C h a p t e r

13 MONOPOLISTIC
COMPETITION
AND OLIGOPOLY

Topic: Monopolistic Competition

Monopolistic Competition Skill: Recognition
5) Which of the following is NOT a characteristic of
Topic: Monopolistic Competition
Skill: Recognition monopolistic competition?
1) Which of the following is a characteristic of the A) There are many firms in the market.
market structure for monopolistic competition? B) The firms act as price-taking firms.
A) Barriers to entry. C) The firm might advertise its product.
B) A large number of firms compete. D) The product of one firm is somewhat different
C) Each firm produces a differentiated product. from that of another firm.
Answer: B
D) Both answers B and C are correct.
Answer: D Topic: Monopolistic Competition
Skill: Recognition
Topic: Monopolistic Competition
Skill: Recognition 6) Which of the following is NOT a characteristic of
2) Which characteristic is associated with monopo- monopolistic competition?
listic competition? A) There are a large number of competing firms.
A) Collusion B) There are significant barriers to entry.
B) Product differentiation C) Each firm produces a differentiated product.
C) Small number of firms D) Collusion is impossible
Answer: B
D) Awareness of rival firms in the market
Answer: B Topic: Monopolistic Competition
Skill: Recognition
Topic: Monopolistic Competition
Skill: Recognition 7) In a monopolistically competitive market there
3) Monopolistic competition is a market structure in are
which A) Many firms.
A) firms face barriers to entry. B) One firm.
B) a large number of firms compete. C) A very small number of firms.
C) firms produce and sell an identical product. D) Two firms.
Answer: A
D) firms face perfectly elastic demand for their
product. Topic: Monopolistic Competition
Answer: B Skill: Recognition
8) Within a monopolistically competitive industry,
Topic: Monopolistic Competition
Skill: Recognition A) each firm faces a downward sloping demand
4) Which of the following is NOT a characteristic of curve.
monopolistic competition? B) firms can charge a higher price for a higher qual-
A) A large number of firms compete. ity product.
B) Entry and exit is restricted. C) firms are not able to collude because there are
C) Firms compete on product quality. too many of them.
D) Firms compete on price. D) All of the above answers are correct.
Answer: B Answer: D

435
436 CHAPTER 13

Topic: Monopolistic Competition Topic: Comparing Perfect Competition and

Skill: Recognition Monopolistic Competition
9) In monopolistically competitive markets, prod- Skill: Conceptual
ucts are ____ and entry is ____. 13) One difference between perfect competition and
A) identical; free monopolistic competition is that
B) differentiated; free A) a perfectly competitive industry has fewer firms.
C) identical; hard B) in perfect competition, firms produce slightly
D) differentiated; hard differentiated products.
Answer: B C) monopolistic competition has barriers to entry.
D) firms in monopolistic competition face a down-
Topic: Monopolistic Competition ward-sloping demand curve.
Skill: Recognition Answer: D
10) Within a monopolistically competitive industry,
A) firms can freely enter and exit and economic Topic: Comparing Perfect Competition and
profits are zero in the long run. Monopolistic Competition
B) firms can freely enter and exit and economic Skill: Conceptual
profits are greater than zero in the long run. 14) When comparing perfect competition and mo-
C) there are some barriers to entry and exit but nopolistic competition, we find that
economic profits are zero in the long run. A) firms in monopolistic competition produce
D) there are some barriers to entry and exit and identical products just as do firms in perfect
economic profits are greater than zero in the competition
long run. B) firms in monopolistic competition face barriers
Answer: A to entry, unlike firms in perfect competition.
C) advertising plays a large role in monopolistic
Topic: Monopolistic Competition competition, unlike in perfect competition.
Skill: Recognition D) firms in monopolistic competition are price tak-
11) In monopolistic competition, when firms make ers just as is the case for firms in perfect compe-
an economic profit, tition
A) the existing firms continue to make an economic Answer: C
profit in the long run because of product differ-
entiation. Topic: Product Differentiation
B) new firms enter the industry and so the price Skill: Analytical
falls and the economic profit eventually de- 15) In monopolistically competitive industries,
creases to zero. A) non-price competition through product differ-
C) new firms enter the industry and so output de- entiation is vigorous.
creases and the economic profit increases. B) the amount of variety in products is the same as
D) new firms enter the industry and so output in- in perfectly competitive industries.
creases and the economic profit increases. C) firms are not sensitive to changes in consumer
Answer: B demand.
D) firms produce where marginal cost exceeds the
Topic: Monopolistic Competition marginal benefit to consumers.
Skill: Analytical Answer: A
12) A monopolistically competitive firm has ____
power to set the price of its product because
____.
A) no; there are no barriers to entry
B) some; there are barriers to entry
C) no; of product differentiation
D) some; of product differentiation
Answer: D
MONOPOLISTIC COMPETITION AND OLIGOPOLY 437

Topic: Product Differentiation Topic: Examples of Monopolistic Competition

Skill: Analytical Skill: Conceptual
16) Firms in monopolistic competition make prod- 21) An example of a monopolistically competitive
ucts that are industry is
A) perfect complements. A) wheat farming.
B) close but not perfect complements. B) the automobile industry.
C) perfect substitutes. C) phone service.
D) close but not perfect substitutes. D) the restaurant industry.
Answer: D Answer: D

Topic: Product Differentiation

Skill: Recognition Price and Output in Monopolistic
17) A characteristic of monopolistic competition is Competition
A) product differentiation.
Topic: Monopolistic Competition; Demand Curve
B) a high capital-output ratio. Skill: Recognition
C) a low ratio of fixed to variable costs. 22) A characteristic of monopolistic competition is
D) the absence of advertising. that each firm
Answer: A
A) faces perfectly elastic demand.
Topic: Product Differentiation B) faces a downward-sloping demand curve.
Skill: Recognition C) has a perfectly elastic supply.
18) Product differentiation is a defining characteristic D) has a perfectly inelastic supply.
of Answer: B
A) perfectly elastic demand.
Topic: Monopolistic Competition; Demand Curve
B) oligopoly. Skill: Recognition
C) perfect competition. 23) In monopolistic competition, each firm has a
D) monopolistic competition. demand curve with
Answer: D
A) a negative slope, and there are no barriers to en-
Topic: Product Differentiation try into the market.
Skill: Recognition B) a slope equal to zero, and there is are no barriers
19) A monopolistically competitive industry has to entry into the market.
A) significant barriers to entry. C) negative slope, and there are barriers to entry
B) differentiated products. into the market.
C) mutually dependent firms. D) a slope equal to zero, and there are barriers to
D) a small number of large firms. entry into the market.
Answer: B Answer: A

Topic: Product Differentiation Topic: Monopolistic Competition; Demand Curve

Skill: Conceptual Skill: Recognition
20) Firms in monopolistic competition can achieve 24) If an industry lacks barriers to entry and each of
product differentiation by the many firm faces a demand curve with a nega-
A) expanding plant size. tive slope, the industry is
B) exploiting economies of scale in production. A) perfectly competitive.
C) advertising special characteristics. B) monopolistically competitive.
D) setting the price equal to average revenue. C) an oligopoly.
Answer: C D) a monopoly.
Answer: B
438 CHAPTER 13

Topic: Monopolistic Competition; Demand Curve Topic: Monopolistic Competition; Cost Curves
Skill: Recognition Skill: Analytical
25) One important difference between monopoly and 29) For a firm in monopolistic competition, the mar-
monopolistic competition is the ginal cost curve intersects the average total cost
A) slope of the demand curve that the firms faces. curve
B) point there are no barriers to entry in monopo- A) at the minimum average total cost.
listic competition. B) to the left of the minimum average total cost.
C) greater restriction of output in monopolistic C) to the right of the minimum average total cost.
competition. D) at no point.
D) point that the marginal revenue and demand Answer: A
curves are the same for a monopoly.
Answer: B Topic: Monopolistic Competition; Price
Skill: Analytical
Topic: Monopolistic Competition; Demand Curve 30) Firms in monopolistic competition always will
Skill: Conceptual A) earn an economic profit.
26) In monopolistic competition, each firm’s mar- B) set their price equal to their marginal cost.
ginal revenue curve lies ____ its demand curve C) set their price above their marginal cost.
because of ____. D) produce at the minimum average total cost.
A) below ; barriers to entry Answer: C
B) below; product differentiation
Topic: Monopolistic Competition; Price
C) above; barriers to entry
Skill: Conceptual
D) above; product differentiation
31) Firms in monopolistic competition have rivals
Answer: B
that
Topic: Monopolistic Competition; Demand Curve A) match their price increases.
Skill: Conceptual B) match their price decreases.
27) In monopolistic competition, each firm’s mar- C) agree on a common price.
ginal revenue curve has D) set their prices according to the demand curves
A) a slope equal to zero, and so does its demand they face.
curve. Answer: D
B) a slope equal to zero, but its demand curve has a
Topic: Monopolistic Competition; Short-Run Profit
negative slope.
Maximization
C) a negative slope, but its demand curve has zero
Skill: Conceptual
slope. 32) In the short run, a monopolistically competitive
D) a negative slope, and so does its demand curve. firm chooses
Answer: D
A) both its price and its quantity.
Topic: Monopolistic Competition; Demand Curve B) its price but not its quantity.
Skill: Analytical C) its quantity but not its price.
28) A firm in monopolistic competition has some D) neither its price nor its quantity.
degree of price-setting power because Answer: A
A) in the long run it earns a normal profit.
B) it can never earn less than normal profit.
C) the price it charges is never more than its mar-
ginal cost.
D) it must lower its price in order to sell a greater
quantity.
Answer: D
MONOPOLISTIC COMPETITION AND OLIGOPOLY 439

