Econ Micro 2 2nd Edition Mceachern Test Bank

ECON Micro 2 2nd Edition McEachern
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Chapter 10—Monopolistic Competition and Oligopoly
MULTIPLE CHOICE
1. Firms may easily enter a monopolistically competitive market.

a. True
b. False
ANS: A PTS: 1 DIF: Easy NAT: Analytic
LOC: Monopolistic competition TOP: Characteristics of Monopolistic Competition
2. Product differentiation helps determine the slope of the demand curve facing a firm in monopolistic
competition.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Reflective Thinking
3. Monopolistic competitors are protected by barriers to entry.

a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Analytic
4. The forces that determine the cost of production are largely independent of the forces that shape
demand.
a. True
b. False
ANS: A PTS: 1 DIF: Moderate NAT: Analytic
5. The term monopolistic competition

a. is an alternate expression for monopoly
b. is used to describe perfect competition with strong entry barriers
c. denotes an industry with one seller of many differentiated products
d. denotes an industry with many sellers of homogeneous products
e. denotes an industry with many sellers of differentiated products
ANS: E PTS: 1 DIF: Easy NAT: Analytic
6. Monopolistically competitive industries consist of

a. one firm selling several products
b. one firm selling one product
c. many firms, all selling identical products
d. many firms, each selling a slightly different product
e. many firms, each selling a completely different product
ANS: D PTS: 1 DIF: Easy NAT: Analytic
7. Collusion among firms to raise price is rare in monopolistically competitive markets because
a. there are too many firms
b. there are too few firms
c. there is only one firm
d. products are homogeneous
e. price leadership is used instead
8. Monopolistically competitive firms ignore the effect of their decisions upon other firms in the industry
because
a. each firm is large relative to the market
b. each firm is small relative to the market
c. there are few sellers in the market
d. there is only one seller in the market
e. all firms follow the same known pricing rules
ANS: B PTS: 1 DIF: Moderate NAT: Reflective Thinking
9. Monopolistic competition is different from perfect competition because monopolistic competitors

produce
a. a homogeneous product
b. a homogeneous but unique product
c. identical products
d. differentiated products
e. products similar to those produced by a monopoly
10. If Family Travel Agency, a monopolistic competitor, offers services that are differentiated from the
services of other producers in the industry, it
a. faces a perfectly elastic demand curve
b. is a price taker
c. has some power to control the price it charges
d. faces a perfectly inelastic demand curve
e. produces a product with no close substitutes
ANS: C PTS: 1 DIF: Easy NAT: Analytic
11. In a monopolistically competitive market, all of the following are correct, except:
a. Firms produce differentiated products
b. There are no barriers to entry
c. Firms have some control over the price they charge
d. There are many firms in the market
e. Firms can easily enter and exit the market
ANS: B PTS: 1 DIF: Moderate NAT: Analytic
12. A monopolistically competitive firm can raise price somewhat due to

a. product differentiation
b. barriers to entry
c. product similarity
d. its homogeneous product
e. high tariffs
ANS: A PTS: 1 DIF: Easy NAT: Reflective Thinking
13. The demand curve facing Imelda's Shoe Boutique, a monopolistically competitive firm,
a. is horizontal because Imelda's is small relative to the market as a whole
b. is horizontal because Imelda's is large relative to the market as a whole
c. slopes downward because Imelda's is small relative to the market as a whole
d. slopes downward because Imelda's sells a differentiated product
e. slopes downward because Imelda's firm is the entire industry
ANS: D PTS: 1 DIF: Moderate NAT: Reflective Thinking
14. Monopolistically competitive firms use product differentiation to increase the price elasticity of
demand.
a. True
b. False
15. Monopolistic competition is best described as

a. many firms with some control over price, and some product differentiation
b. many firms with no control over price, producing identical products
c. a few firms with some control over price, producing highly differentiated products
d. a few firms with no control over price, producing similar products
e. a single firm producing all of the output for the industry, with strong control over price
16. If a monopolistically competitive firm raises its price, it

a. loses all of its customers (sales drop to zero)
b. loses some, but not all, of its customers
c. loses very few customers
d. loses no customers at all
e. gains customers (sales increase)
17. Which of the following is most likely produced in a monopolistically competitive market?
a. soybeans
b. autos
c. fast food
d. oil
e. local phone service
ANS: C PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: Monopolistic competition TOP: Product Differentiation
18. A firm could differentiate its product by all of the following means except one. Which is the
exception?
a. making the product available at a number of different locations
b. increasing the number of services that accompany the product
c. making the product physically different from other products
d. using packaging or advertising to create a special subjective image of the product in the
consumer's mind
e. emphasizing that the product provides the same benefits to consumers as the others on the
market, even when it is really physically different
19. All of the following are examples of product differentiation except one. Which is the exception?
a. developing a new video game or a computer program called "How to Teach Your New
Dog Old Tricks"
b. manufacturing a car that minimizes outside noise relative to other cars
c. lowering the price of a good in a special sale
d. providing movies and special meals on airline flights
e. making sodium-free, caffeine-free colas
20. Economic analysis of product differentiation leads to all of the following conclusions except one.
Which is the exception?
a. Product differentiation makes it harder for firms to collude.
b. Product differentiation makes price leadership harder to maintain.
c. Product differentiation sometimes contributes to wasteful allocation of resources.
d. Product differentiation must be based on real, substantive differences among products.
e. There is a tradeoff between using resources efficiently and providing consumers with wide
choices.
ANS: D PTS: 1 DIF: Easy NAT: Reflective Thinking
21. When firms differentiate their products, they

a. provide information to consumers with no additional use of productive resources
b. always increase their profits
c. always create real differences among products
d. frequently create artificial or superficial differences among products, thus raising
production costs
e. usually strain the physical capacity of their plants
22. When firms in an industry produce differentiated products,

a. long-run economic profit will always be zero
b. short-run economic profit will always be positive
c. the demand curves facing firms will always be perfectly elastic
d. the demand curves facing firms will always be downward-sloping
e. new firms will always have an incentive to enter the industry in the long run
ANS: D PTS: 1 DIF: Moderate NAT: Analytic
23. Monopolistic competitors are

a. price takers
b. price searchers
c. price maximizers
d. price ignorers
e. collusive price fixers
24. In economics, products are considered "differentiated" only if

a. they are physically or chemically different
b. sellers decide that they are different
c. buyers think that they are different
d. the government determines that they are different
e. they are produced by different firms
25. Compared to regular grocery stores, convenience stores have

a. higher prices and a more limited selection of goods
b. higher prices and a greater selection of goods
c. lower prices and a more limited selection of goods
d. lower prices and a greater selection of goods
e. equal prices and an equal selection of goods
26. A monopolistically competitive firm produces where demand is inelastic.

