ECON HW 4

Monopolistic competition is characterized by a:

large number of firms and low entry barriers.

A monopolistically competitive firm’s marginal revenue curve:

is downsloping and lies below the demand curve

In short-run equilibrium, the price charged by the monopolistically competitive firm:

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

In long-run equilibrium, the price charged by the monopolistically competitive firm:

will be equal to ATC.

The monopolistically competitive seller maximizes profit by producing at the point where:

marginal revenue equals marginal cost.

In long-run equilibrium a monopolistically competitive firm will:

have excess production capacity.

Monopolistically competitive industries are inefficient because:

monopolistically competitive industries are overpopulated with firms whose plants are underutilized.

The economic inefficiencies of monopolistic competition may be offset by the fact that:

consumers have a number of variations of the product from which to choose.

Oligopolistic industries are characterized by:

a few dominant firms and substantial entry barriers.

Oligopoly is difficult to analyze primarily because:

the price and output decisions of any one firm depend on the reactions of its rivals.

Game theory:

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

Suppose an oligopolistic producer assumes its rivals will ignore a price increase but match a price cut. In this case the firm perceives its:

demand curve as kinked, being steeper below the going price than above.

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:

decrease total revenue by either increasing or decreasing price.

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

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

Oligopolistic firms engage in collusion to:

earn greater profits.

Advertising can enhance economic efficiency when it:

expands sales such that firms achieve substantial economies of scale. Please review page 234.

Advertising can impede economic efficiency when it:

leads to greater monopoly power.

Pure monopoly means:

a single firm producing a product for which there are no close substitutes.

Which of the following is a characteristic of pure monopoly?

barriers to entry

A natural monopoly occurs when:

long-run average costs decline continuously through the range of demand.

A nondiscriminating pure monopolist’s demand curve:

lies above its marginal revenue curve.

The marginal revenue curve for a monopolist:

becomes negative when output increases beyond some particular level.

Because the monopolist’s demand curve is downsloping:

price must be lowered to sell more output.

When total revenue is increasing:

marginal revenue is positive.

In the short run a pure monopolist:

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