Chapter 13 Study Set

Monopolistic competition means:

<a market situation where competition is based entirely on product differentiation and advertising.
<a large number of firms producing a standardized or homogeneous product.
<many firms producing differentiated products.
<a few firms producing a standardized or homogeneous product.

many firms producing differentiated products.

Monopolistic competition is characterized by a:

<few dominant firms and low entry barriers.
<large number of firms and substantial entry barriers.
<large number of firms and low entry barriers.
<few dominant firms and substantial entry barriers.

large number of firms and substantial entry barriers.

Under monopolistic competition, entry to the industry is:

<completely free of barriers.
<as difficult as under pure monopoly.
<more difficult than under pure monopoly.
<blocked.

more difficult than under pure competition but not nearly

Which of the following is not a basic characteristic of monopolistic competition?

<The use of trademarks and brand names.
<Recognized mutual interdependence.
<Product differentiation.
<A relatively large number of sellers.

Recognized mutual interdependence.

A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from:

<the likelihood of collusion.
<high entry barriers.
<product differentiation.
<mutual interdependence in decision making.

product differentiation.

The monopolistic competition model assumes that:

<allocative efficiency will be achieved.
<productive efficiency will be achieved.
<firms will engage in nonprice competition.
<firms will realize economic profits in the long run.

firms will engage in nonprice competition.

A monopolistically competitive firm’s marginal revenue curve:

<is downsloping and coincides with the demand curve.
<coincides with the demand curve and is parallel to the horizontal axis.
<is downsloping and lies below the demand curve.
<does not exist because the firm is a "price maker."

is downsloping and lies below the demand curve.

In the long run, the price charged by the monopolistically competitive firm attempting to maximize profits:

<must be less than ATC.
<must be more than ATC.
<may be either equal to ATC, less than ATC, or more than ATC.
<will be equal to ATC.

will be equal to ATC.

Which of the following is correct for a monopolistically competitive firm in long-run equilibrium?

<MC = ATC.
<MC exceeds MR.
<P exceeds minimum ATC.
<P = MC.

P exceeds minimum ATC.

In the long run, economic theory predicts that a monopolistically competitive firm will:

<earn an economic profit.
<realize all economies of scale.
<equate price and marginal cost.
<have excess production capacity.

…

Refer to the diagram for a monopolistically competitive firm in short-run equilibrium. This firm’s profit-maximizing price will be:

<$10.
<$13.
<$16.
<$19.

$16.

Refer to the diagram for a monopolistically competitive firm in short-run equilibrium. The profit-maximizing output for this firm will be:

<100.
<160.
<180.
<210.

160.

Refer to the diagram for a monopolistically competitive firm in short-run equilibrium. This firm will realize an economic:

<loss of $320.
<profit of $480.
<profit of $280.
<profit of $600.

profit of $480.

In short-run equilibrium, the monopolistically competitive firm shown will set its price:

<below ATC.
<above ATC.
<below MC.
<below MR.

<below ATC

Which of the following is not characteristic of long-run equilibrium under monopolistic competition?

&lt;Price equals minimum average total cost.
&lt;Marginal cost equals marginal revenue.
&lt;Price is equal to average total cost.
&lt;Price exceeds marginal cost.

Price equals minimum average total cost.

If some firms leave a monopolistically competitive industry, the demand curves of the remaining firms will:

&lt;be unaffected.
&lt;shift to the left.
&lt;become more elastic.
&lt;shift to the right.

shift to the right.

In long-run equilibrium, monopolistic competition entails:

&lt;an efficient allocation of resources.
&lt;an overallocation of resources due to inadequate capacity.
&lt;an underallocation of resources due to excess capacity.
&lt;production at the minimum attainable average total cost.

an underallocation of resources due to excess capacity.

Refer to the data. If columns (1) and (3) of the demand data shown are this firm’s demand schedule, the profit-maximizing level of output will be:

&lt;12 units.
&lt;8 units.
&lt;10 units.
&lt;9 units.

8 units.

Refer to the data. If columns (1) and (3) of the demand data shown are this firm’s demand schedule, the profit-maximizing price will be:

&lt;$9.
&lt;$7.
&lt;$11.
&lt;$6.

$9.

Refer to the data. If columns (1) and (3) of the demand data shown are this firm’s demand schedule, economic profit will be:

&lt;$10.
&lt;$19.
&lt;$6.
&lt;$8.

$8.

Refer to the data. Suppose that entry into the industry changes this firm’s demand schedule from columns (1) and (3) shown to columns (2) and (3). Economic profit will:

&lt;fall by $10.
&lt;fall to $6.
&lt;increase by $10.
&lt;decline to zero.

decline to zero.

Refer to the data. Suppose that entry into this industry changes this firm’s demand schedule from columns (1) and (3) shown to columns (2) and (3). We can conclude that this industry is:

&lt;a pure monopoly.
&lt;purely competitive.
&lt;a constant cost industry.
&lt;monopolistically competitive.

monopolistically competitive.

Refer to the data. With the demand schedule shown by columns (2) and (3), in long-run equilibrium:

&lt;price will equal average total cost.
&lt;total cost will exceed total revenue.
&lt;marginal cost will exceed price.
&lt;price will equal marginal revenue.

price will equal average total cost.

