Chapter 10

Which of the following is true about an oligopoly equilibrium in comparison with equilibrium under similar circumstances but with perfect competition? a. Output is larger and price is lower than under perfect competition. b. Output is larger but price is higher than under perfect competition. c. Output is smaller and price is higher than under perfect competition. d. Output is smaller and price is lower than under perfect competition.

c. Output is smaller and price is higher than under perfect competition.

Which of the following is a distinction between perfectly competitive and monopolistic competition? a. Perfectly competitive firms must compete with rival sellers; monopolistically competitive firms do not confront rival sellers. b. Monopolistically competitive firms can raise their price without losing sales; perfectly competitive firms must lower their price in order to sell more of their product. c. Perfectly competitive firms confront a perfectly elastic demand curve; monopolistically competitive firms face a downward sloping demand curve. d. Perfectly competitive firms may make either economic profits or losses in the short run, but monopolistically competitive firms always earn an economic profit.

c. Perfectly competitive firms confront a perfectly elastic demand curve; monopolistically competitive firms face a downward sloping demand curve

Which of the following is true for a firm operating under perfect competition, monopolistic competition, and monopoly? a. Firms earn positive economic profits in the long run. b. Firms earn zero economic profits in the long run. c. Profits are maximized when marginal cost equals marginal revenue. d. Price equals marginal cost.

c. Profits are maximized when marginal cost equals marginal revenue.

The purpose of a cartel is to: a. promote product innovation b. increase market competition c. act like a monopoly d. diversify operations e. decrease market concentration

c. act like a monopoly

Supporters of advertising claim that it: a. promotes the public interest. b. is a barrier to entry. c. allows new competitors a change to gain market share. d. all of the answers above are correct.

c. allows new competitors a chance to gain market share

Assume that an oligopolist has a kinked demand curve. Suppose that the marginal cost curve passes through the gap in the marginal revenue curve. This means price and output will be shown by a point: a. above the curve b. below the curve c. at the kink d. on the upper part of the curve e. on the lower part of the curve

c. at the kink

The kinked demand theory attempts to explain why an oligopolistic firm: a. has relatively large advertising expenditures. b. fails to invest in research and development. c. infrequently changes its price. d. engages in excessive brand proliferation.

c. infrequently changes its price.

If OPEC is an effective cartel, a. price changes are dictated by changes in demand. b. output changes are dictated by changes in demand. c. members agree on output quotas. d. all of these

c. members agree on output quotas

Game theory is useful for analysis in ______ and for describing pricing among firms that are _____. a. monopoly; mergine b. perfect competition; regulated c. oligopoly; interdependent d. monopolistic competition; independent

c. oligopoly; interdependent

Suppose an oligopoly has a dominant firm that sets the price for the entire industry. In this situation, the oligopoly has: a. nonprice competition b. a kinked demand curve c. price leadership d. a cartel

c. price leadership

A(n) _____ is a formal agreement among firms to set prices and output quotas. the goal is to maximize profits, but firms have an incentive to cheat.

cartel

Which of the following market structures describes an industry in which a group of firms formally agree to control prices and output of a product? a. Perfect competition b. Monopoly c. Oligopoly d. Cartel e. Monopolistic competition

d. Cartel

Which of the following is true in long-run equilibrium for both perfect competition and monopolistic competition? a. Accounting profit is zero b. Marginal cost equals price c. Long-run average cost is at a minimum d. Economic profit is zero.

d. Economic profit is zero

Which of the following is an outcome of advertising for a monopolistically competitive firm? a. Long-run average costs shift downward. b. The firm's demand curve becomes flatter and shift inward. c. The firm's demand curve keeps the same slope and shifts inward. d. Long-run average costs shift upward.

d. Long-run average costs shift upward

Which of the following is evidence that OPEC is an effective cartel? a. Output changes are dictated by changes in demand. b. Price changes are dictated by changes in demand. c. Members do not agree on output quotas. d. None of the answers above are correct.