a. True
b. False
ANS: B PTS: 1 DIF: Easy NAT: Reflective Thinking
LOC: Monopolistic competition
TOP: Short-Run Profit Maximization or Loss Minimization
27. Firms in monopoly or monopolistically competitive market structures do not have traditional supply
curves as firms in perfect competition do.
a. True
b. False
28. A monopolistic competitor's demand curve is

a. perfectly elastic
b. less elastic than a monopolist's or oligopolist's but more elastic than a perfect competitor's
c. as elastic as an oligopolist's
d. more elastic than a monopolist's or oligopolist's but less elastic than a perfect competitor's
e. perfectly inelastic
29. The demand curve facing a firm will be more elastic,

a. the fewer the number of competing firms
b. the more differentiated the product
c. the more substitutes there are for its product
d. the greater the firm's ability to control price
e. the larger the profit the firm can make
ANS: C PTS: 1 DIF: Moderate NAT: Analytic
Exhibit 10-15
$/unit
MC ATC
20
14
11
3 D
MR
20 27 Q
30. To maximize profit, the firm in Exhibit 10-15 produces:

a. 27 units, and sells them at P=$20
b. 20 units, and sells them at P=$11
c. 27 units, and sells them at P=$3
d. 27 units, and sells them at P=$11
e. 20 units, and sells them at P=$20
ANS: E PTS: 1 DIF: Moderate NAT: Reflective Thinking
31. In Exhibit 10-15, at the profit maximizing level of output, the total revenue is:
a. $400
b. $297
c. $280
d. $120
e. $60
32. In Exhibit 10-15, at the profit maximizing level of output, the total cost is:
a. $400
b. $297
c. $280
d. $120
e. $60
ANS: C PTS: 1 DIF: Moderate NAT: Reflective Thinking
33. In Exhibit 10-15, the maximum profit is:

a. $400
b. $297
c. $280
d. $120
e. $60
34. What do monopolistic competition, pure monopoly, and perfect competition have in common?
a. free entry
b. long-run economic profits
c. differentiated product
d. price taking
e. the rule of profit maximization
Exhibit 10-1
35. In Exhibit 10-1, the monopolistic competitor's profit-maximizing level of output is

a. 75 units
b. 100 units
c. 125 units
d. 150 units
e. 137.5 units
36. In Exhibit 10-1, the price that the monopolistic competitor will charge at the profit-maximizing level
of output is
a. $2
b. $4
c. $8
d. $9
e. $10
37. The monopolistic competitor in Exhibit 10-1 is in

a. long-run equilibrium because price equals average total cost
b. long-run equilibrium because marginal cost equals marginal revenue
c. long-run equilibrium because price exceeds marginal cost
d. short-run equilibrium because it is earning a positive economic profit
e. short-run equilibrium because price equals average total cost
38. In Exhibit 10-1, the monopolistic competitor's total economic profit at the profit-maximizing level of
output is
a. $0
b. $4
c. $600
d. $6
e. $750
Exhibit 10-2
39. Consider Exhibit 10-2. If the firm is charging price P* for output q*, then in order to minimize loss in
the short run, the firm should
a. shut down because price is greater than average variable cost
b. shut down because price is greater than marginal cost
c. shut down because price is less than average variable cost
d. continue to produce because price is greater than average variable cost
e. continue to produce because price is greater than marginal cost
Exhibit 10-3
Q P TC
1 $27 $10
2 24 17
3 21 25
4 18 40
5 15 60
40. The profit-maximizing output for the firm in Exhibit 10-3 is

a. 0 units
b. 1 unit
c. 3 units
d. 5 units
e. impossible to determine because MC and MR are not known
41. The profit-maximizing price for the firm in Exhibit 10-3 is

a. $0
b. $27
c. $21
d. $15
e. impossible to determine because MR and MC are not known
42. At the profit-maximizing output, the firm in Exhibit 10-3 is earning

a. an economic profit of $38
b. an economic profit, but the amount cannot be determined
c. zero economic profit
d. an economic profit of $32
e. an economic loss
ANS: A PTS: 1 DIF: Hard NAT: Reflective Thinking
43. At the profit-maximizing output, the monopolistically competitive firm in Exhibit 10-3 is in
a. long-run equilibrium because price equals average total cost
b. long-run equilibrium because price is less than average total cost
c. short-run equilibrium because price is greater than average total cost
d. short-run equilibrium because there is an economic loss
e. short-run equilibrium because there is zero economic profit
ANS: C PTS: 1 DIF: Hard NAT: Reflective Thinking
44. In the short run, a monopolistically competitive firm is

a. guaranteed to earn zero economic profit
b. guaranteed to earn economic profit
c. guaranteed to earn an economic loss
d. guaranteed to earn either zero or positive economic profit
e. not guaranteed any level of economic profit
ANS: E PTS: 1 DIF: Moderate NAT: Analytic
Exhibit 10-4
45. In the short run, which of the following should the firm in Exhibit 10-4 do?
a. Produce 10 units at a price of $36 per unit.
b. Produce 10 units at a price of $24 per unit.
c. Produce 10 units at a price of $40 per unit.
d. Produce 15 units at a price of $32 per unit.
e. We cannot determine what the firm should do without knowing its average variable cost.
Exhibit 10-5
46. In the short run, the firm in Exhibit 10-5 should

a. shut down
b. produce 8 units at a price of $11 per unit
c. produce 8 units at a price of $10 per unit
d. produce 8 units at a price of $9 per unit
e. produce 10 units at a price of $9 per unit
Exhibit 10-6
P Q TC
$7 0 $10
6 4 20
5 8 32
4 12 48
3 16 66
47. In Exhibit 10-6, what is the profit-maximizing price for this monopolistic competitor in the short run?
a. $7
b. $6
c. $5
d. $4
e. $3
48. In Exhibit 10-6, what is the maximum profit this monopolistic competitor can earn in the short run?
a. $40
b. $4
c. $48
d. $8
e. $0
49. If a monopolistically competitive firm can earn a profit, it will adjust production until
a. MR > AVC
b. MR = ATC
c. MC > MR
d. MR = AR
e. MR = MC
Exhibit 10-7
50. Assume that the firm in Exhibit 10-7 is maximizing profit. Its total revenue is
a. $5,320
b. $5,700
c. $4,750
d. $8,120
e. $8,100
51. At the profit-maximizing output level, total cost for the firm in Exhibit 10-7 is approximately
a. $5,700
b. $5,320
c. $4,750
d. $4,940
e. $8,100
52. At the profit-maximizing output level, the firm in Exhibit 10-7 is

a. earning economic profit of $760
b. earning economic profit of $950
c. earning zero economic profit
d. earning economic profit of $990
e. suffering a loss of $1,000
53. Assume a monopolistically competitive firm is earning an economic profit. The marginal revenue from
selling an additional unit is $30 and the marginal cost of producing that additional unit is $23. The firm
should
a. change neither its price nor its output level
b. reduce its price and increase its output level
c. increase its price and reduce its output level
d. reduce both its price and its output level
e. increase both its price and its output level
54. A rise in demand for restaurant meals is likely to cause which of the following in the short run?
a. economic losses for each restaurant
b. a lower price for each restaurant meal
c. fewer restaurants in the industry
d. more restaurants in the industry
e. economic profit for restaurants
55. In both monopolistic competition and non-price-discriminating monopoly,

