Fundamentals of Economics 6th Edition Boyes Test Bank 1

Fundamentals of Economics 6th Edition Boyes
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Chapter 6—Competition
MULTIPLE CHOICE
1. The results of competition will be different depending on

a. the type of product being produced.
b. the size of the largest firm.
c. whether rivals can enter the business.
d. how consumers utilize a product.
e. the season of the year.
ANS: C PTS: 1 DIF: Moderate
NAT: BPROG: Reflective Thinking TOP: Competition and Entry
KEY: BLOOM'S: Knowledge
2. A perfectly competitive market is characterized by

a. large numbers of producers of differentiated products.
b. large numbers of producers of commodities with barriers to entry.
c. small numbers of producers of commodities with ease of entry.
d. large numbers of producers of commodities with ease of entry.
e. none of these.
ANS: D PTS: 1 DIF: Moderate
3. Which of the following is the closest to being a perfectly competitive market in the United States?
a. Freshly brewed coffee
b. Airline travel
c. Computer hardware
d. Fast-food restaurants
e. Cell phone service
ANS: A PTS: 1 DIF: Moderate
KEY: BLOOM'S: Comprehension
4. More competitors will increase the market supply, thus

a. creating larger barriers to entry.
b. making demand more elastic.
c. contributing to creative destruction.
d. resulting in lower prices.
e. causing demand to increase.
5. Most economists like perfect competition because

a. it raises profits.
b. it reduces the role of government in providing public goods.
c. economists appreciate perfect systems.
d. it results in economic efficiency.
e. none of these; economists do not like perfect competition.
6. When perfectly competitive firms produce at a quantity where marginal revenue equals marginal costs,
they are
a. minimizing profits.
b. maximizing output.
c. employing resources until the extra cost of producing the last unit just equals the price of
that unit.
d. employing more people and expanding total output in the process.
e. operating at a loss.
7. A product is turned into a commodity when

a. there is only one seller of a product
b. there is no more incentive for new businesses to enter
c. there is product differentiation
d. economic profits can be earned
e. consumers perceive the product to be differentiated
ANS: B PTS: 1 DIF: Easy
8. Monopoly is a market structure characterized by

a. one producer with ease of entry.
b. few producers vying to become the sole supplier to the market.
c. many producers but one dominant firm.
d. one producer and entry by other firms is not possible.
e. one producer of something that the government requires everyone to purchase.
ANS: D PTS: 1 DIF: Easy
9. Which of the following is most likely to be a monopoly market in the United States?
a. Retail clothing
b. Patented pharmaceuticals
c. Mobile telephone service
d. Automobile manufacturing
e. College textbook manufacturing
ANS: B PTS: 1 DIF: Moderate
10. Which of the following is least likely to be a monopolistically competitive market in the United
States?
a. Farmers' Markets held one or two mornings a week in parking lots around town
b. Patented pharmaceuticals
c. Mobile telephone service
d. Automotive manufacturing
e. Fast food restaurants
11. A monopolist will earn

a. normal profit in the short run.
b. normal profit in the long run.
c. positive economic profit as long as entry is blocked.
d. less profit than if it were monopolistically competitive.
e. greater economic profit as entry becomes available.
12. All of the following are characteristics of the market for a commodity product except
a. economic profit is zero.
b. price is driven down to just equal opportunity costs.
c. consumers perceive the goods to be identical no matter who supplies them.
d. entry by new firms is easy.
e. All of these are characteristics of a market for a commodity product.
ANS: E PTS: 1 DIF: Moderate
13. Competition is exemplified by:

a. Walmart offers lower prices due to its economies of scale.
b. Nordstrom focuses on superior customer service.
c. Sharper Image attempts to be the first to offer a product.
d. Apple focuses on innovation and offers products that others do not have.
e. All of these are examples of competition.
ANS: E PTS: 1 DIF: Easy
KEY: BLOOM'S: Application
14. Competition benefits individuals because

a. Firms must continually work to improve their products.
b. Technology continually improves.
c. Consumers get the goods and services at the lowest possible price.
d. Resources are allocated to their highest-valued use.
e. All of these are true of competition.
15. A brand new store, Billy's Boards, opens and business takes off. We would expect:
a. Billy's Boards to be in business for a very long time.
b. new firms will enter the board business.
c. the price for Billy's Boards products will increase.
d. people will change their preferences to boarding.
e. government to investigate this new business.
16. "Creative destruction" is:

