econ quiz 3
If the industry depicted in this graph were purely competitive, the market price would be
$14.
If the industry depicted in this graph were a pure monopoly, the product price would be
$16.
Refer to the diagram for a monopolistically competitive firm in short-run equilibrium. This firm's profit-maximizing price will be
$16.
Refer to the data for a nondiscriminating monopolist. At its profit-maximizing output, this firm's price will exceed its marginal cost by ____ and its average total cost by ____.
$30; $20.50
A natural monopoly occurs when
long-run average costs decline continuously through the range of demand.
A monopolistically competitive industry combines elements of both competition and monopoly. The competition element results from
low entry barriers.
In a decreasing-cost industry,
lower demand leads to higher long-run equilibrium prices.
An argument for making regulated monopolies adopt marginal-cost pricing is that this would
make the marginal cost equal to society's valuation of the marginal benefit.
Pure competition produces a socially optimal allocation of resources in the long run because
marginal cost equals price.
For a pure monopolist, the relationship between total revenue and marginal revenue is such that
marginal revenue is positive when total revenue is increasing, but marginal revenue becomes negative when total revenue is decreasing.
In the long run, a pure monopolist will maximize profits by producing that output at which marginal cost is equal to
marginal revenue.
In the long run, an oligopoly
may be able to earn positive economic profits.
Concentration ratios
may understate the degree of competition because they ignore imported products.
Some observers assert that oligopolies are less socially desirable than pure monopolies because
monopolies are often government-regulated, whereas collusion among oligopolies may lead to similar results as a monopoly yet, having several firms, may give the illusion of competition.
For which market model can we not assume a homogeneous product?
monopolistic competition
Product variety is likely to be greater in
monopolistic competition than in pure competition.
Network effects and simultaneous consumption tend to foster the development of
monopoly power.
The demand curve of a monopolistically competitive producer is
more elastic than that of a pure monopolist, but less elastic than that of a pure competitor.
Mutual interdependence means that each oligopolistic firm
must consider the reactions of its rivals when it determines its price policy.
Which of the following is a unique feature of oligopoly?
mutual interdependence
At long-run equilibrium in monopolistic competition, there is
neither allocative nor productive efficiency.
A monopolistically competitive industry is like a purely competitive industry in that
neither industry has significant barriers to entry.
Assume that the market for soybeans is purely competitive. Currently, firms growing soybeans are earning positive economic profits. In the long run, we can expect
new firms to enter, causing the market price of soybeans to fall.
The graphs are for a purely competitive market in the short run. The graphs suggest that in the long run, assuming no changes in the given information,
new firms will be attracted into the industry.
If a purely competitive firm is producing at the MR = MC output level and earning an economic profit, then
new firms will enter this market.
The supply curve for a monopoly is
not clearly defined.
Assume that a decline in consumer demand occurs in a purely competitive industry that is initially in long-run equilibrium. We can
not compare the original and the new prices without knowing what cost conditions exist in the industry.
Oligopoly is more difficult to analyze than other market models because
of mutual interdependence and the fact that oligopoly outcomes are less certain than in other market models.
Innovations that lower production costs or create new products
often generate short-run economic profits that do not last into the long run.
In the U.S. market, people often refer to the "Big Three" in autos and the "Big Four" in accounting. These terms suggest that these two industries are
oligopolies.
Concentration ratios measure the
percentage of total industry sales accounted for by the largest firms in the industry.
When a purely competitive firm is in long-run equilibrium,
price equals marginal cost.
At the profit-maximizing level of output for a monopolist,
price is greater than marginal cost.
If a particular bank regularly announces changes in its interest rate schedules before its competitors, who then set rates very close to those announced by that bank, this could be described as
price leadership.
For a monopolistically competitive firm in long-run equilibrium,
price will equal average total cost.
Other things equal, a price-discriminating monopolist will
produce a larger output than a nondiscriminating monopolist.
A firm is producing an output such that the benefit from one more unit is more than the cost of producing that additional unit. This means the firm is
producing less output than allocative efficiency requires.
