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FIRMS AND MARKET

STRUCTURES
12

1. A firm that is experiencing diseconomies of scale should:

(A) decrease its plant size.
(B) decrease output in the short run.
(C) shut down in the long run.

2. A market has the following characteristics:

 There is a large number of independent sellers.
 Each produces a differentiated product.
 There are low barriers to entry.
 Producers face downward-sloping demand curves.
 Demand is highly elastic.
This market is best characterized as:
(A) a monopoly.
(B) an oligopoly.
(C) monopolistic competition.

3. The law of diminishing returns states that for a given production process, as more
and more of a resource (such as labour) are added, holding the quantities of other
resources fixed:
(A) cost declines at a decreasing rate.
(B) cost declines at an increasing rate.
(C) output increases at a decreasing rate

4. The demand curves faced by monopolistic competitors is

(A) elastic due to the availability of many close substitutes.
(B) inelastic due to the availability of many complementary goods.
(C) not sensitive to price due to absence of close substitutes.

5. A firm operating as a price taker will produce the quantity at which:

(A) revenue is maximized.
(B) it earns long-run economic profit.
(C) marginal revenue equals marginal cost.

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6. A key difference between the short-run and long-run outputs under monopolistic
competition is that in the long run, the price is:
(A) above average total cost, such that economic profits are positive.
(B) equal to average total cost, such that economic profits are zero.
(C) below average total cost, such that economic profits are negative.

7. Based on the concept of diminishing returns, as the quantity of output increases, the
short run marginal costs of production eventually:
(A) fall at a decreasing rate.
(B) rise at a decreasing rate.
(C) rise at an increasing rate.

8. An oligopoly is least likely characterized by:

(A) a large number of sellers.
(B) barriers to entry.
(C) economies of scale.

9. A venture capitalist is interested in providing funding for a new company. The

company wants to enter an industry where the market structure is best described as
monopolistic competition. The venture capitalist can expect to find an industry where:
(A) the products are homogeneous.
(B) firms compete regularly on price.
(C) the costs to enter the market are low.

10. At a fixed level of capital, output increases as the quantity of labor increases, but at a
decreasing rate. This phenomenon is an example of:
(A) diminishing costs to labor.
(B) diminishing returns to capital.
(C) diminishing returns to labor.

11. The most effective way to assess the impact of a potential merger on the market
structure of an industry is to
(A) calculate the n-firm concentration ratio.
(B) analyse barriers to entry.
(C) calculate the Herfindahl-Hirschman Index.

12. The law of diminishing returns states that at some point as:
(A) more of a resource is devoted to production, holding the quantity of other inputs
constant, at some point output will begin to decrease.
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(B) less of a resource are devoted to production, holding the quantity of other inputs
constant, the output will decrease, but at an increasing rate.
(C) more of a resource is devoted to production, holding the quantity of other inputs
constant, the output will increase, but at a decreasing rate.

13. Which of the following is most likely to be considered a characteristic of monopolistic

competition?
(A) High barriers to entry and exit.
(B) Differentiated products.
(C) Inelastic demand curves.

14. The sale price per unit that would maximize profits for all oligopoly participants is
equal to $25 per unit. The sale price that would exist in a perfectly competitive market
structure is equal to $18 per unit. The most likely price for a firm in an oligopoly to
charge will be closest to
(A) $30.
(B) $20.
(C) $25.

15. The type of economic market that features a large number of competitors offering
differentiated products is best characterized as:
(A) monopolistic competition.
(B) oligopoly.
(C) perfect competition.

16. Which of the following is least likely to be considered a feature that is common to
both monopolistic competition and perfect competition?
(A) Extensive advertising to differentiate products.
(B) Low or no barriers to entry.
(C) Zero economic profits in the long run.

17. Which one of the following is least likely a characteristic of monopolistic competition?
(A) A single seller.
(B) Differentiated products.
(C) Low barriers to entry and exit.

18. The market structure in which a firm's optimal pricing strategy depends on the
responses of other firms is
(A) Oligopoly.
(B) Monopolistic competition.
(C) Perfect competition.

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19. Which of the following is least likely a condition of a perfectly competitive market?
(A) Firms face elastic demand curves.
(B) Indistinguishable products.
(C) Sellers make economic profits.

20. The upward sloping segment of a long-run average total cost curve represents the
existence of:
(A) diseconomies of scale.
(B) economies of scale.
(C) efficiencies of scale.

21. Which of the following is most likely a characteristic of monopolistic competition?

(A) Each producer offers a differentiated product.
(B) Producers face horizontal demand curves.
(C) Producer decisions are interdependent.

22. Which of the following is most likely to be a characteristic of an oligopolistic industry?

(A) Low barriers to entry.
(B) Many sellers.
(C) Interdependence among firms.

23. An industry characterized by monopolistic competition contains approximately 25

different companies. Each individual company is most likely to:
(A) focus on average market price rather than individual competitor prices.
(B) have significant power over pricing.
(C) attempt to engage in price-fixing, as it will generate reasonable profits.

24. Under which type of market structure are the production and pricing alternatives of a
firm most affected by the decisions of its competitors?
(A) Monopolistic competition.
(B) Oligopoly.
(C) Perfect competition.

25. For profitable firms in an industry characterized by monopolistic competition, over a

long time period, positive economic profits will tend to:
(A) increase, along with accounting profits.
(B) decrease, even if accounting profits remain positive.
(C) remain constant, regardless of the trend in accounting profits.

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26. Firms in perfectly competitive markets and firms operating in a market characterized
by monopolistic competition have several things in common. Which of the following is
least likely one of them? Both:
(A) face perfectly elastic demand curves.
(B) maximize economic profit.
(C) operate in markets that have low or no barriers to entry.

