	RE

	96.	An oligopolist operating with a kinked demand curve would expect rivals to match its price:
a.	increases.
b.	decreases.
c.	both a and b.
d.	neither a nor b.


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	RE

	97.	A kink in the demand curve facing an oligopolist is caused by:
a.	rapidly rising marginal revenues.
b.	excessive advertising.
c.	the belief that competitors will follow price increases but not match price decreases.
d.	the tendency of competitors to follow price reductions but not price increases.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	RE

	98.	As a result of a kinked demand curve, the price:
a.	fluctuates.
b.	falls below the kink.
c.	settles at the kink.
d.	rises above the kink.


ANS:	C	PTS:	1	DIF:	Difficult	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	CA

	99.	Suppose an oligopoly has a dominant firm that sets the price for the entire industry. In this situation, the oligopoly has:
a.	nonprice competition.
b.	a kinked demand curve.
c.	price leadership.
d.	a cartel.


ANS:	C	PTS:	1	DIF:	Easy	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	RE

	100.	The "kinked" oligopoly demand curve is a result of the assumption by an oligopolist that:
a.	price increases will be matched, but price reductions will not.
b.	price increases will not be matched, but price reductions will.
c.	both price increases and price reductions will be matched.
d.	neither price increases, nor price reductions will be matched.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	RE

	101.	The kinked demand theory attempts to explain why an oligopolistic firm:
a.	has relatively large advertising expenditures.
b.	fails to invest in research and development (R and D).
c.	infrequently changes its price.
d.	engages in excessive brand proliferation.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	RE

	102.	According to the kinked demand theory, when one firm raises its price, other firms will:
a.	also raise their prices.
b.	refuse to follow.
c.	increase their advertising expenditures.
d.	exit the industry.


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	RE

	103.	A kink in the demand curve facing an oligopolist is caused by:
a.	the belief that competitors will follow price increases but not match price decreases.
b.	excessive advertising.
c.	rapidly rising marginal revenues.
d.	the assumption that competitors will follow price reductions but not price increases.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	RE

	104.	The assumption(s) made to construct a kinked-demand oligopoly model is (are) that:
a.	all firms in the industry will ignore the price changes made by any one firm.
b.	any price decrease will be ignored, but price increases will be followed.
c.	all firms will follow a price decrease but will ignore any price increase.
d.	all price changes made by any firm will be followed by all of the other firms.
e.	price can go up, but it cannot go down.


ANS:	C	PTS:	1	DIF:	Difficult	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	CA

Exhibit 10-4 Kinked demand curves



	105.	In Exhibit 10-4, in a kinked-demand oligopoly model, D1 represents the:
a.	demand curve applicable to any price increase above $50.
b.	demand curve applicable to any price decrease below $50.
c.	demand curve facing firms when a cartel is formed.
d.	market demand curve.
e.	demand curve facing the price leader.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	SA

	106.	In Exhibit 10-4, in a kinked-demand oligopoly model, D2 represents the:
a.	demand curve applicable to any price increase above $50.
b.	demand curve applicable to any price decrease below $50.
c.	demand curve facing firms when a cartel is formed.
d.	market demand curve.
e.	demand curve facing the price leader.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	SA

	107.	In Exhibit 10-4, the exhibit represents a kinked-demand oligopoly model. Suppose the current price is $50. If one firm in the oligopoly now attempts to raise price, all firms will:
a.	follow along demand curve D1.
b.	follow along demand curve D2.
c.	ignore this price increase and cause the price-raising firm to move along D1.
d.	ignore this price increase and cause the price-raising firm to move along D2.
e.	lower their prices.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	SA

	108.	In Exhibit 10-4, the exhibit represents a kinked-demand oligopoly model. Suppose the current price is $50. If one firm in the oligopoly now attempts to lower price, all firms will:
a.	follow along demand curve D1.
b.	follow along demand curve D2.
c.	ignore this price decrease and cause the price-raising firm to move along D1.
d.	ignore this price decrease and cause the price-raising firm to move along D2.
e.	raise their prices.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	SA

	109.	The conclusion arrived at from a kinked-demand oligopoly model is that:
a.	oligopoly firms cannot maximize their profits.
b.	oligopoly firms should keep prices at their current level.
c.	all oligopoly firms should raise prices.
d.	all oligopoly firms should lower prices.
e.	oligopoly market structure will lead to lower prices than more competitive industries.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	SA

