Multiple Choice Tutorial Chapter 10 Monopolistic Competition and

Multiple Choice Tutorial Chapter 10 Monopolistic Competition and Oligopoly 1

1. The two most extreme market structures in terms of performance and number of firms are a. perfect competition and monopolistic competition b. monopolistic competition and pure monopoly c. monopolistic competition and oligopoly d. perfect competition and pure monopoly D. Perfect competition is a market structure in which there are a large number of informed buyers and sellers of a homogeneous product, with no obstacles to entry or exit of firms in the long run. Monopoly is a market structure in which there is a sole producer of a product for 2 which there are no close substitutes.

2. The market structure of monopolistic competition is best described as a. many firms with some control over price, and some product differentiation b. many firms with no control over price, producing identical products with no differentiation c. a few firms with some control over price, producing highly differentiated products A. Monopolistic competition is a market structure characterized by a large number of firms selling products that are close substitutes yet different enough that each firm’s demand curve slopes downward. 3

3. Firms in monopolistic competition and perfect competition typically a. are price takers b. produce identical products c. earn zero economic profit in the long run d. face a downward-sloping demand curve C. Economic profit is a firm’s total revenue minus its explicit and implicit costs; it is the minimum amount of profit that will keep a business owner operating a business. Zero economic is earned in the long run because of the characteristic of easy entry and easy exit. If economic profits are made, more firms will enter the market; if losses are being made, 4 some firms will leave the market.

4. Monopolistic competition is similar to a. perfect competition, in that firms face downward-sloping demand curves and earn zero long-run economic profit b. pure monopoly because it can earn economic profits both in the short run and in the long run c. pure monopoly, in that firms face downward-sloping demand curves, and similar to perfect competition, in that longrun economic profit is zero C. A firm that is a part of a monopolistic competitive industry faces a downward sloping demand curve because it can differentiate itself from its competitors. It makes zero economic profit over the long run 5 because of easy entry and exit.

5. In the market structure of monopolistic competition, new firms a. have no incentive to enter the industry, even if an economic profit is present b. may freely enter and leave the industry c. entering the industry tends to shift the demand curve of the existing firms in the industry outward d. cannot profitably enter the industry B. Entry and exit from the market is not as easy as in perfect competition, but is much easier than monopoly and oligopoly. It takes very little resources to enter into a monopolistic competitive industry and exiting is easy because of low fixed costs. 6

6. When firms in an industry produce differentiated products a. long-run economic profit will always be zero b. short-run economic profit will always be positive c. the demand curves facing firms will always be perfectly elastic d. the demand curves facing firms will always be downward-sloping D. The demand curves are downward-sloping because firms may be able to charge a higher price than competitors for a similar product. The higher prices are possible because of some advantage the firm has over competitors. 7

7. Firms in a monopolistically competitive industry act a. independently of each other b. interdependently c. independently in some conditions and interdependently in other conditions d. the same as perfect competitors C. The less competition there is in a market (the market is a local one, for example, the neighborhood convenience store) the more independent the business can be. The more competition in the market, the more the firm is dependent on what its competitors do. 8

8. Monopolistic competitors are known as a. price takers b. price searchers c. price maximizers d. price ignorers B. Any firm that faces a downward sloping demand curve is a price searcher. The lower the price the firm charges the greater the quantity demanded, and vice versa. 9

9. In economics, products are considered “differentiated” only if a. they are physically or chemically different b. sellers decide that they are different c. buyers think that they are different d. the government determines that they are different C. Differentiation can take many forms, for example, location, name recognition, quality ( either perceived or real), packaging, service, and credit policies to name a few. Sometimes there is very little difference between competitors, but if consumers think there is a difference they will act accordingly. 10

10. Compared to regular grocery stores, convenience stores tend to have a. higher prices and more limited selection b. higher prices and greater selection c. lower prices and more limited selection d. lower prices and greater selection A. Convenience stores can charge a higher price than a regular grocery store because it is offering a greater degree of convenience, however, its selections are smaller because the store itself is much smaller than a full fledged grocery store. 11

11. The market power of a monopolistically competitive firm is a. zero b. limited c. extremely strong d. absolute B. Firms that a part of a monopolistic competitive industry have very little market power because of the characteristics of easy entry and exit, and the fact that there are limitations to how much a firm can differentiate itself from its competitors. 12

