Monopolistic competition and oligopoly behavior 1. True or False 1. In the long run, monopolistically competitive firms make normal profits because they are forced to operate at the minimum point on their average total cost curve. 2. The monopolistically competitive seller maximizes profits by equating price and marginal cot, FMC =MR 3. Monopolistically competitive firms are inefficient because they produce at a point on the rising segment of their average cost curves 4. The demand curve of a monopolistically competitive producer is less elastie than that of a purely competitive producer. 5. The larger the number of firms and the less the degree of product differentiation, the greater will be the elasticity of a monopolistically competitive seller's demand curve. 6. The economic profits earned by monopolistically competitive sellers are zero in the long run. 7. The excess capacity problem associated with ‘monopolistic competition implies that fewer firms could produce the same industry output at a lower total cost 8. The demand curve of a monopolistically competitive fim is more elastic than that of a pure monopolist 9. Monopolistically competitive sellers realize economi¢ profits in the long run because entry barriers are significant. 10. Monopolistically competitive sellers produce efficiently because they obtain only normal profits in the long run. 1. Monopolistically competitive firms have some control over the price of their products. 12. Product differentiation is what allows monopolistically competitive firms to have some market power 13. The demand curve faced by a monopolistically competitive firm is more elastic than the monopolist’s demand curve 14, The larger the number of firms in an industry and the less the extent of product differentiation, the greater will be the elasticity of the individual seller's demand curve. 15. In the Jong rum, a wpical firm in a monopolistically competitive market ears positive economic profits. 16. In monopolistic competition, easy industry entry and exit drives long-run profits of firms to zero. 17. As new firms enter a monopolistically competitive market, the demand curves facing existing firms will tend to shift lef. 18, Monopolistically competitive firms will achieve the most efficient allocation of society's resources because there are no significant barriers to entry into the industry. F 19, Monopolistic competition entails a deadweight loss to society, even if the firms eam zero economic profits. 20. The entry of more firms into a monopolistically competitive market tends to increase the excess capacity of firms in the industry in the long run. 21. Monopolistic competition provides the benefit of product variety but at the cost of productive inefliciency. 22. The oligopolist’s kinked-demand curve is highly elastic below and highly inelastic above the going product price 23. Mutual interdependence means that oligopolistic producers rely primarily on price competition in determining their shares of the total market for their product24. Han oligopolis's several rivals exactly match any price changes it initiates, the demand curve will be less elastic than fits price changes are ignored by its rivals. 25. [three or four homogeneous oligopolists collude, the resulting prive and production outcomes will be similar to those of pure monopoly. 26. The USS. breakfast cereal industry is an example of differentiated oligopoly. 27. The US. steel industry is an example of homogeneous oligopoly. 28. Homogeneous oligopolists tend to advertise more than do differentiated oligopolists 29. Mouopolistic competition and oligopoly ate more common in the real world than pare competition and monopoly. 30. Two important characteristics of oligopolists are that they have significant control over price and that there is mutual interdependence among them. “[~ 31. A homogeneous oligopoly means thatthe few firms in the industry have identical cost and demand curves. 32. Patents and copyrights were established by the {government fo reduce oligopoly and monopoly power: 33. If an oligopolist's competitors follow its price cuts but ignore its price increases, the oligopolist would end up holding its price constant even if its marginal cost changes 34. OPEC fimetions as a classic example of a kinked demand curve oligopoly. 35. The kinked-demand curve model applies to a noncollusive oligopoly situation 36. The kinked-demand curve model shows that oligopolistie firms tend to change their prices frequently. 37, advertising succeeds in enhancing brand loyalty among consumers, it tends to enhance the monopoly power of the seller. 