a. the marginal revenue curve lies above the average revenue curve
b. the marginal revenue curve lies above the demand curve
c. the marginal revenue curve lies below the demand curve
d. marginal revenue is equal to average revenue
e. marginal revenue is equal to price
56. A monopolistically competitive firm is producing an output level at which marginal revenue is greater
than marginal cost. This firm should _____ quantity and _____ price to increase profit or reduce
losses.
a. increase, increase
b. increase; decrease
c. decrease; increase
d. decrease; decrease
e. increase; not change
57. A monopolistically competitive firm is producing an output level at which marginal revenue is less
than marginal cost. This firm should _____ quantity and _____ price to increase profit or reduce
losses.
a. increase, increase
b. increase; decrease
c. decrease; increase
d. decrease; decrease
e. increase; not change
Exhibit 10-8
58. Assume the firm in Exhibit 10-8 is currently charging price P and producing output level Q. In order to
maximize profit (or minimize loss), the firm should
a. charge more and sell less
b. charge less and sell more
c. charge less and sell less
d. charge more and sell more
e. continue to charge P and sell Q
Exhibit 10-9
59. In order to maximize profit or minimize loss, the firm in Exhibit 10-9 should
a. produce 100 units of output and charge $15
b. produce 100 units of output and charge $8
c. produce more than 100 units of output and charge less than $8
d. produce slightly less than 100 units of output and charge more than $8
e. shut down
60. If the firm in Exhibit 10-9 produces 100 units of output, it will have
a. both d and e
b. variable cost of slightly less than $800
c. fixed cost of slightly more than $700
d. total cost of $1,500
e. total revenue of $800
61. Which of the following describes the relationship among market price (P), average revenue (AR), and
marginal revenue (MR) for a firm in monopolistic competition.
a. P = AR = MR
b. P > AR = MR
c. P = AR > MR
d. P > AR > MR
e. P = AR < MR
62. A profit-maximizing firm in monopolistic competition should shut down in the short run
a. if marginal revenue is less than price
b. if price is always less than average total cost
c. if price is always less than average fixed cost
d. if price is always less than average variable cost
e. under no circumstances
63. A monopolistically competitive firm is currently producing 20 units of output and charging $30 per
unit. The marginal revenue of the 20th unit produced is $20 and the marginal cost of producing the 20th
unit is $18. To maximize profit or minimize loss, the firm should:
a. Charge more and sell more output
b. Charge less and sell more output
c. Charge more and sell less output
d. Charge less and sell less output
e. Charge $30 per unit and sell more output
ANS: B PTS: 1 DIF: Hard NAT: Reflective Thinking
64. A monopolistically competitive firm is currently producing 20 units of output and charging $30 per
unit. The marginal revenue of the 20th unit produced is $12 and the marginal cost of producing the 20th
unit is $18. To maximize profit or minimize loss, the firm should:
a. Charge more and sell more output
b. Charge less and sell more output
c. Charge more and sell less output
d. Charge less and sell less output
e. Charge $30 per unit and sell less output
65. In the long run in monopolistic competition, firms earn zero economic profit.
a. True
b. False
LOC: Monopolistic competition TOP: Zero Economic Profit in the Long Run
66. If a monopolistically competitive firm is in long-run equilibrium and average cost equals $150, then
the market price must be $150.
a. True
b. False
67. Monopolistic competition is similar to

a. perfect competition because the firms face downward-sloping demand curves and can earn
only a normal profit in the long run
b. pure monopoly because the firms face downward-sloping demand curves and can earn
only a normal profit in the long run
c. perfect competition because the firms face downward-sloping demand curves and similar
to pure monopoly in that the firms can earn only a normal profit in the long run
d. pure monopoly because the firms face downward-sloping demand curves and similar to
perfect competition in that the firms can earn only a normal profit in the long run
e. pure monopoly because the firms face downward-sloping demand curves and can earn an
economic profit in the long run
ANS: D PTS: 1 DIF: Hard NAT: Analytic
68. In the long run, a monopolistically competitive firm will

a. produce a greater variety of goods than do firms in other market structures
b. produce a greater output level than would a perfectly competitive firm
c. produce where price equals average total cost
d. earn an economic profit
e. suffer a loss because of its advertising budget
69. Suppose that a monopolistically competitive firm is in long-run equilibrium. The firm's demand curve
is tangent to its average cost curve at Q = 25. Average cost is minimized at Q = 35, where average cost
is $50. Which of the following is true?
a. This firm maximizes profit at an output level of 25 units.
b. This firm maximizes profit at an output level of 35 units.
c. This firm maximizes profit at an output level less than 25 units.
d. This firm maximizes profit at an output level greater than 35 units.
e. There is not enough information to find the firm's profit-maximizing level of output.
70. Suppose that a monopolistically competitive firm is in long-run equilibrium. The firm's demand curve
is tangent to its average cost curve at Q = 25. Average cost is minimized at Q = 35, where average cost
is $50. Which of the following is true?
a. This firm charges $50 for the good.
b. This firm charges more than $50 for the good.
c. This firm charges less than $50 for the good.
d. The firm has excess capacity at all output levels greater than 35 units.
e. Average cost is $50 at the profit-maximizing output level.
71. Because of easy entry, monopolistically competitive firms will

a. produce at the lowest average total cost
b. charge a price equal to marginal cost
c. earn no economic profit in the long run
d. take advantage of all economies of scale
e. earn no economic profit in the short run
Exhibit 10-10
P Q TC
$7 0 $10
6 4 20
5 8 32
4 12 48
3 16 66
72. In Exhibit 10-10, what is the maximum profit this monopolistic competitor can earn in the long run?
a. $40
b. $4
c. $48
d. $8
e. $0
Exhibit 10-11
73. Assume that the firm in Exhibit 10-11 maximizes profit. Its total revenue is
a. $5,200
b. $4,000
c. $3,600
d. $5,600
e. $3,200
74. At the profit-maximizing output level, total cost for the firm in Exhibit 10-11 is
a. $5,200
b. $4,000
c. $3,600
d. $5,600
e. impossible to determine
75. At the profit-maximizing output level, the firm in Exhibit 10-11 is

a. earning economic profit of $400
b. earning economic profit of $200
c. earning zero economic profit
d. suffering a loss of $200
e. suffering a loss of $400
76. A firm will only earn normal profit in the long run
a. if firms can freely enter or leave the market
b. if firms do not try to maximize profit
c. only if the industry is perfectly competitive
d. whenever products are not differentiated
e. if barriers to entry exist
77. In the long run, Bubba's Baby Boutique, a monopolistically competitive firm,
a. earns zero normal profit but positive economic profit
b. earns normal profit but zero economic profit
c. earns normal and economic profit
d. earns zero normal and economic profit
e. might earn any level of economic profit; no level is guaranteed
78. In the long run, the economic profit of Hoot's Pump Chicken 'n' Ribs, a monopolistic competitor,
a. is not eliminated because competition is not perfect
b. is not eliminated because the demand curve slopes downward
c. is eliminated because of new firms entering the industry
d. is eliminated because of firms leaving the industry
e. is not eliminated because new firms cannot enter the industry
79. A permanent decrease in demand for convenience store services is likely to cause which of the
following in the long run?
a. an economic loss for each firm
b. a higher price for each firm's output
c. fewer firms in the industry
d. more firms in the industry
e. economic profit for each firm
80. If the firms in a monopolistically competitive industry are suffering short-run losses, which of the
following will occur in the long run?
a. Some firms will enter the industry.
b. Customers of firms that leave the industry will switch to remaining firms.
c. Firms that remain in the industry will face reduced demand.
d. Firms will continue to incur losses.
e. There will be no excess capacity.
ANS: B PTS: 1 DIF: Hard NAT: Analytic
81. If the firms in a monopolistically competitive industry are earning short-run profit, which of the
following is not likely to occur in the long run?
a. New firms will enter the industry.
b. New firms in the industry will draw customers away from existing firms.
c. Existing firms in the industry will face a decrease in demand.
d. Firms will continue to earn profit.
e. Firms will produce with some excess capacity.
ANS: D PTS: 1 DIF: Hard NAT: Reflective Thinking
82. In the long run in monopolistic competition, the demand curve facing the typical firm
a. is perfectly elastic
b. slopes upward
c. is tangent to the firm's average total cost curve
d. lies above the firm's average total cost curve
e. is the same as the portion of the firm's marginal cost curve above average variable cost
83. As new monopolistically competitive firms enter the market, the demand facing each firm _____,
causing the price charged by each firm to _____ In the long run, each firm will earn a _____ profit.
a. falls; rise; positive
b. rises; fall; positive
c. falls; rise; normal
d. rises; fall; normal
e. falls; fall; normal
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
84. If the demand curve facing the Acme Awl Company is tangent to its average total cost curve, all of the
following statements are true except one. Which is the exception?
a. Economic profit is zero.
b. A normal profit exists.
c. Marginal cost must exceed marginal revenue.
d. Acme has excess capacity.
e. Firms have no incentive to enter or leave this industry.
85. In the long run in monopolistic competition, a firm will not produce the output level that minimizes
average cost because
a. that output level is less than the profit-maximizing one
b. at that output level, MC is greater than MR
c. at that output level, P is greater than MR
d. demand is horizontal
e. that would leave the firm with excess capacity
86. Which of the following characteristics does perfect competition share with monopolistic competition?
a. price-taking firms
b. zero long-run economic profit
c. homogeneous product
d. some barriers to entry
e. economies of scale in production
87. Monopolistically competitive firms

