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 Chapter_10_Monopolistic_Competition_and_Oligopoly

1
Firms may easily enter a monopolistically competitive market.

True
False

2
Product differentiation helps determine the slope of the demand curve
facing a firm in monopolistic competition.

True
False

3
Monopolistic competitors are protected by barriers to entry.

True
False

4
The forces that determine the cost of production are largely independent of
the forces that shape demand.

True
False

5
The term monopolistic competition

is an alternate expression for monopoly

is used to describe perfect competition with strong
entry barriers
denotes an industry with one seller of many
differentiated products
denotes an industry with many sellers of
homogeneous products
denotes an industry with many sellers of
differentiated products

6
Monopolistically competitive industries consist of

one firm selling several products

one firm selling one product
 many firms, all selling identical products
many firms, each selling a slightly different product

many firms, each selling a completely different

product

7
Collusion among firms to raise price is rare in monopolistically competitive
markets because

there are too many firms

there are too few firms
there is only one firm
products are homogeneous
price leadership is used instead

8
Monopolistically competitive firms ignore the effect of their decisions upon
other firms in the industry because

each firm is large relative to the market

each firm is small relative to the market
there are few sellers in the market
there is only one seller in the market
all firms follow the same known pricing rules

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

a homogeneous product
a homogeneous but unique product
identical products
differentiated products
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

faces a perfectly elastic demand curve

is a price taker
has some power to control the price it charges
faces a perfectly inelastic demand curve
produces a product with no close substitutes

11
A monopolistically competitive firm can raise price somewhat due to

product differentiation
barriers to entry
product similarity
its homogeneous product
 high tariffs

12
The demand curve facing Imelda's Shoe Boutique, a monopolistically
competitive firm,

is horizontal because Imelda's is small relative to

the market as a whole
is horizontal because Imelda's is large relative to the
market as a whole
slopes downward because Imelda's is small relative
to the market as a whole
slopes downward because Imelda's sells a
differentiated product
slopes downward because Imelda's firm is the entire
industry

13
Monopolistically competitive firms use product differentiation to increase
the price elasticity of demand.

True
False

14
Monopolistic competition is best described as

many firms with some control over price, and some

product differentiation
many firms with no control over price, producing
identical products
a few firms with some control over price, producing
highly differentiated products
a few firms with no control over price, producing
similar products
a single firm producing all of the output for the
industry, with strong control over price

15
If a monopolistically competitive firm raises its price, it

loses all of its customers (sales drop to zero)

loses some, but not all, of its customers
loses very few customers
loses no customers at all
gains customers (sales increase)

16
Which of the following is most likely produced in a monopolistically
competitive market?

soybeans
 autos
fast food
oil
local phone service

17
Which of the following is most likely produced in a monopolistically
competitive market?

restaurant meals
computer chips
firewood
motorcycles
soft drink

18
A firm could differentiate its product by all of the following means except
one. Which is the exception?

making the product available at a number of

different locations
increasing the number of services that accompany
the product
making the product physically different from other
products
using packaging or advertising to create a special
subjective image of the product in the consumer's mind

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?

developing a new video game or a computer

program called "How to Teach Your New Dog Old
Tricks"
manufacturing a car that minimizes outside noise
relative to other cars
lowering the price of a good in a special sale
providing movies and special meals on airline flights

making sodium­free, caffeine­free colas

20
Economic analysis of product differentiation leads to all of the following
conclusions except one. Which is the exception?

Product differentiation makes it harder for firms to

collude.
 Product differentiation makes price leadership
harder to maintain.
Product differentiation sometimes contributes to
wasteful allocation of resources.
Product differentiation must be based on real,
substantive differences among products.
There is a tradeoff between using resources
efficiently and providing consumers with wide choices.

21
When firms differentiate their products, they

provide information to consumers with no additional

use of productive resources
always increase their profits
always create real differences among products
frequently create artificial or superficial differences
among products, thus raising production costs
usually strain the physical capacity of their plants

22
When firms in an industry produce differentiated products,

long­run economic profit will always be zero

short­run economic profit will always be positive
the demand curves facing firms will always be
perfectly elastic
the demand curves facing firms will always be
downward­sloping
new firms will always have an incentive to enter the
industry in the long run

23
Monopolistic competitors are

price takers
price searchers
price maximizers
price ignorers
collusive price fixers

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

they are physically or chemically different

sellers decide that they are different
buyers think that they are different
the government determines that they are different
they are produced by different firms

25
Compared to regular grocery stores, convenience stores have
 higher prices and a more limited selection of goods
higher prices and a greater selection of goods
lower prices and a more limited selection of goods
lower prices and a greater selection of goods
equal prices and an equal selection of goods

26
A monopolistically competitive firm produces where demand is inelastic.

True
False

27
Firms in monopoly or monopolistically competitive market structures do not
have traditional supply curves as firms in perfect competition do.