12. The demand curve facing a monopolistically competitive firm is typically GRAPH a. perfectly elastic b. more elastic than the demand curves facing either monopolists or perfect competitors c. more elastic than the demand curves facing monopolists, but less elastic than the demand curves facing perfect competitors C. The demand curve is more elastic (more horizontal) than a monopolists because it has so much less control over its price; it is less elastic (more vertical) than in perfect competition because it can differentiate itself from its competitors. 13

Last slide viewed AR MC MR MC P ATC AC D Exhibit 23.1 Q MR 14

13. The firm in Exhibit 23-1 is operating a. in both c and d b. in the long run c. when it should close immediately d. in the short run GRAPH D. Because this chapter is about monopolistic competition and oligopoly, we can assume that the graph is not a monopoly. We also know that is not an oligopoly because it does not have a kinked demand curve. Therefore, we know that Exhibit 23-1 is a short run situation because a profit is being made. In a monopolistic competitive industry economic profit is zero in the long run. 15

14. Assume the firm in Exhibit 23-1 is currently charging price P and producing at output level Q. In order to maximize profits (or minimize losses), the firm should a. charge more and sell less b. charge less and sell more c. charge less and sell less d. charge more and sell more GRAPH B. To maximize profit a firm will produce where MR MC. Locate where MR MC and draw a vertical line so that it touches the demand curve and the horizontal axis. In any market, demand determines the price. Therefore, the price is lower and quantity is greater at the point where MR MC. 16

15. By charging price P and selling output Q, the firm in Exhibit 23-1 GRAPH a. breaks even b. has an economic profit which would be greater if it adjusted its price and output c. has the greatest economic profit possible d. has an economic loss which would be smaller if it adjusted its price and output B. We know that it has an economic profit because average revenue, AR, is greater than average cost, AC, at price P and quantity Q. 17

Last slide viewed MC AR MR MC ATC AC 7 D Exhibit 23.2 100 MR 18

16. At 100 units of output the firm in Exhibit 23-2 would have GRAPH a. total revenue which exceeds 700 b. total costs which exceed 700 c. total revenue which is less than 700 d. total revenue equal to 700 D. The price for each unit is 7 and the quantity it is selling is 100, so 7 times 100 equals 700. 19

17. The firm in Exhibit 23-2 is operating GRAPH a. in both c and d b. in the long run c. when it should close immediately d. in the short run D. It is the short run because a profit (economic profit) is being made. In the longrun, zero economic profit (normal profit) is made. We know this because the graph does not represent a monopoly or an oligopoly. 20

18. Assume the firm in Exhibit 23-2 is currently charging 7 and producing at output level 100. In order to maximize profit (or minimize losses), the firm should GRAPH a. charge more and sell less b. charge less and sell more c. charge less and sell less d. charge more and sell more A. To maximize profit a firm will produce where MR MC. Locate where MR MC and draw a vertical line so that it touches the demand curve and the horizontal axis. At this point where MR MC, price is higher and quantity is lower. 21

19. By charging 7 and selling 100, the firm in Exhibit 23-2 GRAPH a. breaks even b. has an economic profit which would be greater if it adjusted its price and output c. has the greatest economic profit possible d. has an economic loss which would be smaller if it adjusted its price and output B. We know an economic profit is being made because at the price of 7 and quantity 100 average revenue (AR) is greater than average cost (AC). 22

Last slide viewed AR MR MC MC ATC 33 AC 23 Exhibit 23.3 D 85 MR 23

20. The firm in Exhibit 23-3 is operating in GRAPH a. both c and d b. the long run c. when it should close immediately d. in the short run D. We know that exhibit 23-3 is the short run because an economic profit (profit) is being made. In the long run, only a normal profit (zero economic profit) would be made. 24

21. Assume the firm in Exhibit 23-3 is currently charging 33 and producing at output level 85. In order to maximize profits (or minimize losses), the firm should GRAPH a. charge more and sell less b. charge less and sell more c. charge less and sell less d. continue to charge 33 and sell 85 units. D. The firm will continue charging a price of 33 and produce 85 because this is the point where MR MC. 25

22. By charging 33 and selling 85, the firm in Exhibit 23-3 GRAPH a. breaks even b. has an economic profit which would be greater if it adjusted its price and output c. has the greatest economic profit possible d. has an economic loss which is the least that it could lose C. Is maximizing profit because it is producing where MR MC and its AR is greater then its ATC on the vertical line where MR MC. 26