a. are guaranteed to earn short-run economic profit
b. may earn short-run economic profits, although long-run economic profit is typically zero
c. may earn economic profit both in the short run and in the long run
d. earn zero economic profit both in the short run and in the long run
e. can only earn an economic profit in the inelastic portion of their demand curves
88. In the long run, economic profit for a monopolistically competitive firm
a. is zero, due to the lack of barriers to entry
b. is zero, due to product differentiation
c. may be positive, due to strong barriers to entry
d. may be positive, due to product differentiation
e. may be positive, due to advertising and product promotion
Exhibit 10-12
89. The profit-maximizing (or loss-minimizing) output for the firm in Exhibit 10-12 is
a. zero (i.e., a shut down case)
b. 700 units
c. 1,000 units
d. more than 700 and less than 1,000 units
e. more than 1,000 units
90. The profit-maximizing (or loss-minimizing) price the firm would charge in Exhibit 10-12 is
a. nonexistent, since the firm should shut down
b. $3.25
c. $3.00
d. $2.50
e. between $2.50 and $3.00
91. At the profit-maximizing (or loss-minimizing) output and price, the firm in Exhibit 10-12 would
a. be earning zero economic profit (i.e., breaking even)
b. be earning an economic profit
c. be earning an economic loss
d. be better off to shut down since total revenue does not cover fixed costs
e. have to expand to stay in business in the long run
92. Assume that firms in a monopolistically competitive market are earning a short run economic loss. In
the long run,
a. Firms will continue to experience losses
b. Firms will earn economic profit
c. Firms will earn zero economic profit
d. The demand faced by each firm will decrease
e. Firms will produce more output
93. In the long run, a monopolistically competitive firm will find

a. its demand curve shifting until price equals average total cost
b. its cost curve shifting until price equals average total cost
c. its demand curve shifting until marginal revenue equals marginal cost
d. its cost curve shifting until marginal revenue equals marginal cost
e. no changes in its demand or cost curves if it is earning an economic profit
94. Suppose that firms in a monopolistically competitive industry are earning short-run economic profits.
In the long run, the demand curve facing each individual firm can be expected to
a. shift to the left and become flatter
b. shift to the left and become steeper
c. shift to the right and become flatter
d. shift to the right and become steeper
e. remain constant
95. In the long run in monopolistic competition, all economies of scale are exhausted.
a. True
b. False
TOP: Monopolistic Competition and Perfect Competition Compared
96. Excess capacity is defined as the difference between a firm's maximum possible output and its actual
output.
a. True
b. False
97. In regards to monopolistic competition, some economists argue that consumers are willing to pay a
higher price in order to enjoy a wider selection of goods and services.
a. True
b. False
98. Which of the following is inconsistent with the model of perfect competition?
a. ease of entry into an industry
b. ease of exit from an industry
c. many buyers and sellers in the industry
d. advertising of product differences in the industry
e. a horizontal demand curve facing each firm in the industry
99. In which of the following market structures is a firm most likely to advertise extensively and fear entry
of new firms?
a. perfect competition
b. pure monopoly
c. monopolistic competition
d. oligopoly
e. both perfect competition and monopolistic competition
100. Which of the following is true of the relationship between price and marginal cost under monopolistic
competition?
a. P = MC at all levels of output
b. P = MC only at the profit-maximizing quantity
c. P > MC at the profit-maximizing quantity
d. P < MC at the profit-maximizing quantity
e. P < MC at the quantities below the profit-maximizing quantity
101. In long-run equilibrium, a monopolistically competitive firm will produce

a. at the minimum average cost
b. at full capacity
c. along the downward-sloping portion of its ATC curve
d. along the upward-sloping portion of its ATC curve
e. at the minimum of marginal cost
102. At the profit-maximizing output, price is greater than marginal cost

a. for a monopolistically competitive firm only in the short run
b. for a monopolistically competitive firm only in the long run
c. for a monopolistically competitive firm in both the short run and the long run
d. for a perfectly competitive firm only in the short run
e. for a perfectly competitive firm only in the long run
103. In the long run, the output of a monopolistically competitive firm

a. exceeds that of an otherwise similar perfectly competitive firm
b. is less than that of an otherwise similar perfectly competitive firm
c. is at the point at which LRAC is minimized
d. equals that of an otherwise similar perfectly competitive firm
e. is less than that of an otherwise similar monopolist
104. A monopolistically competitive firm

a. earns no long-run economic profit and is therefore allocatively efficient
b. earns no long-run economic profit and therefore produces at the minimum point of its
ATC curve
c. earns no long-run economic profit and is allocatively efficient even though it is not
producing at the minimum point of its ATC curve
d. earns no long-run economic profit, is allocatively inefficient, and does not produce at the
minimum point of its ATC curve
e. has a chance of making a long-run economic profit and is therefore allocatively inefficient
105. Although both perfectly competitive and monopolistically competitive firms earn normal profits in the
long run, monopolistically competitive firms will not
a. operate where price equals marginal cost
b. charge a higher price than firms in perfect competition
c. produce a smaller quantity than firms in perfect competition
d. produce where price equals average total cost
e. exit when demand falls below long-run average costs
106. Which of the following is true of firms in both monopolistic competition and perfect competition?
a. Firms face a horizontal demand curve.
b. Price exceeds marginal revenue.
c. Firms can enter and leave the industry with relative ease.
d. Price exceeds marginal cost.
e. Products are differentiated.
107. One difference between perfect competition and monopolistic competition is that
a. in perfect competition, firms cannot earn a long-run economic profit
b. in perfect competition, firms take full advantage of economies of scale in long-run
equilibrium; in monopolistic competition, firms do not
c. only under perfect competition is there ease of entry and exit
d. in monopolistic competition, the firm's demand curve is horizontal; in perfect competition,
the firm's demand curve slopes downward
e. in perfect competition, there are many firms; under monopolistic competition, there are
few firms
108. Which of the following characteristics does perfect competition have in common with monopolistic
competition?
a. price-taking firms
b. homogeneous products
c. no barriers to entry
d. horizontal demand curve
e. neither market advertises
109. Compared to a firm in perfect competition, the monopolistically competitive firm tends to
a. produce less and charge a higher price
b. produce less and charge a lower price
c. produce more and charge a lower price
d. produce more and charge a higher price
e. produce the same quantity
110. Excess capacity typically occurs

a. in the short run in perfect competition
b. in the short run in monopolistic competition
c. in long-run equilibrium in perfect competition
d. in long-run equilibrium in monopolistic competition
e. usually in markets experiencing an increase in demand
111. Which of the following is unique to perfect competition?