True
False

28
A monopolistic competitor's demand curve is

perfectly elastic
less elastic than a monopolist's or oligopolist's but
more elastic than a perfect competitor's
as elastic as an oligopolist's
more elastic than a monopolist's or oligopolist's but
less elastic than a perfect competitor's
perfectly inelastic

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

the fewer the number of competing firms

the more differentiated the product
the more substitutes there are for its product
the greater the firm's ability to control price
the larger the profit the firm can make

30
What do monopolistic competition, pure monopoly, and perfect competition
have in common?

free entry
long­run economic profits
differentiated product
price taking
the rule of profit maximization
31 Exhibit 10­1

In Exhibit 10­1, the monopolistic competitor's profit­maximizing level of

output is

75 units
100 units
125 units
150 units
137.5 units

32
Exhibit 10­1

In Exhibit 10­1, the price that the monopolistic competitor will charge at the
profit­maximizing level of output is

$2
$4
$8
$9
$10

33
 Exhibit 10­1

The monopolistic competitor in Exhibit 10­1 is in

long­run equilibrium because price equals average

total cost
long­run equilibrium because marginal cost equals
marginal revenue
long­run equilibrium because price exceeds marginal
cost
short­run equilibrium because it is earning a positive
economic profit
short­run equilibrium because price equals average
total cost

34
Exhibit 10­1

In Exhibit 10­1, the monopolistic competitor's total economic profit at the

profit­maximizing level of output is

$0
$4
$600
 $6
$750

35
Exhibit 10­2

Consider Exhibit 10­2. If the firm is charging price P* for output q*, then in
order to minimize loss in the short run, the firm should

shut down because price is greater than average

variable cost
shut down because price is greater than marginal
cost
shut down because price is less than average
variable cost
continue to produce because price is greater than
average variable cost
continue to produce because price is greater than
marginal cost

36
Exhibit 10­3

Q P TC

1 $27 $10

2 24 17

3 21 25

4 18 40

5 15 60
 The profit­maximizing output for the firm in Exhibit 10­3 is

0 units
1 unit
3 units
5 units
impossible to determine because MC and MR are not
known

37
Exhibit 10­3

Q P TC

1 $27 $10

2 24 17

3 21 25

4 18 40

5 15 60

The profit­maximizing price for the firm in Exhibit 10­3 is

$0
$27
$21
$15
impossible to determine because MR and MC are not
known

38
Exhibit 10­3

Q P TC

1 $27 $10

2 24 17
 3 21 25

4 18 40

5 15 60

At the profit­maximizing output, the firm in Exhibit 10­3 is earning

an economic profit of $38

an economic profit, but the amount cannot be
determined
zero economic profit
an economic profit of $32
an economic loss

39
Exhibit 10­3

Q P TC

1 $27 $10

2 24 17

3 21 25

4 18 40

5 15 60

At the profit­maximizing output, the monopolistically competitive firm in

Exhibit 10­3 is in

long­run equilibrium because price equals average

total cost
long­run equilibrium because price is less than
average total cost
short­run equilibrium because price is greater than
average total cost
short­run equilibrium because there is an economic
loss
short­run equilibrium because there is zero
economic profit
40 In the short run, a monopolistically competitive firm is

guaranteed to earn zero economic profit

guaranteed to earn economic profit
guaranteed to earn an economic loss
guaranteed to earn either zero or positive economic
profit
not guaranteed any level of economic profit

41
Exhibit 10­4

In the short run, which of the following should the firm in Exhibit 10­4 do?

Produce 10 units at a price of $36 per unit.

Produce 10 units at a price of $24 per unit.
Produce 10 units at a price of $40 per unit.
Produce 15 units at a price of $32 per unit.
We cannot determine what the firm should do
without knowing its average variable cost.

42
Exhibit 10­4

For the situation depicted in Exhibit 10­4, what will happen in the long­run?
 New technology will lower average total costs and
increase profits for the firm.
Firms will exit this market causing economic profit
to increase.
Product differentiation will lead to an increase in
profitablility.
New firms will enter the market driving economic
profit to zero.
Nothing, the situation will remain the same.

