Chapter 14: Oligopoly and Monopolistic competition

All of the following statements about market structures are true except​: A. Monopolistic competitors practice marginal cost pricing. B. ​Monopolists' sales revenues are constrained by market demand. C. Oligopolists often practices game theory. D. Perfect competitors can have​ short-run economic profits.

A. Monopolistic competitors practice marginal cost pricing.

What happens in a monopolistically competitive market when new firms enter the​ market? A. The existing​ firm's demand curve shifts in and becomes flatter. B. Consumers become less sensitive to price. C. The existing​ firm's demand curve shifts out and becomes steeper. D. Firms have more market power.

A. The existing​ firm's demand curve shifts in and becomes flatter.

All of the following statements describe a duopoly with homogeneous​ products, cost​ structures, and effort except​: A. The market demand curve is elastic. B. If prices are​ equal, each firm will have half of the demand. C. The residual demand curve is less than the market demand curve. D. ​Price-cutting will drive prices down to marginal cost.

A. The market demand curve is elastic. The market demand curve is perfectly inelastic at the quantity demanded and ends at the maximum price.

All of the following are legitimate reasons to consider regulation except​: A. a loss of surplus with low concentration. B. a high​ Herfindahl-Hirschman Index. C. a loss of surplus with high concentration. D. the benefits of collusion outweighing the costs.

A. a loss of surplus with low concentration. Colluding and merging increase the concentration in an industry and increase the​ Herfindahl-Hirschman Index. A loss of surplus occurs in monopolistic​ competition, but regulation is unnecessary due to the low concentration and increased variety of products.

With the growth of the​ Internet, there are a large number of online retailers as well as buyers in the online retail market. One might think that different firms would charge very similar prices for the same good because​ ____________. A. it is easy for sellers to adjust their prices. B. consumers have limited information about prices. C. the cost of searching online is high. D. barriers exist to new firms selling online.

A. it is easy for sellers to adjust their prices.

If a firm is operating at marginal cost​ pricing: A. more firms entering the industry will not affect prices. B. more firms entering the industry will bring prices down. C. more firms entering the industry will create deadweight loss. D. more firms entering the industry will bring prices up.

A. more firms entering the industry will not affect prices. If a market is already effectively​ competitive, the addition of one more firm should not change prices. Perfectly competitive markets practice marginal cost pricing with no deadweight loss.

Both monopolies and monopolistically competitive firms set marginal revenue equal to marginal cost to maximize profit. Given the same cost​ curves, would you expect prices to be higher in a monopoly or a monopolistically competitive​ market? A. ​Monopoly, because its demand is more inelastic. B. Monopoly​, because consumers are more sensitive to price. C. Monopolistically competitive​ market, because demand is greater. D. Monopoly​, because it is a price taker.

A. ​Monopoly, because its demand is more inelastic.

Monopolistically competitive firms earn zero economic profit in the long run as do perfectly competitive firms. Does this mean that total surplus is maximized in a monopolistically competitive​ market? A. ​No, because firms restrict output to raise price. B. ​No, because firms produce where price is equal to marginal cost. C. ​No, because firms produce where marginal cost equals marginal revenue. D. ​Yes, because production occurs at the minimum average total cost.

A. ​No, because firms restrict output to raise price.

Despite the logic described​ above, several recent studies have found that different online retailers often charge quite different prices. How might you explain this​ result? A. ​Sellers' warranties differ. B. Consumers have lots of information about prices. C. The cost of searching online is low. D. The products are homogeneous.

A. ​Sellers' warranties differ.

As long as a monopolistic competitor has a​ downward-sloping demand​ curve, it will produce at a level that is below above equal to the efficient scale of production and set a price below above equal to its marginal cost.

As long as a monopolistic competitor has a​ downward-sloping demand​ curve, it will produce at a level that is below the efficient scale of production and set a price above its marginal cost.

Assuming the oil cartel is an​ oligopoly, it would be more similar to a monopoly/ monopolistic competition due to its homogeneous/ differentiated product. Since Coke and Pepsi control most of the soda​ industry, they would be considered an oligopoly that is most similar to a monopoly/ monopolistic competition .

Assuming the oil cartel is an​ oligopoly, it would be more similar to a monopoly due to its homogeneous product. Since Coke and Pepsi control most of the soda​ industry, they would be considered an oligopoly that is most similar to a monopolistic competition.

Economists study market structures that fall between the two extremes of perfect competition and monopoly for all of the following reasons except​: A. Studying the interaction between firms allows us to learn about the nature of competition and how prices are set. B. Counting the number of firms tells us whether the market is competitive. C. Additional models are necessary to help answer questions about how many firms are necessary to make a market competitive. D. Realistic models of market structure lie somewhere between perfect competition and monopoly.

B. Counting the number of firms tells us whether the market is competitive.

Suppose the refrigerator industry has an HHI of​ 2,500 while the aluminum​ industry's HHI is​ 6,850. Is this information sufficient to conclude that the aluminum market is less competitive than the market for​ refrigerators? A. Not necessarily. It could indicate increased competition because firms could be more profitable. B. Not necessarily. Although the HHI indicates a smaller number of​ firms, those firms may compete intensely. C. ​No, because close substitutes exist in the refrigerator market. D. ​Yes, because there are more firms in the refrigerator market.

B. Not necessarily. Although the HHI indicates a smaller number of​ firms, those firms may compete intensely.

Which of the following statements is true of monopolistic competition and perfect​ competition? A. Perfect competition is a special case of monopolistic​ competition, except firms in monopolistic competition can earn profits in the long run. B. Perfect competition is a special case of monopolistic​ competition, which occurs when demand is perfectly elastic. C. Perfect competition and monopolistic competition are completely unrelated. D. Perfect competition is a special case of monopolistic​ competition, which occurs when demand is perfectly inelastic.