a. The individual firm cannot earn economic profit in the long run.
b. It is easy for new firms to enter the industry.
c. The market demand curve slopes downward.
d. The demand curve facing an individual firm is perfectly elastic.
e. The firms in the industry produce a homogeneous product.
112. Monopolistically competitive firms do not achieve allocative efficiency in the long run because
a. marginal cost equals marginal revenue
b. marginal cost is greater than marginal revenue
c. marginal cost is less than marginal revenue
d. price is less than marginal cost
e. price is greater than marginal cost
ANS: E PTS: 1 DIF: Easy NAT: Reflective Thinking
113. Monopolistically competitive firms do not achieve productive efficiency because

a. entry of firms raises production costs in the long run
b. barriers to entry allow profit to be earned in the long run
c. price is greater than marginal cost at the profit maximizing output level
d. profit is maximized at a quantity where average total cost is not minimized
e. there is no threat of entry in the long run
114. Firms in monopolistic competition and perfect competition typically

a. are price takers
b. produce identical products
c. earn zero economic profit in the long run
d. face a downward-sloping demand curve
e. face an upward-sloping total revenue curve at all rates of output
115. Monopolistic competition is similar to

a. perfect competition, in that firms face downward-sloping demand curves and earn zero
long-run economic profit
b. pure monopoly, in that firms face downward-sloping demand curves and can earn
economic profits both in the short run and in the long run
c. perfect competition, in that firms face perfectly elastic demand curves and earn zero
long-run economic profit
d. pure monopoly, in that firms can earn economic profits both in the short run and in the
long run, and similar to perfect competition, in that firms face perfectly elastic demand
curves
e. pure monopoly, in that firms face downward-sloping demand curves, and similar to
perfect competition, in that long-run economic profit is zero
116. If marginal revenue is less than price for a firm, it must be true that the firm
a. is a monopoly
b. is in perfect competition
c. is in monopolistic competition
d. faces a perfectly elastic demand curve
e. faces a downward-sloping demand curve
ANS: E PTS: 1 DIF: Hard NAT: Analytic
117. Which of the following characteristics distinguishes oligopoly from other market structures?
a. a horizontal demand curve
b. a downward-sloping demand curve
c. production of homogeneous outputs
d. production of differentiated outputs
e. interdependence among firms in the industry
LOC: Oligopoly TOP: An Introduction to Oligopoly
118. Oligopolistic industries consist of

a. a few independent firms
b. a few interdependent firms
c. many interdependent firms
d. many independent firms
e. a small monopoly
119. The automobile, breakfast cereal, and tobacco industries are examples of
a. monopolistic competition
b. oligopoly
c. perfect competition
d. monopoly
e. monopsony
120. The defining characteristic of oligopoly is that each firm

a. produces the same output as its rivals
b. acts independently of its rivals
c. is mutually interdependent
d. is atomistic
e. advertises how its products are different from its rivals' products
121. The steel, cigarettes, and personal computers industries are examples of:
a. Monopoly
b. Monopsony
c. Perfect competition
d. Monopolistic competition
e. Oligopoly
ANS: E PTS: 1 DIF: Easy NAT: Reflective Thinking
122. An intersection known as Four Corners lies 300 miles from the nearest town. At this intersection are
three independently owned gas stations and one small pharmacy. Which of the following is true?
a. The firms are all perfectly competitive because of their size.
b. It would be easier for all four firms to form a cartel than for only the gas stations to do so.
c. The gas stations are monopolistically competitive because there are so few of them that
they are almost monopolists.
d. The gas stations are perfectly competitive; the pharmacy is not.
e. The gas stations are oligopolists; the pharmacy is a monopolist.
123. Which of the following is unique to oligopoly among all the market structures?
a. product differentiation
b. profit maximization
c. mutual interdependence
d. advertising
e. long-run economic profits
124. Oligopolists are more sensitive to the pricing and output policies of their rivals when
a. all firms produce identical products
b. their products are highly differentiated
c. there is freedom of entry and exit
d. there are barriers to entry
e. there are many firms in the industry
LOC: Oligopoly TOP: Varieties of Oligopoly
125. As a real estate agent, Krista Otavi prides herself on her good training, availability to clients, and hard
work to make a sale. Which one of the basic ways of product differentiation does Krista emphasize?
a. services
b. product image
c. location
d. commission rate
e. physical differences
126. The defining characteristic of oligopoly is product differentiation.

a. True
b. False
127. Something is called a barrier to entry only if it makes entry into an industry absolutely impossible.
a. True
b. False
128. When there are barriers to entry, a profit-maximizing firm already in the industry can charge any price
it wants, even in the long run.
a. True
b. False
129. It is harder to explain the behavior of firms in oligopoly than in other market structures because in
oligopoly
a. the firms act independently of each other
b. firms base their decisions on what their rivals do
c. only differentiated products are produced
d. only homogeneous products are produced
e. the demand curve can slope upward
130. Which of the following is not considered a barrier to entry?

a. economies of scale
b. patents
c. control of a scarce resource
d. licensing
e. perfect price discrimination
131. For firms in an oligopoly to be interdependent,
a. goods must be undifferentiated
b. goods must be differentiated
c. firms must be small
d. barriers to entry must be minimal
e. goods can be either undifferentiated or differentiated
132. An oligopoly is characterized by

a. few firms, which have control over market price
b. many firms and some barriers to entry
c. a large number of firms and no barriers to entry
d. a single firm and no barriers to entry
e. a single firm and significant barriers to entry
133. In which market structure(s) might firms produce an undifferentiated product?

a. perfect competition only
b. perfect competition and oligopoly
c. monopolistic competition only
d. perfect competition and monopolistic competition
e. monopoly only
134. If Ford raises the price of its automobiles, the demand curve for GM automobiles
a. shifts to the left
b. is unaffected
c. becomes more elastic
d. shifts to the right
e. becomes vertical
135. In an oligopoly, the demand curve facing an individual firm depends upon
a. the behavior of competing firms
b. the shape of the firm's average total cost curve
c. the shape of the firm's marginal cost curve
d. the firm's supply curve
e. the shape of the firm's average variable cost curve
136. Interdependent decision making on price, quality, or advertising is characteristic of

b. monopolies
c. oligopolies
d. monopolistic competition
e. both oligopolies and monopolistic competition
137. There are multiple models of pricing behavior in oligopolistic markets because
a. it is difficult to predict how rival firms will react to any pricing decision
b. the demand curve slopes upward for these firms
c. firms could earn profit in the long run unlike other markets
d. price has a direct impact on profit for a firm in oligopoly
e. the products are not identical in terms of quality, image, location
138. In oligopoly, minimum efficient scale is large relative to the market.

a. True
b. False
LOC: Oligopoly TOP: Economies of Scale
139. Economies of scale yield

a. declining average cost as output increases
b. declining marginal cost as output increases
c. declining total cost as output increases
d. diminishing average returns as output increases
e. increasing marginal revenue as output increases
Exhibit 10-13
140. All of the following statements regarding Exhibit 10-13 are true except one. Which is the exception?
a. The firm represented in the exhibit will likely be a perfect competitor.
b. There are economies of scale in this industry.
c. The minimum efficient quantity is 1,000 units.
d. At 500 units there is excess capacity.
e. A firm too small to produce at least 1,000 units will have difficulty surviving in this
industry.
141. Consider Exhibit 10-13. If two firms each produced 500 units, the total cost of supplying 1,000 units
would be
a. $6
b. $4,000
c. $4
d. $3,000
e. $6,000
Exhibit 10-14
142. Which of the curves shown in Exhibit 10-14 best represents the long-run average cost curve for an
oligopolist?
a. Curve a
b. Curve b
c. Curve c
d. Curve d
e. Curve e
143. The automobile industry is

a. in monopolistic competition because brand names are important
b. in monopolistic competition because it has economies of scale
c. in monopolistic competition for legal reasons
d. an oligopoly because each firm must produce a large amount of output before it can
achieve low average costs
e. an oligopoly for legal reasons
ANS: D PTS: 1 DIF: Hard NAT: Analytic
144. If a firm must produce a significant share of market output before low average costs can be achieved,
the structure of this industry will tend to be
b. perfect competition
c. oligopoly
d. either monopolistic competition or oligopoly
e. either perfect competition or monopolistic competition
145. Which of the following is not an example of an oligopolistic barrier to entry?