38. Unlike a monopoly, an oligopoly tends to achieve allocative efficiency due to the rivalry among several firms. IL Multiple Choice Questions 1, Monopolistie competition means A. a market situation where competition is based entirely on produet differentiation and advertising. B.a large number of firms producing a standardized or homogeneous product. C. many firms producing differentiated products D. a few firms producing a standardized or homogeneous product, 2. Monopolistie competition is characterized by a A. few dominant firms and low entry barriers B. large number of firms snd substantial entry barter, C. large number of firms and low entry barriers. D. few dominant firms and substantial entry bantiers. 3. Which of the following is nor a basic characteristic of monopolistic competition? A the use of trademarks and brand names B. recognized mutual interdependence C. product differentiation D. arelatively large number of sellers 4. Nonprice competition refers to A. competition between products of different industries, for example, competition between aluminum and steel in the manufacture of automobile parts. B. price increases by a firm that are ignored by its rivals. @ advertising, product promotion, and changes in ihe real or perceived characteristies of a product. D. reductions in production costs that are not reflected in price reductions. 5, The restaurant, legal assistance, and clothing industries are each illustration of A. countervailing power. B, homogeneous oligopoly. C. monopolistic competition. D. pure monopoly.6. If the number of finns in a monopolistically competitive industry increases and the degree of product differentiation diminishes, A the likelihood of realizing economic profits in the Jong run would be enhanced. B. individual firms would now be operating at outputs Where their average total costs would be higher. C. the industry Would more closely approximate pure competition. D. the likelihood of collusive pricing would increase 7. A monopolistically competitive indusuy combines elements of both competition and monopoly. The monopoly element results from A. the likelihood of eollusion. B high entry barriers © product differentiation. D. mutual interdependence in decision making 8. A. monopolistically competitive industry combines elements of both competition and monopoly. The competition element results from A. the likelihood of collusion. B. product differentiation. C. low entry barriers. D. mntual interdependence in decision making 9. The monopolistic competition model assumes that A. allocative efficiency will be achieved. B. productive efficiency will be achieved. . firms will engage in nonprice competition. D. firms will realize economic profits in the long mn, 10. In which of the following market models do xl and marginal revenue diverge? pure monopoly, oligopoly. and monopolistic competition B. pure monopoly, oligopoly, and pure competition C. pure monopoly only D. oligopoly only 11. The price elasticity of a monopolistically competitive firm's demand curve varies ‘A inversely with the number of competitors and the degree of product differentiation. B. directly with the number of competitors and the degree of product differentiation. C. directly with the number of competitors but inversely with the degree of product differentiation. D. inversely with the number of competitors but directly with the degree of product differentiation. 12. In the short mm, a profit-maximizing monopolistically competitive firm sets it price A. equal to marginal revenue B. equal to marginal cost. C. above marginal cost. D. below marginal cost. 13. In the long nm, a profitanaximizing monopolistically competitive firm sets it price A. above marginal cost. B. below marginal cost. C. equal to marginal revenue, D, equal to marginal cost. 14. Tn the short nm, the price charged by a monopolistically competitive firm attempting to maximize profits A. ust be less than ATC B, must be more than ATC. inay be either equal to ATC, less than ATC, or iiiore than ATC D. must be equal to ATC. 15. In the long mun, the price charged by the monopolistically competitive firm attempting to maximize profits A. must be less than ATC. B. must be more than ATC. C. may be either equal to ATC, less than ATC. or ore than ATC. will be equal to ATC. 16. Monopolistically competitive firms A tealize normal profits in the short run but losses in the long run. B. incur persistent losses in both the short run and ong mn. C. may realize either profits or losses in the short run but realize normal profits in the long run. D, persistently realize economic profits in both the short mun and long ran.17. Which of the following is correct for a monopolistically competitive firm in long-run equilibrium? AMC = ATC. B.MC exceeds MR. © P exceeds minimum ATC. D. P=MC. 18, Inthe long mun, economic theory predicts that a ‘monopolistically competitive firm will A eam an economic profit. B. realize all economies of scale. equate price and marginal cost. have excess production capacity. 