	110.	The kinked demand curve:
a.	applies when competitors match price decreases but not price increases.
b.	could apply to market demand in any market structure.
c.	applies when competitors match price increases but not price decreases.
d.	applies to the price leadership model.
e.	applies when competitors act independently.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	RE

	111.	A kinked demand curve is perceived by the firm as being:
a.	more elastic to the right of the kink
b.	more inelastic to the right of the kink
c.	more inelastic to the left of the kink
d.	present when there is a monopoly
e.	bowed-in or bowed-out


ANS:	B	PTS:	1	DIF:	Difficult	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	CA

	112.	For a kinked demand curve, the marginal revenue curve is:
a.	positively sloped.
b.	a horizontal line.
c.	a vertical line.
d.	discontinuous.
e.	above the demand curve.


ANS:	D	PTS:	1	DIF:	Difficult	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	RE

	113.	Assume that an oligopolist has a kinked demand curve. Suppose that the marginal cost curve passes through the gap in the marginal revenue curve. This means price and output will be shown by a point:
a.	above the curve.
b.	below the curve.
c.	at the kink
d.	on the upper part of the curve.
e.	on the lower part of the curve.


ANS:	C	PTS:	1	DIF:	Difficult	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	CA

	114.	An increase in marginal cost that remains within the gap of the marginal revenue curve of a kinked demand oligopolist will:
a.	keep price and output the same.
b.	raise price and decrease output.
c.	lower price and increase output.
d.	raise price and raise output.
e.	lower price and lower output.


ANS:	A	PTS:	1	DIF:	Difficult	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	CA

	115.	In a price leadership oligopoly model,
a.	a cartel of leading firms determines price and industry output.
b.	the industry in consortium with the government determines price and output.
c.	one firm is the price leader and all other firms follow.
d.	the firms abandon a profit-maximizing goal.
e.	firms do not operate where MR = MC.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 281 | Mic: 281
TOP:	Price leadership		TYP:	SA

	116.	Suppose that R. J. Reynolds raises the price of cigarettes by 10 percent. Although they have no requirement or agreement to do so, the other cigarette firms decide to raise their prices accordingly. This situation is best described as:
a.	price leadership.
b.	a cartel.
c.	monopolistic competition.
d.	a market with kinked demand.


ANS:	A	PTS:	1	DIF:	Easy	REF:	Full: 281 | Mic: 281
TOP:	Price leadership		TYP:	RE

	117.	An organization of sellers designed to coordinate their supply decisions to maximize joint profits is called a:
a.	consumer cooperative.
b.	marketing association.
c.	regulatory agency.
d.	cartel.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	118.	The two tendencies of a firm in a cartel are the incentive to:
a.	cheat to maximize joint profits and the incentive to raise prices.
b.	cheat and avoid collusion and the incentive to raise price to maximize the firm's share of profits.
c.	increase output in order to minimize per-unit cost and the incentive to reduce price in order to maximize joint profit.
d.	cooperate to maximize joint profits and to cheat on the agreement in order to increase the firm's share of the profit.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	119.	Cartel agreements are difficult to maintain because individual members:
a.	can gain by raising their price above the price that is best for the cartel.
b.	are often unable to police the price and output policies of other members.
c.	can gain by secretly raising their price above the price that is best for the cartel.
d.	can enforce price arrangements vigorously in court.


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	120.	Which of the following market structures describes an industry in which a group of firms formally agree to control prices and output of a product?
a.	Perfect competition.
b.	Monopoly.
c.	Oligopoly.
d.	Cartel.
e.	Monopolistic competition.


ANS:	D	PTS:	1	DIF:	Medium	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	121.	If OPEC is an effective cartel,
a.	price changes are dictated by changes in demand.
b.	output changes are dictated by changes in demand.
c.	members agree on output quotas.
d.	all of these.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	122.	In order to make oil profits as large as possible, OPEC meets to set oil production quotas for its members. OPEC is best classified as a:
a.	monopoly.
b.	cartel.
c.	kinked demand industry.
d.	price-leadership industry.