43
Exhibit 10­5

In the short run, the firm in Exhibit 10­5 should

shut down
produce 8 units at a price of $11 per unit
produce 8 units at a price of $10 per unit
produce 8 units at a price of $9 per unit
produce 10 units at a price of $9 per unit

44
Exhibit 10­5

In the long run, the firm in Exhibit 10­5 can expect

 to shut down
entry into the industry which will reduce the
demand for their product and lower their profit
exit from the industry which will increase demand
for their product and increase their profitability
competitors to differentiate their products which will
reduce the demand for their product and lower their
profit
no change in the industry

45
Exhibit 10­6

P Q TC

$7 0 $10

6 4 20

5 8 32

4 12 48

3 16 66

In Exhibit 10­6, what is the profit­maximizing price for this monopolistic

competitor in the short run?

$7
$6
$5
$4
$3

46
Exhibit 10­6

P Q TC

$7 0 $10

6 4 20

5 8 32
 4 12 48

3 16 66

In Exhibit 10­6, what is the maximum profit this monopolistic competitor

can earn in the short run?

$40
$4
$48
$8
$0

47
If a monopolistically competitive firm can earn a profit, it will adjust
production until

MR > AVC
MR = ATC
MC > MR
MR = AR
MR = MC

48
Exhibit 10­7

Assume that the firm in Exhibit 10­7 is maximizing profit. Its total revenue
is

$5,320
$5,700
$4,750
 $8,120
$8,100

49
Exhibit 10­7

At the profit­maximizing output level, total cost for the firm in Exhibit 10­7
is approximately

$5,700
$5,320
$4,750
$4,940
$8,100

50
Exhibit 10­7

At the profit­maximizing output level, the firm in Exhibit 10­7 is

 earning economic profit of $760
earning economic profit of $950
earning zero economic profit
earning economic profit of $990
suffering a loss of $1,000

51
Exhibit 10­7

In the long run, the firm in Exhibit 10­7 can expect

to earn an economic profit of $760

earn an economic profit of $950
earn zero economic profit
earn an economic profit of $990
suffer a loss of $1,000

52
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

change neither its price nor its output level

reduce its price and increase its output level
increase its price and reduce its output level
reduce both its price and its output level
increase both its price and its output level

53
A rise in demand for restaurant meals is likely to cause which of the
following in the short run?

economic losses for each restaurant

a lower price for each restaurant meal
fewer restaurants in the industry
 more restaurants in the industry
economic profit for restaurants

54
A rise in demand for restaurant meals is likely to cause which of the
following in the long run?

economic losses for each restaurant

a lower price for each restaurant meal
fewer restaurants in the industry
more restaurants in the industry
economic profit for restaurants

55
In both monopolistic competition and non­price­discriminating monopoly,

the marginal revenue curve lies above the average

revenue curve
the marginal revenue curve lies above the demand
curve
the marginal revenue curve lies below the demand
curve
marginal revenue is equal to average revenue
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.

increase, increase
increase; decrease
decrease; increase
decrease; decrease
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.

increase, increase
increase; decrease
decrease; increase
decrease; decrease
increase; not change

58
Exhibit 10­8
 Assume the firm in Exhibit 10­8 is currently charging price P and producing
output level Q. In order to maximize profit (or minimize loss), the firm
should

charge more and sell less

charge less and sell more
charge less and sell less
charge more and sell more
continue to charge P and sell Q

59
Exhibit 10­9

In order to maximize profit or minimize loss, the firm in Exhibit 10­9 should

produce 100 units of output and charge $15

produce 100 units of output and charge $8
produce more than 100 units of output and charge
less than $8
produce slightly less than 100 units of output and
charge more than $8
shut down
60
Exhibit 10­9

If the firm in Exhibit 10­9 produces 100 units of output, it will have

both d and e
variable cost of slightly less than $800
fixed cost of slightly more than $700
total cost of $1,500
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.

P = AR = MR
P > AR = MR
P = AR > MR
P > AR > MR
P = AR < MR

62
A profit­maximizing firm in monopolistic competition should shut down in
the short run

if marginal revenue is less than price

if price is always less than average total cost
if price is always less than average fixed cost
if price is always less than average variable cost
under no circumstances

63
In the long run in monopolistic competition, firms earn zero economic profit.

True
 False

64
If a monopolistically competitive firm is in long­run equilibrium and average
cost equals $150, then the market price must be $150.