a. diseconomies of scale
b. legal restrictions
c. advertising and brand proliferation
d. high start-up costs
e. control over an essential resource
146. Oligopolists often sacrifice economies of scale as they expand product variety.
a. True
b. False
LOC: Oligopoly TOP: High Cost of Entry
147. A brand name may contribute to oligopolists' economic profit by

a. shifting the demand curve leftward
b. shifting the supply curve leftward
c. overcoming economies of scale
d. acting as a barrier to entry
e. reducing advertising costs
LOC: Oligopoly TOP: High Cost of Entry
148. The various models of oligopoly explain observed behavior in different industries, but none is
satisfactory as a general theory of oligopoly.
a. True
b. False
LOC: Oligopoly TOP: Models of Oligopoly
149. Which of the following is an example of an actual cartel?

a. the three largest cereal producers in the United States
b. General Motors, Ford, and Chrysler
c. the Organization of Petroleum Exporting Countries (OPEC)
d. the three major U.S. cigarette manufacturers
e. U.S. television networks -- ABC, NBC, CBS, and Fox
LOC: Oligopoly TOP: Models of Oligopoly
150. Collusion is most likely to occur in those oligopolies in which firms have vastly different cost
structures.
a. True
b. False
LOC: Oligopoly TOP: Collusion and Cartels
151. Cartels are inherently unstable.
a. True
b. False
152. Collusion and cartels are frequently legal in Europe.

a. True
b. False
153. An oligopolist that cheats on a collusive agreement by reducing price will quickly be forced out of the
industry by its competitors.
a. True
b. False
154. The incentives for oligopolists to cheat on collusive agreements are strongest during periods of
increasing industry sales.
a. True
b. False
155. There are only 5 suppliers of toilet paper to GreenVillage. If all of them agree to set the price at $0.85
per roll, this would be:
a. A cartel
b. Price leadership
c. A monopoly
d. A duopoly
e. A legal contract
156. If a cartel can earn a profit, it will increase production as long as

a. MR > MC
b. MR > ATC
c. MC > MR
d. MR < AR
e. MR > AVC
157. Two heavy equipment manufacturers might collude in an effort to do all of the following except one.
Which is the exception?
a. determine a more advantageous price and quantity
b. prevent new entry into the market
c. take advantage of the legal benefits that U.S. cartels receive
d. increase their combined profits
e. predict the behavior of other competitors in the heavy equipment market with greater
certainty
158. A cartel's marginal cost curve is the

a. highest of all the individual firms' marginal cost curves
b. lowest of all the individual firms' marginal cost curves
c. horizontal sum of all the individual firms' marginal cost curves
d. average of all the individual firms' marginal cost curves
e. product of all the individual firms' marginal cost curves
159. A cartel's profit-maximizing quantity occurs where the cartel's

a. marginal cost equals marginal revenue
b. marginal cost equals demand
c. price is highest
d. cost is lowest
e. demand curve has a kink
160. A cartel's profit-maximizing price is

a. on the demand curve at the quantity where marginal cost equals marginal revenue
b. on the demand curve where it intersects its marginal cost curve
c. the highest price possible
d. determined by using the cost-plus pricing model
e. where the kink in the demand curve occurs
161. Collusion occurs when

a. a firm chooses a level of output to maximize its own profit
b. firms get together to maximize joint profits
c. firms refuse to follow their price leaders
d. firms petition their U.S. senators for favors
e. two firms' price and output decisions come into conflict
162. A cartel is
a. a group of oligopolistic firms that engage in formal collusion
b. a group of monopolistically competitive firms which charge the same price
c. usually legal in the United States
d. an agreement among rival firms to set prices independently
e. illegal throughout the world
163. Three firms that are successful in colluding to raise their prices must
a. lose profits
b. announce any price changes to the government
c. restrict output
d. increase advertising to earn a profit
e. expand production
164. In a cartel,
a. all firms produce the same amount of output and earn the same profit
b. all firms produce the same amount of output but earn different amounts of profit because
their costs differ
c. firms produce different amounts of output but earn the same profit
d. firms with higher average cost produce more so that all firms earn the same profit
e. firms with lower average cost often earn higher profits
165. Under which of the following market conditions is it most difficult to maintain a cartel agreement?
a. There are many firms in the industry and these firms have similar costs.
b. There are many firms in the industry and these firms have different costs.
c. There are few firms in the industry and these firms have similar costs.
d. There are few firms in the industry and these firms have different costs.
e. There are many firms in the industry and these firms produce homogeneous products.
166. If all six suppliers of cement to Metropolis all agree to establishes a price of $45 per ton, this would be
a. a legal contract
b. price discrimination
c. cost-plus pricing
d. a cartel
e. beneficial to consumers
167. The chances of successful collusion are greatest when

a. firms are producing a differentiated product
b. there are many firms in the industry
c. there are tiny firms and huge firms together in the same industry
d. demand curves and cost curves are similar among the firms in the industry
e. demand is falling
168. If zinc suppliers are successful in forming an international zinc cartel, they will experience
a. lower output and higher prices, which discourage the entry of new firms into the industry
b. lower output, higher prices, and the need to organize an effort to prevent the entry of new
firms into the industry
c. higher output and higher prices, which discourage the entry of new firms into the industry
d. higher output, higher prices, and the need to organize an effort to prevent the entry of new
firms into the industry
e. none of the above
169. Which of the following helps to make a cartel successful?

a. stable demand and costs
b. differentiated output
c. highly variable cost conditions
d. highly variable demand conditions
e. rapidly changing technology
170. To maximize cartel profit, the members must allocate output so that the marginal cost for the final unit
produced by each firm is
a. identical
b. unequal
c. negative
d. equal to the firm’s average total cost
e. maximized
171. Consensus becomes easier to achieve as the number of firms in a cartel grows
a. True
b. False
172. An oligopoly model that describes formal collusion is the

a. kinked demand curve model
b. cartel model
c. cost-plus pricing model
d. game theory model
e. horizontal merger model
173. A formal agreement among the firms in an industry to coordinate their production and pricing
decisions in order to earn monopoly profits is known as
a. price discrimination
b. the kinked demand curve
d. a cartel
e. joint competition
174. If oligopolists engaged in some sort of collusion, industry output would be _____ and the price would
be _____ than under perfect competition.
a. smaller, lower
b. smaller, higher
c. smaller, no different
d. greater, lower
e. greater, higher
LOC: Oligopoly TOP: Comparison of Oligopoly and Perfect Competition
175. Each member of a cartel

a. faces a temptation to cheat on the agreement because lowering its price slightly below the
established price will usually increase the firm's sales and profit
b. faces a temptation to cheat on the agreement because raising its price slightly above the
established price will usually increase the firm's sales and profit
c. has no temptation to cheat on the agreement because lowering its price slightly below the
established price will usually have no impact on the firm's sales and profit
d. has no temptation to cheat on the agreement because raising its price slightly above the
established price will usually decrease the firm's sales and profit
e. has no temptation to cheat on the agreement because lowering its price slightly below the
established price will usually lower the firm's sales and profit
176. A cartel is
a. explicit collusion
b. a conglomerate merger
c. a horizontal merger
d. legal in the United States
e. implicit collusion
177. Collusion is easier to achieve and maintain in oligopoly when

a. there are many firms in the industry
b. the firms' products are homogeneous
c. the firms' cost structures are very different
d. there are very weak barriers to entry
e. the industry is located in the United States
178. Suppose a firm that sells a variety of athletic shoes is trying to start a pattern of price leadership in its
market. Which of the following is not a problem this firm might have to face?
a. Rivals recognize the intent of its actions.
b. Other firms may not necessarily follow the leader.
c. Other firms may not follow the leader but offer better service instead.
d. Differentiation among products allows for more variation in price.
e. The price leader must keep costs lower than other firms'.
LOC: Oligopoly TOP: Price Leadership
179. Tacit collusion occurs in industries that