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	123.	Which of the following is evidence of an ineffective cartel?
a.	Output changes are dictated by changes in demand.
b.	Price changes are dictated by changes in demand.
c.	Members do not agree on output quotas.
d.	All of these.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	124.	A cartel:
a.	is a group of firms formally agreeing to control the price and the output of a product.
b.	has as its primary goal to reap monopoly profits by replacing competition with cooperation.
c.	is illegal in the United States, but not in other nations.
d.	all of these.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	125.	Suppose an oil cartel has an agreement to restrict members' production in order to maintain a price of $30 per barrel. A single cartel member may want to cheat and exceed its quota so that it can:
a.	reduce its costs.
b.	charge higher prices.
c.	make demand more inelastic.
d.	earn a bigger profit.


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	SA

	126.	A cartel is:
a.	a joint venture of two companies.
b.	a joining of firms for the purpose of fixing prices and controlling output.
c.	a breaking up of a company into two or more parts.
d.	the joining of industry with government to solve a specified problem.
e.	the joining of two firms with unrelated products.


ANS:	B	PTS:	1	DIF:	Easy	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	127.	The purpose of a cartel is to:
a.	promote product innovation.
b.	increase market competition.
c.	act like a monopoly.
d.	diversify operations.
e.	decrease market concentration.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	128.	Cartel members have an incentive to cheat on the cartel because:
a.	the cartel does not maximize profits.
b.	the cartel price is the competitive price.
c.	each member's output quota is too high.
d.	each member's MR is not equal to the cartel's MC.
e.	the industry profit would be higher under competitive conditions.


ANS:	D	PTS:	1	DIF:	Difficult	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	CA

	129.	A group of firms that collude to limit competition is called a(n):
a.	conglomerate.
b.	oligopoly.
c.	cartel.
d.	kinked demand.
e.	market concentration.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	130.	A cartel maximizes industry profit by:
a.	eliminating quotas.
b.	producing at the kink in its demand curve.
c.	producing where MR = MC.
d.	giving secret price concessions.
e.	producing more output than a monopoly would.


ANS:	C	PTS:	1	DIF:	Difficult	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	CA

	131.	Cartel pricing refers to the output and price choice of a cartel. This choice most closely resembles that of a:
a.	b or d
b.	godfather oligopoly.
c.	duopoly.
d.	monopoly.
e.	more competitive industry.


ANS:	D	PTS:	1	DIF:	Difficult	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	CA

	132.	Game theory is an especially useful model for analysis in the following types of markets:
a.	perfect competition.
b.	monopolistic competition.
c.	oligopoly.
d.	monopoly.


ANS:	C	PTS:	1	DIF:	Easy	REF:	Full: 283 | Mic: 283
TOP:	Game theory	TYP:	RE

	133.	Game theory is a model for describing oligopoly price decisions among firms that are:
a.	interdependent.
b.	independent.
c.	regulated
d.	merging


ANS:	A	PTS:	1	DIF:	Easy	REF:	Full: 283 | Mic: 283
TOP:	Game theory	TYP:	RE

	134.	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.
a.	interdependence index
b.	gini coefficient
c.	herfindahl index
d.	payoff matrix


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 283 | Mic: 283
TOP:	Game theory	TYP:	RE

	135.	Which of the following is a game theory strategy for oligopolists to avoid a low-price outcome?
a.	Tit-for-tat
b.	Win-win
c.	Last in-first out
d.	Second best


ANS:	A	PTS:	1	DIF:	Easy	REF:	Full: 283 | Mic: 283
TOP:	Game theory	TYP:	RE

	136.	Which of the following is a game theory strategy for oligopolists to avoid a low-price outcome?
a.	Tit-for-tat
b.	Price leadership
c.	Cartel
d.	All of these


ANS:	D	PTS:	1	DIF:	Easy	REF:	Full: 283 | Mic: 283
TOP:	Game theory	TYP:	RE

Exhibit 10-5 Two-Firm Payoff Matrix



	137.	Assume costs are identical for the two firms in Exhibit 10-5. If both firms were allowed to form a cartel and agree on their prices, equilibrium would be established by:
a.	Beta Co. charging $1,000 and Alpha Co. charging $1,000.
b.	Beta Co. charging $1,000 and Alpha Co. charging $500.
c.	Beta Co. charging $500 and Alpha Co. charging $500.
d.	Beta Co. charging $500 and Alpha Co. charging $1,000.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 283 | Mic: 283
TOP:	Game theory	TYP:	CA

	138.	Suppose costs are identical for the two firms in Exhibit 10-5. If both firms assume the other will compete and charge a lower price, equilibrium will be established by:
a.	Beta Co. charging $1,000 and Alpha Co. charging $1,000.
b.	Beta Co. charging $1,000 and Alpha Co. charging $500.
c.	Beta Co. charging $500 and Alpha Co. charging $500.
d.	Beta Co. charging $500 and Alpha Co. charging $1,000.