a. always easy and fast
b. the process of competition where the inefficient producers are driven out of business
c. exemplified by farms being replaced by golf courses and resorts
d. one reason for the decrease in consumer buying power
e. when one firm is taken over by another
17. A price taker is

a. an individual seller in a commodity market
b. a monopoly firm
c. the electric company as their rates are set by the Public Utilities Commission
d. a firm that has a brand name
e. a firm that enjoys positive economic profits
ANS: A PTS: 1 DIF: Easy
18. As competitors enter a market, demand becomes more ____, meaning the demand curve shifts ____
and becomes ____.
a. inelastic; in; steeper
b. inelastic; out; flatter
c. elastic; in; flatter
d. elastic; in; steeper
e. elastic; out; flatter
19. The demand curve facing a perfectly competitive firm is
a. the market demand
b. vertical
c. horizontal
d. unit elastic
e. more inelastic than for a firm in monopolistic competition
ANS: C PTS: 1 DIF: Easy
20. A monopolistically competitive firm will maximize profits where

a. MR = MC.
b. P = MR.
c. MR + MC = 0.
d. TR  TC = MC.
e. MC  MR = P.
21. If, at the current level of output, the extra revenue received from producing and selling the last unit of
output is less than the extra cost of producing that output, the firm should
a. expand rapidly.
b. expand cautiously.
c. do nothing.
d. reduce output to the point where the extra revenue is less than the extra cost.
e. reduce output to the point where the extra revenue just equals the extra cost.
Figure 6.1
22. Refer to Figure 6.1. Given MR1, what is total revenue if marginal cost at the profit-maximizing
quantity is $2?
a. $50
b. $60
c. $80
d. $100
e. The amount cannot be determined from the information given.
ANS: C PTS: 1 DIF: Moderate NAT: BPROG: Analytic
TOP: Competition and Entry KEY: BLOOM'S: Application
23. Refer to Figure 6.1. Given MR2, what is total cost at the profit-maximizing quantity if the lowest point
of the average-total-cost curve is $4?
a. $50
b. $60
c. $120
d. $200
ANS: D PTS: 1 DIF: Moderate NAT: BPROG: Analytic
24. Refer to Figure 6.1. Given MR2, what is total revenue if the firm produces 60 units and the lowest point
of the average-total-cost curve is $4?
a. $240
b. $300
c. $400
d. $440
ANS: A PTS: 1 DIF: Moderate NAT: BPROG: Analytic
25. Economic profits are earned