d. None of the answers above are correct

Under which one of the following market structures are sellers most likely to consider the reaction of rival sellers when they set the price of their product? a. Perfectly competitive b. Monopoly c. Monopolistic competition d. Oligopoly

d. Oligopoly

Which of the following is the best example of a monopolistically competitive market? a. Wheat b. Automobiles c. Diamonds d. Retail sales

d. Retail sales

A cartel: a. is a group of firms formally agreeing to control the price and the output of a product. b. has as its primary goal to reap monopoly profits by replacing competition with cooperation. c. is illegal in the United States, but not in other nations. d. all of the answers above are correct

d. all of the answers above are correct

A monopolistically competitive firm will: a. maximize profits by producing where MR = MC b. not likely earn an economic profit in the long run c. shut down if price is less than average variable cost d. all of the answers above are correct

d. all of the answers above are correct

An oligopoly: a. and monopolistically competitive market produce less and charge higher prices than if their markets were perfectly competitive. b. is characterized by mutual interdependence of pricing decisions. c. may be characterized by a kinked demand curve d. all of the answers above are correct.

d. all of the answers above are correct

Which of the following is true about advertising by a firm? a. It is not always successful in increasing demand for a firm's product. b. It can increase demand and make demand more inelastic. c. It may reduce per unit costs of production when economies of scale exist. d. All of the answer above are correct.

d. all of the answers above are correct

Which of the following is evidence of an ineffective cartel? a. Output changes are dictated by changes in demand. b. Price changes are dictated by changes in demand. c. Members do not agree on output quotas. d. All of these

d. all of these

An organization of sellers designed to coordinate their supply decisions to maximize joint profits is called a: a. consumer cooperative b. marketing association c. regulatory agency d. cartel

d. cartel

Two tendencies of a firm in a cartel are the incentive to: a. cheat to maximize joint profits and the incentive to raise prices. b. cheat and avoid collusion and the incentive to raise price to maximize the firm's share of profits. c. increase output in order to minimize per unit cost and the incentive to reduce price in order to maximize joint profit. d. cooperate to maximize joint profits and to cheat on the agreement in order to increase the firm's share of the profit.

d. cooperate to maximize joint profits and to cheat on the agreement in order to increase the firm's share of the profit.

For a kinked demand curve, the marginal revenue curve is: a. positively sloped b. a horizontal line c. a vertical line d. discontinuous e. above the demand curve

d. discontinuous

In the long run in a monopolistic competitive industry, a. economic profits will be positive. b. price will be driven to zero. c. the firm will not operate where MR = MC. d. economic profit will be zero e. price will exceed average cost

d. economic profit will be zero

The theory of monopolistic competition predicts that in long-run equilibrium a monopolistically competitive firm will: a. produce the output level at which price equals long-run marginal cost. b. operate at minimum long-run average cost. c. overutilize its insufficient capacity d. produce the output level at which price equals long-run average cost.

d. produce the output level at which price equals long-run average

A monopolistic competitive firm is inefficient because the firm: a. earns positive economic profit in the long run. b. is producing at an output corresponding to the condition that marginal cost equals price. c. is not maximizing its profit. d. produces an output where average total cost is not minimum.

d. produces an output where average total cost is not minimum

Critics of advertising argue that it: a. lowers price by increasing competition. b. results in more variety of products. c. establishes brand loyalty, which promotes competition. d. serves as a barrier to entry for new firms.

d. serves as a barrier to entry for new firms.

A kink in the demand curve facing an oligopolist is caused by: a. the belief that competitors will follow price increases but not match price decreases. b. excessive advertising. c. rapidly rising marginal revenues. d. the assumption that competitors will follow price reductions but not price increases.

d. the assumption that competitors will follow price reductions but not price increases

An oligopoly is a market structure in which: a. one firm has 100 percent of a market. b. there are many small firms. c. there are many firms with no control over price. d. there are few firms selling either a homogeneous or differentiated product.

d. there are few firms selling either a homogeneous or differentiated product

Which of the following is a characteristic of the monopolistic competition market structure? a. Many firms and a homogeneous product. b. Few firms and differentiated products. c. Few firms and similar products. d. Few firms and a homogeneous product. e. Many firms and differentiated products.

e. Many firms and differentiated products.