ANS:	D	PTS:	1	DIF:	Medium	REF:	Full: 283 | Mic: 283
TOP:	Game theory	TYP:	CA

	139.	Suppose costs are identical for the two firms in Exhibit 10-5. 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:
a.	Beta Co. charging $1,000 and Alpha Co. charging $1,000.
b.	Beta Co. charging $1,000 and Alpha Co. charging $500.
c.	Beta Co. charging $500 and Alpha Co. charging $500.
d.	Beta Co. charging $500 and Alpha Co. charging $1,000.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 283 | Mic: 283
TOP:	Game theory	TYP:	CA

Exhibit 10-6 Two-Firm Payoff Matrix



	140.	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:
a.	Widget Co. charging the low price and Ajax Co. charging the high price.
b.	Widget Co. charging the high price and Ajax Co. charging the low price.
c.	Widget Co. charging the low price and Ajax Co. charging the low price.
d.	Widget Co. charging the high price and Ajax Co. charging the high price.


ANS:	D	PTS:	1	DIF:	Medium	REF:	Full: 283 | Mic: 283
TOP:	Game theory	TYP:	CA

	141.	Suppose costs are identical for the two firms in Exhibit 10-6. If both firms assume the other will compete and charge a lower price, equilibrium will be established by:
a.	Widget Co. charging the low price and Ajax Co. charging the low price.
b.	Widget Co. charging the high price and Ajax Co. charging the low price.
c.	Widget Co. charging the low price and Ajax Co. charging the high price.
d.	Widget Co. charging the high price and Ajax Co. charging the high price.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 283 | Mic: 283
TOP:	Game theory	TYP:	CA

	142.	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:
a.	Widget Co. charging the high price and Ajax Co. charging the low price.
b.	Widget Co. charging the high price and Ajax Co. charging the high price.
c.	Widget Co. charging the low price and Ajax Co. charging the low price.
d.	Widget Co. charging the low price and Ajax Co. charging the high price.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 283 | Mic: 283
TOP:	Game theory	TYP:	CA

Exhibit 10-7 Two-Firm Payoff Matrix



	143.	Assume costs are identical for the two firms in Exhibit 10-7. If both firms were allowed to form a cartel and agree on their prices, equilibrium would be established by:
a.	Camel charging the low price and Marlboro charging the high price.
b.	Camel charging the high price and Marlboro charging the low price.
c.	Camel charging the high price and Marlboro charging the high price.
d.	Camel charging the low price and Marlboro charging the low price.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 283 | Mic: 283
TOP:	Game theory	TYP:	CA

	144.	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:
a.	Camel charging the high price and Marlboro charging the high price.
b.	Camel charging the low price and Marlboro charging the low price.
c.	Camel charging the low price and Marlboro charging the high price.
d.	Camel charging the high price and Marlboro charging the low price.


ANS:	B	PTS:	1	DIF:	Medium	REF:	Full: 283 | Mic: 283
TOP:	Game theory	TYP:	CA

	145.	Suppose costs are identical for the two firms in Exhibit 10-7. 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:
a.	Camel charging the high price and Marlboro charging the high price.
b.	Camel charging the high price and Marlboro charging the low price.
c.	Camel charging the low price and Marlboro charging the low price.
d.	Camel charging the low price and Marlboro charging the high price.


ANS:	D	PTS:	1	DIF:	Medium	REF:	Full: 283 | Mic: 283
TOP:	Game theory	TYP:	CA

	146.	Which of the following is a distinction between perfectly competitive and monopolistic competition?
a.	Perfectly competitive firms must compete with rival sellers; monopolistically competitive firms do not confront rival sellers.
b.	Monopolistically competitive firms can raise their price without losing sales; perfectly competitive firms must lower their price in order to sell more of their product.
c.	Perfectly competitive firms confront a perfectly elastic demand curve; monopolistically competitive firms face a downward-sloping demand curve.
d.	Perfectly competitive firms may make either economic profits or losses in the short run, but monopolistically competitive firms always earn an economic profit.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 287 | Mic: 287
TOP:	Market structure comparison	TYP:	RE

	147.	Some economists argue that monopolistically competitive markets are inefficient because:
a.	the firms earn economic profits in the long run.
b.	the firms' marginal costs and marginal revenues are not always equal.
c.	firms do not produce the output rate that would minimize their average total cost.
d.	barriers to entry are high.