Topic: Monopolistic Competition; Short-Run Profit Topic: Monopolistic Competition; Short-Run

Maximization Economic Profit
Skill: Recognition Skill: Recognition
33) In monopolistic competition, in the short run a 37) If firms in a monopolistically competitive industry
firm maximizes its profit by selecting an output at are earning an economic profit, then
which marginal cost equals A) some customers will exit the market.
A) average total cost. B) some workers will leave the industry’s labor
B) marginal revenue. force.
C) price. C) some firms will leave the industry.
D) zero. D) new firms will enter the industry.
Answer: B Answer: D

Topic: Monopolistic Competition; Profit Topic: Monopolistic Competition; Short-Run and

Maximization Long-Run Economic Profit
Skill: Analytical Skill: Analytical
34) If a monopolistically competitive firm’s marginal 38) In monopolistic competition, firms can earn an
cost curve shifts upward, then its level of output economic profit in
A) will increase. A) the short run and in the long run.
B) will stay the same. B) the short run but not in the long run.
C) will decrease. C) the long run but not in the short run.
D) could increase, decrease, or stay the same but D) neither the long run nor the short run.
more information is needed. Answer: B
Answer: C

Topic: Monopolistic Competition; Short-Run

Economic Loss
Skill: Analytical
35) When firms in monopolistic competition incur an
economic loss, some firms will
A) enter the industry and produce more products.
B) exit the industry, and demand will increase for
the firms that remain.
C) exit the industry, and demand will decrease for
the firms that remain.
D) enter the industry, and demand will become
more elastic for the original firms.
Answer: B

Topic: Monopolistic Competition; Short-Run

Economic Profit
Skill: Analytical
36) When firms in monopolistic competition are Topic: Monopolistic Competition; Short-Run Profit
Maximization
earning an economic profit, firms will
Skill: Analytical
A) enter the industry, and demand will increase for 39) In the above figure, if the firm is in monopolistic
the original firms. competition, it will produce
B) exit the industry, and demand will increase for
A) 40 units.
the firms that remain.
B) 60 units.
C) exit the industry, and demand will decrease for
C) between 60 and 80 units.
the firms that remain.
D) 100 units.
D) enter the industry, and demand will decrease for Answer: A
the original firms.
Answer: D
440 CHAPTER 13

Topic: Monopolistic Competition; Short-Run Profit Topic: Monopolistic Competition; Long-Run

Maximization Equilibrium
Skill: Analytical Skill: Analytical
40) In the above figure, if the firm is in monopolistic 44) If all firms in a monopolistically competitive in-
competition, its price will be dustry faced the same demand and cost curves
A) $1. pictured in the above figure,
B) $2. A) new firms will enter the industry.
C) $3. B) some firms will exit the industry.
D) $4. C) their economic profit would be zero.
Answer: C D) they would produce 60 units in total.
Answer: A
Topic: Monopolistic Competition; Short-Run
Economic Profit Topic: Monopolistic Competition; Long-Run
Skill: Analytical Economic Profit
41) In the above figure, the monopolistically competi- Skill: Analytical
tive firm earns an economic profit of 45) In the above figure, the firm is a monopolistically
A) $0. competitive firm. In the long run, its economic
B) between $0 and $50 per day. profit will be
C) between $50.01 and $100 per day. A) zero.
D) greater than $100.01 per day. B) between zero and $50 per day.
Answer: B C) greater than $50 per day.
D) some amount that cannot be determined with-
Topic: Monopolistic Competition; Long-Run and
out more information.
Short-Run Economic Profit
Answer: A
Skill: Conceptual
42) The above figure is for a firm in monopolistic Topic: Monopolistic Competition; Long-Run Profit
competition. The diagram represents the short Maximization
run rather than the long run because Skill: Recognition
A) the MR curve cuts the ATC curve from below. 46) The figure above could represent the long-run
B) the MR curve and the D curve do not coincide. equilibrium for a
C) the firm is incurring an economic loss. A) perfectly competitive firm.
D) the firm is earning an economic profit. B) monopolistically competitive firm.
Answer: D C) monopoly.
D) firm facing inelastic demand at all outputs.
Topic: Monopolistic Competition; Long-Run Answer: C
Equilibrium
Skill: Analytical
43) The figure above shows a monopolistically com-
petitive firm in the short run. During the transi-
tion to the long run, the demand curve will shift
____ and the MR curve will shift ____.
A) leftward; leftward
B) leftward; rightward
C) rightward; leftward
D) rightward; rightward
Answer: A
MONOPOLISTIC COMPETITION AND OLIGOPOLY 441

Topic: Monopolistic Competition; Long-Run

Equilibrium
Skill: Analytical
50) The figure above shows a firm in monopolistic
competition. If all firms in the industry have the
demand and cost curves illustrated in the figure,
A) some firms will exit the industry in the long run.
B) some firms will enter the industry in the long
run.
C) firms will neither enter nor exit the industry in
the long run.
D) we cannot tell if firms will enter or exit the in-
dustry in the long run.
Answer: A

Topic: Monopolistic Competition; Long-Run

Equilibrium
Skill: Analytical
Topic: Monopolistic Competition; Short-Run Profit 51) If the market served by a monopolistically com-
Maximization
petitive industry expands, a likely result in the
Skill: Analytical
long run will be
47) In the figure above, assuming that the firm does
not shut down, the firm will produce A) less elastic demand curves facing each firm.
B) a higher ratio of price to average cost.
A) fewer than 20 units.
C) a larger number of firms producing a similar
B) 20 units.
product.
C) 30 units.
D) a transition from monopolistic competition to
D) 40 units.
Answer: B
oligopoly.
Answer: C
Topic: Monopolistic Competition; Short-Run Profit
Maximization Topic: Monopolistic Competition; Long-Run Profit
Skill: Analytical Maximization
Skill: Conceptual
48) In the figure above, assuming that the firm does
52) In the long run, a firm in a monopolistically com-
not shut down, it will charge a price of
petitive industry produces where its marginal cost
A) $1.
A) is less than its average cost.
B) $2.
B) equals its average cost.
C) $3.
C) exceeds its average cost.
D) $4.
Answer: C
D) equals its price.
Answer: A
Topic: Monopolistic Competition; Short-Run
Economic Loss Topic: Monopolistic Competition; Long-Run Profit
Skill: Analytical Maximization
Skill: Recognition
49) In the figure above, the firm’s economic
53) In the long run, a firm in monopolistic competi-
A) loss will be greater than $30 per day.
tion produces where the slope of the average total
B) loss will be $30 or less per day.
cost curve is
C) profit will be between $0 and $30 per day.
A) negative.
D) profit will be greater than $30.01 per day.
Answer: B
B) zero.
C) positive.
D) equal to the marginal cost.
Answer: A
442 CHAPTER 13

Topic: Monopolistic Competition; Long-Run Topic: Monopolistic Competition; Long-Run