a. when price is less than average total cost.
b. when price exceeds average total cost.
c. by perfectly competitive firms in the long run.
d. when marginal revenue equals marginal cost.
e. when price exceeds average sunk cost.
26. In the long run, if a perfectly competitive firm cannot cover its costs, the profit-maximizing firm will
a. continue to produce as long as total revenue exceeds total fixed cost.
b. continue to produce as long as total revenue exceeds total variable cost.
c. continue to produce to maximize its opportunity costs.
d. seek more rewarding opportunities in some other industry.
e. increase output and lower price.
27. In the long run, if a perfectly competitive firm is incurring an economic loss, the firm
a. is earning greater than normal profit but not an economic profit.
b. will minimize opportunity costs by staying in business.
c. will have some long-run fixed costs.
d. will leave the industry.
e. will produce as long as total revenue exceeds total fixed cost.
28. If a firm is producing at a point where marginal revenue is greater than marginal cost, it should
a. continue producing at the current level.
b. raise its prices.
c. lower its prices.
d. increase the level of production.
e. decrease the level of production.
Table 6.1
Table 6.1
Price Quantity Marginal Cost
$15 1,000 $3
$14 2,000 $4
$13 3,000 $5
$12 4,000 $6
$11 5,000 $7
$10 6,000 $8
29. What price will be charged by the profit-maximizing firm described in Table 6.1 if the firm is earning
a positive economic profit?
a. $15
b. $14
c. $13
d. $11
e. $10
ANS: D PTS: 1 DIF: Challenging NAT: BPROG: Analytic
30. Assume that the firm described in Table 6.1 is earning a normal profit at the profit-maximizing output
level. The firm will
a. go out of business immediately.
b. increase the price of its product.
c. produce at the profit-maximizing output level in both the short run and the long run.
d. produce at the profit-maximizing output level in the short run and shut down in the long
run.
e. produce at the profit-maximizing output level in the short run and go out of business in the
long run.
ANS: C PTS: 1 DIF: Moderate NAT: BPROG: Analytic
31. Assume that the firm described in Table 6.1 is incurring a loss at the profit-maximizing output level. In
the short run, the firm will
a. shut down temporarily because fixed costs are being paid for.
b. go out of business because bankruptcy is certain.
c. increase the price of its product.
d. produce at the profit-maximizing output level if the price exceeds average fixed cost.
e. produce at the profit-maximizing output level if the price exceeds average variable cost.
ANS: E PTS: 1 DIF: Challenging NAT: BPROG: Analytic
32. Assume that the firm described in Table 6.1 is incurring a loss at the profit-maximizing output level. In
the long run, the firm will
a. produce more than the profit-maximizing output level.
b. go out of business.
c. increase the price of its product.
d. produce at the profit-maximizing output level if the price exceeds average fixed cost.
e. produce at the profit-maximizing output level if the price exceeds average variable cost.
ANS: B PTS: 1 DIF: Moderate NAT: BPROG: Analytic
33. Assume that the firm described in Table 6.1 is incurring a total cost of $25,000 at the
profit-maximizing output level. The firm will
a. lose $10,000 in the short run.
b. break even.
c. earn a profit of $3,000.
d. earn a profit of $30,000.
e. earn a profit of $55,000.
34. Free entry into a market will result in
a. profits in the long run.
b. zero economic profits in the long run.
c. uncontrolled competition requiring government intervention.
d. economic profits from interdependence.
e. none of these.
NAT: BPROG: Reflective Thinking TOP: Creating Barriers to Entry
35. Over time, the only way firms can continue to earn positive economic profits is
a. with government control over price.
b. hire top entrepreneurs.
c. if other firms cannot copy the unique aspects of the firm's product or service.
d. by reducing diseconomies of scale.
e. through increased competition.
36. Individual sellers in a commodity market are called

a. price takers
b. price makers
c. profit-maximizers
d. monopolistic competitors
e. oligopolists
37. The more differentiated a firm's product, the more

a. elastic the firm's demand curve.
b. elastic the firm's supply curve.
c. inelastic the firm's demand curve.
d. inelastic the firm's supply curve.
e. the demand curve shifts right.
38. One could argue that advertising

a. creates diseconomies of scale.
b. creates barriers to entry.
c. is a waste of resources.
d. makes demand curves more elastic.
e. enables firms to take advantage of diseconomies of scale.
39. Which of the following is not a signal of information that consumers associate with a specific firm?
a. The name on a bottle of Paul Mitchell hair styling product
b. Television
c. The Calvin Klein name on jeans
d. The Nike name on shoes
e. The golden arches
40. Because of their brand names, Apple, Sony, BMW, Mercedes-Benz, and other well-known firms are
able to charge significantly higher prices for their products than their competitors without losing any
business. Expenditures made by firms to create brand names
a. are always inefficient.
b. provide information to consumers.
c. lead to monopolies.
d. leads to advertising wars.
e. would not exist if information were less costly for firms than consumers to obtain.
ANS: B PTS: 1 DIF: Challenging
41. Barriers to entry take the form of

a. Creating a brand name
b. Sunk costs
c. Unique Resources
d. Economies of scale
e. All of these are barriers to entry
42. An example of a firm with high sunk costs is

a. the local electric company
b. United-Continental Airlines
c. Nike
d. Costco
e. all of these firms have high sunk costs
43. A firm can gain monopoly power by

a. creating a brand name
b. raising the cost to rivals for entering the business
c. seeking government's help
d. controlling unique resources
e. all of these are ways of gaining monopoly power.
44. Creative destruction is the process by which

a. competition ends and monopolies are started.
b. environmental principles are replaced by market discipline.
c. deadweight loss is destroyed.
d. old, inefficient products are driven out of business.
e. all of these occurs.
NAT: BPROG: Reflective Thinking TOP: The Benefits of Competition
45. Most televisions produced today no longer include hardware for playing VHS tapes. This is an
example of
a. creative destruction.
b. consumer loss.
c. monopoly control.
d. new technology.
e. government mandate.
46. The disappearance of jobs for secretaries and telephone operators are examples of
a. creative destruction.
b. producer loss.
c. diseconomies of scale.
d. mutual synthesis.
e. creative license.
47. What is an assumption of the model of monopolistic competition?