ANS:	C	PTS:	1	DIF:	Difficult	REF:	Full: 287 | Mic: 287
TOP:	Market structure comparison	TYP:	CA

	148.	Compared to the perfectly competitive outcome, monopolistically competitive markets will result in:
a.	a wider variety of products and higher prices.
b.	less product variety and higher prices.
c.	a wider variety of products and lower prices.
d.	less product variety and lower prices.


ANS:	A	PTS:	1	DIF:	Medium	REF:	Full: 287 | Mic: 287
TOP:	Market structure comparison	TYP:	RE

	149.	In long-run equilibrium, output is expanded to the minimum long-run average total cost by:
a.	perfectly competitive firms but not by monopolistically competitive firms.
b.	monopolistically competitive firms but not by perfectly competitive firms.
c.	both monopolistically competitive firms and perfectly competitive firms.
d.	neither perfectly competitive firms nor monopolistically competitive firms.


ANS:	A	PTS:	1	DIF:	Difficult	REF:	Full: 287 | Mic: 287
TOP:	Market structure comparison	TYP:	CA

	150.	In the long run, a monopolistically competitive firm will set price:
a.	at the intersection of the marginal cost and demand curves.
b.	at the intersection of the average total cost and demand curves.
c.	higher than the competitive level, but lower than the monopoly price.
d.	higher than the marginal cost, but lower than average total cost.


ANS:	C	PTS:	1	DIF:	Difficult	REF:	Full: 287 | Mic: 287
TOP:	Market structure comparison	TYP:	CA

	151.	How will the price and output of a monopolist compare with perfect competition?
a.	The output of the monopolist will be too large and the price too high.
b.	The output of the monopolist will be too large and the price too low.
c.	The output of the monopolist will be too small and the price too high.
d.	The output of the monopolist will be too small and the price too low.


ANS:	C	PTS:	1	DIF:	Easy	REF:	Full: 287 | Mic: 287
TOP:	Market structure comparison	TYP:	RE

	152.	Which of the following is true for perfect competition, monopolistic competition, and monopoly?
a.	The product of all firms is homogeneous.
b.	Firms will earn zero economic profits in the long run.
c.	Short-run profits are maximized when marginal cost equals marginal revenue.
d.	All of these.


ANS:	C	PTS:	1	DIF:	Medium	REF:	Full: 287 | Mic: 287
TOP:	Market structure comparison	TYP:	CA

	153.	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?
a.	Perfectly competition.
b.	Monopoly.
c.	Monopolistic competition.
d.	Oligopoly.


ANS:	D	PTS:	1	DIF:	Medium	REF:	Full: 287 | Mic: 287
TOP:	Market structure comparison	TYP:	SA

TRUE/FALSE

	1.	The monopolistic competition market structure is characterized by a few large firms which account for a large percentage of industry sales.

ANS:	F	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	2.	A monopolistically competitive firm, like a perfectly competitive firm, is a price taker.

ANS:	F	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	3.	In a monopolistically competitive market like retail trade, firms can easily enter and exit the market.

ANS:	T	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	4.	In the short run, the monopolistic competitive firm will charge a price equal to marginal cost.

ANS:	F	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	5.	In a monopolistic competitive industry, short-run economic profit encourages entry of new firms until there are no economic profits in the long-run.

ANS:	T	PTS:	1	DIF:	Easy	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	RE

	6.	In the long run, marginal cost must equal marginal revenue for a monopolistic competitive firm, but not at the minimum point of the long-run average cost curve.

ANS:	T	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	7.	A monopolistic competitive firm in the long run sets price equal to the minimum point on the long-run average cost curve.