Economic Profit Economic Profit
Skill: Conceptual Skill: Recognition
54) In the long run, a monopolistically competitive 57) In the long run, a firm in monopolistic competi-
firm can earn tion will
A) an economic profit, and so can a monopoly. A) earn a negative economic profit, that is, an eco-
B) an economic profit, but a monopoly cannot. nomic loss.
C) no economic profit, but a monopoly might. B) earn zero economic profit, that is, a normal
D) no economic profit, and neither can a monop- profit.
oly. C) earn a positive economic profit.
Answer: C D) None of the above answers is necessarily correct
because the amount of the profit or loss depends
Topic: Monopolistic Competition; Long-Run
on the slope of the demand curve.
Economic Profit
Answer: B
Skill: Conceptual
55) In monopolistically competitive industries, Topic: Monopolistic Competition; Long-Run
A) entry and exit push economic profits toward Economic Profit
zero. Skill: Conceptual
B) there is no diversity of products. 58) In the long run, all firms in a monopolistically
C) firms are not sensitive to changes in consumer competitive industry earn
demand. A) negative accounting profit.
D) firms produce where marginal cost equals the B) zero accounting profit.
marginal benefit to the consumers. C) an economic profit.
Answer: A D) zero economic profit.
Answer: D
Topic: Monopolistic Competition; Long-Run,
Economic Profit Topic: Monopolistic Competition; Long-Run Price
Skill: Analytical Skill: Conceptual
56) In long-run equilibrium, a firm in monopolistic 59) In monopolistic competition, in the long run
competition earns customers pay a price that is
A) an economic profit but the economic profit is A) less than the minimum ATC.
less than it would be if the firm was a monop- B) more than the minimum ATC.
oly. C) equal to both the minimum ATC and the mini-
B) an economic profit that is higher than what it mum AVC.
would be if the firm was a monopoly. D) equal to the minimum ATC, but not equal to
C) a normal profit. the minimum AVC.
D) an economic profit that is the same amount as it Answer: B
would be if the firm was a monopoly.
Answer: C Topic: Monopolistic Competition; Long-Run Price
Skill: Conceptual
60) In the long run, a monopolistically competitive
firm’s price equals its
A) average total cost and its marginal cost.
B) average total cost but not its marginal cost.
C) marginal cost but not its average total cost.
D) neither marginal cost nor its average total cost.
Answer: B
MONOPOLISTIC COMPETITION AND OLIGOPOLY 443

Topic: Monopolistic Competition; Long-Run Price

Skill: Conceptual
61) In long-run equilibrium, a firm’s price definitely
equals its average total cost in both
A) perfect competition and monopoly.
B) oligopoly and monopoly.
C) perfect competition and monopolistic competi-
tion.
D) oligopoly and monopolistic competition.
Answer: C

Topic: Monopolistic Competition; Long-Run Price

Skill: Recognition
62) In the long run, a firm in a monopolistically com-
petitive industry has its price equal to its
A) average total cost.
B) marginal cost.
C) marginal revenue. Topic: Monopolistic Competition; Long-Run Profit
D) elasticity of demand. Maximization
Answer: A Skill: Analytical
65) The firm in the figure above is in monopolistic
Topic: Monopolistic Competition; Long-Run Price
Skill: Conceptual competition. It will set a price equal to
63) In the long-run, a firm in monopolistic competi- A) $1.
tion has B) $2.
A) a price that exceeds its average total cost. C) $3.
B) a price that exceeds its marginal cost. D) more than $3.
C) an average total cost that exceeds its price. Answer: C
D) a marginal cost that exceeds its price. Topic: Monopolistic Competition; Long-Run Profit
Answer: B Maximization
Skill: Analytical
Topic: Monopolistic Competition; Long-Run Price
66) The firm in the figure above is in monopolistic
Skill: Conceptual
64) In the long-run equilibrium, a firm’s price defi- competition. It will produce
nitely equals its average total cost in A) 10 units.
A) both monopoly and monopolistic competition. B) 20 units.
B) neither monopoly nor monopolistic competi- C) 30 units.
tion. D) 40 units.
Answer: B
C) monopoly but not monopolistic competition.
D) monopolistic competition but not monopoly. Topic: Monopolistic Competition; Long-Run Excess
Answer: D Capacity
Skill: Analytical
67) The firm in the figure above is in monopolistic
competition. The firm has
A) no excess capacity.
B) excess capacity of 10 units.
C) excess capacity of 20 units.
D) excess capacity of 30 units.
Answer: C
444 CHAPTER 13

Topic: Monopolistic Competition; Long-Run Excess

Capacity
Skill: Recognition
68) In monopolistic competition, in the long run
firms have
A) a capacity shortage.
B) excess capacity.
C) an economic profit.
D) an economic loss.
Answer: B

Topic: Monopolistic Competition; Long-Run Excess

Capacity
Skill: Conceptual
69) In monopolistic competition, in the long run
firms produce
A) less output than that which minimizes their
ATC.
Topic: Monopolistic Competition; Long-Run Profit
B) more output than that which minimizes their
Maximization
ATC. Skill: Conceptual
C) the amount of output that minimizes their ATC 70) The above figure depicts a firm in monopolistic
and their AVC. competition. What is the profit maximizing level
D) the amount of output that minimizes their ATC of output the firm will produce?
but not their AVC. A) 4 units per day.
Answer: A
B) 8 units per day.
C) 10 units per day.
D) 16 units per day.
Answer: B

Topic: Monopolistic Competition; Long-Run Profit

Maximization
Skill: Conceptual
71) The above figure depicts a firm in monopolistic
competition. What price should the firm charge?
A) $12.
B) $24.
C) $36.
D) None of the above answers is correct.
Answer: C
MONOPOLISTIC COMPETITION AND OLIGOPOLY 445

Topic: Monopolistic Competition, Long-Run

Economic Profit
Skill: Conceptual
72) The above figure depicts a firm in monopolistic
competition. At the profit maximizing level of
output,
A) the firm is making economic profit.
B) the firm incurs an economic loss.
C) the firm is making zero economic profit.
D) this firm would choose to shut down in the
short run.
Answer: C

Topic: Monopolistic Competition, Long-Run Excess

Capacity
Skill: Conceptual
73) The above figure depicts a firm in monopolistic
competition. At the profit maximizing level of
output, excess capacity for the firm is equal to Topic: Monopolistic Competition; Profit
Maximization
A) 0 units per day. Skill: Analytical
B) 4 units per day. 74) In the above figure, the monopolistically competi-
C) 8 units per day. tive firm produces
D) 16 units per day.
Answer: C A) Q3 and sets the price at P3.
B) Q2 and sets the price at P2.
C) Q1 and sets the price at P1.
D) Q1 and sets the price at P5.
Answer: D

Topic: Monopolistic Competition; Profit

Maximization
Skill: Analytical
75) In the above figure of a monopolistically competi-
tive firm, the marginal cost of the last unit pro-
duced is
A) equal to P2 and is greater than marginal revenue.
B) equal to P3 and is greater than marginal revenue.
C) equal to P1 and is greater than marginal revenue.
D) equal to P1 and is equal to marginal revenue.
Answer: D
446 CHAPTER 13

Topic: Monopolistic Competition, Economic Profit Topic: Monopolistic Competition, Long-Run Excess
Skill: Analytical Capacity
76) In the above figure of a monopolistically competi- Skill: Analytical
tive firm, the area of economic profit is 79) When the monopolistically competitive firm
A) ADB. shown in the above figure is at its long-run equi-
B) ABC. librium, it will be
A) producing the efficient scale of output and is at
C) P2AD P4.
point A on the ATC curve.
D) P2FEP5. B) producing more than the efficient scale of out-
Answer: D put and is at point C on the ATC curve.
C) producing at less than the efficient scale of out-
Topic: Monopolistic Competition, Long-Run put and is at a point such as F on the ATC
Economic Profit
curve.
Skill: Conceptual
D) producing the efficient scale of output and is at
77) The above figure shows a monopolistically com-
point B on the MC curve.
petitive firm. The figure
Answer: C
A) is only a short-run illustration, because the firm
is earning an economic profit.
B) could be either a short-run or long-run illustra- Product Development and
tion because monopolistically competitive firms Marketing
can earn an economic profit in the long-run.
Topic: Innovation and Product Development
C) is only a long-run illustration because the firm is Skill: Recognition
earning only a normal profit. 80) Under monopolistic competition, product im-
D) is neither a short- nor a long-run illustration. provement and development
Answer: A
A) is valued by the consumer as the increase in
Topic: Monopolistic Competition, Long-Run price that consumers are willing to pay.
Economic Profit B) yields a marginal benefit to the producer equal
Skill: Analytical to marginal revenue.
78) In the above figure, in the long run, this monopo- C) is less than its efficient amount.
listically competitive firm will D) All of the above answers are correct.
A) produce more output at a higher price, assuming Answer: D
no change in costs of production.
Topic: Innovation and Product Development
B) produce less output at a lower price, assuming
Skill: Conceptual
no change in costs of production.
81) “It is clear from the theory of monopolistic com-
C) produce the same quantity at the same price.
petition that product development is not pushed
D) Any of the above are possible.
to its efficient level.” This statement is
Answer: B
A) false because there is so much product differen-
tiation in monopolistic competition.
B) true because there really is little incentive to in-
novate in monopolistic competition.
C) false because there are so many wasteful innova-
tions in monopolistic competition that are
merely cosmetic.
D) true because price exceeds marginal revenue in
monopolistic competition.
Answer: D
MONOPOLISTIC COMPETITION AND OLIGOPOLY 447

Topic: Marketing What Is Oligopoly?