True
False

65
Monopolistic competition is similar to

perfect competition because the firms face

downward­sloping demand curves and can earn only a
normal profit in the long run
pure monopoly because the firms face downward­
sloping demand curves and can earn only a normal
profit in the long run
perfect competition because the firms face
downward­sloping demand curves and similar to pure
monopoly in that the firms can earn only a normal
profit in the long run
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
pure monopoly because the firms face downward­
sloping demand curves and can earn an economic profit
in the long run

66
In the long run, a monopolistically competitive firm will

produce a greater variety of goods than do firms in

other market structures
produce a greater output level than would a
perfectly competitive firm
produce where price equals average total cost
earn an economic profit
suffer a loss because of its advertising budget

67
Suppose that a monopolistically competitive firm is in long­run 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?

This firm maximizes profit at an output level of 25

units.
This firm maximizes profit at an output level of 35
 units.
This firm maximizes profit at an output level less
than 25 units.
This firm maximizes profit at an output level greater
than 35 units.
There is not enough information to find the firm's
profit­maximizing level of output.

68
Suppose that a monopolistically competitive firm is in long­run 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?

This firm charges $50 for the good.

This firm charges more than $50 for the good.
This firm charges less than $50 for the good.
The firm has excess capacity at all output levels
greater than 35 units.
Average cost is $50 at the profit­maximizing output
level.

69
Because of easy entry, monopolistically competitive firms will

produce at the lowest average total cost

charge a price equal to marginal cost
earn no economic profit in the long run
take advantage of all economies of scale
earn no economic profit in the short run

70
Exhibit 10­10

P Q TC

$7 0 $10

6 4 20

5 8 32

4 12 48

3 16 66

In Exhibit 10­10, what is the maximum profit this monopolistic competitor

 can earn in the long run?

$40
$4
$48
$8
$0

71
Exhibit 10­11

Assume that the firm in Exhibit 10­11 maximizes profit. Its total revenue is

$5,200
$4,000
$3,600
$5,600
$3,200

72
Exhibit 10­11

At the profit­maximizing output level, total cost for the firm in Exhibit 10­11
is

$5,200
 $4,000
$3,600
$5,600
impossible to determine

73
Exhibit 10­11

At the profit­maximizing output level, the firm in Exhibit 10­11 is

earning economic profit of $400

earning economic profit of $200
earning zero economic profit
suffering a loss of $200
suffering a loss of $400

74
A firm will only earn normal profit in the long run

if firms can freely enter or leave the market

if firms do not try to maximize profit
only if the industry is perfectly competitive
whenever products are not differentiated
if barriers to entry exist

75
In the long run, Bubba's Baby Boutique, a monopolistically competitive
firm,

earns zero normal profit but positive economic profit

earns normal profit but zero economic profit

earns normal and economic profit
earns zero normal and economic profit
might earn any level of economic profit; no level is
guaranteed

76
In the long run, the economic profit of Hoot's Pump Chicken 'n' Ribs, a
 monopolistic competitor,

is not eliminated because competition is not perfect

is not eliminated because the demand curve slopes

downward
is eliminated because of new firms entering the
industry
is eliminated because of firms leaving the industry
is not eliminated because new firms cannot enter
the industry

77
A permanent decrease in demand for convenience store services is likely to
cause which of the following in the long run?

an economic loss for each firm

a higher price for each firm's output
fewer firms in the industry
more firms in the industry
economic profit for each firm

78
If the firms in a monopolistically competitive industry are suffering short­
run losses, which of the following will occur in the long run?

Some firms will enter the industry.

Customers of firms that leave the industry will
switch to remaining firms.
Firms that remain in the industry will face reduced
demand.
Firms will continue to incur losses.
There will be no excess capacity.

79
If the firms in a monopolistically competitive industry are earning short­run
profit, which of the following is not likely to occur in the long run?

New firms will enter the industry.

New firms in the industry will draw customers away
from existing firms.
Existing firms in the industry will face a decrease in
demand.
Firms will continue to earn profit.
Firms will produce with some excess capacity.

80
In the long run in monopolistic competition, the demand curve facing the
typical firm

is perfectly elastic
slopes upward
 is tangent to the firm's average total cost curve
lies above the firm's average total cost curve
is the same as the portion of the firm's marginal
cost curve above average variable cost

81
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.

falls; rise; positive

rises; fall; positive
falls; rise; normal
rises; fall; normal
falls; fall; normal

82
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?

Economic profit is zero.

A normal profit exists.
Marginal cost must exceed marginal revenue.
Acme has excess capacity.
Firms have no incentive to enter or leave this
industry.