460180 210 ‘Quantity 0400 to the diagram for a monopolistically competitive firm in short-man equilibrium. This firm's profit-maximizing price will be: A. $10. By $13. Osis $19. 20. Refer to the diagram for a monopolistically competitive firm in short-run equilibrium. The profit-maximizing output for this firm will be A. 100. 160. C. 180. D. 210. 21. Refer to the diagram for a monopolistieally competitive firm in short-run equilibrium. This firm will realize an economic A. loss of $320. @pxit of $480, profit of $280. D. profit of $600. 22. Which of the following is nor characteristic of long-run equilibrium under monopolistic wpetition? ice equals minimum average total cost. Marginal cost equals marginal revenue, C. Price is equal to average total cost. D. Price exceeds marginal cost s Me ATC A 5 Demand 8 MR, oe DE ‘Quantity 23. Refer to the diagram for a monopolistically competitive fim, Long-ran equilibrium price will be: A above 4 BEF. A. D. B. 24. Refer to the diagram for a monopolistivally competitive fin, Long-rm equilibrium output will be: A. greater than E. E. O> D.C. 25Refer to the diagram for a monopolistically competitive firm. If more firms were to enter the industry and product differentiation were to weaken, then A. resource misallocation would become more ere. the demand curve would become more elastic. 4. firms would begin camming economic profits. D. the firm would achieve allocative efficiency. 26. Refer to the diagram for a monopolistically competitive producer. This firm is experiencing A.a shortage of production capacity. excess capacity of CD. Gases capacity of DE. D. diseconomies of scale. 27. Long-run equilibrium for a monopolistically competitive firm where economic profits are zero results from A rising marginal costs. B. a perfectly elastic product demand curve C. relatively easy entry. D. product differentiation and development 28. When a monopolistically competitive firm is in Jong-run equilibrium, ‘A production takes place where ATC is minimized. B, marginal revenue equals marginal cost and price equals average total cost. C. normal profit is zero and price equals marginal cost. D. economic profit is zero and price equals marginal cost. 29. If some firms leave a monopolistically competitive industry, the demand curves of the remaining firms will ‘A be unaffected. B. shift to the left. C. become more elastic. D. shift to the tight. 30. When a monopolistically competitive firm is in long-run equilibrium, A P=MC=ATC B. MR= MC and minimum ATC > P_ MR > MC and P= minimum ATC. MR=MC and P > minimum ATC. 31. Other things equal, if more firms enter a monopolistically competitive industry. A. the demand curves facing existing firms would shift to the right. B. the demand curves facing existing firms would shift to the left. C. the demand curves facing existing fms would become less elastic. D. losses would necessarily occur. 32. In long-run competition entails A. an efficient allocation of resources. B, an overallocation of resources due to inadequate acity. an under allocation of resources due to excess capacity. D. production at the minim attainable average total cost. equilibrium, — monopolistic 33. The economic inefficiencies of monopolistic competition may be offset by the fact that A. advertising expenditures shift the average cost curve upward. B. available capacity is fully utilized. C. resourees are optimally allocated to the roduction of the product. (Dy consumers have increased product variety. 34, Product variety is likely to be greater in A. monopolistic competition than in pure competition. B. pwe competition than in monopolistic competition. C. homogeneous oligopoly than in monopolistic competition. D. homogeneous oligopoly than in differentiated oligopoly. 35. Which of the following is correct? ‘A. The excess capacity problem diminishes as the monopolistically competitive firm's demand curve becomes less elastic B. The excess capacity problem means that monopolistically competitive firms typically produce at some point on the rising segment of their average total cost curve. C. The greater the degree of product variation, the ser is the excess capacity problem. The greater the degree of product variation, the greater is the excess capacity problem. 36. The less elastic a monopolistic competitors 5g-nim demand curve, the | greater its excess capacity. B. lower its price relative to that of a pure competitor having the same cost curves. C. higher its long-run economic profit. D. lower its average total cost at its equilibrium level of output. 