B. Perfect competition is a special case of monopolistic​ competition, which occurs when demand is perfectly elastic.

David runs a bakery in a monopolistically competitive market. He sells his specialty cupcakes at ​$2.25 ​each, and his​ per-cupcake cost is ​$1.75. ​David's market​ is: A. likely to see new competition that will shift his demand curve to the right. B. likely to see new competition that will shift his demand curve to the left. C. in​ long-run equilibrium. D. not in​ short-run equilibrium.

B. likely to see new competition that will shift his demand curve to the left.

Telesource and Belair are two of the largest firms in the wireless carrier market in a certain country. Both these firms account for more than 80 percent of the market. Given that both firms differentiate their​ products, a Nash equilibrium is achieved in this market by​ ____________. A. one firm becoming the industry leader and setting the price that maximizes its payoff and then the other firm setting its price next to maximize its payoff. B. the firms acting independently to maximize their payoff without regard to their​ rival's behavior. C. both firms maximizing their payoffs simultaneously so that their prices are best responses to each other. D. the firms colluding to set price such that their joint payoff is maximized.

C. both firms maximizing their payoffs simultaneously so that their prices are best responses to each other. Since the products are​ differentiated, the demand curve facing each firm has the​ other's price directly embedded in it. For​ example, if Telesource raises its​ price, Belair's sales will increase.​ Likewise, Telesource's quantity demanded goes up when Belair raises its price. Telesource executives must estimate the demand for its product given every possible price for Belair. It can then construct its optimal price for every possible price of Belair. Belair makes the same calculations in order to figure out its best response to changes in​ Telesource's prices.

Suppose there are four firms in a market and each of them sells differentiated products. If the four firms engage in a price​ war, then​ ____________. A. the firm with the lowest price will acquire the entire market. B. the firms with the most similar products will sell more output. C. each​ firm's profit will be less than with collusion but not zero. D. none of the firms will earn economic profits.

C. each​ firm's profit will be less than with collusion but not zero.

For economic profit to exist within a duopoly with homogeneous​ goods: A. economies of scale must be equal. B. price must equal marginal cost. C. the firms would have to agree to a set price. D. a Nash equilibrium would have to exist.

C. the firms would have to agree to a set price.

A collusive agreement between two firms is likely to break down when​ ____________. A. firms value profits less today than in the future. B. it is easy to punish cheaters. C. the market has little long−term value. D. detection of cheaters is easy.

C. the market has little long−term value.

Which of the following statements about​ price, P​, is​ correct? A. P=MR= MC can only be true if economic profits are zero. B. P=MR= MC can only be true at profit maximization. C. P=MR= MC can be true for certain oligopolies. D. P=MR= MC can only be true in perfect competition

D. P=MR= MC can only be true in perfect competition

All of the following statements describe a duopoly with differentiated products except​: A. Firms respond to a competitor before the competitor is actually competing. B. When one company reduces prices or makes its product more​ attractive, it reduces the demand for the product of the other firms in the market. C. No company is able to capture the entire market. D. When consumers view the products as more​ substitutable, prices are higher.

D. When consumers view the products as more​ substitutable, prices are higher.

Oligopolistic firms that sell differentiated products determine their prices when prices are​ __________. A. agreed upon by firms jointly conspiring to maximize profits. B. identified independently by each firm from the demand curve for its product. C. set equal to marginal cost for each firm. D. determined simultaneously by the firms as best responses given other firm prices.

D. determined simultaneously by the firms as best responses given other firm prices.

In the model of an oligopoly with identical​ (homogeneous) products, the price is likely to be​ ___________. A. less than minimum average cost. B. greater than marginal revenue. C. equal to variable costs. D. equal to marginal cost.

D. equal to marginal cost.

In a monopolistically competitive​ market, a firm earning negative economic profit in the short run will​ ____________. A. produce only if price is greater than marginal cost. B. shut down to avoid losses. C. produce when revenue is positive. D. produce only if price is greater than average variable cost.

D. produce only if price is greater than average variable cost.

Some people might argue that the luxury tax in baseball is not an important determinant of major league salaries. As​ evidence, they show that team payrolls rarely exceed the threshold level and so teams rarely pay the tax. Your answer to this question suggests the logic of the luxury tax is​ __________. A. ​important, because teams collude. B. not​ important, because it does not affect salaries. C. not​ important, since teams seek to maximize payoffs. D. ​important, because it promotes low salaries.

D. ​important, because it promotes low salaries.

Firms produce the quantity that minimizes​ long-run average cost. Perfect​ competition: ▼ True/False. ​ Monopoly: ▼ True/False. Monopolistic​ competition: ▼ True/False.

Firms produce the quantity that minimizes​ long-run average cost. Perfect​ competition: True. ​ Monopoly: False. Monopolistic​ competition: False. Perfectly competitive firms have horizontal demand​ curves, but monopoly and monopolistically competitive firms have​ downward-sloping demand curves. In​ turn, perfectly competitive firms produce the quantity at which average cost is minimized in the long​ run, but monopoly and monopolistically competitive firms do not. A monopoly earns economic profit in the long​ run, and with a​ downward-sloping demand​ curve, it is not possible for monopolistically competitive firms to both earn zero economic profit and produce at lowest average total cost.

In the short​ run, a monopolistic competitor will will not practice marginal cost pricing. In the long​ run, a monopolistic competitor will not will earn an economic profit.

In the short​ run, a monopolistic competitor will not practice marginal cost pricing. In the long​ run, a monopolistic competitor will not earn an economic profit.

In an oligopoly with differentiated​ products: A. prices will equal marginal costs. B. barriers to entry will be low. C. economic profit will exist. D. game theory will be useless.

barriers to entry will be low. C. economic profit will exist..