Skill: Conceptual
82) Selling costs, such as advertising, are likely to be a Topic: Oligopoly
Skill: Recognition
large share of total cost in an industry that is
87) When only a small number of producers compete
A) perfectly competitive.
with each other is a defining characteristic of
B) monopolistically competitive.
C) a monopoly. A) inelastic supply.
D) non-profit. B) monopolistic competition.
Answer: B C) efficient competition.
D) oligopoly.
Topic: Marketing Answer: D
Skill: Conceptual
83) Excess capacity and high advertising expenditures Topic: Oligopoly
Skill: Recognition
are encountered in
88) An example of oligopoly is
A) perfect competition.
B) monopolistic competition. A) wheat farming.
C) monopoly. B) the restaurant industry.
D) non-profit competition. C) long-distance telephone service.
Answer: B D) the clothing industry.
Answer: C
Topic: Marketing
Skill: Recognition Topic: Oligopoly
Skill: Conceptual
84) Advertising by firms in monopolistic competition
89) In oligopolistic markets,
A) provides consumers with no useful information.
B) does not occur. A) there are many firms.
C) can persuade customers that product differentia- B) there are no barriers to entry.
tion exists. C) there are only a few firms.
D) wastes resources because the entry of rivals forces D) all firms are price takers.
Answer: C
firms to be price takers.
Answer: C Topic: Oligopoly
Skill: Conceptual
Topic: Efficiency of Monopolistic Competition
90) One difference between oligopoly and monopolis-
Skill: Conceptual
85) Product variety and information for consumers tic competition is that
are gains from A) a monopolistically competitive industry has
A) perfect competition. fewer firms.
B) monopolistic competition. B) in monopolistic competition, the products are
C) monopoly. identical.
D) oligopoly. C) monopolistic competition has barriers to entry.
Answer: B D) fewer firms compete in oligopoly than in mo-
nopolistic competition.
Topic: Efficiency of Monopolistic Competition Answer: D
Skill: Recognition
86) The loss of efficiency that occurs in monopolistic
competition has to be weighed against the gain of
A) higher wages for employees.
B) an increase in employment.
C) greater product variety.
D) reduced environmental damage.
Answer: C
448 CHAPTER 13

Topic: Oligopoly Topic: Kinked Demand Curve Model

Skill: Recognition Skill: Recognition
91) Of the following market structures, which has the 95) The kinked demand curve model of oligopoly is
fewest number of firms competing against each based on the assumption that each firm believes
other? that
A) Monopolistic competition. A) if it raises or lowers its price other firms will fol-
B) Oligopoly. low.
C) Perfect competition. B) if it raises its price other firms will not follow,
D) Both answers A and C are correct. and if it lowers its price other firms will follow.
Answer: B C) if it raises or lowers its price other firms will not
follow.
D) if it raises its price other firms will follow, and if
Two Traditional Oligopoly Models it lowers its price other firms will not follow.
Topic: Kinked Demand Curve Model Answer: B
Skill: Recognition
92) Which of the following market structure might Topic: Kinked Demand Curve Model
have a kinked demand curve? Skill: Conceptual
96) According to the kinked demand curve theory of
A) Monopoly.
oligopoly, each firm thinks that the demand curve
B) Monopolistic competition.
just below the existing price is
C) Oligopoly.
D) Perfect competition. A) flatter than the curve just above the existing
Answer: C price.
B) has the same slope as the curve just above the
Topic: Kinked Demand Curve Model existing price.
Skill: Recognition C) steeper than the curve just above the existing
93) The kinked demand model is based on the as- price.
sumption that each firm believes that D) None of the above, because in the kinked de-
A) if it raises its price, other firms will follow. mand curve theory, the firms are concerned with
B) if it cuts its price, other firms will not follow. how the kink in their supply curve affects their
C) if it cuts its price, the other firms will follow. consumers’ demands.
D) it is unable to ever raise its price. Answer: C
Answer: C
Topic: Kinked Demand Curve Model
Topic: Kinked Demand Curve Model Skill: Conceptual
Skill: Recognition 97) According to the kinked demand curve theory of
94) According to the kinked demand curve theory of oligopoly, each firm believes that if it lowers its
oligopoly, each firm believes that if it raises its price,
price, A) the government will impose price floors.
A) the government will impose price controls. B) the government will impose price ceilings.
B) other firms will not raise their prices. C) other firms will not lower theirs.
C) the overall price level will rise by the same per- D) other firms will also lower theirs.
centage. Answer: D
D) its profits will rise by the same percentage.
Answer: B
MONOPOLISTIC COMPETITION AND OLIGOPOLY 449

Topic: Kinked Demand Curve Model Topic: Kinked Demand Curve Model
Skill: Conceptual Skill: Analytical
98) Which of the following is a basic assumption of 101) The kinked-demand curve model predicts that
the kinked demand curve oligopoly model? A) dominant firms in oligopolistic markets will fre-
A) If a firm raises its price, other firms will not raise quently change their prices.
their prices. B) small firms will look to larger firms for price
B) If a firm raises its price, other firms will raise leadership.
their prices. C) oligopolies often show no change in price al-
C) If a firm cuts its price, other firms will raise their though costs have changed.
prices. D) the law of demand doesn’t work for oligopolies.
D) A firm always produces at an output level where Answer: C
marginal revenue is increasing.
Answer: A

Topic: Kinked Demand Curve Model

Skill: Conceptual
99) In the kinked-demand curve model of oligopoly,
the firm’s marginal revenue curve
A) is kinked at the output level at which the de-
mand curve is kinked.
B) is kinked at an output level that is greater than
that at which the demand curve is kinked.
C) has a gap at the output level at which the de-
mand curve is kinked.
D) has a gap at an output level that is greater than
that at which the demand curve is kinked.
Answer: C

Topic: Kinked Demand Curve Model

Skill: Conceptual
Topic: Kinked Demand Curve Model
100) The kinked demand curve model of oligopoly Skill: Analytical
predicts that 102) In the figure above, if the firm’s marginal cost is
A) the price the firm sets does not change if there MC0, then the firm will produce
are small changes in the firm’s marginal costs.
B) the price the firm sets does not change if there A) less than 30 units per day.
are large changes in the firm’s marginal costs. B) 30 units per day.
C) price wars in the industry are common. C) more than 30 but less than 40 units per day.
D) the prices charged by any of the firms in the in- D) 40 units per day.
Answer: B
dustry never change.
Answer: A Topic: Kinked Demand Curve Model
Skill: Analytical
103) In the figure above, if the firm’s marginal cost
curve is MC0 then it will charge a price of
A) $5.
B) more than $5 and less than $15 dollars.
C) $15.
D) $20.
Answer: D
450 CHAPTER 13

Topic: Kinked Demand Curve Model Topic: Kinked Demand Curve Model
Skill: Analytical Skill: Analytical
104) In the figure above, if the firm’s marginal cost 108) A problem with the kinked demand curve model
curve is MC0 then its economic profit of oligopoly is that
A) is 0. A) firms’ beliefs about the demand curve are not
B) is $150 per day. always correct and firms can figure out that
C) is $600 per day. these beliefs are not correct.
D) cannot be determined. B) it assumes that oligopolists can price discrimi-
Answer: D nate.
C) it implies that firms ignore the actions of each
Topic: Kinked Demand Curve Model other.
Skill: Analytical D) it assumes that the largest firm has a lower aver-
105) The figure above illustrates the kinked demand age cost than the other firms.
curve model of oligopoly. In this figure, if the Answer: A
firm’s marginal cost curve shifts from MC0 to
Topic: Dominant Firm Oligopoly Model
MC1, then the firm’s output level
Skill: Conceptual
A) will increase. 109) In the dominant firm model of oligopoly
B) will decrease. A) the demand curve facing the dominant firm is
C) will not change. the same as the demand curve of the entire mar-
D) could increase, decrease, or stay the same. ket.
Answer: C B) the demand curve facing the dominant firm
Topic: Kinked Demand Curve Model equals the demand curve of the entire market
Skill: Analytical minus the supply of the smaller firms.
106) The figure above illustrates the kinked demand C) the marginal revenue curve is kinked.
curve model of oligopoly. In this figure, if the D) the marginal revenue curve has a gap.
firm’s marginal cost curve shifts from MC0 to Answer: B