37. The stronger the product differentiation in monopolistic competition, the ‘A. less elastic the demand curve, and production will take place further to the left of minimum average costs B. less elastic the demand curve, and production will, take place further to the right of minimum average costs. C. more elastic the demand curve, and production will take place further to the left of minimum average costs. D. more elastic the demand curve, and production will take place further to the right of minimum average costs. 38. The term oligopoly indicates ‘Aca oneefirm industry B. many producers of a differentiated product. C. a few firms producing either a differentiated or a homogeneous product. D. an industry whose fonr-firmm concentration ratio is low. Oligopolistic industries are characterized by a fewr dominant firms and substantial entry barter. B. a few dominant firms and no bartiers to entry. Ca large number of fimis and lov entry barriers. D.a few dominant firms and low entry barviers. 40. The automobile, household appliance, and antomobile tire industries are all illustrations of A. homogeneous oligopoly. B. monopolistic competition. pure monopoly. differentiated oligopoly 41. Use your basie knowledge and your understanding of market strictures to answer this question. Which of the following companies most closely approximates a differentiated oligopolist in a highly concentrated industry? A. Subway Sandwiches B. Pittsburgh Plate Glass . Ford Motor Company’ D. Kaiser Aluminum 42. The mutual interdependence that characterizes oligopoly arises because ‘A. the produets of various fims are homogeneous, the products of various fims are differentiated. 6 each firm in an oligopoly depends on its own Pricing strategy and that of its rivals ‘D. the demand curves of firms are kinked at the prevailing price, 43. The copper, aluminum, cement, and industrial aleohol industries are examples of interproduct competition. GB) homogeneous oligopoly. C, monopolistic competition. D. differentiated oligopoly. 44. Which of the following is the best example of oligopoly? A. women's dress manufacturing B. automobile manufacturing C. restaurants D. cotton farming 45, Oligopoly is more difficult to analyze than other ‘market models because ‘A. the number of firms is so large that market behavior cannot be accurately predicted. B. the marginal cost and marginal revenue curves of an ligopolist play no part in the determination of ‘equilibrium price and quantity. C. of mutual interdependence and the fact that oligopoly outcomes are less certain than in other market models, D. unlike the firms of other market models, it cannot be assumed that oligopolists are profit maximizers. 46, Differentiated oligopoly exists where a small number of fimis are ‘A. producing goods that differ in tenus of quality and design, B. setting price and output collusively. . setting price and output independently. D. producing virtually identical products. 47. Homogeneous oligopoly exists where a small umber of firms are‘A. producing virtually identical produets. B. setting price and ontput independently C. setting price and output collusively. D. producing differentiated products. 48. Which of the following is a unique feature of igopoly? Q) nt interdependence B. advertising expenditures C. product differentiation D. nonprice competition 49. Prices are likely tobe least flexible in oligopoly. in monopolistic competition. C. where product demand is inelastic. D. in pure competition. 50. Mutual interdependence means that each oligopolistic firm A. faces a perfectly elastic demand for its product. B_ must consider the reactions of its rivals when it determines its price policy. C. produces a product identical to those of its rivals. D. produces a product similar but not identical to the products of its rivals. 51. The Kinked-demand curve of an oligopolist is based on the assumption that ‘A. competitors will follow a price cut but ignore a price increase. B. competitors will match both price cuts and price increases. C. competitors will ignore a price cut but follow a ptive increase. D. there is no product differentiation. 52. If an oligopoly is faced with a kinked-demand curve that is relatively elastic above, and relatively inelastic below, the going price, then it A. increase total revenue by inereasing price but lower total revenue by decreasing price. B. decrease total revenue by either increasing or decreasing price C. imerease total revenue by either increasing or decreasing price. D. increase total revenne by decreasing price but lower total revenme by increasing price. 