a. There are only a few firms in the industry.
b. Each firm sells an identical product.
c. There are significant barriers to entry in the market.
d. Consumers lack adequate information about the prices and qualities of products.
e. None of these choices.
48. What distinguishes monopolistic competition from perfect competition?

a. The number of firms
b. The ease of entry and exit
c. The difficulty new firms have in entering monopolistic competition as compared with
perfect competition.
d. In monopolistic competition each firm sells a slightly different or unique product; that is
not the case in perfect competition.
e. In perfect competition each firm sells a slightly different or unique product; that is not the
case in monopolistic competition.
49. Compared with a perfectly competitive market, a monopolistically competitive firm's demand curve is
a. downward sloping.
b. more elastic.
c. horizontal.
d. upward sloping.
e. less elastic.
50. Any time firms in monopolistic competition are earning above-normal profit,
a. new firms enter the market, and entry continues until firms are earning normal profit.
b. new firms have no incentive to enter the market.
c. new firms have incentive to enter the market but are legally barred from doing so.
d. they can maintain those levels indefinitely.
e. their cost structure automatically shifts up, eliminating the additional profit.
51. As new firms enter a monopolistically competitive industry, the demand facing a typical firm will
most likely
a. increase and become less elastic.
b. decrease and become more elastic.
c. increase and become more elastic.
d. decrease and become less elastic.
e. not change.
52. Product differentiation

a. separates monopolistically competitive firms from perfectly competitive firms.
b. means the firm has an elastic demand curve.
c. allows the firm to raise its price without losing all of its customers.
d. is often accomplished through advertising or trivial product changes.
e. All of these choices
53. When economists discuss product differentiation, they are referring to

a. the cost structures of firms.
b. the diseconomies of scale.
c. the supply curves of firms.
d. the profit-maximizing level of output.
e. consumer perceptions of products.
54. Which of the following is not an example of nonprice competition?

a. Advertising
b. Quality improvements
c. Salespersonship
d. Location
e. Price discounts
55. Successful product differentiation ____ the price elasticity of demand and gives the firm ____ ability
to control its price.
a. reduces; more
b. increases; more
c. increases; less
d. reduces; less
e. Successful product differentiation has no effect on price elasticity of demand or ability for
the firm to set its price.
56. If firms could not advertise their products in any way other than to present the physical characteristics
and facts pertaining to the product,
a. consumers would benefit by lower prices.
b. producers would benefit because they would not have to compete.
c. brand names would disappear.
d. consumers would bear the additional costs of learning those characteristics of the product
that were described in the image advertising.
e. nothing would change.
ANS: D PTS: 1 DIF: Challenging
57. Because consumers often possess incomplete information in markets,

a. gaining information about products itself may be costly.
b. brand names provide valuable information to consumers about the quality of products.
c. firms often provide information through marketing.
d. guarantees can help to increase consumer confidence in a product.
e. All of these choices
58. Consumers are willing to pay a higher price for a brand-name product as opposed to a generic product
because
a. a brand name provides a signal about a product's quality and reliability.
b. they are willing to pay more for the privilege of watching the firm's commercials.
c. a brand-name product itself is always of higher quality.
d. consumers maximize utility by purchasing the most expensive products.
e. consumers are irrational.
59. What characteristic is unique to oligopolistic firms?

a. Barriers to entry in the market
b. Interdependence of firms
c. Homogeneous products
d. Economic profits can exist in the long run.
e. Economic profits can exist in the short run.
NAT: BPROG: Reflective Thinking TOP: Number of Firms: Oligopoly
60. In an oligopoly market,

a. many firms produce differentiated products.
b. one firm dominates the market.
c. easy entry is one of its characteristics.
d. a few firms dominate market.
e. the other firms' demand curves are not affected by a large firm's behavior change.
61. The policy used by Mexican government officials to force mergers to create larger companies and
appoint their friends to head them is called
a. capitalism.
b. semicapitalism.
c. quasi capitalism.
d. crony capitalism.
e. None of these
Table 6.2
Firm A
Advertise Not Advertise
Advertise Firm A 70 Firm A 100