MC1, then the price the firm charges

Supply of each
A) will rise. Price small firm Market demand
B) will fall. (dollars) (cases) (cases)
C) will not change. 50 100 0
D) could rise, fall, or stay the same depending on 40 80 300
other factors not illustrated. 30 60 600
Answer: C
20 40 900
Topic: Kinked Demand Curve Model 10 20 1200
Skill: Conceptual Topic: Dominant Firm Oligopoly Model
107) In the kinked demand curve model of oligopoly, Skill: Analytical
if the marginal cost curve shifts upward, then out- 110) The table above outlines the market demand and
put small firm supply in the situation of a dominant
A) will always decrease. firm oligopoly. If there are ten identical small
B) will always stay the same. firms, then when the price is $30 per case, the
C) will decrease if the shift is small, but stay the quantity demanded from the dominant firm at
same if the shift is large. this price is
D) will stay the same if the shift is small, but de- A) 0 cases.
crease if the shift is large. B) 60 cases.
Answer: D C) 540 cases.
D) 600 cases.
Answer: A
MONOPOLISTIC COMPETITION AND OLIGOPOLY 451

Topic: Dominant Firm Oligopoly Model Topic: Dominant Firm Oligopoly Model
Skill: Analytical Skill: Conceptual
111) The table above outlines the market demand and 115) In the dominant firm model of oligopoly, the
small firm supply in the situation of a dominant smaller firms act as if they were
firm oligopoly. If there are ten identical small A) perfect competitors.
firms, then when the price is $20 per case, the B) monopolistic competitors.
quantity demanded from the dominant firm at C) oligopolists.
this price is D) monopolists.
A) 40 cases. Answer: A
B) 500 cases.
Topic: Dominant Firm Oligopoly Model
C) 860 cases.
Skill: Conceptual
D) 900 cases.
116) In the dominant firm model of oligopoly, the
Answer: B
dominant firm produces the quantity at which its
Topic: Dominant Firm Oligopoly Model marginal revenue equals
Skill: Analytical A) the price of the product.
112) In the dominant firm model of oligopoly, the B) its marginal cost.
dominant firm charges C) its average total cost.
A) a lower price than the smaller firms. D) zero.
B) the same price as the smaller firms. Answer: B
C) a higher price than the smaller firms.
D) a price equal to its marginal revenue.
Answer: B
Oligopoly Games
Topic: Game Theory
Topic: Dominant Firm Oligopoly Model Skill: Conceptual
Skill: Analytical 117) Game theory proves most useful for analyzing
113) In the dominant firm model of oligopoly, the
A) perfect competition.
dominant firm
B) monopolistic competition.
A) has lower costs than the smaller firms. C) oligopoly.
B) has higher costs than the smaller firms. D) monopoly.
C) charges a lower price than the smaller firms. Answer: C
D) charges a higher price than the smaller firms.
Answer: A Topic: What Is A Game?
Skill: Conceptual
Topic: Dominant Firm Oligopoly Model 118) Game theory is distinctive in that its elements are
Skill: Conceptual
A) costs, prices, and profits.
114) In the dominant firm model of oligopoly, the
B) revenues, elasticity, and profits.
dominant firm faces a
C) rules, strategies, payoffs, and outcomes.
A) horizontal kinked demand curve. D) patents, copyrights, and barriers to entry.
B) horizontal non-kinked demand curve. Answer: C
C) kinked demand curve with negative slope.
D) non-kinked demand curve with negative slope.
Answer: D
452 CHAPTER 13

Topic: Prisoners’ Dilemma Bob

Skill: Recognition
Don’t con-
119) The prisoners’ dilemma describes a single-play
Confess fess
game that features
Confess B: 10 years B: 20 years
A) an outcome in which the participants collude.
Joe J: 10 years J: 1 year
B) a large number of rivals cooperating with each
Don’t B: 1 year B: 2 years
other.
confess J: 20 years J: 2 years
C) a situation in which one player has better odds
than the other. Topic: Prisoners’ Dilemma
D) two players who are unable to communicate Skill: Conceptual
with each other. 122) The table above displays the possible outcomes
Answer: D for Bob and Joe, who have been arrested for
armed robbery and car theft. Which of the follow-
Topic: Prisoners’ Dilemma ing is true?
Skill: Analytical A) If Joe confesses, Bob should not confess.
120) In the prisoners’ dilemma game, each player B) If Bob confesses, Joe should confess.
A) has only one possible strategy. C) The dominant equilibrium is that Joe and Bob
B) can choose from two strategies. both serve 2 years.
C) can choose from three strategies. D) If Joe does not confess, Bob should not confess.
D) can choose from four strategies. Answer: B
Answer: B
Topic: Prisoners’ Dilemma
Topic: Prisoners’ Dilemma Skill: Conceptual
Skill: Recognition 123) The prisoners’ dilemma has an equilibrium in
121) The simplest prisoners’ dilemma is a game that, in which
part, requires A) both players deny.
A) two players who are able to communicate with B) both players confess.
each other. C) the player who confesses wins.
B) two players who are unable to communicate D) the player who denies wins.
with each other. Answer: B
C) monopolistic competition.
D) an oligopoly with one very large firm. Topic: Prisoners’ Dilemma
Answer: B Skill: Conceptual
124) The prisoners’ dilemma has an equilibrium that is
A) a Nash equilibrium and both players confess.
B) not a Nash equilibrium and both players con-
fess.
C) a Nash equilibrium and both players deny.
D) not a Nash equilibrium and both players deny.
Answer: A
MONOPOLISTIC COMPETITION AND OLIGOPOLY 453

Firm 1 Firm A
Sell Give away R&D No R&D
Sell 1: $3 1: $4 R&D A: $25 A: –$3
Firm 2 2: $3 2: –$1 Firm B B: $15 B: $60
Give 1: –$1 1: $2 No A: $60 A: $50
away 2: $4 2: $2 R&D B: –$3 B: $35
Topic: Game Theory Topic: Game Theory
Skill: Analytical Skill: Conceptual
125) Two software firms have developed an identical 127) Firms A and B can conduct research and devel-
new software application. They are debating opment (R&D) or not conduct it. R&D is costly
whether to give the new application away free and but can increase the quality of the product and
then sell add-ons or sell the application at $30 a thus possibly increase sales. The payoff matrix is
copy. The payoff matrix is above and the payoffs the economic profits of the two firms and is given
are profits in millions of dollars. What is Firm 1’s above, where the numbers are millions of dollars.
best strategy? A’s best strategy is to
A) Give away the application regardless of what A) conduct R&D regardless of what B does.
Firm 2 does. B) not conduct R&D regardless of what B does.
B) Sell the application at $30 a copy regardless of C) conduct R&D only if B conducts R&D.
what Firm 2 does. D) conduct R&D only if B does not conduction
C) Give away the application only if Firm 2 sells R&D.
the application. Answer: A
D) Give away the application only if Firm 2 gives
Topic: Game Theory, Nash Equilibrium
away the application.
Skill: Conceptual
Answer: A
128) Firms A and B can conduct research and devel-
Topic: Game Theory, Nash Equilibrium opment (R&D) or not conduct it. R&D is costly
Skill: Analytical but can increase the quality of the product and
126) Two software firms have developed an identical thus possibly increase sales. The payoff matrix is
new software application. They are debating the economic profits of the two firms and is given
whether to give the new application away free and above, where the numbers are millions of dollars.
then sell add-ons or sell the application at $30 a The Nash equilibrium occurs when
copy. The payoff matrix is above and the payoffs A) both A and B conduct R&D.
are profits in millions of dollars. What is the Nash B) only A conducts R&D.
equilibrium of the game? C) only B conducts R&D.
A) Both Firm 1 and 2 will sell the software applica- D) neither A nor B conduct R&D.
tion at $30 a copy. Answer: A
B) Both Firm 1 and 2 will give the software appli-
cation away free.
C) Firm 1 will give the application away free and
Firm 2 will sell it at $30.
D) There is no Nash equilibrium to this game.
Answer: B
454 CHAPTER 13