23. At the profit maximizing price and output, the firm in Exhibit 23-3 has an average profit of and a total profit of . GRAPH a. 10 and 850. b. 20 and 425 c. 40 and 1700 A. AR at the point where MR MC is 33 and AC at the point where MR MC is 23, so AR - AC 10, average profit. Total profit is price times quantity, 10 times 85 equals 850. 27

24. When a firm in monopolistic competition raises its price, it a. loses all of its customers (sales drop to zero) b. loses many, but not all of its customers c. loses very few customers d. loses no customers at all B. This is because it faces a downward sloping demand curve. At higher prices fewer units will be demanded and at lower prices more units will be demanded. 28

25. Which of the following is true with regard to the price elasticity of demand for a monopolistically competitive firm? a. the less product differentiation, the more elastic demand will be b. the more product differentiation, the more elastic demand will be c. the smaller the number of firms in the industry, the more elastic demand will be A. A firm that faces a elastic demand curve will experience a decrease in total revenue when it raises its price and an increase in total revenue when it lowers its price. The less product differentiation, the larger will be 29 the effect of a change in price.

AC Last slide viewed AVC MC AR MR MC ATC 27 17 AVC Loss D 200 Exhibit 23.4 MR 30

26. The profit maximizing firm in monopolistic competition illustrated in Exhibit 23-4 should GRAPH a. stay open even though it is making a loss because its fixed costs are greater than its losses at the level of output where MR MC. b. produce more than 200 units of output and charge less than 17 c. produce less than 200 units of output and charge more than 17 A. This firms average fixed cost is the distance between its AVC curve and its ATC curve. Average loss is the distance between AR and AC. Because its average loss is less than its AFC, this firm should stay open even though it is making a 31 loss where MR MC.

27. How much loss is the firm making in Exhibit 23-4 ? GRAPH a. 500 b. 1,000 c. 2,000 d. 4,000 C. The firm is making a loss of 2,000 because its AR at the level of output where MR MC is 27 and its AC is 17. Therefore, its average loss is 10 (27 - 17) and 10 times 200 is 2,000. 32

AC Last slide viewed AVC MR MC 75 55 Loss 50 MC ATC AVC AR D 100 Exhibit 23.5 MR 33

28. The firm in Exhibit 23-5 should GRAPH a. stay open even though it is making a loss because its average fixed cost is less then its average loss. b. shut down because its losses are greater than its fixed costs. c. one cannot tell from the graph what the firm should do. B. The distance between its ATC curve and its AVC curve is the firm’s AFC. The distance between its AR curve and its ATC curve is the firm’s average profit or loss, in this case we know it is average loss because its AR is less then its AC at the level of output where MR MC. 34

29. In Exhibit 23-5 the firm’s fixed cost is and its loss is ? GRAPH a. 2,500 and 2,000. b. 2,500 and 1,000. c. 2,000 and 2,000. d. 2,000 and 2,500. D. Its fixed cost is 2,000 because that is the distance between its ATC curve and its AVC curve at the level of output where MR MC. 2,500 is the firms loss because that is the distance between its AR curve and its ATC curve at the level of output where MR MC. 35

30. Which of the following could make the firm in Exhibit 23-5 a profitable business? GRAPH a. its demand curve could increase to the extent that the firm’s AR would be greater than its ATC at the level of output where MR MC. b. its ATC curve could fall to the extent that the firm’s AR would be greater than its ATC at the level of output where MR MC. c. both b and c are correct answers. C. As long as AR is greater than ATC at the level of output where MR MC a firm is making a profit. 36

31. Describe the relationship between market price (P), average revenue (AR), and marginal revenue (MR) for a firm in monopolistic competition. a. P AR MR b. P AR MR c. P AR MR C. Price is equal to AR because once price is determined all units are sold for the same price, therefore, TR / Q will always equal the price. AR is greater than MR, beyond the first unit, because in order to sell additional units the firm has to lower the price, and once the price is lowered the same price applies to all units at one point in time. 37

32. If marginal revenue is less than price for a firm, it must be true that the firm a. is a monopoly b. is in perfect competition c. faces a downward-sloping demand curve C. If a firm can differentiate itself from its competitors, it has some control over its prices, and therefore, at higher prices the quantity demanded decreases and at lower prices the quantity demanded increases. Because demand determines price, in order for a firm to sell more units it has to lower its price. Any price cut has to apply to all identical units at one point in time, therefore, 38 MR is less than price for all units but the first.