An important similarity between a monopolistically competitive firm and a pure monopolist is that both:

&lt;realize an economic profit in the long run.
&lt;achieve allocative efficiency.
&lt;face demand curves that are less than perfectly elastic.
&lt;achieve productive efficiency.

face demand curves that are less than perfectly elastic.

In the long run a monopolistically competitive firm:

&lt;earns an economic profit.
&lt;produces where P = ATC.
&lt;produces where MR exceeds MC.
&lt;achieves allocative efficiency.

produces where P = ATC.

A significant benefit of monopolistic competition compared with pure competition is:

&lt;less likelihood of X-inefficiency.
&lt;improved resource allocation.
&lt;greater product variety.
&lt;stronger incentives to achieve economies of scale.

greater product variety.

Product variety is likely to be greater in:

&lt;monopolistic competition than in pure competition.
&lt;pure competition than in monopolistic competition.
&lt;homogeneous oligopoly than in monopolistic competition.
&lt;homogeneous oligopoly than in differentiated oligopoly.

monopolistic competition than in pure competition.

The more elastic a monopolistic competitor’s long-run demand curve, the:

&lt;greater its excess capacity.
&lt;higher its price relative to that of a pure competitor having the same cost curves.
&lt;lower its long-run profit.
&lt;lower its average total cost at its profit-maximizing level of output.

lower its average total cost at its profit-maximizing level of output.

The mutual interdependence that characterizes oligopoly arises because:

&lt;the products of various firms are homogeneous.
&lt;the products of various firms are differentiated.
&lt;each firm in an oligopoly depends on its own pricing strategy and that of its rivals.
&lt;the demand curves of firms are kinked at the prevailing price.

each firm in an oligopoly depends on its own pricing strategy and that of its rivals.

The copper, aluminum, cement, and industrial alcohol industries are examples of:

&lt;interproduct competition.
&lt;homogeneous oligopoly.
&lt;monopolistic competition.
&lt;differentiated oligopoly.

homogeneous oligopoly.

Oligopoly is more difficult to analyze than other market models because:

&lt;the number of firms is so large that market behavior cannot be accurately predicted.
&lt;the marginal cost and marginal revenue curves of an oligopolist play no part in the determination of equilibrium price and quantity.
&lt;of mutual interdependence and the fact that oligopoly outcomes are less certain than in other market models.
&lt;unlike the firms of other market models, it cannot be assumed that oligopolists are profit maximizers.

of mutual interdependence and the fact that oligopoly outcomes are less certain than in other market models.

Which of the following is an illustration of differentiated oligopoly?

&lt;The aluminum industry.
&lt;The steel industry.
&lt;The soft drink industry.
&lt;Retail stores in large cities.

The soft drink industry.

Differentiated oligopoly exists where a small number of firms are:

&lt;producing goods that differ in terms of quality and design.
&lt;setting price and output collusively.
&lt;setting price and output independently.
&lt;producing virtually identical products.

producing goods that differ in terms of quality and design.

Homogeneous oligopoly exists where a small number of firms are:

&lt;producing virtually identical products.
&lt;setting price and output independently.
&lt;setting price and output collusively.
&lt;producing differentiated products.

producing virtually identical products.

Clear-cut mutual interdependence with respect to the price-output policies exists in:

&lt;pure monopoly.
&lt;oligopoly.
&lt;monopolistic competition.
&lt;pure competition.

oligopoly.

Concentration ratios measure the:

&lt;geographic location of the largest corporations in each industry.
&lt;degree to which product price exceeds marginal cost in various industries.
&lt;percentage of total industry sales accounted for by the largest firms in the industry.
&lt;number of firms in an industry.

percentage of total industry sales accounted for by the largest firms in the industry.

If the four-firm concentration ratio for industry X is 80:

&lt;the four largest firms account for 80 percent of total sales.
&lt;each of the four largest firms accounts for 20 percent of total sales.
&lt;the four largest firms account for 20 percent of total sales.
&lt;the industry is monopolistically competitive.

the four largest firms account for 80 percent of total sales.

The Herfindahl index for a pure monopolist is:
100.
10,000.
100,000.
10.

10,000.

The four-firm sales concentration ratio for an industry measures the:

&lt;geographic concentration of firms.
&lt;extent to which the four largest firms dominate the production of a good.
&lt;percentage of the industry’s capital facilities owned by the four largest firms.
&lt;degree of X-inefficiency in the industry.

extent to which the four largest firms dominate the production of a good.

Assume six firms comprising an industry have market shares of 30, 30, 10, 10, 10, and 10 percent. The Herfindahl index for this industry is:

&lt;2,000.
&lt;1,600.
&lt;2,200.
&lt;80.

2,200.

Game theory:

&lt;is the analysis of how people (or firms) behave in strategic situations.
&lt;is best suited for analyzing purely competitive markets.
&lt;reveals that mergers between rival firms are self-defeating.
&lt;reveals that price-fixing among firms reduces profits.

is the analysis of how people (or firms) behave in strategic situations.