a. are monopolistically competitive
b. contain price leaders
c. experience rapid technological change
d. are regulated
e. produce very differentiated products
180. Which of the following does not hinder successful price leadership?
a. all of the following are correct
b. potentially large economic profits due to this activity
c. cheating by offering secret discounts
d. product differentiation
e. illegality of coordinated pricing
181. Historically, the U.S. steel industry has been a good example of
b. a cartel
c. a pure monopoly
d. the kinked demand curve model of oligopoly
e. the price leadership model of oligopoly
182. During certain periods in the past few decades, if one of the three major breakfast cereal producers in
the United States announced a price increase, the other two announced a similar price increase. This is
a good example of
b. a cartel
c. a pure monopoly
d. the kinked demand curve model of oligopoly
e. the price leadership model of oligopoly
183. Cost-plus pricing

a. is used only in oligopolistic market structures
b. simplifies pricing policy by adding a markup to average total cost
c. in actual practice leads to markups which are greater for more elastic demand curves
d. is likely to increase profits more than the use of marginal analysis
e. requires the firm to project the amount which will be sold and then "mark-up" the price
based on average variable cost
184. Price wars occur more often in monopolistic competition than in other market structures.
a. True
b. False
LOC: Oligopoly TOP: Game Theory
185. A payoff matrix is a table listing the expected economic profit resulting from different possible
strategies.
a. True
b. False
186. In the game theory model of oligopoly,

a. firms will be successful in colluding to raise prices
b. one firm raises its prices, and other firms follow suit
c. firms will match other firms' price cuts but not their price increases
d. firms may attempt to avoid the worst outcome but may achieve a less-than-optimal
outcome
e. firms never avoid the worst outcome
187. In game theory, if two rivals in an oligopoly can avoid a large loss by cutting price from $40 to $35,
a. neither will cut its price
b. one will charge $40 and the other will charge $35
c. their actions will depend on their respective strategies
d. each will cut price but not all the way to $35
e. they will collude to do what's best for both of them
188. One common assumption in game theory is that firms

a. try to avoid the worst outcome
b. try to achieve the best outcome
c. minimize losses
d. always cooperate
e. always compete
189. Game theory is a separate model of oligopoly therefore it is of limited value when trying to generally
understand firm level behavior
a. True
b. False
190. Bank-with-us and First-Bank are the only two banks in GreenVillage, and they are trying to increase
their profits by attracting more customers. Consumers are indifferent between banks; they are
interested only in the interest rate they can earn on their savings. Assume that each bank can choose to
offer a 2% or a 5% interest rate on savings. If both banks are offering 2% interest rate, they split the
market and each earns $1.6 billion in profits. If both banks are offering 5% interest rate, they split the
market and each earns $1.2 billion in profits. If one offers 2% and the other one offers 5%, the bank
offering the higher interest rate earns $2 billion in profits, and the other bank earns only $1 billion.
Which of the following statements is correct?
a. If Bank-with-us is offering 2% interest rate, then First-Bank is also offering 2% interest
rate
b. If Bank-with-us is offering 2% interest rate, then First-Bank is offering 5% interest rate
c. First-Bank will offer 2% interest rate no matter what the other bank does
d. Bank-with-us will offer 2% interest rate only if First-Bank will offer 2%
e. Bank-with-us will offer 5% interest rate no matter what the other bank does
ANS: E PTS: 1 DIF: Hard NAT: Reflective Thinking
191. Bank-with-us and First-Bank are the only two banks in GreenVillage, and they are trying to increase
their profits by attracting more customers. Consumers are indifferent between banks; they are
interested only in the interest rate they can earn on their savings. Assume that each bank can choose to
offer a 2% or a 5% interest rate on savings. If both banks are offering 2% interest rate, they split the
market and each earns $1.6 billion in profits. If both banks are offering 5% interest rate, they split the
market and each earns $1.2 billion in profits. If one offers 2% and the other one offers 5%, the bank
offering the higher interest rate earns $2 billion in profits, and the other bank earns only $1 billion.
What is the dominant strategy equilibrium?
a. Both banks offer 2% interest rate to maximize profits
b. Both banks offer 5% interest rate
c. Bank-with-us offers 2% no matter what the other bank does
d. Bank-with-us offers 2% and First-Bank offers 5%
e. Bank-with-us offers 5% and First-Bank offers 2%
192. Gin and Rummy, producers of skateboards, have to decide how much to charge for their boards.
Assume that the strategies are to charge a low price ($200) or a high price ($400). The profits appear
in the following payoff matrix:
Which of the following statements is correct?

a. Gin charges the low price only when Rummy charges the low price
b. Gin charges the high price only when Rummy charges the high price
c. Gin charges the low price only when Rummy charges the high price
d. Gin charges the low price no matter the price charged by Rummy
e. Gin charges the high price no matter the price charged by Rummy
193. Gin and Rummy, producers of skateboards, have to decide how much to charge for their boards.
Assume that the strategies are to charge a low price ($200) or a high price ($400). The profits appear
in the following payoff matrix:
What is the dominant strategy equilibrium?

a. Gin charges the low price, and Rummy charges the low price
b. Gin charges the high price, and Rummy charges the low price
c. Gin charges the low price, and Rummy charges the high price
d. Gin charges the high price, and Rummy charges the high price
e. Gin charges the high price no matter the price charged by Rummy
194. Game theory provides us with a general approach to understanding the behavior of firms when their
choices are interdependent
a. True
b. False
195. The prisoner's dilemma is applicable only when considering the illegal behavior that firms in a
non-competitive market may pursue
a. True
b. False
196. A player's strategy is a game plan when decisions are interdependent

a. True
b. False
197. Because firms in an oligopoly are interdependent, they attempt to maximize revenues rather than
profits
a. True
b. False
198. Game theory is most useful in understanding the decision making behavior of firms in which type of
industry?
b. monopoly
d. natural monopoly
e. oligopoly
199. Game theory focuses on

a. strategic behavior among interdependent firms
b. professional athletic events
c. competition between the players in board games
d. competition between those in the political arena and those in the market place
e. the interaction between firms in a competitive industry and those in a non-competitive
industry
200. Game theory is used in a number of areas in economics. What is the primary reason that it is used in
analyzing oligopoly type market structures?
a. The firms are producing a similar product
b. The firms are producing differentiated products
c. The demand curve facing the oligopolistic firms is perfectly inelastic
d. The mutual interdependence of firms in industries with a small number of firms
e. The demand curve the oligopolistic firm faces is downward sloping
201. Game theory is the study of which of the following?