33. If a firm’s demand curve slopes downward, the firm’s a. marginal revenue will rise as price is reduced b. marginal revenue will generally be less than price c. total revenue will decline continuously as price is reduced B. Suppose a firm charges 20 to sell one unit, so its MR is also 20. To sell two units it lowers its price to 15; so its MR now is 10 which is less than the price of 20. This is because its TR at one unit is 20 and its TR at two units is 30, so the firm added 10 to its TR by selling two units instead of one. 39

34. A profit-maximizing firm in monopolistic competition should shut down in the short run a. if marginal revenue is less than price b. if price is less than average total cost c. if price is less than fixed cost d. if price is less than average variable cost D. To shut down a firm stops production, it does not go out of business. If its price is less than its AVC its losses will exceed its fixed costs, and therefore, it should shut down because it will lose less money by shutting down than it would lose by staying open. 40

35. Firms in any market structure should maximize economic profit where a. price equals marginal cost b. total revenue is maximized c. average total cost is minimized d. marginal revenue equals marginal cost D. If MR MC a firm should produce that last unit because it is making money on the last unit. If MR MC a firm should not produce that last unit because it would lose money on that last unit. If a firm produces at the level of output where MR MC no money is made and no money is lost on that last unit of output. 41

36. Firms in monopolistic competition a. are guaranteed to earn short-run economic profits b. may earn economic profits both in the short run and in the long run c. earn zero economic profit in the long run C. A normal profit is the minimum profit a firm can make and still have the incentive to stay in business. An economic profit is the profit made above a normal profit. In the long run, firms in monopolistic competition will only make a normal profit (zero economic profit) because of the characteristic of easy entry and exit into and out of the industry. 42

37. A firm can earn a short-run economic profit if there is a rate of output at which a. price equals marginal cost b. marginal revenue equals marginal cost c. price (or the demand curve) is greater than average variable cost d. price (or the demand curve) is greater than average total cost D. In the short run, if price is greater than ATC its TR is greater than TC, and therefore, it makes a profit (economic profit). But in the long run, more firms will enter the industry to partake in the profits and prices will decline, erasing the economic profits. 43

38. In the long run, economic profit for a firm in monopolistic competition a. is zero, due to the lack of barriers to entry b. is zero, due to product differentiation c. may be positive, due to strong barriers to entry d. may be positive due to product differentiation A. The lower the barriers to entry the easier it is for firms to enter the industry to partake in the profits, thus an increase in supply (the supply curve shifts to the right) will lower prices and eliminate economic profits. The more a firm can differentiate itself, the 44 higher will be the barriers to entry.

Last slide viewed P MR MC MC 3.25 3.00 2.50 LRAC D AR Exhibit 23.6 700 1000 MR Q 45

39. The profit maximizing (or loss minimizing) output for the firm in Exhibit 23-6 would be GRAPH a. zero (that is, a close down case) b. 700 c. 1000 d. more than 700 and less than 1000 B. 700 units is the number of units where MR MC. Look where MR MC and then drop down to the horizontal axis to determine the number of units where MR MC. 46

40. The profit maximizing (or loss minimizing) price the firm would charge in Exhibit 23-6 would be GRAPH a. nonexistent since the firm should close b. 3.25 c. 3.00 d. 2.50 B. 3.25 is the price where MR MC. Look where MR MC and then move to the left to the vertical axis. 47

41. At the profit maximizing (or loss minimizing) output and price, the firm in Exhibit 23-6 would GRAPH a. be earning zero economic profit (break even) b. be earning an economic profit c. be earning an economic loss d. have to expand to stay in business in the long run A. At a price of 3.25 and a quantity of 700 AR (average revenue) equals AC (average cost), so TR (total revenue) equals TC (total cost). When TR TC a normal profit (zero economic profit) is being made. 48

42. At the profit maximizing (or loss minimizing) price and output, the firm operating in monopolistic competition in Exhibit 23-6 would have GRAPH a. total cost equal to 3000 b. to close, so the price isn’t important c. total costs equal to 1750 d. total revenue equal to 2275 D. TR equals price times quantity. In this case that is 3.25 times 700 units equals 2275. 49