If the long-run supply curve is upward sloping, it indicates that resource prices fall when
production in the industry decreases in the long run.
Excess capacity implies
productive inefficiency.
A positive effect of advertising for society is that it
provides useful information to reduce search cost for consumers.
In which of the following market models do demand and marginal revenue not diverge?
pure competition
In which one of the following market models is X-inefficiency least likely to be present?
pure competition
In which of these continuums of degrees of competition (highest to lowest) is monopolistic competition properly placed?
pure competition, monopolistic competition, oligopoly, pure monopoly
Refer to the diagrams. Firm A is a
pure competitor, and Firm B is a pure monopoly.
Competitive firms will always try to earn more than a normal profit by doing the following except
raising the prices of their existing products.
Refer to the diagram for a monopolistically competitive producer. The firm is
realizing a normal profit in the long run.
If marginal costs decrease and the MC curve shifts down, a typical monopolist will
reduce price and increase quantity of output.
The long-run supply curve would be upward sloping if
resource prices fall as industry production contracts.
Refer to the diagram. At output level Q2,
resources are overallocated to this product and productive efficiency is not realized.
If the long-run supply curve of a purely competitive industry slopes upward, this implies that the prices of relevant resources
rise as the industry expands.
(Last Word) The economic profits generated by Elon Musk's series of innovations are most threatened by
rival firms entering the market or copying Musk's innovations.
Refer to the diagram. This firm's demand and marginal revenue curves are based on the assumption that
rivals will ignore a price increase but match a price decrease.
In a sequential game with two firms, the first mover into a new market
runs the risk that the untested new market will not provide enough customers.
In some games, one player or firm moves first and commits to a strategy to which the rival player or firm will subsequently respond. Such games are called
sequential games.
Suppose a firm in a purely competitive market discovers that the price of its product is above its minimum AVC point but everywhere below ATC. Given this, the firm
should continue producing in the short run but leave the industry in the long run if the situation persists.
(Consider This) The main point of the 1987 Wendy's commercial depicting a Soviet fashion show was to
show Wendy's product differentiation from its competitors.
A profit-maximizing monopolist facing the situation shown in the graph should
shut down in the short run.
Marginal costs of a producer may be very small due to its product's ability to satisfy a large number of consumers at the same time. This characteristic of a product is called
simultaneous consumption.
One feature of pure monopoly is that the demand curve
slopes downward.
A single-price monopoly is economically inefficient because, at the profit-maximizing output,
society values additional units of the monopolized product more highly than it does the alternative products those resources could otherwise produce.
Allocative efficiency means that
society's scarce resources are used to produce products that align with consumer preferences.
Which phrase would be most characteristic of pure monopoly?
sole seller
Game theory, which is used in studying oligopoly behavior, originated from the study of games such as the following, except
solitaire.
Which of the following is correct?
The greater the degree of product variation, the greater is the excess capacity problem.
Refer to the above graph of the representative firm in monopolistic competition. Marginal revenue and marginal cost intersect at point
a.
In the long run, a profit-maximizing monopolistically competitive firm sets it price
above marginal cost.
A significant benefit of monopolistic competition compared with pure competition is
greater product variety.
A monopolistically competitive firm has a
highly elastic demand curve.
In a Stackelberg duopoly,
one firm is the leader; the other is the follower.
The term allocative efficiency refers to
the production of the product mix most desired by consumers.
If oligopolistic firms facing similar cost and demand conditions successfully collude, price and output results in this industry will be most accurately predicted by which of the following models?
the pure monopoly model
Assume a purely competitive constant-cost industry is initially at long-run equilibrium. Now suppose that a decrease in demand occurs. After all the long-run adjustments have been completed, the new equilibrium price
will be the same as the initial price, and the output will be less.
The graph depicts a monopolistically competitive firm. This monopolistically competitive firm is earning economic profits in the short run and
will earn only normal profits in the long run.
This monopolistically competitive firm is earning economic profits in the short run and
will earn only normal profits in the long run.
The representative firm in a purely competitive industry
will earn zero economic profit in the long run.
For a monopolist to sell an output level of 10 units, the price must be $8. MR at this output level will be
< $8.