Disney Dr. Smith

Thanksgiving Christmas Don’t
release release Advertise advertise
Thanksgiving D: $100 D: $105 Advertise S: $80 S: $60
Fox release F: $80 F: $95 Dr. Jones J: $70 J: $110
Christmas D: $110 D: $95 Don’t S: $120 S: $100
release F: $100 F: $85 advertise J: $60 J: $90
Topic: Game Theory Topic: Game Theory
Skill: Analytical Skill: Analytical
129) Disney and Fox must decide when to release their 131) Libertyville has two optometrists, Dr. Smith and
next films. The revenues received by each studio Dr. Jones. Each optometrist can choose to adver-
depends on when the other studio releases its tise his service or not. The net revenue to each op-
film. Each studio can release its film at Thanks- tometrist, in thousands of dollars, is depicted in
giving or at Christmas. The revenues received by the payoff matrix above. Which of the following
each studio, in millions of dollars, are depicted in statements correctly describes Dr. Smith’s strategy
the payoff matrix above. Which of the following given what Dr. Jones may do?
statements correctly describes Fox’s strategy given A) Dr. Smith should advertise no matter what Dr.
what Disney’s release choice may be? Jones does.
A) If Disney chooses a Thanksgiving release, Fox B) Dr. Smith should not advertise no matter what
should choose a Christmas release. Dr. Jones does.
B) If Disney chooses a Christmas release, Fox C) Dr. Smith should advertise only if Dr. Jones
should choose a Thanksgiving release. doesn’t advertise.
C) Fox should release on Christmas regardless of D) Dr. Smith should advertise only if Dr. Jones ad-
what Disney does. vertises.
D) Both answers A and B are correct. Answer: A
Answer: D
Topic: Game Theory
Topic: Game Theory Skill: Analytical
Skill: Analytical 132) Libertyville has two optometrists, Dr. Smith and
130) Disney and Fox must decide when to release their Dr. Jones. Each optometrist can choose to adver-
next films. The revenues received by each studio tise his service or not. The net revenue to each op-
depends on when the other studio releases its tometrist, in thousands of dollars, is depicted in
film. Each studio can release its film at Thanks- the payoff matrix above. Which of the following
giving or at Christmas. The revenues received by statements correctly describes Dr. Jones’ strategy
each studio, in millions of dollars, are depicted in given what Dr. Smith may do?
the payoff matrix above. Which of the following A) Dr. Jones should advertise no matter what Dr.
statements correctly describes Disney’s strategy Smith does.
given what Fox’s release choice may be? B) Dr. Jones should not advertise no matter what
A) If Fox chooses a Thanksgiving release, Disney Dr. Smith does.
should choose a Christmas release. C) Dr. Jones should advertise only if Dr. Smith
B) If Fox chooses a Christmas release, Disney doesn’t advertise.
should choose a Thanksgiving release. D) Dr. Jones should advertise only if Dr. Smith ad-
C) Disney should release on Thanksgiving regard- vertises.
less of what Fox does. Answer: A
D) Both answers A and B are correct.
Answer: D
MONOPOLISTIC COMPETITION AND OLIGOPOLY 455

Topic: Nash Equilibrium Topic: Cartel

Skill: Analytical Skill: Recognition
133) Libertyville has two optometrists, Dr. Smith and 137) A cartel usually has a collusive agreement to
Dr. Jones. Each optometrist can choose to adver- A) restrict output.
tise his service or not. The net revenue to each op- B) boost output.
tometrist, in thousands of dollars, is depicted in C) lower the price.
the payoff matrix above. Which of the following D) increase the number of firms in the industry.
statements correctly categorizes the Nash equilib- Answer: A
rium for the game?
Topic: Cartel
A) The game has a Nash equilibrium in which both
Skill: Recognition
optometrists advertise.
138) A cartel is a group of firms that
B) The game has a Nash equilibrium in which both
A) produce differentiated products.
optometrists do not advertise.
B) produce products that are complements.
C) The game has a Nash equilibrium in which Dr.
C) agree to restrict output to boost their profit.
Smith advertises and Dr. Jones does not adver-
D) agree to boost output to boost their profit.
tise.
Answer: C
D) The game has a Nash equilibrium in which Dr.
Smith does not advertise and Dr. Jones does ad- Topic: Colluding To Maximize Profits
vertise. Skill: Conceptual
Answer: A 139) If there is a collusive agreement in a duopoly to
maximize profit, then the price will
Topic: Price-Fixing Game
Skill: Recognition A) equal the marginal cost of production.
134) In an oligopoly price-fixing game, each player B) equal the average total cost of production.
tries to C) be the same as the price set by a monopoly.
D) be the same as the price set by a competitive in-
A) minimize the market shares of its opponents.
dustry.
B) maximize its own market share.
Answer: C
C) minimize the profits of its opponents.
D) maximize its own profit. Topic: Colluding To Maximize Profits
Answer: D Skill: Recognition
140) The maximum total economic profit that can be
Topic: Price-Fixing Game
made by colluding duopolists
Skill: Recognition
135) In the oligopoly price-fixing game, the payoffs are A) is less than the economic profit made by a mo-
the nopolist.
A) profits of the firms. B) equals the economic profit made by a monopo-
B) market shares of the firms. list.
C) sales of the firms. C) exceeds the economic profit made by a monopo-
D) reputations of the firms. list.
Answer: A D) bears no necessary relation to the economic
profit made by a monopolist.
Topic: Price-Fixing Game Answer: B
Skill: Conceptual
136) A duopoly is a form of
A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
Answer: C
456 CHAPTER 13

Topic: Cartel; Incentive To Cheat Topic: Cartel; Incentive To Cheat

Skill: Conceptual Skill: Analytical
141) Once a cartel determines the profit-maximizing 145) A firm might be tempted to cheat on a collusive
price, price-fixing agreement by setting a
A) each firm faces the temptation to cheat by rais- A) lower price and quantity than agreed.
ing its price. B) higher price and quantity than agreed.
B) each firm faces the temptation to cheat by low- C) higher price and lower quantity than agreed.
ering its price. D) lower price and higher quantity than agreed.
C) changes in the output of any member firm will Answer: D
not affect the market price.
D) entry into the industry by rival firms will not af- Sears
fect the profit of the cartel. Don’t lower
Answer: B Lower prices prices
Lower S: $5 million S: $1 million
Topic: Cartel; Incentive To Cheat
prices W: $5 million W: $30 million
Skill: Conceptual
142) In a cartel, Wal-mart Don’t S: $30 million S: $20 million
A) each firm has an incentive to decrease its own lower W: $1 million W: $20 million
output below the level set by the cartel. prices
B) the firms’ marginal cost equals the price set by Topic: Colluding To Maximize Profits
the cartel. Skill: Conceptual
C) each firm has an incentive to lower its price be- 146) Sears and Wal-Mart must decide whether to lower
low the level set by the cartel. their prices, based on the potential economic
D) each firm has an incentive to raise its price above profits shown in the table above. Which of the
the level set by the cartel. following is true?
Answer: C A) This situation is not a prisoners’ dilemma.
Topic: Cartel; Incentive To Cheat
B) If Sears lowers its prices and Wal-Mart does not,
Skill: Conceptual Sears will earn a $20 million economic profit.
143) In a cartel, the incentive to cheat is significant C) If Wal-Mart lowers its prices, Sears should keep
because its prices high.
A) each firm has an incentive to decrease its own D) Both Sears and Wal-Mart would jointly be bet-
output. ter off if they could each keep their prices high.
Answer: D
B) each firm’s marginal cost exceeds the price that
the cartel sets. Topic: Equilibrium of the Duopolists’ Dilemma
C) each firm has an incentive to raise its price. Skill: Analytical
D) each firm has an incentive to expand its output. 147) Refer to the payoffs in the table above. Sears and
Answer: D Wal-Mart must decide whether to lower their
prices based on the potential profits shown in the
Topic: Cartel; Incentive To Cheat
Skill: Analytical table. This game has
144) If a duopoly has a collusive agreement that maxi- A) no Nash equilibrium.
mizes joint profit, then each duopolist has B) a Nash equilibrium: Sears keeps its prices high
A) no incentive to cheat. and Wal-mart lowers its prices.
B) an incentive to cheat by lowering its price. C) a Nash equilibrium: both Sears and Wal-Mart
C) an incentive to cheat by raising its price. keep prices high.
D) an incentive to cheat by decreasing its output. D) a Nash equilibrium: both Sears and Wal-Mart
Answer: B lower prices.
Answer: D
MONOPOLISTIC COMPETITION AND OLIGOPOLY 457

Repeated Games and Sequential Topic: Repeated Games

Games Skill: Recognition
151) A trigger strategy is one in which
Topic: Repeated Games A) a player cooperates in the current period if the
Skill: Analytical
other player cooperated in the previous period,
148) A tit-for-tat strategy can be used in but cheats in the current period only if the other
A) a single-play game or a repeated game. player cheated in the previous period.
B) a single-play game but not a repeated game. B) a player cheats in the current period if the other
C) a repeated game but not a single-play game. player cooperated in the previous period, but
D) neither a repeated game nor a single-play game. cooperates in the current period if the other
Answer: C
player cheated in the previous period.
Topic: Repeated Games C) a player cooperates in the current period if the
Skill: Recognition other player has always cooperated, but cheats
149) A trigger strategy can be used in forever if the other player ever cheats.
A) a single-play game or a repeated game. D) a player cheats in the current period if the other
B) a single-play game but not a repeated game. player has always cheated, but cooperates forever
C) a repeated game but not a single-play game. if the other player has ever cooperated.
D) neither a single-play game nor a repeated game. Answer: C
Answer: C
Topic: Repeated Games
Topic: Repeated Games Skill: Recognition
Skill: Recognition 152) In a repeated game,
150) A strategy in which a player cooperates in the A) tit-for-tat and trigger strategies are both mild.
current period if the other player cooperated in B) tit-for-tat and trigger strategies are both severe.
the previous period, but the player cheats in the C) a tit-for-tat strategy is mild and a trigger strategy
current period if the other player cheated in the is severe.
previous period is called a D) a tit-for-tat strategy is severe and a trigger strat-
A) tit-for-tat strategy. egy is mild.
B) trigger strategy. Answer: C
C) duopoly strategy. Topic: Repeated Games
D) dominant firm strategy. Skill: Analytical
Answer: A 153) A cooperative equilibrium is most likely to arise in
A) a single-play game with a large number of play-
ers.
B) a single-play game without communication.
C) a repeated game with a large number of players.
D) a repeated game with a small number of players.
Answer: D