Firm B 80 Firm B 50
Firm B
Not Advertise Firm A 40 Firm A 80
Firm B 100 Firm B 90
62. According to the payoffs in Table 6.2,

a. Firm A will advertise, no matter what, if Firm B does not advertise.
b. Firm A will advertise only if Firm B advertises.
c. Firm A has a dominant strategy but Firm B does not.
d. Firm B has a dominant strategy but Firm A does not.
e. both firms have a dominant strategy of not advertising.
ANS: E PTS: 1 DIF: Easy NAT: BPROG: Analytic
TOP: Number of Firms: Oligopoly KEY: BLOOM'S: Application
63. Table 6.2

a. explains how rival firms react using game theory.
b. represents the prisoner's dilemma.
c. shows an equilibrium in which both firms advertise.
d. demonstrates that Firm A has the dominant strategy.
e. demonstrates that Firm B has the dominant strategy.
ANS: A PTS: 1 DIF: Easy NAT: BPROG: Analytic
TOP: Number of Firms: Oligopoly KEY: BLOOM'S: Knowledge
64. A dominant strategy is

a. a strategy that every firm likes to choose.
b. a strategy the rival firms do not choose.
c. the only strategy a firm has.
d. a strategy that produces the best results no matter what strategy the opposing player
follows.
TOP: Number of Firms: Oligopoly KEY: BLOOM'S: Knowledge
65. A Nash equilibrium occurs

a. when a unilateral move by a participant does not make the participant better off.
b. when a unilateral move by a participant makes the participant better off.
c. when a unilateral move by a participant does not make the other participant better off.
d. when a unilateral move by a participant makes the other participant worse off.
66. A typical convention is

a. the person who called originally does not call again.
b. the person who called originally calls again.
c. the person waits another person's call.
d. another person who called originally does not call again.
67. In oligopoly
a. firms never cooperate.
b. one firm always wants to destroy the rival firms.
c. a firm does not need to consider the reactions of the rival firms.
d. firms may act jointly to make more profits.
68. When oligopoly firms collude, they usually do so to

a. increase their size.
b. increase costs and raise barriers to entry.
c. avoid antitrust prohibitions.
d. increase their profits.
e. become more efficient.
69. When firms in an industry jointly make pricing and output decisions, they are
a. dumping.
b. colluding.
c. arbitrating.
d. regulating.
e. trying to irritate the government.
70. When a cartel is successful,

a. it offers consumers the lowest possible prices.
b. it minimizes profits for its members.
c. it behaves as a monopolist in the market.
d. it has no effective mechanism for enforcing agreements.
e. it will always be stable.
71. A most-favored customer is one who

a. buys the most of a firm's product.
b. is a relative of the owner of the firm.
c. is given a guarantee of receiving the lowest price.
d. spends the most money.
e. None of these
72. When firms in an illegal market form a cartel,
a. they are able to supply higher quality products.
b. it is more difficult for police to detect their activities.
c. they are able to increase profits by behaving as a monopolist.
d. they actually become economically efficient by setting price equal to marginal cost.
e. they rely on goodwill to keep the cartel stable.
73. Perfect competition, monopoly, monopolistic competition, and oligopoly are all examples of
a. ceteris paribus assumptions.
b. real-world situations that firms face.
c. market structure models.
d. markets with positive economic profits.
e. voodoo economics.
74. Which of the following products would most likely not be produced in a perfectly competitive market
structure?
a. Wheat.
b. Airplanes.
c. Potatoes.
d. Apples.
e. All of these would be produced in a perfectly competitive market structure.
75. Firms operating in a perfectly competitive market are price takers because
a. they have a lot of market power.
b. in the market there are many firms, it's easy to enter, and the firms produce identical
product.
c. they choose to set a price that differs from the market price but do not lose profit.
d. they choose to set a price that differs from the market price in order to gain market share.
e. in a perfectly competitive market, price is dictated through various government agencies.
76. Mike is about to start up a business in a monopolistically competitive market. He can expect to find
entry into the market to be ____, the number of competitors to be ____, and the product he sells to be
____.
a. easy; very large; nondifferentiated
b. difficult; very large; differentiated
c. easy; relatively few; nondifferentiated
d. impossible; relatively few; differentiated
e. easy; large; differentiated
ANS: E PTS: 1 DIF: Moderate NAT: BPROG: Analytic
TOP: Competition and Entry KEY: BLOOM'S: Knowledge
77. The characteristic that distinguishes a perfectly competitive market from a monopolistically
competitive market is
a. ease of entry.
b. large number of firms.
c. degree of government regulation.
d. product differentiation.
e. market share.
78. A monopoly market structure is characterized by