If a regulatory commission wants to provide a natural monopoly with a fair return, it should establish a price that is equal to
average total cost.
Refer to the diagrams, which pertain to monopolistically competitive firms. Short-run equilibrium entailing economic loss is shown by
diagram c only.
The price elasticity of a monopolistically competitive firm's demand curve varies
directly with the number of competitors but inversely with the degree of product differentiation.
Concentration ratios may be inaccurate indicators of the degree of monopoly power in an industry because
foreign competition is not considered.
A significant difference between a monopolistically competitive firm and a purely competitive firm is that the
former sells similar, although not identical, products.
Refer to the diagrams. In diagram (B) the profit-maximizing quantity is
g, and the profit-maximizing price is d.
The study of how people (or firms) behave in strategic situations is called
game theory.
The automobile, household appliance, and automobile tire industries are all illustrations of
ifferentiated oligopoly.
The MR = MC rule applies
in both the short run and the long run.
Line (1) in the diagram reflects a situation where resource prices
increase as industry output expands.
In monopolistic competition, which of the following would make an individual firm's demand curve less elastic?
increased brand loyalty toward the firm's product
Advertising can impede economic efficiency when it
increases entry barriers.
In game theory, the credibility of a threat
influences the degree of cooperation between two rivals.
Which of the following has not contributed to the development of oligopolies in the U.S. economy?
interindustry competition
Which of the following forces does not play a major part in the adjustments of a monopolistically competitive industry toward its long-run equilibrium?
introduction of new products and patents
With a natural monopoly, the fair-return price
is allocatively inefficient; the socially optimal price is allocatively efficient.
Answer the question on the basis of the accompanying demand schedule. At the point where 3 units are being sold, the coefficient of price elasticity of demand
is greater than unity (one).
The demand curve faced by a pure monopolist
is less elastic than that faced by a single purely competitive firm.
A nondiscriminating monopolist will find that marginal revenue
is less than average revenue or price.
Collusive agreements between two firms are most likely to be honored when the game
is repeated and both firms offer credible threats if the other violates the agreement.
Refer to the payoff matrix. Suppose that Speedy Bike and Power Bike are the only two bicycle manufacturing firms serving the market. Both can choose large or small advertising budgets. If this is a repeated game with no cooperation or reciprocity, cell A
is the expected outcome of this game, and it is both a Nash equilibrium and a prisoner's dilemma.
(Last Word) "Big Data"
is used by firms to price discriminate through personalized pricing.
Suppose that an industry's long-run supply curve is downsloping. This suggests that
it is a decreasing-cost industry.
If a pure monopolist is producing more output than the MR = MC output,
it will be in the interest of the firm, but not necessarily of society, to reduce output.
In a duopoly, if one firm increases its price, then the other firm can
keep its price constant and thus increase its market share.
The monopolistically competitive seller's demand curve will become more elastic the
larger the number of competitors.
In many large U.S. cities, taxicab companies operate as near monopolies because of
licenses.
The strategy of establishing a price that prevents the entry of new firms is called
limit pricing.
Which constitutes an obstacle to collusion among oligopolists?
a large number of firms
Refer to the two diagrams for individual firms. Figure 2 pertains to
an imperfectly competitive seller.
Refer to the diagrams. With the industry structures represented by diagram
(B), output will be less than in diagram (A).
Refer to the graph, which shows the revenue curves for a monopolist. The elastic portion of the demand curve ranges from quantity
0 to Q3.
Refer to the diagram. At the profit-maximizing level of output, total revenue will be
0AJE.
Refer to the diagram. At the profit-maximizing level of output, total cost will be
0BHE.
A constant-cost industry is one in which
100 units can be produced for $100, then 150 can be produced for $150, 200 for $200, and so forth.
Refer to the diagram for a monopolistically competitive firm in short-run equilibrium. The profit-maximizing output for this firm will be
160.
Balin's Burger Barn operates in a perfectly competitive market. Balin's is currently earning economic profits of $20,000 per year. Based on this information, we can conclude that
Balin's is operating in the short run, but not the long run.