27. According to the law of diminishing returns, doubling the number of salespeople for a
firm will most likely result in:
(A) decreasing the total sales of the firm as a result of competition amongst
salespeople.
(B) doubling the total sales of the firm.
(C) increasing the total sales of the firm and reducing the average sales per
salesperson.

28. A market that is characterized by monopolistic competition is least likely to feature:

(A) low barriers to entry.
(B) sellers that produce a differentiated product.
(C) a small number of independent sellers.

29. Which of the following is least likely a characteristic of an oligopoly?

(A) There are few sellers.
(B) Products can either be similar or differentiated.
(C) Relatively small economies of scale.

30. Which of the following most accurately describes a market with a single seller of a
product that has no good substitutes?
(A) Monopoly.
(B) Monopolistic competition.
(C) Oligopoly.

31. The most likely limitation of the N-firm and Herfindahl-Hirschman concentration
measures in assessing market power is that they:
(A) are both backward looking.
(B) are insensitive to mergers within the industry.
(C) do not explicitly include the effects of potential competition.

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32. Which of the following regarding monopolistic competition is most accurate?

(A) Each firm produces a differentiated product.
(B) There are very few independent sellers.
(C) Zero barriers to entry and exit exist.

33. In which of the following industry structures is a firm least likely able to increase its
total revenue by decreasing the price of its output?
(A) Perfect competition.
(B) Oligopoly.
(C) Monopolistic competition.

34. A firm is operating in a perfectly competitive market. Market price is greater than
average variable cost (AVC) but lower than average total cost (ATC). Which of the
following statements is most accurate?
(A) The firm should continue to produce and sell its product in the short run but not
in the long run, unless the price increases.
(B) The firm should decrease its production in the short run-in order to increase
price and either reduce losses or produce profits.
(C) If the owner thinks the price eventually will exceed ATC, the firm should shut
down its operations temporarily and resume when price exceeds ATC.

35. Which one of the following structures is characterized by free entry and exit, a
differentiated product, and price searcher behaviour?
(A) Monopolistic competition.
(B) Oligopoly.
(C) Pure competition.

36. Which of the following statements regarding diminishing marginal returns is most
accurate?
(A) As the quantity produced rises, costs begin to rise at a decreasing rate.
(B) The total cost curve arches downward.
(C) As the quantity produced rises, costs begin to rise at an increasing rate.

37. Firm X and Firm Y are two firms in a Cournot duopoly model with identical marginal
cost curves. In the long run, equilibrium will occur with both firms selling:
(A) different quantities with different market shares at an equilibrium price above
the price in a monopoly market structure.
(B) the same quantity with differing market shares at an equilibrium price equivalent
To the price in a monopoly market structure.
(C) the same quantity with an equivalent market share at an equilibrium price above
the price in a perfectly competitive market.

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38. Which of the following is least accurate regarding product development and
marketing for firms under monopolistic competition?
(A) Brand names can provide consumers with information regarding the quality of
firm’s products.
(B) Firms that bring new and innovative products to the market face relatively more
elastic demand curves than their competitors.
(C) Relative to other types of competition, product innovation is critical to the pursuit
of economic profits.

39. Concentration measures are most likely to be used to:

(A) analyse barriers to entry into an industry.
(B) identify the market structure of an industry.
(C) measure elasticity of demand facing an industry.

40. A key difference in oligopoly price setting between the Cournot model and the
Stackelberg model is that the latter assumes:
(A) a strategic game model versus the former, which is a rule-based model.
(B) sequential rather than simultaneous pricing by market participants.
(C) competitors’ prices will not change.

41. Monopolistic competition differs from pure monopoly in that:

(A) monopolistic competitors have low barriers to entry and monopolists do not.
(B) monopolists maximize profits and monopolistic competitors do not.
(C) monopolistic competitors are price takers and monopolists are not.

42. Which of the following most accurately describes economies of scale? Economies of
scale:
(A) are dependent on short-run average costs.
(B) increase at a decreasing rate.
(C) occur when long-run unit costs fall as output increases.

43. Which of the following is least likely a characteristic of perfect competition?

(A) The size of each firm is small relative to the size of the overall market.
(B) The demand curve for an individual firm is a vertical line.
(C) The products produced within a given market are homogenous.

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44. Characteristics of an oligopoly least likely include:

(A) significant barriers to entry.
(B) interdependence among competitors.
(C) identical products.

45. Monopolistic competition differs from pure monopoly in that:

(A) monopolistic competitors are price takers, monopolists are not.
(B) monopolists maximize profit; monopolistic competitors do not.
(C) barriers to entry are high under monopoly, but low under monopolistic
competition.

46. A firm has the following characteristics:

 relatively small in size.
 marginal revenue is equal to the selling price.
 economic profits will not be earned for any significant period of time.
The firm is best described as existing in a(n):
(A) monopolistic market structure.
(B) price searcher market.
(C) purely competitive market.

47. A market structure characterized by a large number of firms all producing identical
products is best described as:
(A) monopolistic competition.
(B) perfect competition.
(C) monopoly.

48. Which of the following is most likely a characteristic of perfect competition?

(A) The number of firms in the market is small.
(B) Different firms sell their output at different prices.
(C) Barriers to entry are not a significant factor.

49. One way in which monopolistic competition can be distinguished from perfect
competition is that in monopolistic competition:
(A) each firm faces a perfectly elastic demand curve.
(B) marginal revenue is greater than marginal cost at the quantity produced.
(C) price is greater than marginal cost.

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