a. large number of firms, standardized products, easy entry and exit.
b. large number of firms, differentiated products, easy entry and exit.
c. small number of firms, standardized or differentiated products, difficult entry.
d. one firm, an unique product without close substitutes, and impossible entry.
e. one firm, differentiated product, impossible entry.
79. Which of the following is not a characteristic of monopolistic competition?

a. Differentiated products
b. A downward-sloping demand curve for individual firms
c. Firms that are price makers
d. Impeded entry to the industry
e. A large number of firms
80. One factor that distinguishes oligopoly from other market structures is
a. the ease of entry into the market.
b. the interdependence of firms.
c. the slope of the demand curve.
d. the degree of product differentiation.
e. the amount of advertising expenditures.
81. Suppose Firm A, a large automobile manufacturer in the United States, found that as it increased its
production of automobiles, its long-run average total costs declined at first, but then slowly began to
increase again, even when all of its resources were variable over time. According to economic theory,
this phenomenon illustrates
a. first diseconomies of scale and then economies of scale.
b. first economies of scale and then diseconomies of scale.
c. bad management techniques.
d. lazy workers.
e. not enough government controls.
82. In the electricity generation industry, the cost per kilowatt hour of electricity declines as the capacity to
generate output increases. This situation represents
a. a poor opportunity for investors.
b. constant returns to scale.
c. diseconomies of scale.
d. economies of scale.
e. that electricity generation doesn't harm the environment.
83. Which of the following would not be likely to result in diseconomies of scale?
a. Low worker morale
b. Low productivity
c. Administration overhead
d. Specialization of labor
e. Managerial problems
84. When increasing size leads to lower per unit costs, we say there are
a. Diseconomies of scale
b. Economies of scale
c. Untapped resources
d. Unique resources
e. Sunk costs
85. "Unique resources" as a barrier to entry is exemplified in all of the following except:
a. DeBeers controlling about 80% of the diamonds in the world before the breakdown of the
Soviet empire.
b. Microsoft hiring top scientists.
c. Hawaii's beautiful scenery, weather, and beaches.
d. McDonald's golden arches
e. All of these are examples of "unique resources".
86. Which of the following statements is true?

a. Mrs. Fields cookie company trains all of its store managers in one place to achieve
economies of scale, and producing all of its cookie dough at one location results in
economies of scale.
b. Mrs. Fields cookie company trains all of its store managers in one place to achieve
diseconomies of scale, and producing all of its cookie dough at one location results in
economies of scale.
c. Mrs. Fields cookie company trains all of its store managers in one place to achieve
economies of scale, and producing all of its cookie dough at one location results in
diseconomies of scale.
d. Mrs. Fields cookie company trains all of its store managers in one place to achieve
diseconomies of scale, and producing all of its cookie dough at one location results in
diseconomies of scale.
e. Mrs. Fields cookie company headquarters is in New York City.
87. Differentiated products cannot be found in

a. Perfect competition
b. Monopolistic competition
c. Monopoly
d. Oligopoly
e. All of these can have differentiated products
88. ____ can arise as the result of economies of scale

a. Monopolistic competition
b. Oligopolies only
c. Perfect competition
d. Oligopolies and Monopoly
e. Monopoly only
89. If a cartel is to work, a way to stop cheaters must be established. ____ serves as the police in OPEC.
a. Saudi Arabia
b. Venezuela
c. China
d. The United States of America
e. Iraq
90. Examples of cartels include all the following except:

a. OPEC
b. NCAA
c. Sunkist Growers
d. TSA
e. All of these are cartels.
91. ____ is/are actions by oligopolistic firms that can contribute to cooperation and collusion even though
the firms do not formally agree to cooperate.
a. The most-favored customer classification
b. Markup pricing
c. Facilitating practices
d. Tying contracts
e. Convention
92. When firms collude, they usually do so to

a. increase their size.
b. increase costs and raise barriers to entry.
c. avoid antitrust prohibitions.
d. increase their profits.
e. become more efficient.
NAT: BPROG: Reflective Thinking TOP: Alternatives to the Market
93. When officers of firms in an industry get together to discuss how they can improve their mutual
well-being, the result is
a. product differentiation.
b. collusion.
c. price leadership.
d. rule-of-thumb pricing.
e. game theory.
94. Which of the following statements about collusion is false?