53. The kinked-demand curve model of oligopoly is useful in explaining ‘A. the way that collusion works. B. why oligopolistic prices and outputs are extremely sensitive to changes in marginal cost. C. why oligopolistc prices might change inftequently. D. the process by which oligopolists merge with one another. 54, The kinked-demand curve model helps to explain plice rigidity because ‘A. there is a gap in the marginal reveane curve within which changes in marginal cost will not affect output or price B. demand is inelastic above and elastic below the going price. CC. the model assumes firms are engaging in some form of collusion. D. the associated marginal revenne curve is perfectly elastic atthe going price. 55. If competing oligopolists completely ignore oligopolist X's price changes, then X's ‘A. demand curve will be less elastic than if the other oligopolists matched X’s price changes. B. demand curve will be more elastic than ifthe other oligopolists matched X's price changes. C. marginal revenue curve will have a vertical gap D, demand aud marginal revenue curves will coincide. $s) D, Dollars 2 \ur, quantity 56, Refer to the diagram for a uon collusive oligopolist. Suppose thatthe firm is initially in equilibrium at point E, where the equilibrium price aud quantity are P and Q. Which of the following statements is correct? ‘A, Demand curve D1 assumes that rivals will matel, any price change initiated by this oligopolist B. Demand curves D| and D2 both assume that rivals will ignore any price change initiated by thisoligopolist. C, Demand curves D1 and D2 both assume that rivals vwill match any price change initiated by this oligopolist D, Demand curve D2 assumes that rivals will match auy price change initiated by this ligopolist. 57. Refer to the diagram for a non collusive oligopolist Suppose that the firm is initially in equilibrium at point E, where the equilibrium price and quantity are P and Q. Ifthe firm's rivals will ignore any price increase ‘but match any price reduction, then the firm's demand curve will be (moving fiom left to tight) A. DIED? B. DIED C.DIED\. D. D2ED2. 58. Refer to the diagram for a nou collusive oligopolist. We assume that the firm is initially in equilibrium at point £, where the equilibrium price and quantity are P and Q. If the firm's rivals will ignore any price increase but match any price reduction, the firm's ‘marginal revenue curve will be (moving from left 10 right) A. DIED. B. MR2abMR1. C. MR2aMR2. D. MRIOMR1 59. Refer to the diagram for a noucollusive oligopolist. We assume that the firm is initially in equilibrium at point £, where the equilibrium price aud quantity are P and Q. If the firm's rivals will ignore any price inetease but match any price reduetion, over what range might marginal cost rise without distwbing equilibrium price and output? A bE B. ab C.Qa D.0b ° f g hj Output 60. The diagram portrays A. pure competition. B. collusive oligopoly. C. noncollusive oligopoly. D. pure monopoly. 61. Refer to the diagram, Equilibrium output is Aj Bh. Cg Df 62, Refer to the diagram, Equilibrium price is Ae B. d. Ce Db. 63. Refer to the diagram. This fim’s demand and ‘marginal revenue curves are based on the assumption ‘that ‘Ate firm has no immediate rivals. B. rivals will match both a price increase and a price decrease C rivals will match a price increase but ignore a price decrease D. rivals will ignore a price increase but mateh a price decrease. 64, Refer to the diagram. In equilibrium the firm ‘A. is realizing an economic profit of ad per unit. B, should close down in the short run, is incurring a loss. D. is realizing an economic profit of bd per unit.65. OPEC provides an example of Aan unwritten, infoumal understanding, B. noncollusive oligopoly. C. an international cartel. D. a monopolistically competitive industry. 66. Advertising can enhance economic efficiency when it A. inereases brand loyalty B. raises entry bartiers. CC. increases consumer awareness of substitute products. D. boosts average total cost. 67. The consumer Wi-Fi-service providers’ market is best described as a A. monopolistic competition. B. monopoly. C. differentiated oligopoly. D. homogeneous oligopoly. 68. Mutual interdependence means that A. a finn's behavior is affected by other firms’ actions. B. a firm's profits are affected by other finms' entry or exit. C. a firm's costs are affected by other firms’ costs. D.a firm's revenues are affected by other firms’ demand for its product. 69. One shorteoming of the kinked demand curve model of oligopoly is that it does not explain ‘A. why the marginal revenme curve is kinked. B. how the current price gets determined. C. what the level of profits is for the firm. D. why the firm is a least-cost producer. 