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Published by: api-3716695 on Oct 19, 2008
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Answer Key (PS #3, Summer 2002) Q 1 2 3 4 5 6 7 8 9 10 A D D C D D C A A A B Q 11 12 13 14 15 16 17 18 19 20 A A D B D D D D C B C Q 21 22 23 24 25 26 27 28 29 30 A A A C B B D A C B C Q 31 32 33 34 35 36 37 38 39 40 A D A C B C D C D A B Q 41 42 43 44 45

46 47 48 49 50 A C C D A B A A D B C Q 51 52 53 54 55 56 57 58 59 60 A D D A D C B

57. Like competition, there are many firms in a monopolistically competitive industry, no barriers to entry or exit, and perfect information. Like monopoly, the firm faces a downward sloping demand curve due to product heterogeneity. One might add that profits are zero in the long run, like competition, but price is above minimum average cost, more like monopoly. 58. The disadvantage is that monopolistically competitive firms do not operate at minimum long-run average cost, whereas competitive firms do. The advantage is that “variety is the spice of life” and there is variety in monopolistic competition but not in perfect competition. Where all producers make an identical product. 59. No, it is not. The models are not compatible in their assumptions. Specifically, price leadership assumes that rivals will follow a price increase, while the kinked demand curve model assumes that rivals will not follow such a lead. Because of the incompatibility, it is impossible for an oligopoly to conform to both models at the same time. 60. The interdependence fits the kinked demand model, where firms match price cuts but not price increase. With cartels, firms agree on price and market share, and there is no discussion of firms not matching price increases or decreases. With price leadership, one firm sets price and others follow, whether up or down.

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