The strategic moves and countermoves of rival firms can be explained using _____ _____.

game theory

A market structure between the extremes of perfect competition and monopoly is called _____ _____.

imperfect competition

A(n) _____ _____ _____ faces an oligopolist that assumes rivals will match a price decrease, but ignores a price increase.

kinked demand curve

The process of creating real or apparent differences between goods and services is called _____ _____.

product differentiation

Which of the following is the best example of a firm operating in a monopolistically competitive market? a. A Kansas wheat farmer b. TGI Fridays, a family restaurant c. U. S. Postal Service d. Boeing, an aircraft manufacturer

B. TGI Fridays, a family restaurant

A group of firms formally agreeing to control prices and output of a product.

Cartel

Advertising, packaging, better quality, and better service are examples of nonprice _____.

Competition

Product _____ is the process of creating real or apparent differences between goods and services.

Differentiation

A kinked demand curve is based on the actions of an oligopolist to follow a price increase but not a price reduction. T or F

False

Cartels are legal in the United States. T or F

False

T or F A monopolistic competitive firm in the long run sets price equal to the minimum point on the long-run average cost curve.

False

T or F Cartels are generally legal in the United States.

False

T or F In order from the most to the least competitive market structure is the perfectly competitive, monopolistically competitive, monopolist and then oligopolistic market structure.

False

T or F In the short run, the monopolistic competitive firm will charge a price equal to marginal cost.

False

Monopolistic competition and oligopoly belong to the _____ competition category.

Imperfect

A _____ demand curve is a curve facing an oligopolist that assumes rivals will match a price decrease, but ignores a price increase.

Kinked

_____ competition is a market structure characterized by many sellers, a differentiated product and easy market entry and exit.

Monopolistic

_____ _____ is a market structure characterized by (1) many small sellers, (2) a differentiated product, and (3) easy entry and exit.

Monopolistic Competition

_____ interdependence is an action by one firm that causes reactions by other firms.

Mutual

_____ _____ means an action by one firm may cause a reaction on the part of other firms.

Mutual Interdependence

Advertising, packaging, product development, better quality, and better service are examples of _____ _____.

Nonprice competition

A market structure characterized by few sellers.

Oligopoly

_____ is a market structure characterized by (1) few sellers, (2) a homogeneous or differentiated product, and (3) difficult entry.

Oligopoly

_____ leadership is a strategy in which a dominant firm sets the price for an industry and the other firms follow.

Price

_____ _____ occurs when a dominant firm in an industry raises or lowers its price, and other firms follow suit.

Price Leadership

In a monopolistic competitive industry, short-run economic profit encourages entry of new firms until there are no economic profits in the long-run. T or F

True

T or F A cartel is an agreement among firms to divide output of a product among members.

True

T or F A major cartel problem is that member firms cheat by attempting to steal customers from one another.

True

T or F In a monopolistic competitive industry, short-run economic profit encourages entry of new firms until there are no economic profits in the long-run.

True

T or F In an oligopoly, the outcome is uncertain because price and output decisions depend on the response of rivals.

True

T or F In the long run, marginal cost must equal marginal revenue for a monopolistic competitive firm, but not at the minimum point of the long-run average cost curve.

True

Which of the following is a characteristic of an oligopoly? a. Mutual interdependence in pricing decisions. b. Independent pricing decisions. c. Lack of control over prices. d. All of the answers above are correct.

a. Mutual interdependence in pricing decisions

Which of the following is a game theory strategy for oligopolists to avoid a low price outcome? a. Tit-for-tat b. Win-win c. Last in-first out d. Second best

a. Tit-for-tat

The kinked demand curve: a. applies when competitors match price decreases but not price increase. b. could apply to market demand in any market structure. c. applies when competitors match price increases but not price decreases. d. applies to the price leadership model. e. applies when competitors act independently.