43. In the long run, a firm in monopolistic competition will find a. its supply curve shifting until price equals average total cost b. its cost curve shifting until price equals average total cost c. its demand curve shifting until marginal revenue equals marginal cost A. If firms in the industry are making a profit (profit always means economic profit) more firms will enter the industry, thus driving price down toward where a normal profit is made; if firms are making a loss, some of the firms will leave the industry, thus driving prices up toward where a normal profit is made. 50

44. Firms in a monopolistically competitive industry are earning short-run economic profits. In the long run, the supply curve facing each individual firm can be expected to a. shift to the left b. stay the same c. shift to the right C. The supply curve will shift to the right as more firms enter the industry to partake in the profits being made. This will happen because of the characteristic of easy entry and easy exit that is prevalent in a monopolistic competitive industry. 51

45. In monopolistic competition, if the firm’s demand curve is tangent to its average total cost curve, a. it must be maximizing its economic profit b. it will earn an economic loss at all rates of output c. it will earn an economic profit at all rates of output d. there is only one rate of output at which economic profit is zero-all other rates of output create economic loss D. If a firm’s demand curve is tangent to its ATC curve then MR MC AR. When it is stated that an economic loss is made, this 52 means that less than a normal profit is made.

46. The market for VCR videotape rentals a. is an example of perfect competition b. has experienced consistently rising prices and economic profits since the early 1980’s c. has experienced stable prices and zero economic profit since the early 1980’s d. has experienced declining prices and decreasing economic profit since the early 1980’s D. When the supply curve for a product increases, there will be a decline in the market price, the decline in prices will, in turn, lead to lower profits. 53

47. In the market for VCR videotape rentals during the past 15 years, a. demand and supply have both remained stable, resulting in constant prices b. demand and supply have both decreased, resulting in stable prices c. supply has increased faster than demand, resulting in falling prices C. Any change in either demand or supply results in a change in the equilibrium price. If both curves shift, the impact on the equilibrium price is determined by how much one curve shifts in relation to the other. 54

48. When comparing the long-run efficiency of monopolistic competition with that of perfect competition (assuming firms in both market structures have identical cost curves), a. they are equally efficient since both produce where demand equals average total cost b. monopolistic competition is more efficient because such firms produce more output than do perfect competitors c. perfect competition is more efficient because such firms produce at lower average cost C. Because firms in monopolistic competition can differentiate themselves, efficiency is not the only factor that determines their 55 profitability.

49. Compared to perfect competition, a firm in monopolistic competition tends to produce a. more output and charge higher prices b. more output and charge lower prices c. less output and charge higher prices d. less output and charge lower prices C. This is true because a firm in a monopolistic competitive industry faces a downward sloping demand curve; whereas a firm that is a part of a perfectly competitive industry faces a horizontal demand curve at the market price. 56

50. In which market structure is excess capacity most likely to occur after all long-run adjustments have been made? a. perfect competition b. monopolistic competition c. oligopoly d. pure monopoly D. Excess capacity is defined as the difference between the minimum average cost and a firm’s profit-maximizing level of output. In this case, production is short of the level that would achieve the lowest average cost. The more steeply sloped the demand curve, as in a monopolistic industry, the more this is true. 57

51. Which of the following describes the market structure of oligopoly? a. many firms with some control over price, differentiated products, and strong barriers to entry b. many firms with no control over price, identical products, and very weak barriers to entry c. a few firms with some control over price and strong barriers to entry d. a few firms with no control over price and very weak barriers to entry C. Definition. 58

52. The primary characteristic of oligopoly which is rare in other market structures is a. product differentiation b. the interdependence of firms c. strong barriers to entry d. advertising and other nonprice competition B. Interdependence means that one firm will not do anything until it considers what its competitors will do as a result of what it does. Consider 3 firms, A, B, and C. everything else being equal, if A raises price, B and C will not raise theirs; if A lowers its price, B and C will follow suit and raise theirs also. 59

53. Oligopolists are more sensitive to the pricing and output policies of their rivals when a. all firms produce identical products b. their products are highly differentiated c. there is freedom of entry and exit d. there are many firms in the industry A. Consider 3 firms in an industry A, B, and C, everything else being equal, the more identical the products the easier it is for consumers to buy from firms B and C if A raises its prices. 60

Last slide viewed MC 5 ATC AVC D AR 90 Exhibit 23.7 MR 61

54. The market structure in which the firm represented in Exhibit 23-7 is most likely to be operating is GRAPH a. any of the following is equally likely compared to the others b. perfect competition c. monopolistic competition d. oligopoly D. We know this is an oligopolistic industry because of the kinked demand curve. 62