Topic: Games And Price Wars

Skill: Analytical
154) With barriers to the entry of new firms,
A) a cartel is guaranteed to earn an economic profit.
B) a cartel’s members have no incentive to cheat.
C) the cartel might earn an economic profit.
D) industry supply will expand.
Answer: C
458 CHAPTER 13

Topic: Games And Price Wars Topic: Contestable Market

Skill: Conceptual Skill: Conceptual
155) Price wars are 159) In a contestable market
A) most likely when there is a monopoly. A) two or more firms are competing.
B) most likely when there is oligopoly. B) the Herfindahl-Hirschman Index exceeds 1,800.
C) most likely when there is perfect competition. C) the four-firm concentration ratio exceeds 50
D) equally likely in the cases of monopoly, oligop- percent.
oly, and perfect competition. D) potential entry holds down prices.
Answer: B Answer: D

Topic: Contestable Market Topic: Entry-Deterrence Game

Skill: Conceptual Skill: Analytical
156) An example of someone who could operate in a 160) Adkins Air is the only seller offering service di-
contestable market is rectly from Milwaukee to Greensboro. The mar-
A) a cable TV company. ket is contestable. Thus the Nash Equilibrium for
B) a wheat farmer. a game between Adkins Air and a potential en-
C) a ship owner operating on a major waterway. trant is when
D) a private college operating in a state with many A) the potential entrant enters and Adkins earns a
public colleges. normal profit.
Answer: C B) the potential entrant enters and Adkins earns an
economic profit.
Topic: Contestable Market
C) the potential entrant does not enter and Adkins
Skill: Conceptual
earns a normal profit.
157) In a contestable market the Herfindahl-
D) the potential entrant does not enter and Adkins
Hirschman Index is
earns an economic profit.
A) low and the market behaves as if it is perfectly Answer: C
competitive.
B) low but the market behaves as if it is a monop- Topic: Limit Pricing
oly. Skill: Recognition
C) high but the market behaves as if it is perfectly 161) The practice of the only seller in a market charg-
competitive. ing a price less than the monopoly price in order
D) high and the market behaves as if it is a monop- to scare away potential entrants is called
oly. A) limit pricing.
Answer: C B) collusive pricing.
C) agile pricing.
Topic: Contestable Market
D) trigger pricing.
Skill: Recognition
Answer: A
158) A contestable market is one in which
A) there are one or a few firms and entry into the
market is costly. Study Guide Questions
B) there are one or a few firms and entry into the Topic: Study Guide Question; Monopolistic
market is not costly. Competition
C) there are many firms and entry into the market Skill: Recognition
is costly. 162) The type of industry structure that has many
D) there are many firms and entry into the market firms, each producing a differentiated product,
is not costly. with no barriers to entry or exit is called
Answer: B A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
Answer: B
MONOPOLISTIC COMPETITION AND OLIGOPOLY 459

Topic: Study Guide Question; Excess Capacity Topic: Study Guide Question, Colluding to
Skill: Conceptual Maximize Profits
163) A monopolistically competitive firm has excess Skill: Conceptual
capacity because in the 167) When a cartel maximizes its profit,
A) short run its MR exceeds its MC. A) each firm necessarily produces the same amount.
B) short run its ATC is less than its AVC. B) the industry level of output is efficient.
C) long run its ATC exceeds its minimum ATC. C) industry marginal revenue equals industry mar-
D) long run it earns an economic profit. ginal cost at the level of total output.
Answer: C D) total output is greater than it would be without
collusion.
Topic: Study Guide Question, Monopolistic Answer: C
Competition, Long-Run Economic Profit
Skill: Conceptual Topic: Study Guide Question; Equilibrium of the
164) A monopolistically competitive firm is like a per- Duopolists’ Dilemma
fectly competitive firm insofar as both Skill: Conceptual
A) have negatively sloping demand curves. 168) In an oligopoly with a collusive agreement, the
B) can earn no economic profit in the long run. total industry profits will be smallest when
C) have horizontal MR curves. A) all firms comply with the agreement.
D) are protected by high barriers to entry. B) one firm cheats on the agreement and the other
Answer: B firms do not cheat.
C) all firms cheat on the agreement.
Topic: Study Guide Question; Oligopoly D) the firms act as a monopoly.
Skill: Conceptual Answer: C
165) Which of the following is characteristic of oligop-
oly, but NOT of monopolistic competition? Topic: Study Guide Question; Games and Price
A) The choices made by one firm have a significant Wars
effect on other firms. Skill: Conceptual
B) Each firm faces a downward-sloping demand 169) Price wars can be the result of
curve. A) a cooperative equilibrium.
C) Firms are profit-maximizers. B) a firm playing a tit-for-tat strategy in which last
D) There is more than one firm in the industry. period the competitors complied with a collusive
Answer: A agreement.
C) new firms entering the industry and immedi-
Topic: Study Guide Question; Oligopoly ately agreeing to abide by a collusive agreement.
Skill: Conceptual D) new firms entering the industry and all firms
166) A monopolistically competitive firm is like an then finding themselves in a prisoners’ dilemma.
oligopolistic firm insofar as Answer: D
A) both face perfectly elastic demand.
B) both can earn an economic profit in the long Topic: Study Guide Question, Contestable Markets
run. Skill: Conceptual
C) both have MR curves that lie beneath their de- 170) In a contestable market,
mand curves. A) the HHI is usually quite low.
D) neither is protected by high barriers to entry. B) the firm in the market usually earns a large eco-
Answer: C nomic profit.
C) the firm in the market may play an entry-
deterrence game.
D) there are high barriers to entry.
Answer: C
460 CHAPTER 13

MyEconLab Questions Topic: Game Theory

Level 1: Definitions and Concepts
Topic: Monopolistic Competition 176) In game theory, strategies include ____.
Level 1: Definitions and Concepts
A) all possible actions of each player
171) Monopolistic competition is a market in which
B) only the winning action of each player
____ firms produce ____ goods and services.
C) all possible actions and payoffs of each player
A) many; identical D) the payoff matrix
B) many; differentiated Answer: A
C) few; differentiated
D) few; identical Topic: Game Theory
Answer: B Level 1: Definitions and Concepts
177) A table that shows the payoffs for every possible
Topic: Product Differentiation action by each player for every possible action by
Level 1: Definitions and Concepts
each other player is called the ____.
172) The Netscape, Internet Explorer, and Opera
A) strategy table
browsers are an example of ____.
B) game matrix
A) monopoly industries C) payoff matrix
B) perfectly competitive industries D) strategy matrix
C) product differentiation Answer: C
D) identical products
Answer: C Topic: Nash Equilibrium
Level 1: Definitions and Concepts
Topic: Innovation and Product Development 178) In the prisoners’ dilemma game, when each player
Level 1: Definitions and Concepts
takes the best possible action given the action of
173) A monopolistically competitive firm can increase the other player, ____.
its economic profit by ____.
A) a competitive equilibrium is reached
A) developing new products B) one player denies and one player confesses
B) producing at the efficient quantity C) both players deny
C) eliminating excess capacity D) a Nash equilibrium is reached
D) advertising less Answer: D
Answer: A
Topic: Prisoners’ dilemma
Topic: Marketing Level 1: Definitions and Concepts
Level 1: Definitions and Concepts
179) The outcome of a prisoners’ dilemma game with a
174) Advertising costs of a monopolistically competi- Nash equilibrium is that ____.
tive firm are ____.
A) both players deny
A) greater than a monopoly and the same as a com- B) one player denies and one player confesses
petitive firm C) both players confess
B) greater than a competitive firm D) there is no equilibrium
C) less than a competitive firm Answer: A
D) the same as a monopoly
Answer: B

Topic: Oligopoly
Level 1: Definitions and Concepts
175) A market structure in which a small number of
firms compete is called ____.
A) a monopoly
B) a small-number market
C) an oligopoly
D) monopolistic competition
Answer: C
MONOPOLISTIC COMPETITION AND OLIGOPOLY 461