70. In the long nm, an oligopoly A. will produce less than a monopoly. B. my be able to eam positive economic profits C. will always produce in the range of decreasing tetums to scale. D. will produce on the portion of the demand curve where demand is price-inelastic. ILL Short-Answer, Essays, and Problems 1. Assume that the short-run cost and demand data siven in the table below confront @ monopolistic competitor selling a given product and engaged in a given amount of product promotion. Compute the marginal cost aud marginal revenue of each ‘unit of output and enter these figures in the table. Total Margin Quantity Marginal Output cost alcost demandePrice revenue d 0 $35 0 $60 1408 5 204 2 3088S 400 4 5 0S 6 us 6 Tous TS 8 10 8 9 mS 10 265 0 10 (a) At what output level and at what price will the firm produce in the short mua? What will be the total profit? (b) What will happen to demand, price, and profit in the long run? Explain why the following graph is likely to represent the long-run equilibrium for a representative fim in monopolistic competition What will be the product price, output, and amount of economic profit? o oy s eveoS we are 4 5 : Demand 1 ote Quantity 3. Assume that the short-run eost and demand data given in the table below confionts a monopolistic competitor selling a given product and engaged in a given amount of product promotion, Comparethe marginal cost and marginal revenue of each ‘nit of output and enter these figures inthe table. TC MC Qd Marginal Output Price revenue Profit 0 $50 0 $60 8 1 80S 1 558 2 120 2 90 3 150 345 4 170 440 5 185 538 6 205 6 30 72 7 25 8 275 8 20 9 325 9 15 10 385 10 10 (a) At what output level and at what price will the firm produce in the short mm? What will be the total profit? (b) What will happen to demand, price, and profit in the long run? How will the market adjust to achieve this? In the first graph below, illustrate the cost curves and demand conditions for a mouopolistically competitive firm making short-run profits. In the second graph, illustrate what those conditions are most likely to bein the long run. Explain the major differences in the two graphs. 0 A monopoistically competitive firm is producing 50 units of output in the short mn where marginal cost is $3.00, average total costs are $5.00, price is $4.50, average variable cost is $4.00, and marginal revenue is $3.00. How much profit is the firm making? What output recommendation would you anake forthe firm? 6. In the short run, a monopolistically competitive firm calculates that marginal cost is $6.00, average total costs are $4.00, and marginal revenue is $3.00. The firm is charging a price of $6.00 and producing 200 mnits of output. How much profit is the fim making? What output recommendation ‘would you make as the company economist? 7. Draw a graph of the cost curves for a monopolistically competitive firm that clearly illustrates the excess capacity that arises in the long - run, Explain why this excess capacity atises. 8. The kinked-demand schedule oligopolist believes confronts the firm is the table below. Compute the oligopolist’s total revenne at each of the nine prices, and enter these figures in the table. Also compute marginal revenue for each unit between the nine prices and enter these figures in the table. that an” Marginal Quantity Total revenue Price demandedrevenue per unit $580 50 $e 560 100 5400 150 320002000 5000 25000 48000 264 460002799 440 88 420 300(a)Where is the “kink” in the demand curve? What is the current selling price at that kink and how much output will be demanded? (b)What is the range of marginal cost that will keep the price set at the kink? 9.The kinked-demand schedule that an oligopolist believes confionts the firm is given in the table below. Compute the oligopolist’s total revene at each of the nine prices, and enter these figures in the table. Also compute marginal revenue for each unit between the nine prices and enter these figures inthe table. Marginal Quantity Total revenue Price _demandedrevenve per unit $1740 150 S$ 1680 3000 Se 1620 4500 1560 6000 1500) 7500 W400 7920 B80 87 13200 864 12.60 900 (a)Whete is the “kink” in the demand curve? What is the curent selling price at that kink and how much output will be demanded? (b)What is the range of marginal cost that will keep the price set at the kink? BCompare pure competition, pure monopoly, monopolistic competition. and oligopoly on each of the following points: (@Ability to manipulate price. (b)Flexibility of prices. (c)Expenditures on advertising and sales promotion. (Efficiency in allocation of resources.