83
In the long run in monopolistic competition, a firm will not produce the
output level that minimizes average cost because

that output level is less than the profit­maximizing

one
at that output level, MC is greater than MR
at that output level, P is greater than MR
demand is horizontal
that would leave the firm with excess capacity

84
Which of the following characteristics does perfect competition share with
monopolistic competition?

price­taking firms
zero long­run economic profit
homogeneous product
some barriers to entry
economies of scale in production

85
Monopolistically competitive firms

are guaranteed to earn short­run economic profit

 may earn short­run economic profits, although long­
run economic profit is typically zero
may earn economic profit both in the short run and
in the long run
earn zero economic profit both in the short run and
in the long run
can only earn an economic profit in the inelastic
portion of their demand curves

86
In the long run, economic profit for a monopolistically competitive firm

is zero, due to the lack of barriers to entry

is zero, due to product differentiation
may be positive, due to strong barriers to entry
may be positive, due to product differentiation
may be positive, due to advertising and product
promotion

87
Exhibit 10­12

The profit­maximizing (or loss­minimizing) output for the firm in Exhibit 10­
12 is

zero (i.e., a shut down case)

700 units
1,000 units
more than 700 and less than 1,000 units
more than 1,000 units

88
Exhibit 10­12
 The profit­maximizing (or loss­minimizing) price the firm would charge in
Exhibit 10­12 is

nonexistent, since the firm should shut down

$3.25
$3.00
$2.50
between $2.50 and $3.00

89
Exhibit 10­12

At the profit­maximizing (or loss­minimizing) output and price, the firm in

Exhibit 10­12 would

be earning zero economic profit (i.e., breaking

even)
be earning an economic profit
 be earning an economic loss
be better off to shut down since total revenue does
not cover fixed costs
have to expand to stay in business in the long run

90
In the long run, a monopolistically competitive firm will find

its demand curve shifting until price equals average

total cost
its cost curve shifting until price equals average
total cost
its demand curve shifting until marginal revenue
equals marginal cost
its cost curve shifting until marginal revenue equals
marginal cost
no changes in its demand or cost curves if it is
earning an economic profit

91
Suppose that firms in a monopolistically competitive industry are earning
short­run economic profits. In the long run, the demand curve facing each
individual firm can be expected to

shift to the left and become flatter

shift to the left and become steeper
shift to the right and become flatter
shift to the right and become steeper
remain constant

92
In the short­run, firms in a monopolistically competitive market will earn
zero economic profit.

True
False

93
The video rental market can be described as a monopolistically competitive
market. As a result of the economic profit earned by the first video rental
outlets,

existing firms were able to successfully lobby the

government for patent protection
competitors were attracted to the industry, and their
entry reduced economic profit
demand dried up
Blockbuster saw an opportunity to take over the
industry
competitors were discouraged from entering the
industry
94 In the long­run, firms in a monopolistically competitive market earn zero
economic profit.

True
False

95
In the long­run, both perfectly competitive and monopolistically competitive
firms will produce at minimum average cost.

True
False

96
In the long run in monopolistic competition, all economies of scale are
exhausted.

True
False

97
Excess capacity is defined as the difference between a firm's maximum
possible output and its actual output.

True
False

98
Which of the following is inconsistent with the model of perfect
competition?

ease of entry into an industry

ease of exit from an industry
many buyers and sellers in the industry
advertising of product differences in the industry
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?

perfect competition
pure monopoly
monopolistic competition
oligopoly
both perfect competition and monopolistic
competition
100 Which of the following is true of the relationship between price and
marginal cost under monopolistic competition?

P = MC at all levels of output

P = MC only at the profit­maximizing quantity
P > MC at the profit­maximizing quantity
P < MC at the profit­maximizing quantity
P < MC at the quantities below the profit­
maximizing quantity

101
In long­run equilibrium, a monopolistically competitive firm will produce

at the minimum average cost

at full capacity
along the downward­sloping portion of its ATC
curve
along the upward­sloping portion of its ATC curve
at the minimum of marginal cost

102
At the profit­maximizing output, price is greater than marginal cost

for a monopolistically competitive firm only in the

short run
for a monopolistically competitive firm only in the
long run
for a monopolistically competitive firm in both the
short run and the long run
for a perfectly competitive firm only in the short
run
for a perfectly competitive firm only in the long run