Refer to the above graphs. A short-run equilibrium that would produce profits for a monopolistically competitive firm would be represented by graph
A.
Refer to the game theory matrix, where the numerical data show the profits resulting from alternative combinations of advertising strategies for Ajax and Acme. Ajax's profits are shown in the upper right part of each cell; Acme's profits are shown in the lower left. Without collusion, the outcome of the game is cell
A.
Which of the diagrams correctly portrays a nondiscriminating pure monopolist's demand (D) and marginal revenue (MR) curves?
B
Refer to the diagram, where the numerical data show profits in millions of dollars. Beta's profits are shown in the northeast corner and Alpha's profits in the southwest corner of each cell. If Alpha and Beta agree to a high-price policy through collusion, the temptation to cheat on that agreement is demonstrated by the fact that
Beta can increase its profit by lowering its price.
Which of the following conditions is not required for price discrimination?
Buyers with different elasticities must be physically separate from each other.
Refer to the payoff matrix. Suppose that Speedy Bike and Power Bike are the only two bicycle manufacturing firms serving the market. Both can choose large or small advertising budgets. Is there a Nash equilibrium solution to this game?
Cell A represents a Nash equilibrium.
Refer to the payoff matrix. Which cell represents the equilibrium outcome of this game??
D
Refer to the diagram for a non-collusive oligopolist. Suppose that the firm is initially in equilibrium at point E, where the equilibrium price and quantity are P and Q. Which of the following statements is correct?
Demand curve D1 assumes that rivals will match any price change initiated by this oligopolist.
Which of the following is a measure of the degree of industry concentration?
Herfindahl Index
What do economies of scale, the ownership of essential raw materials, and patents have in common?
They are all barriers to entry.
Which of the following statements is true for a long-run supply curve that slopes upward?
If total market output is increased, unit costs of production increase.
Which of the following statements about a competitive firm is correct?
In long-run equilibrium, a competitive firm will produce at the point of minimum average total costs.
Which of the following is true concerning purely competitive industries?
In the short run, firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.
Which one of the following is not illustrated by the so-called Prisoner's Dilemma?
It does not pay for the players to collude with each other.
Which of the following is characteristic of a pure monopolist's demand curve?
It is the same as the market demand curve.
Which statement concerning monopolistic competition is false?
Long-run equilibrium in monopolistic competition does not entail any economic inefficiency because of easy entry and exit.
Which is true of pure competition but not of monopolistic competition?
Long-run equilibrium occurs at the minimum point on the ATC curve.
Refer to the diagrams. If $4 is Firm B's profit-maximizing price, its
MC must be zero.
When a monopolistically competitive firm is in long-run equilibrium,
MR = MC and P> minimum ATC.
Which of the following is true of normal profits?
They are necessary to keep a firm in the industry in the long run.
Which would be a qualification to the view that oligopoly is allocatively and productively inefficient?
Oligopolies may purposely keep prices below short-run profit-maximizing levels to bolster barriers to entry.
(Consider This) Which of the following statements is true about U.S. firms?
Over half are bankrupt within the first five years after starting up.
Which of the following conditions is true for a purely competitive firm in long-run equilibrium?
P = MC = minimum ATC.
Allocative inefficiency happens in a monopoly because at the profit-maximizing output level,
P > MC.
Which of the following is correct for a monopolistically competitive firm in long-run equilibrium?
P exceeds minimum ATC.
Which of the following is not characteristic of long-run equilibrium under monopolistic competition?
Price equals minimum average total cost.
Refer to the graph, which shows the revenue curves for a monopolist. At what output level is demand inelastic?
Q4
Refer to the diagram for a natural monopolist. If a regulatory commission set a maximum price of P1, the monopolist would produce output
Q4 and realize a loss.
Larry's Lizards and Ronaldo's Reptiles are competing pet store franchises. Both are considering opening a store in the small town of Turtleville. If Ronaldo's opens a profitable store in Turtleville and Larry's management determines that it is not profitable to also open a store, then
Ronaldo's had a first-mover advantage in this game.