55. The profit maximizing firm in Exhibit 23-7 would GRAPH a. produce 90 units of output b. produce more than 90 units of output c. produce slightly less than 90 units of output d. close to minimize loss A. This is a given because 90 units is where the demand curve is kinked. It is difficult for an oligopolists to follow the MR MC rule of profit maximization because of the characteristic of mutual interdependence. Therefore, price is determined by other methods. In exhibit 23-7, the price that all firms are charging is assumed to be 5. 63

56. The profit maximizing firm in Exhibit 23-7 would GRAPH a. charge 5 b. charge more than 5 c. charge slightly less than 5 (somewhere in the 4 to 4.50 range) d. charge substantially less than 5 A. 5 is the price that exists where the demand curve is kinked. 64

Last slide viewed MC ATC AVC 9 D AR 20 Exhibit 23.8 MR 65

57. At the profit maximizing (or loss minimizing) price and output, the firm in Exhibit 23-8 GRAPH a. is operating in the long run b. breaks even c. has an economic profit d. has an economic loss D. This is because AR is less than ATC at 20 units of output. If AR is less than ATC then TR is less than TC which means that this firm is experiencing a loss. 66

58. The profit maximizing or loss minimizing oligopoly in Exhibit 23-8 would GRAPH a. produce slightly more than 20 units of output b. produce slightly less than 20 units of output c. close to minimize losses d. produce 20 units of output D. 20 units is the number of units at the point where the demand curve is kinked. 67

59. The profit maximizing or loss minimizing oligopoly in Exhibit 23-8 would GRAPH a. charge 9 b. charge a price which is somewhat higher than 9 c. charge a price which is much lower than 9 d. charge a price which is slightly lower than 9 A. 9 is the price that exists at the point where the demand curve is kinked. 68

60. The profit maximizing or loss minimizing firm in Exhibit 23-8 would have GRAPH a. both d and e b. both c and e c. variable costs equal to 180 d. total costs equal to 180 e. total revenue equal to 180 E. TR equals price times quantity. The price in this case is 9 and 20 is the number of units, 9 times 20 is 180. 69

P Last slide viewed MC 95 80 ATC AVC 70 D AR Exhibit 23.9 36 44 50 MR Q 70

61. The profit maximizing or loss minimizing firm in Exhibit 23-9 would produce GRAPH a. nothing, since it should close b. 36 c. 44 d. 50 B. 36 units is the number of units where MR MC. Look where MR MC then draw a vertical line down to the horizontal axis. 71

62. The profit maximizing or loss minimizing firm in Exhibit 23-9 would charge GRAPH a. 95 b. 80 c. 70 A. 95 is the price where MR MC. Once you find where MR MC draw a vertical line up and down from this point. Now all answers to questions will be found on this vertical line. Because demand determines price, take the vertical line up to the demand curve and then move across horizontally to the left. Where this line hits the vertical axis is the profit maximizing price. 72

63. The profit maximizing or loss minimizing firm in Exhibit 23-9 would have GRAPH a. an economic loss of an amount which cannot be determined on this graph b. economic profits of 360 c. economic profits of 700 d. economic profits of 900 D. At the point where MR MC the price is 95 and the number of units is 36. So TR is equal to 3,420 (36 times 95). ATC at MR MC is 70, so TC is equal to 2,520 (70 times 36). So profit is 3,420 - 2,520 900 73

64. The profit maximizing or loss minimizing firm in Exhibit 23-9 would have GRAPH a. total costs of 3500 b. total costs of less than 3000 c. total revenue of 3500 d. total revenue of less than 3400 B. See previous answer. 74

65. Which of the following is not an example of oligopolistic barriers to entry? a. diseconomies of scale b. legal restrictions c. advertising and brand proliferation d. high start-up costs A. Diseconomies of scale exists when as a firm grows it becomes less efficient. This is not the case with an oligopoly. One reason an oligopolist becomes an oligopolist is because of economies of scale. Economies of scale exists when as a firm grows it experiences an increase in productivity. 75

66. Collusion is easier to achieve and maintain in oligopoly when a. there are many firms in the industry b. the firms’ products are homogeneous c. the firms’ cost structures are very different d. there are very weak barriers to entry B. A homogeneous product is a product that is the same and cannot be distinguished from one another. An example of a homogeneous product would be a potato. When farmers bring their potatoes to market, you cannot distinguish one potato from another potato. 76