a. applies when competitors match price decrease but not price increases

A monopolistically competitive market is characterized by: a. many small sellers selling a differentiated product b. a single seller of a product that has few suitable substitutes c. very strong barriers to entry d. mutual interdependence is pricing decisions

a. many small sellers selling a differentiated product

If a firm has substantial market power, it must be operating in an industry that would be classified as: a. a monopoly or oligopoly b. perfectly competitive c. monopolistically competitive d. perfectly competitive or monopolistically competitive e. perfectly competitive or a monopoly

a. monopoly or oligopoly

A characteristic of an oligopoly is: a. mutual interdependence in pricing decisions. b. independent pricing decisions. c. lack of control over prices. d. none of these

a. mutual interdependence in pricing decisions

A game theory strategy for oligopolists to avoid a low-price outcome is: a. tit-for-tat b. price leadership c. second best d. win-win

a. tit-for-tat

The short-run equilibrium for a monopolistically competitive firm is at P = $28.47, ATC = $22.13, and MC = MR = $17.47. Which of the following is true? a. Per unit profit is $11 b. Additional firms will be attracted into the industry. c. The firm could raise price and increase profits. d. The firm could lower price and increase profits. e. Average cost must be rising.

b. Additional firms will be attracted into the industry.

The short-run equilibrium for a monopolistically competitive firm is at P = $28.47, ATC = $22.13, and MR = MR = $17.47. Which of the following is true? a. Per unit profit is $11 b. Additional firms will be attracted to the industry. c. the firm could raise price and increase profits d. The firm could lower price and increase profits. e. Average cost must be rising.

b. Additional firms will be attracted to the industry.

Which of the following is the best example of a monopolistic competitor? a. Wheat farmers b. Diet centers c. American Telephone and Telegraph d. General Motors

b. Diet Centers

Which of the following is not a characteristic of the monopolistic competition market structure? a. Many sellers, each small in size relative to the overall market. b. Few sellers c. Differentiated product d. Easy, low-cost entry and exit

b. few sellers

A monopolistic competitive firm is inefficient because the firm: a. is not maximizing its profit. b. is producing at an output where average total cost is not minimum. c. earns positive economic profit in the long run. d. none of these

b. is producing at an output where average total cost is not minimum

The conclusion arrived at from a kinked-demand oligopoly model is that: a. oligopoly firms cannot maximize their profits. b. oligopoly firms should keep prices at their current level. c. all oligopoly firms should raise prices. d. all oligopoly firms should lower prices. e. oligopoly market structure will lead to lower prices than more competitive industries.

b. oligopoly firms should keep prices at their current level.

For both a monopolist and a monopolistically competitive firm: a. price equals average total cost. b. price is above marginal revenue. c. marginal revenue equals zero. d. marginal cost equals zero.

b. price is above marginal revenue

Product differentiation: a. refers to the attempt of firms to make their products look like those of the other firms in the industry. b. refers to the attempt of firms to make real or apparent differences in essentially substitutable products look different in the minds of the consumers. c. refers to the advantage big firms have in research and development. d. is a common characteristic of a perfectly competitive market structure. e. is only employed in a monopoly market structure.

b. refers to the attempt of firms to make real or apparent differences in essentially substitutable products look different in the minds of the consumers.

According to the kinked demand theory, when one firm raises its price, other firms will: a. also raise their prices. b. refuse to follow. c. increase their advertising expenditures. d. exit the industry

b. refuse to follow

Tombstones are produced in a monopolistic competitive market. One producer, Rolling Stones, sells 20 tombstones a week at a price of $500 each. Its average total cost is $600. From this information, we can tell: a. new tombstone firms will want to enter. b. this producer is losing $2,000 a week. c. this producer is making an economic profit of $400. d. this producer is setting MR = MC. e. this producer should increase production.

b. this producer is losing $2,000 a week

In the long-run, surviving firms in monopolistic competition earn: a. higher pure economic profits. b. zero pure economic profits. c. below normal profits. d. substantial economic losses.

b. zero pure economic profits

Which of the following statements best describes the price, output, and profit conditions of monopolistic competition? a. Price will equal marginal cost at the profit-maximizing level of output; profits will be positive in the long-run. b. Price will always equal average variable cost in the short run and either profits or losses may result in the long run. c. Marginal revenue will equal marginal cost at the short run, profit maximizing level of output; in the long run, economic profit will be zero. d. Marginal revenue will equal average total cost in the short run; long run economic profits will be zero.

c. Marginal revenue will equal marginal cost at the short run, profit maximizing level of output; in the long run, economic profit will be zero.

Which of the following is evidence of an ineffective cartel? a. Output changes are dictated by changes in demand b. Price changes are dictated by changes in demand c. Members do not agree on output quotas d. All of these

c. Members do not agree on output quotas