Use your basic knowledge and your understanding of market structures to answer this question. Which of the following companies most closely approximates a monopolistic competitor?
Subway Sandwiches
Which is not true of price discrimination?
Successful price discrimination will generally result in a lower level of output than would be the case under a single-price monopoly.
In a purely competitive market at its long-run equilibrium, which of the following is not true?
The combined amount of consumer and producer surpluses is at its minimum possible.
Which of the following statements is correct?
The long-run supply curve for a purely competitive increasing-cost industry will be upsloping.
The accompanying graph represents the purely competitive market for a product. When the market is at equilibrium, the value of the total benefits derived by consumers from this product would be represented by the area
a + b + c.
The characteristic most closely associated with oligopoly is
a few large producers.
The payoff matrix represents
a positive-sum game.
A breakdown in price leadership leading to successive rounds of price cuts is known as
a price war.
If the firms in an oligopolistic industry can establish an effective cartel, the resulting output and price will approximate those of
a pure monopoly.
Pure monopoly refers to
a single firm producing a product for which there are no close substitutes.
Refer to the diagrams, which pertain to a purely competitive firm producing output q and the industry in which it operates. The predicted long-run adjustments in this industry might be offset by
a technological improvement in production methods.
Refer to the diagram for a non-collusive oligopolist. We assume that the firm is initially in equilibrium at point E, where the equilibrium price and quantity are P and Q. If the firm's rivals will ignore any price increase but match any price reduction, over what range might marginal cost rise without disturbing equilibrium price and output?
ab
In competing with rivals, oligopolistic firms will tend to use
advertising because it is less easily duplicated than price cuts.
Nonprice competition refers to
advertising, product promotion, and changes in the real or perceived characteristics of a product.
The economic inefficiency in an oligopoly may be reduced by the following, except
aggressive advertising by rivals.
(Consider This) In Wendy's 1987 commercial depicting a Soviet fashion show, one objective was to portray McDonald's and Burger King products as
all the same and not very appealing.
Line (1) in the diagram reflects the long-run supply curve for
an increasing-cost industry.
An increasing-cost industry is associated with
an upsloping long-run supply curve.
If output is set at the kink of the kinked-demand model, then there
are several prices at which marginal revenue equals marginal cost.
The variety of products and features that consumers may choose from in monopolistically competitive industries
at least partially offsets the economic inefficiencies of this market structure.
Refer to the above graphs. The long-run equilibrium for a monopolistically competitive firm is represented by graph
b
Which of the following is a characteristic of pure monopoly?
barriers to entry
Under pure competition, in the long run
both allocative efficiency and productive efficiency are achieved.
A firm in an oligopoly is similar to a monopoly in that
both firms could have significant market power and control over price.
Game theory can be used to demonstrate that oligopolists
can increase their profits through collusion.
Barriers to entry
can result from government regulation.
If a monopolist engages in price discrimination, it will
charge a higher price where individual demand is inelastic and a lower price where individual demand is elastic.
Assume a pure monopolist is currently operating at a price-quantity combination on the inelastic segment of its demand curve. If the monopolist is seeking maximum profits, it should
charge a higher price.
When firms in an industry reach an agreement to fix prices, divide up market share, or otherwise restrict competition, they are practicing the strategy of
collusion.
Mutual interdependence means that each firm in an oligopoly
considers the reactions of its rivals when it determines its pricing policy.
If the entry or exit of firms does not affect the resource prices in an industry, we refer to it as a
constant-cost industry.
The accompanying graph shows the long-run supply and demand curves in a purely competitive market. The curves suggest that in this industry, the dollars' worth of other products that have to be sacrificed in order to produce each unit of the output of this industry is
constant.
Product differentiation in monopolistic competition involves a trade-off between
consumer choice and productive efficiency.
Possible reasons for X-inefficiency include the following, except
costs of materials rising due to tight supply conditions.
The process by which new firms and new products replace existing dominant firms and products is called
creative destruction.
Suppose an oligopolistic producer assumes its rivals will ignore a price increase but match a price cut. In this case the firm perceives its
demand curve as kinked, being steeper below the going price than above.