a. Collusion is illegal in the United States.
b. Its overriding goal is to reduce competition and thereby increase profits.
c. The greater the number of firms, the more difficult it is to maintain.
d. There is a tendency for cheating.
e. Collusion never results in benefits for the participants.
95. A cartel attempts to regulate

a. production levels alone.
b. prices alone.
c. market share alone.
d. production levels and/or prices.
e. government.
96. A cartel is
a. implicit collusion.
b. explicit collusion.
c. a facilitating practice.
d. a merger of firms into a monopoly.
e. legal in the United States.
97. When firms in an industry jointly make pricing and output decisions, they are
a. dumping.
b. colluding.
c. arbitrating.
d. regulating.
e. trying to irritate the government.
98. The problem with cartels is

a. strategic deterrence.
b. producers have an incentive to cheat.
c. marginal cost does not equal marginal revenue.
d. profits are always negative.
e. there are not enough members.
99. The most famous cartel is

a. Walmart.
b. OPEC.
c. WTO.
d. Microsoft.
e. NAFTA.
100. Which of the following is not considered a cartel?

a. National Collegiate Athletic Association (NCAA)
b. Organization of Petroleum Exporting Countries (OPEC)
c. European Union (EU)
d. National Basketball Association (NBA)
e. Major League Baseball (MLB)
TRUE/FALSE
101. Businesses would rather produce commodities than differentiated products.
ANS: F PTS: 1 DIF: Moderate

102. In perfect competition, for firms to compete effectively against each other, they need to produce goods
and services that set them apart.

103. To the consumer, price is the only criteria that matters in the market for a commodity.
ANS: T PTS: 1 DIF: Easy

104. Monopolistic competition is a market structure characterized by product differentiation and ease of
entry.

105. If rival firms can do the same thing, economic profit will be driven to zero.

106. When consumers do not differentiate between products offered by different sellers, the product turns
into a "commodity".

107. Under monopolistic competition, firms always earn positive economic profits.
ANS: F PTS: 1 DIF: Easy

108. Monopoly markets are more competitive than markets with monopolistic competition.

109. As competitors enter and provide substitutes, competition increases.

110. To many people, brand names signal quality and reliability and thus create product differentiation.

111. Compared to a brand name firm, a firm with no obvious stake in the future has an easier time
persuading potential customers that it will make good on its promises.

112. Advertising used to build brand recognition is a sunk cost.
ANS: T PTS: 1 DIF: Moderate

113. In the long run, all resources are fixed.

114. Creative destruction benefits society.

115. Creative destruction harms workers in activities that become obsolete or inefficient.

116. Training and education typically are necessary to assist people harmed by creative destruction.
117. Significant barriers to entry exist in monopolistically competitive markets.

118. Monopolistic competition is characterized by many firms selling differentiated products in a market
with no barriers to entry or exit.

119. In monopolistic competition, product differentiation allows each firm to have a demand that is price
elastic but not perfectly elastic.

120. In monopolistic competition, because of product differentiation the firm can make a profit in the
long-run.

121. Unlike perfectly competitive firms, monopolistically competitive firms are facing upward-sloping
demand curve.

122. Monopolistically and perfectly competitive firms are similar in that, in both markets, firms have
long-run economic profits equal to zero.

123. Successful product differentiation reduces the elasticity of demand for a firm's product and helps to
build consumer loyalty in monopolistically competitive markets.

124. When consumers have perfect information, they will spend a lot of time shopping at different stores
and perusing newspaper and magazine articles to learn about the prices and qualities of products.
125. Sometimes offering no guarantee on a product signals to consumers that the product is of lower quality
than it really is.

126. Product differentiation can be created because one firm's salespeople provide better service to the
customers.

127. Celebrity endorsements are often used by monopolistically competitive firms to boost the reputation of
the product that is being endorsed.

128. The number of firms in an oligopoly industry must be small enough that firms are interdependent in
decision making.

129. An oligopoly is characterized by few firms in a market with barriers to entry.

130. Only the governments in developing countries create oligopolies.

131. Oligopolists, like monopolists, can arise for similar reasons, such as economies of scale or government
regulations.