a. The prisoner's dilemma
b. The behavior of people engaged in recreational games
c. The mutual interdependence of firms in oligopolistic industries
d. The downward sloping demand curve faced by firms in an oligopoly
e. The interaction between marginal and average revenue
202. The solution of a game is dependent upon

a. predicted response of competitors
b. the existence of a perfectly inelastic demand curve
c. costs of production being constant
d. economies of scale in production
e. marginal revenue being equal to marginal cost
203. Which of the following is likely to occur when it is known that a two-person game is to be played only
once?
a. Collusion
b. The demand curve becomes perfectly inelastic for this time period
c. The prisoner's dilemma
d. The pursuit of profit maximization for the entire industry
e. An attempt to equate marginal revenue with marginal cost
204. A prisoner's dilemma is a situation in which

a. a change in marginal cost may not lead to a change in price
b. a firm's competitors follow a price increase but ignore a price decrease
c. oligopolists behave irrationally
d. oligopolists attempt to maximize sales rather than profits
e. an oligopolists demand curve may become perfectly inelastic
205. Which of the following is likely to occur when a two-person game can be played repeatedly?
a. Collusion and cooperation among the players
b. The prisoner's dilemma
c. The industry demand curve will become perfectly elastic
d. The industry demand curve will become perfectly inelastic
e. There is no solution possible because of the indeterminate price quantity combinations
206. A prisoner's dilemma can be described as a situation in which

a. a decision maker is uncertain about the potential punishment for something done in the
past
b. an individual decision maker finds it in his best interest to pursue a course of action that
can lead to a less than desirable outcome for the group
c. producers act so as to avoid maximizing profits because of government retaliation
d. individual firms seeks to maximize their own profits with no regard for the group
e. the summation of individual demand curves creates an inelastic demand curve facing the
industry
207. The principal advantage of the game theory approach is that it allows us to
a. take all possible information into consideration before developing a theory
b. better understand why the firm in a competitive industry avoids games
c. better understand how the government should regulate a natural monopoly
d. better understand decision making when one person’s choices affect another person’s
choices
e. understand the relationship between the firm and the industry demand curves
208. The advantage of game theory is that it allows us to focus on the
a. individual firm's incentives to cooperate or not
b. relationship between the market and firm level demand curve
c. costs and benefits
d. government regulators and the firms in an industry
e. models where there are no barriers to entry
209. The term strategy in terms of game theory refers to

a. the relationship between price and marginal cost
b. the relationship between individual firm demand curves and the market demand curve
c. each firm's game plan in making decisions
d. the interrelationship between price and marginal revenue
e. the tendency for collusive firms to generate normal profits
210. The payoff matrix refers to

a. the difference between total revenue and total cost at different price levels
b. a listing of the rewards and penalties associated with pursuing various strategies
c. the difference between average and marginal cost for the non-competitive firm
d. the difference between average and marginal revenue in a non-competitive industry
e. the difference between average variable and average total cost to the firm
211. The solution in the prisoner's dilemma is called the

a. loss minimizing solution
b. profit maximizing equilibrium
c. dominant-strategy equilibrium
d. revenue maximizing equilibrium
e. marginal revenue solution
ANS: C PTS: 1 DIF: Hard NAT: Analytic
212. The dominant-strategy solution implies that each firm

a. ignores the reactions of competitors
b. colludes with competitors to maximize industry profits
c. ignores the decisions of the other firms
d. takes all potential bits of information into consideration before making a decision
e. selects the optimal solution to a game
213. In the prisoner’s dilemma game, the sentence that each player receives depends on
a. neither strategy chosen
b. only the strategy the player chooses
c. only the strategy the other player chooses
d. the strategy the player chooses and on the strategy the other player chooses
e. None of the answers is correct.
214. The prisoner's dilemma provides an explanation for

a. the price wars that sometimes occur in oligopolies
b. the ability of firms in an oligopoly to extract the entire consumer surplus
c. the collusive behavior that sometimes occurs in an oligopoly
d. the failure of firms in non-competitive industries to maximize profits
e. an irrational behavior that occurs in competitive markets
215. The tit-for-tat strategy implies that the firms

a. in non-competitive industries match price increases but ignore price decreases
b. will follow the lead of the dominant firm in making pricing decisions
c. prices will change whenever fixed cost changes
d. cooperate on the first round, and then follow your competitors reactions on the second
round
e. price will only change if demand changes
216. In a coordination game, a Nash equilibrium occurs when

a. each player ignores the strategy of the other player
b. each player chooses no strategy, but maintains the status quo
c. each player chooses the same strategy
d. one player can improve the outcome by changing strategy
e. None of the answers is correct.
217. Which oligopoly model was developed to explain price wars in an industry?
a. natural oligopolies
b. cartels
c. price leadership by a dominant firm
d. game theory
e. cost-plus theory
218. In a game that can be repeated, the optimal solution is

a. dependent upon each firm's decision in the first round of decision making
b. independent of the decisions that competitive firms made on the first round
c. to maximize profits regardless of what competitors do
d. to minimize costs regardless of what competitors do
e. to select the solution that minimizes the potential losses from a decision
219. If the leading canned soup company introduces dozens of new flavors in order to dominate shelf space,
the company is most likely trying to create a barrier to entry by
a. increasing the total investment needed to reach the minimum efficient size
b. spending more on advertising than potential competitors can afford
c. exploiting economies of scale
d. crowding out the competition
e. establishing an undifferentiated oligopoly
LOC: Oligopoly TOP: Crowding Out the Competition

Econ Micro 2 2nd Edition Mceachern Test Bank

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ECON Micro 2 2nd Edition McEachern

1. Firms may easily enter a monopolistically competitive market.

3. Monopolistic competitors are protected by barriers to entry.

5. The term monopolistic competition

6. Monopolistically competitive industries consist of

9. Monopolistic competition is different from perfect competition because monopolistic competitors

12. A monopolistically competitive firm can raise price somewhat due to

15. Monopolistic competition is best described as

16. If a monopolistically competitive firm raises its price, it

21. When firms differentiate their products, they

22. When firms in an industry produce differentiated products,

23. Monopolistic competitors are

24. In economics, products are considered "differentiated" only if

25. Compared to regular grocery stores, convenience stores have

26. A monopolistically competitive firm produces where demand is inelastic.

28. A monopolistic competitor's demand curve is

29. The demand curve facing a firm will be more elastic,

30. To maximize profit, the firm in Exhibit 10-15 produces:

33. In Exhibit 10-15, the maximum profit is:

35. In Exhibit 10-1, the monopolistic competitor's profit-maximizing level of output is

37. The monopolistic competitor in Exhibit 10-1 is in

40. The profit-maximizing output for the firm in Exhibit 10-3 is

41. The profit-maximizing price for the firm in Exhibit 10-3 is

42. At the profit-maximizing output, the firm in Exhibit 10-3 is earning

44. In the short run, a monopolistically competitive firm is

46. In the short run, the firm in Exhibit 10-5 should

52. At the profit-maximizing output level, the firm in Exhibit 10-7 is

55. In both monopolistic competition and non-price-discriminating monopoly,

67. Monopolistic competition is similar to

68. In the long run, a monopolistically competitive firm will

71. Because of easy entry, monopolistically competitive firms will

75. At the profit-maximizing output level, the firm in Exhibit 10-11 is

87. Monopolistically competitive firms

93. In the long run, a monopolistically competitive firm will find

101. In long-run equilibrium, a monopolistically competitive firm will produce

102. At the profit-maximizing output, price is greater than marginal cost

103. In the long run, the output of a monopolistically competitive firm

104. A monopolistically competitive firm

110. Excess capacity typically occurs

111. Which of the following is unique to perfect competition?

113. Monopolistically competitive firms do not achieve productive efficiency because

114. Firms in monopolistic competition and perfect competition typically

115. Monopolistic competition is similar to

118. Oligopolistic industries consist of

120. The defining characteristic of oligopoly is that each firm

126. The defining characteristic of oligopoly is product differentiation.

130. Which of the following is not considered a barrier to entry?

132. An oligopoly is characterized by

133. In which market structure(s) might firms produce an undifferentiated product?

136. Interdependent decision making on price, quality, or advertising is characteristic of

138. In oligopoly, minimum efficient scale is large relative to the market.

139. Economies of scale yield

143. The automobile industry is

145. Which of the following is not an example of an oligopolistic barrier to entry?

147. A brand name may contribute to oligopolists' economic profit by

149. Which of the following is an example of an actual cartel?

152. Collusion and cartels are frequently legal in Europe.

156. If a cartel can earn a profit, it will increase production as long as

158. A cartel's marginal cost curve is the

159. A cartel's profit-maximizing quantity occurs where the cartel's

160. A cartel's profit-maximizing price is

161. Collusion occurs when

167. The chances of successful collusion are greatest when

169. Which of the following helps to make a cartel successful?