Topic: Duopoly Topic: Cartel

Level 1: Definitions and Concepts Level 2: Using Definitions and Concepts
180) A duopoly occurs when ____. 184) When producers agree to restrict output, raise the
A) there are only two producers of a particular good price, and increase profits, the agreement is called
competing in the same market ____.
B) there are two producers of two goods competing A) a pricing agreement
in an oligopoly market B) an oligopoly agreement
C) there are numerous producers of two goods C) a collusive agreement
competing in a competitive market D) a monopoly agreement
D) the one producer of two goods sells the goods in Answer: C
a monopoly market
Answer: A Topic: Cartel
Level 2: Using Definitions and Concepts
Topic: Monopolistic Competition; Long-Run Excess 185) ____ is a group of firms that have made a collu-
Capacity sive agreement.
Level 2: Using Definitions and Concepts A) A cartel
181) In monopolistic competition in the long run, B) An oligopoly
firms ____. C) A strategy
A) make a normal profit and require more capacity D) A duopoly
B) incur an economic loss and require more capac- Answer: A
ity
C) make an economic profit and have excess capac- Topic: Cooperative Equilibrium
Level 2: Using Definitions and Concepts
ity
186) In a repeated game, punishments that result in
D) make a normal profit and have excess capacity
Answer: D heavy damages are an incentive for players to
adopt the strategies that result in a ____ equilib-
Topic: Marketing rium.
Level 2: Using Definitions and Concepts A) contestable
182) Advertising costs are ____ costs and the per unit B) strategic
cost ____ as production increases. C) cooperative
A) fixed; increases D) winner-share-all
B) variable; increases Answer: C
C) fixed; decreases
D) variable; does not change Topic: Limit Pricing
Answer: C Level 2: Using Definitions and Concepts
187) Limit pricing sets the price at the highest level
Topic: Game Theory that ____.
Level 2: Using Definitions and Concepts A) maximizes the profit of an entrant
183) John von Neumann and Oskar Morgenstern are B) maximizes the profit of the existing firm
the inventors of ____. C) maximizes the profit of both the existing firm
A) duopoly theory and the entering firm
B) game theory D) inflicts a loss on the entrant
C) oligopoly theory Answer: D
D) the Nash equilibrium
Answer: B
462 CHAPTER 13

Topic: Monopolistic Competition; Long-Run Topic: Prisoners’ Dilemma

Equilibrium Level 3: Calculations and Predictions
Level 3: Calculations and Predictions 191) Ann and Lynn have been arrested by the police,
188) If in monopolistic competition in the short run, who have evidence that will convict them of rob-
firms make ____ profits, then in the long run, bing a bank. If convicted, each will receive a sen-
new firms will enter the market. The ____ each tence of 6 years for the robbery. During question-
individual firm’s product will ____. In the new ing, the police suspect that Ann and Lynn are
long-run equilibrium firms will make ____ profit. responsible for a series of bank robberies. If both
A) economic; demand for; decrease; a normal confess to the series, each will receive 12 years in
B) normal; demand for; increase; a normal jail. If only one confesses, she will receive 4 years
C) economic; supply of; decrease; an economic and the one who does not confess will receive 14
D) economic; supply of; increase; a normal years. What is the equilibrium for this game?
Answer: A A) both confess
B) Ann confesses and Lynn does not confess
Topic: Innovation and Product Development
C) Lynn confesses and Ann does not confess
Level 3: Calculations and Predictions
189) At a monopolistically competitive firm’s current D) neither confess
Answer: A
level of product development, marginal revenue is
greater than the marginal cost. The firm will Topic: Game Theory
____. Level 3: Calculations and Predictions
A) sell only new products 192) Game theory is a tool for studying ____.
B) increase product development only if the con- A) Nash behavior
sumer benefits B) payoff dilemmas
C) decrease product development C) rational dilemmas
D) increase product development D) strategic behavior
Answer: D Answer: D

Topic: Marketing Topic: Colluding To Maximize Profits

Level 3: Calculations and Predictions Level 3: Calculations and Predictions
190) Expenditures on advertising ____. 193) The maximum economic profit that can be made
A) can lower average total cost if the advertising in- by a duopoly that colludes is equal to the ____.
creases the quantity sold by a large enough A) economic profit made by duopolists who cheat
amount B) normal profit made by an oligopoly
B) cannot lower average total cost because when a C) economic profit made by a monopoly
firm advertises it increases its costs D) normal profit made by firms in perfect competi-
C) always lower average total cost because whenever tion
a firm advertises, it increases the quantity sold Answer: C
D) are variable costs so do not affect the average to-
tal cost Topic: Colluding To Maximize Profits
Answer: A Level 3: Calculations and Predictions
194) In a duopoly with a collusive agreement, a firm’s
profit is largest if it ____ and if the other firm
____.
A) complies; complies
B) complies; cheats
C) cheats; complies
D) cheat; cheats
Answer: C
MONOPOLISTIC COMPETITION AND OLIGOPOLY 463

Topic: Contestable Market Topic: Monopolistic Competition; Short-Run Profit

Level 3: Calculations and Predictions Maximization
195) The Herfindahl-Hirschman Index will indicate Level 4: Advanced Calculations and Predictions
that a contestable market is ____. 197) The figure above shows the cost, marginal reve-
A) a sequential market nue, and demand curves of Golden Chow, a pro-
B) competitive ducer of dog food. The market for dog food is
C) uncompetitive monopolistic competition. In the long run as new
D) a prisoners’ dilemma firms enter, Golden Chow cuts its output to 200
Answer: C cans per day. Its excess capacity is ____ cans per
day.
A) 0
B) between 0 and 200
C) between 201 and 400
D) more than 401
Answer: C

Topic: Monopolistic Competition; Long-Run

Equilibrium
Level 4: Advanced Calculations and Predictions
198) A monopolistically competitive firm in the long
run ____.
A) is inefficient because it makes zero economic
profit
B) produces a profit-maximizing output that is less
than capacity output
C) is efficient because it makes zero economic
profit
Topic: Monopolistic Competition; Short-Run Profit D) sets its price equal to its marginal cost
Maximization Answer: B
Level 4: Advanced Calculations and Predictions
196) The figure above shows the cost, marginal reve- Topic: Game Theory
nue, and demand curves of Golden Chow, a pro- Level 4: Advanced Calculations and Predictions
ducer of dog food. The market for dog food is 199) Game theory is most useful for determining the
monopolistic competition. In the short run, outcome when ____.
Golden Chow sells 400 cans of dog food per day A) the market structure is oligopoly
and makes ____. Other firms have ____ incentive B) monopolistic competition exists
to enter the industry. C) prison terms are involved
A) an economic profit of $200 a day; an D) the market is dominated by a monopoly
Answer: A
B) an economic profit of $400 a day; an
C) normal profit of $200 a day; no Topic: Colluding To Maximize Profits
D) an economic profit of $400 a day; no Level 4: Advanced Calculations and Predictions
Answer: A 200) When two firms collude to maximize profit the
total quantity produced by both firms taken to-
gether is determined at the quantity where ____.
A) excess capacity is minimized
B) industry marginal cost equals industry marginal
revenue
C) the price equals the industry’s marginal cost
D) excess capacity is as large as possible zero
Answer: B
464 CHAPTER 13

Oscar Topic: Game Theory

Level 4: Advanced Calculations and Predictions
Cheat Comply
203) Oscar and Felix are the only firms that clean of-
Cheat O: $1 M O: –$2 M fices in a large city. They agree to operate as a car-
Felix F: $1 M F: $12 M tel. The payoff matrix shows the economic profit
Comply O: $12 M O: $10 M that each firm can make. If the game is played re-
F: –$2 M F: $10 M peatedly and Felix and Oscar both use a tit-for-tat
Topic: Game Theory strategy, then ____.
Level 4: Advanced Calculations and Predictions A) Felix will make $10 million and Oscar will cheat
201) Oscar and Felix are the only firms that clean of- B) Felix and Oscar will each make $1 million profit
fices in a large city. They agree to operate as a car-
C) Felix will make −$2 million and Oscar will cheat
tel. The payoff matrix above gives the economic
D) Felix and Oscar will each make $10 million
profit that each firm can make. If Felix cheats on
profit
the agreement but Oscar complies, Felix makes an Answer: D
economic profit of ____ and Oscar makes an
economic profit of ____.
A) $10 million; $10 million
B) $1 million; $1 million
C) −$2 million; $12 million
D) $12 million; −$2 million
Answer: D

Topic: Game Theory

Level 4: Advanced Calculations and Predictions
202) Oscar and Felix are the only firms that clean of-
fices in a large city. They agree to operate as a car-
tel. The payoff matrix above shows the economic
profit that each firm can make. If the game is
played only once, then ____.
A) Felix and Oscar will each make $10 million
profit
B) Felix will comply and Oscar will make $12 mil-
lion profit
C) Felix and Oscar will each make $1 million profit
D) Felix will cheat and Oscar will make −$2 million
profit
Answer: C