ANS:	F	PTS:	1	DIF:	Medium	REF:	Full: 268 | Mic: 268
TOP:	Monopolistic competition	TYP:	CA

	8.	Examples of nonprice competition include advertising and product differentiation.

ANS:	T	PTS:	1	DIF:	Easy	REF:	Full: 270 | Mic: 270
TOP:	Advertising	TYP:	RE

	9.	An oligopoly market structure is characterized by firms closely watching their rivals' pricing policies.

ANS:	T	PTS:	1	DIF:	Easy	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	10.	The theory of oligopolistic interdependence means that the outcome is uncertain because price and output decisions depend on responses of rivals.

ANS:	T	PTS:	1	DIF:	Easy	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	11.	In an oligopoly, the outcome is uncertain because price and output decisions depend on the response of rivals.

ANS:	T	PTS:	1	DIF:	Easy	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	12.	Easy entry and exit cause oligopoly profits to be zero in the long run.

ANS:	F	PTS:	1	DIF:	Difficult	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	CA

	13.	Oligopolies have few sellers and difficult entry.

ANS:	T	PTS:	1	DIF:	Easy	REF:	Full: 277 | Mic: 277
TOP:	Oligopoly	TYP:	RE

	14.	A kinked demand curve is based on the actions of an oligopolist to follow a price increase but not a price reduction.

ANS:	F	PTS:	1	DIF:	Medium	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	RE

	15.	An oligopolist operating with a kinked demand curve would expect rivals to match both its price increases and price decreases.

ANS:	F	PTS:	1	DIF:	Medium	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	RE

	16.	Oligopolies with kinked demand curves change their prices quickly and frequently.

ANS:	F	PTS:	1	DIF:	Medium	REF:	Full: 279 | Mic: 279
TOP:	Kinked demand curve		TYP:	RE

	17.	A cartel is a formal agreement among firms to control price and output of a product.

ANS:	T	PTS:	1	DIF:	Easy	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	18.	Cartels are legal in the United States.

ANS:	F	PTS:	1	DIF:	Easy	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	19.	A cartel is an agreement among firms to divide output of a product among members.

ANS:	T	PTS:	1	DIF:	Easy	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	20.	A major cartel problem is that member firms cheat by attempting to steal customers from one another.

ANS:	T	PTS:	1	DIF:	Easy	REF:	Full: 281 | Mic: 281
TOP:	Cartel	TYP:	RE

	21.	In order from the most to the least competitive market structure is the perfectly competitive, monopolistically competitive, monopolist and then the oligopolistic market structure.

ANS:	F	PTS:	1	DIF:	Easy	REF:	Full: 287 | Mic: 287
TOP:	Market structure comparison	TYP:	RE

	22.	In the short run both the monopolistically competitive firm and the perfectly competitive firm will charge a price equal to marginal cost.

ANS:	F	PTS:	1	DIF:	Difficult	REF:	Full: 287 | Mic: 287
TOP:	Market structure comparison	TYP:	CA

ESSAY

	1.	What are the characteristics of monopolistic competition?

ANS:
Monopolistic competition is characterized by a large number of sellers selling a differentiated product. There are relatively weak barriers to entry and firms compete aggressively on a nonprice basis.

PTS:	1	REF:	Full: 268 | Mic: 268

	2.	What are the characteristics of an oligopoly?

ANS:
An oligopoly market is characterized by a few dominant firms selling either a standardized or differentiated product. An oligopoly is also characterized by mutual interdependence and has strong barriers to entry keeping potential competitors out of the market.

PTS:	1	REF:	Full: 277 | Mic: 277

	3.	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.

ANS:
All firms, regardless of the market environment they are operating within, will maximize profits by producing an output level in which marginal revenue equals marginal cost. They also have in common the shut-down rule: shut down whenever losses exceed total fixed costs (or when price is less than average variable costs) in order to minimize losses. They differ in terms of the likelihood of earning economic profits. The monopoly is most likely to earn economic profits in the long run, followed by the oligopoly and the monopolistically competitive firm (which is not very likely). The perfectly competitive market will most certainly not have any firms earning economic profits in the long run. Finally, the greater the degree of competition the more socially desirable the market. Therefore, the competitive market is the most socially desirable, followed by the monopolistically competitive, the oligopoly and then the monopoly. (One could argue that the monopolistically competitive market is the most socially desirable because it gives rise to the greatest variety of products from which consumers can choose; it's a matter of weighing these benefits against the costs.)

PTS:	1	REF:	Full: 287 | Mic: 287