Game theory is best suited to analyze the pricing behavior of:

&lt;pure monopolists.
&lt;pure competitors.
&lt;monopolistic competitors.
&lt;oligopolists.

oligopolists.

Game theory can be used to demonstrate that oligopolists:

&lt;rarely consider the potential reactions of rivals.
&lt;experience economies of scale.
&lt;can increase their profits through collusion.
&lt;may be either homogeneous or differentiated

can increase their profits through collusion.

The kinked-demand curve of an oligopolist is based on the assumption that:

&lt;competitors will follow a price cut but ignore a price increase.
&lt;competitors will match both price cuts and price increases.
&lt;competitors will ignore a price cut but follow a price increase.
&lt;there is no product differentiation.

competitors will follow a price cut but ignore a price increase.

If an oligopoly is faced with a kinked-demand curve that is relatively elastic above, and relatively inelastic below, the going price, then it will:

&lt;increase total revenue by increasing price but lower total revenue by decreasing price.
&lt;decrease total revenue by either increasing or decreasing price.
&lt;increase total revenue by either increasing or decreasing price.
&lt;increase total revenue by decreasing price but lower total revenue by increasing price.

decrease total revenue by either increasing or decreasing price.

The kinked-demand curve model of oligopoly is useful in explaining:

&lt;the way that collusion works.
&lt;why oligopolistic prices and outputs are extremely sensitive to changes in marginal cost.
&lt;why oligopolistic prices might change only infrequently.
&lt;the process by which oligopolists merge with one another.

why oligopolistic prices might change only infrequently.

The kinked-demand curve model helps to explain price rigidity because:

&lt;there is a gap in the marginal revenue curve within which changes in marginal cost will not affect output or price.
&lt;demand is inelastic above and elastic below the going price.
&lt;the model assumes firms are engaging in some form of collusion.
&lt;the associated marginal revenue curve is perfectly elastic at the going price.

there is a gap in the marginal revenue curve within which changes in marginal cost will not affect output or price.

OPEC provides an example of:

&lt;an unwritten, informal understanding.
&lt;noncollusive oligopoly.
&lt;an international cartel.
&lt;a monopolistically competitive industry.

an international cartel.

The likelihood of a cartel being successful is greater when:

&lt;firms are producing a differentiated, rather than a homogeneous, product.
&lt;cost and demand curves of various participants are very similar.
&lt;the number of firms involved is relatively large.
&lt;the economy is in the recession phase of the business cycle.

cost and demand curves of various participants are very similar.

Cartels are difficult to maintain in the long run because:

&lt;they are illegal in all industrialized countries.
&lt;individual members may find it profitable to cheat on agreements.
&lt;it is more profitable for the industry to charge a lower price and produce more output.
&lt;entry barriers are insignificant in oligopolistic industries.

individual members may find it profitable to cheat on agreements.

If the firms in an oligopolistic industry can establish an effective cartel, the resulting output and price will approximate those of:

a purely competitive producer.
a pure monopoly.
a monopolistically competitive producer.
an industry with a low four-firm concentration ratio.

a pure monopoly.

One would expect that collusion among oligopolistic producers would be easiest to achieve in which of the following cases?

&lt;A rather large number of firms producing a differentiated product.
&lt;A very small number of firms producing a differentiated product.
&lt;A rather large number of firms producing a homogeneous product.
&lt;A very small number of firms producing a homogeneous product.

A very small number of firms producing a homogeneous product.

Suppose firms in a collusive oligopoly decide to establish their prices at a level that discourages new rivals from entering the industry. This is called:

&lt;mutual interdependence.
&lt;pricing the demand curve.
&lt;limit pricing.
&lt;price leadership.

limit pricing.

A breakdown in price leadership leading to successive rounds of price cuts is known as:

&lt;limit pricing.
&lt;a price war.
&lt;informal pricing.
&lt;price discrimination.

a price war.

Secret conspiracies to fix prices are examples of:

&lt;cartels.
&lt;price leadership.
&lt;overt collusion.
&lt;covert collusion.

covert collusion.

Advertising can enhance economic efficiency when it:

&lt;increases brand loyalty.
&lt;expands sales such that firms achieve substantial economies of scale.
&lt;keeps new firms from entering profitable industries.
&lt;is undertaken by pure competitors.

expands sales such that firms achieve substantial

Advertising can impede economic efficiency when it:

&lt;increases entry barriers.
&lt;reduces brand loyalty.
&lt;enables firms to achieve substantial economies of scale.
&lt;increases consumer awareness of substitute products.

increases entry barriers.

The conclusion that oligopoly is inefficient relative to the competitive ideal must be qualified because:

&lt;industry price leaders often select a price equal to marginal cost.
&lt;over time oligopolistic industries may promote more rapid product development and greater improvement of production techniques than if they were purely competitive.
&lt;increased output due to persuasive advertising may perfectly offset the restriction of output caused by monopoly power.
&lt;many oligopolists sell their products in monopolistically competitive or even purely competitive industries.

over time oligopolistic industries may promote more rapid product development and greater improvement of production techniques than if they were purely competitive.