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

exceeds that of an otherwise similar perfectly

competitive firm
is less than that of an otherwise similar perfectly
competitive firm
is at the point at which LRAC is minimized
equals that of an otherwise similar perfectly
competitive firm
is less than that of an otherwise similar monopolist

104
A monopolistically competitive firm

earns no long­run economic profit and is therefore

allocatively efficient
 earns no long­run economic profit and therefore
produces at the minimum point of its ATC curve
earns no long­run economic profit and is
allocatively efficient even though it is not producing at
the minimum point of its ATC curve
earns no long­run economic profit, is allocatively
inefficient, and does not produce at the minimum
point of its ATC curve
has a chance of making a long­run 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

operate where price equals marginal cost

charge a higher price than firms in perfect
competition
produce a smaller quantity than firms in perfect
competition
produce where price equals average total cost
exit when demand falls below long­run average
costs

106
Which of the following is true of firms in both monopolistic competition
and perfect competition?

Firms face a horizontal demand curve.

Price exceeds marginal revenue.
Firms can enter and leave the industry with
relative ease.
Price exceeds marginal cost.
Products are differentiated.

107
One difference between perfect competition and monopolistic competition
is that

in perfect competition, firms cannot earn a long­

run economic profit
in perfect competition, firms take full advantage of
economies of scale in long­run equilibrium; in
monopolistic competition, firms do not
only under perfect competition is there ease of
entry and exit
in monopolistic competition, the firm's demand
curve is horizontal; in perfect competition, the firm's
demand curve slopes downward
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?

price­taking firms
homogeneous products
no barriers to entry
horizontal demand curve
neither market advertises

109
Compared to a firm in perfect competition, the monopolistically
competitive firm tends to

produce less and charge a higher price

produce less and charge a lower price
produce more and charge a lower price
produce more and charge a higher price
produce the same quantity

110
Excess capacity typically occurs

in the short run in perfect competition

in the short run in monopolistic competition
in long­run equilibrium in perfect competition
in long­run equilibrium in monopolistic competition

usually in markets experiencing an increase in

demand

111
Which of the following is unique to perfect competition?

The individual firm cannot earn economic profit in

the long run.
It is easy for new firms to enter the industry.
The market demand curve slopes downward.
The demand curve facing an individual firm is
perfectly elastic.
The firms in the industry produce a homogeneous
product.

112
Monopolistically competitive firms do not achieve allocative efficiency in
the long run because

marginal cost equals marginal revenue

marginal cost is greater than marginal revenue
marginal cost is less than marginal revenue
price is less than marginal cost
price is greater than marginal cost
113
Monopolistically competitive firms do not achieve productive efficiency
because

entry of firms raises production costs in the long

run
barriers to entry allow profit to be earned in the
long run
price is greater than marginal cost at the profit
maximizing output level
profit is maximized at a quantity where average
total cost is not minimized
there is no threat of entry in the long run

114
Firms in monopolistic competition and perfect competition typically

are price takers

produce identical products
earn zero economic profit in the long run
face a downward­sloping demand curve
face an upward­sloping total revenue curve at all
rates of output

115
Monopolistic competition is similar to

perfect competition, in that firms face downward­

sloping demand curves and earn zero long­run
economic profit
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
perfect competition, in that firms face perfectly
elastic demand curves and earn zero long­run
economic profit
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
pure monopoly, in that firms face downward­
sloping demand curves, and similar to perfect
competition, in that long­run economic profit is zero

116
If marginal revenue is less than price for a firm, it must be true that the
firm

is a monopoly
is in perfect competition
is in monopolistic competition
faces a perfectly elastic demand curve
 faces a downward­sloping demand curve

117
Which of the following characteristics distinguishes oligopoly from other
market structures?

a horizontal demand curve

a downward­sloping demand curve
production of homogeneous outputs
production of differentiated outputs
interdependence among firms in the industry

118
Oligopolistic industries consist of

a few independent firms

a few interdependent firms
many interdependent firms
many independent firms
a small monopoly

119
The automobile, breakfast cereal, and tobacco industries are examples of

monopolistic competition
oligopoly
perfect competition
monopoly
monopsony

120
The defining characteristic of oligopoly is that each firm

produces the same output as its rivals

acts independently of its rivals
is mutually interdependent
is atomistic
advertises how its products are different from its
rivals' products

121
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?

The firms are all perfectly competitive because of

their size.
It would be easier for all four firms to form a cartel
than for only the gas stations to do so.
The gas stations are monopolistically competitive
because there are so few of them that they are almost
monopolists.
 The gas stations are perfectly competitive; the
pharmacy is not.
The gas stations are oligopolists; the pharmacy is a
monopolist.