132. A strategy that produces the best results no matter what strategy the opposing player follows is known
as the nondominant strategy.
133. The reason a firm advertises its product is to increase demand for its product.

134. Nash equilibrium occurs when a unilateral move by a participant makes the participant better off.

135. A cartel attempts to increase profits in the industry by limiting the production of each member.

136. Actions that allow oligopoly firms to coordinate their pricing behavior are called facilitating practices.

137. If a cartel is successful, it will behave as a monopolist and maximize profit at the point at which MR =
MC.

138. If a firm were to set its price by determining the average cost of an item and then adding some
percentage markup to the cost, it would be practicing cost-plus pricing.

139. Larger size automatically improves efficiency.

140. When increasing size leads to lower per unit costs, we say there are diseconomies of scale.

141. The size of the firm relative to the market can be a barrier to entry.

142. Most industries experience only economies of scale.

143. Diseconomies of scale typically arise because of the growth of bureaucracy.

144. Without policing authority, a cartel will fall apart.

145. If a firm can limit competition, it will likely be able to charge higher prices.

146. If a differentiated product is produced, it would cause a shared firm or cartel to be unstable.

147. When firms collude, they usually do so to increase their size.

148. Cartels and collusion are illegal in the United States.

149. The problem for participating firms in a cartel is that each member has an incentive to cheat.

150. By using similar methods to determine price, firms can have similar prices without having to collude.

151. If a firm set its price by determining the average cost of an item and then adding some percentage
markup to the cost, it would be practicing cost-plus pricing.

152. When a customer is guaranteed that he or she will receive the lowest price and all features for a certain
period of time, he or she is called a most-favored customer.


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1. The results of competition will be different depending on

2. A perfectly competitive market is characterized by

4. More competitors will increase the market supply, thus

5. Most economists like perfect competition because

7. A product is turned into a commodity when

8. Monopoly is a market structure characterized by

11. A monopolist will earn

13. Competition is exemplified by:

14. Competition benefits individuals because

16. "Creative destruction" is:

17. A price taker is

20. A monopolistically competitive firm will maximize profits where

25. Economic profits are earned

36. Individual sellers in a commodity market are called

37. The more differentiated a firm's product, the more

38. One could argue that advertising

41. Barriers to entry take the form of

42. An example of a firm with high sunk costs is

43. A firm can gain monopoly power by

44. Creative destruction is the process by which

47. What is an assumption of the model of monopolistic competition?

48. What distinguishes monopolistic competition from perfect competition?

52. Product differentiation

53. When economists discuss product differentiation, they are referring to

54. Which of the following is not an example of nonprice competition?

57. Because consumers often possess incomplete information in markets,

59. What characteristic is unique to oligopolistic firms?

60. In an oligopoly market,

Advertise Firm A 70 Firm A 100

62. According to the payoffs in Table 6.2,

63. Table 6.2

64. A dominant strategy is

65. A Nash equilibrium occurs

66. A typical convention is

68. When oligopoly firms collude, they usually do so to

70. When a cartel is successful,

71. A most-favored customer is one who

78. A monopoly market structure is characterized by

79. Which of the following is not a characteristic of monopolistic competition?

86. Which of the following statements is true?

87. Differentiated products cannot be found in

88. ____ can arise as the result of economies of scale

90. Examples of cartels include all the following except:

92. When firms collude, they usually do so to

94. Which of the following statements about collusion is false?

95. A cartel attempts to regulate

98. The problem with cartels is

99. The most famous cartel is

100. Which of the following is not considered a cartel?

101. Businesses would rather produce commodities than differentiated products.

ANS: F PTS: 1 DIF: Moderate

ANS: F PTS: 1 DIF: Moderate

ANS: T PTS: 1 DIF: Easy

ANS: T PTS: 1 DIF: Easy

ANS: T PTS: 1 DIF: Easy

ANS: T PTS: 1 DIF: Easy

ANS: F PTS: 1 DIF: Easy

ANS: F PTS: 1 DIF: Easy

109. As competitors enter and provide substitutes, competition increases.

ANS: T PTS: 1 DIF: Easy

ANS: T PTS: 1 DIF: Easy

ANS: F PTS: 1 DIF: Moderate