Assume the market for ball bearings is purely competitive. Currently, each of the firms in this market is earning positive economic profits. In the long run, as adjustments occur in the industry, we can expect the market price of ball bearings to
decrease and individual firms' profits to decrease.
In response to a cost-reducing technological breakthrough in the production of its product, a profit-maximizing monopolist will normally
decrease the price it charges for its product.
If firms are losing money in a purely competitive industry, then the long-run adjustments in this situation will cause the market supply to
decrease, and consequently the representative firm's profits will increase.
The industry indicated by the accompanying graphs would be a(n)
decreasing-cost industry.
The long-run equilibrium position of the monopolistically competitive firm occurs at a point where average costs are
decreasing.
A two-player or firm game in which one firm's gain must equal the other firm's loss is called a
zero-sum game.
If the competitive firm depicted in this diagram produces output Q, it will
earn a normal profit.
In the long run, a representative firm in a monopolistically competitive industry will end up
earning a normal profit, but not an economic profit.
We would expect an industry to expand if firms in that industry are
earning economic profits.
An important similarity between a monopolistically competitive firm and a purely competitive firm is that
economic profit tends toward zero for both.
A monopoly is most likely to emerge and be sustained when
economies of scale are large relative to market demand.
When a pure monopolist is producing its profit-maximizing output, price will
equal neither MC nor MR.
If there is a decrease in demand for a product in a purely competitive industry, it results in an industry contraction that will end when the product price is
equal to its marginal cost.
Resources are efficiently allocated when production occurs at that output level where price
equals marginal cost.
Refer to the diagram for a monopolistically competitive producer. This firm is experiencing
excess capacity of DE.
Consumers who clip and redeem discount coupons
exhibit a higher price elasticity of demand for a given product than consumers who do not clip and redeem coupons.
The four-firm sales concentration ratio for an industry measures the
extent to which the four largest firms dominate the production of a good.
Refer to the diagram for a pure monopolist. Monopoly output will be
f
If production is occurring where marginal cost exceeds price, the purely competitive firm will
fail to maximize profit and resources will be overallocated to the product.
X-inefficiency refers to a situation in which a firm
fails to achieve the minimum average total costs attainable at each level of output.
Monopolistic competition is characterized by excess capacity because
firms produce at an output level less than the least-cost output.
Refer to the diagrams, which pertain to a purely competitive firm producing output q and the industry in which it operates. In the long run we should expect
firms to leave the industry, market supply to fall, and product price to rise.
Suppose that total sales in an industry in a particular year are $600 million and sales by the top four sellers are $200 million, $150 million, $100 million, and $50 million, respectively. We can conclude that
the concentration ratio is more than 80 percent.
The difference between the maximum price a consumer is willing to pay for a product and the actual price the consumer pays is
the consumer surplus.
A price discriminating pure monopolist will attempt to charge each buyer (or group of buyers)
the maximum price each would be willing to pay.
Which of the following best approximates a pure monopoly?
the only grocery store in a small isolated town
The kinked-demand curve model helps to explain price rigidity because
there is a gap in the marginal revenue curve within which changes in marginal cost will not affect output or price.
All of the following statements apply to a purely competitive market in the long run, except
total fixed costs remain constant even when output expands in the long run.
Suppose a pure monopolist is charging a price of $12 and the associated marginal revenue is $9. We thus know that
total revenue is increasing.
With the creation and growth of the Internet, vacationers can now book their own flights, hotels, rental cars, and other travel logistics online. If this capability resulted in creative destruction, which of the following industries would we have expected to decline the most as a result?
travel agencies
In monopolistically competitive markets, resources are
underallocated because long-run equilibrium occurs where price exceeds marginal cost.
A positive-sum game occurs
when the sum of the two firms' outcomes is positive.
Refer to the payoff matrix. Bob's Burgers and Sam's Sandwiches are competing restaurants in a small town. Both are considering adding pizza to their line of products. If this is a sequential game,
whoever moves first to add pizza will discourage the other from adding pizza.
The kinked-demand curve model of oligopoly is useful in explaining
why oligopolistic prices might change infrequently.