122
Which of the following is unique to oligopoly among all the market
structures?

product differentiation
profit maximization
mutual interdependence
advertising
long­run economic profits

123
Oligopolists are more sensitive to the pricing and output policies of their
rivals when

all firms produce identical products

their products are highly differentiated
there is freedom of entry and exit
there are barriers to entry
there are many firms in the industry

124
The defining characteristic of oligopoly is product differentiation.

True
False

125
Something is called a barrier to entry only if it makes entry into an
industry absolutely impossible.

True
False

126
When there are barriers to entry, a profit­maximizing firm already in the
industry can charge any price it wants, even in the long run.

True
False

127
It is harder to explain the behavior of firms in oligopoly than in other
market structures because in oligopoly

the firms act independently of each other

 firms base their decisions on what their rivals do
only differentiated products are produced
only homogeneous products are produced
the demand curve can slope upward

128
Which of the following is not considered a barrier to entry?

economies of scale
patents
control of a scarce resource
licensing
perfect price discrimination

129
For firms in an oligopoly to be interdependent,

goods must be undifferentiated

goods must be differentiated
firms must be small
barriers to entry must be minimal
goods can be either undifferentiated or
differentiated

130
An oligopoly is characterized by

few firms, which have control over market price

many firms and some barriers to entry
a large number of firms and no barriers to entry
a single firm and no barriers to entry
a single firm and significant barriers to entry

131
In which market structure(s) might firms produce an undifferentiated
product?

perfect competition only

perfect competition and oligopoly
monopolistic competition only
perfect competition and monopolistic competition
monopoly only

132
If Ford raises the price of its automobiles, the demand curve for GM
automobiles

shifts to the left

is unaffected
becomes more elastic
shifts to the right
becomes vertical
133
In an oligopoly, the demand curve facing an individual firm depends upon

the behavior of competing firms

the shape of the firm's average total cost curve
the shape of the firm's marginal cost curve
the firm's supply curve
the shape of the firm's average variable cost curve

134
Interdependent decision making on price, quality, or advertising is
characteristic of

perfect competition
monopolies
oligopolies
monopolistic competition
both oligopolies and monopolistic competition

135
There are multiple models of pricing behavior in oligopolistic markets
because

it is difficult to predict how rival firms will react to

any pricing decision
the demand curve slopes upward for these firms
firms could earn profit in the long run unlike other
markets
price has a direct impact on profit for a firm in
oligopoly
the products are not identical in terms of quality,
image, location

136
In oligopoly, minimum efficient scale is large relative to the market.

True
False

137
Economies of scale yield

declining average cost as output increases

declining marginal cost as output increases
declining total cost as output increases
diminishing average returns as output increases
increasing marginal revenue as output increases

138
Exhibit 10­13
 All of the following statements regarding Exhibit 10­13 are true except
one. Which is the exception?

The firm represented in the exhibit will likely be a

perfect competitor.
There are economies of scale in this industry.
The minimum efficient quantity is 1,000 units.
At 500 units there is excess capacity.
A firm too small to produce at least 1,000 units will
have difficulty surviving in this industry.

139
Exhibit 10­13

Consider Exhibit 10­13. If two firms each produced 500 units, the total
cost of supplying 1,000 units would be

$6
$4,000
$4
$3,000
$6,000
140 Exhibit 10­14

Which of the curves shown in Exhibit 10­14 best represents the long­run average
cost curve for an oligopolist?

Curve a
Curve b
Curve c
Curve d
Curve e

141
The automobile industry is

in monopolistic competition because brand names

are important
in monopolistic competition because it has
economies of scale
in monopolistic competition for legal reasons
an oligopoly because each firm must produce a
large amount of output before it can achieve low
average costs
an oligopoly for legal reasons

142
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

monopolistic competition
perfect competition
oligopoly
either monopolistic competition or oligopoly
either perfect competition or monopolistic
competition

143
Which of the following is not an example of an oligopolistic barrier to
entry?

diseconomies of scale
legal restrictions
advertising and brand proliferation
 high start­up costs
control over an essential resource

144
Oligopolists often sacrifice economies of scale as they expand product
variety.

True
False

145
A brand name may contribute to oligopolists' economic profit by

shifting the demand curve leftward

shifting the supply curve leftward
overcoming economies of scale
acting as a barrier to entry
reducing advertising costs

146
The various models of oligopoly explain observed behavior in different
industries, but none is satisfactory as a general theory of oligopoly.

True
False

147
Which of the following is an example of an actual cartel?

the three largest cereal producers in the United

States
General Motors, Ford, and Chrysler
the Organization of Petroleum Exporting Countries
(OPEC)
the three major U.S. cigarette manufacturers
U.S. television networks ­­ ABC, NBC, CBS, and
Fox

148
Collusion is most likely to occur in those oligopolies in which firms have
vastly different cost structures.

True
False

149
Cartels are inherently unstable.

True
False
150
Collusion and cartels are frequently legal in Europe.

True
False

151
An oligopolist that cheats on a collusive agreement by reducing price will
quickly be forced out of the industry by its competitors.

True
False

152
The incentives for oligopolists to cheat on collusive agreements are
strongest during periods of increasing industry sales.

True
False

153
If a cartel can earn a profit, it will increase production as long as

MR > MC
MR > ATC
MC > MR
MR < AR
MR > AVC

154
Two heavy equipment manufacturers might collude in an effort to do all of
the following except one. Which is the exception?

determine a more advantageous price and quantity

prevent new entry into the market

take advantage of the legal benefits that U.S.
cartels receive
increase their combined profits
predict the behavior of other competitors in the
heavy equipment market with greater certainty

155
A cartel's marginal cost curve is the

highest of all the individual firms' marginal cost

curves
lowest of all the individual firms' marginal cost
 lowest of all the individual firms' marginal cost
curves
horizontal sum of all the individual firms' marginal
cost curves
average of all the individual firms' marginal cost
curves
product of all the individual firms' marginal cost
curves

156
A cartel's profit­maximizing quantity occurs where the cartel's

marginal cost equals marginal revenue

marginal cost equals demand
price is highest
cost is lowest
demand curve has a kink

157
A cartel's profit­maximizing price is

on the demand curve at the quantity where

marginal cost equals marginal revenue
on the demand curve where it intersects its
marginal cost curve
the highest price possible
determined by using the cost­plus pricing model
where the kink in the demand curve occurs

158
Collusion occurs when

a firm chooses a level of output to maximize its

own profit
firms get together to maximize joint profits
firms refuse to follow their price leaders
firms petition their U.S. senators for favors
two firms' price and output decisions come into
conflict

159
A cartel is

a group of oligopolistic firms that engage in formal

collusion
a group of monopolistically competitive firms which
charge the same price
usually legal in the United States
an agreement among rival firms to set prices
independently
illegal throughout the world

160
 Three firms that are successful in colluding to raise their prices must

lose profits
announce any price changes to the government
restrict output
increase advertising to earn a profit
expand production

161
In a cartel,

all firms produce the same amount of output and

earn the same profit
all firms produce the same amount of output but
earn different amounts of profit because their costs
differ
firms produce different amounts of output but earn
the same profit
firms with higher average cost produce more so
that all firms earn the same profit
firms with lower average cost often earn higher
profits

162
Under which of the following market conditions is it most difficult to
maintain a cartel agreement?

There are many firms in the industry and these

firms have similar costs.
There are many firms in the industry and these
firms have different costs.
There are few firms in the industry and these firms
have similar costs.
There are few firms in the industry and these firms
have different costs.
There are many firms in the industry and these
firms produce homogeneous products.

163
If all six suppliers of cement to Metropolis all agree to establishes a price
of $45 per ton, this would be

a legal contract
price discrimination
cost­plus pricing
a cartel
beneficial to consumers

164
The chances of successful collusion are greatest when

firms are producing a differentiated product

 there are many firms in the industry
there are tiny firms and huge firms together in the
same industry
demand curves and cost curves are similar among
the firms in the industry
demand is falling

165
If zinc suppliers are successful in forming an international zinc cartel,
they will experience

lower output and higher prices, which discourage

the entry of new firms into the industry
lower output, higher prices, and the need to
organize an effort to prevent the entry of new firms
into the industry
higher output and higher prices, which discourage
the entry of new firms into the industry
higher output, higher prices, and the need to
organize an effort to prevent the entry of new firms
into the industry
none of the above

166
Which of the following helps to make a cartel successful?

stable demand and costs

differentiated output
highly variable cost conditions
highly variable demand conditions
rapidly changing technology

167
An oligopoly model that describes formal collusion is the

kinked demand curve model

cartel model
cost­plus pricing model
game theory model
horizontal merger model

168
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

price discrimination
the kinked demand curve
monopolistic competition
a cartel
joint competition
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