67. For oligopolists, which of the following is not an advantage of operating a cartel? a. the opportunity for increased economic profit b. decreased uncertainty c. increased barriers to entry d. decreased competition e. increased output for each firm E. A cartel is a group of firms that agree to coordinate their production and pricing decisions, thereby behaving as a monopolist. 77

68. During the 1970’s, OPEC exerted strong control over the oil industry. Which of the following is a result of OPEC’s early success as a cartel? a. as new sources of oil were discovered and developed, the new suppliers quickly joined OPEC b. war in the Middle East no longer affect either the supply or the price of oil c. OPEC is now much less powerful, due to the entry of new non-OPEC oil suppliers and due to cheating by OPEC members C. To succeed cartels have to have complete cooperation among all members. 78

69. Price leadership a. has all of the following features b. occurs only when the largest firm in the industry is the decision maker c. is subject to the same kinds of obstacles as other forms of collusion d. typically involves a formal written agreement among firms C. The most common way that an oligopolist determines price is for the oligopoly to pick a price leader and then let the price leader set the price while all the others follow suit. This practice only works as long as all members fully cooperate. 79

70. Game theory is relevant only when a. there are exactly two firms in the industry b. a firm’s decisions are independent of the actions of other firms in the industry c. oligopolists are actively colluding with regard to production and pricing decisions d. each firm has two or more possible strategies, with results that depend on the actions of other firms D. Game theory is a model that analyzes oligopolistic behavior as a series of strategic moves and countermoves by rival firms. 80

71. According to game theory, a. firms will successfully collude to raise prices and increase economic profit b. firms will match other firms’ price increases, but will not match price cuts c. firms’ decisions are interrelated, but each firm is uncertain about the actions of other firms C. One firm may know what the others will do - but not how much? For example, with 3 firms in the industry, if A lowers price, we know that B and C will lower their price but by how much? Yet, what B and C do will determine what happens to A’s revenue. 81

72. The kinked demand curve model is used to explain a. the industry’s long-run price and output in an oligopolistic market structure b. why oligopoly prices are stable, even in the face of changing costs c. why prices are stable in an oligopolistic market. C. For example, if A raises its prices, B and C will not raise their prices and consumers will demand more from B and C. If A lowers its prices, B and C will follow suit, thus A will not gain by lowering its prices in the first place. 82

73. The kinked demand curve a. is more elastic at higher prices and less elastic at lower prices b. is more elastic at lower prices and less elastic at higher prices c. is the result of price leadership d. predicts that oligopolies will change prices more often than monopolies A. It is more elastic above the kink because if it raises prices its revenues will decline a lot as consumers buy more from B and C. It is more inelastic below the kink because as any price cut will be followed, their will not be much change in total revenue with a price cut. 83

74. The marginal revenue curve associated with a kinked demand curve is a. a horizontal line b. a straight line sloping upward c. a straight line sloping downward d. discontinuous at the quantity of output associated with the kink D. The marginal revenue curve is broken at the kink because of the change in slope of the demand curve. The demand curve is more elastic (horizontal) above the kink and less elastic (more vertical) below the kink. 84

75. The kinked demand curve model describes an oligopoly where competitors a. ignore all price changes b. match all price changes c. match price increases but not price decreases d. match price decreases but not price increases D. The term match means to follow. To match a price decrease means firms B and C will lower their prices if A lowers its prices. A raise in price will not be matched as B and C will not raise their prices as a result. 85

76. Suppose that Toyota increases its car prices, while Honda and Mitsubishi respond with their own price increases. This behavior is consistent with the a. collusion, price leadership, and kinked demand curve models b. collusion and price leadership models, but not with the kinked demand curve model c. kinked demand curve model, but not with the collusion or price leadership models B. With the kinked demand curve theory we always assume that when firm A raises or lowers its price, B and C would react or not react to the change in price at a time when no other factors would change. 86

77. A comparison of oligopoly and perfect competition reveals that a. prices and economic profit are usually higher in oligopoly b. prices are usually lower in oligopoly due to economies of scale, and economic profit is usually higher in oligopoly due to barriers to entry c. prices are usually higher in oligopoly and economic profit is usually lower in oligopoly, due to product differentiation A. Anytime the barriers to entry are high a firms in that industry will have more control over their pricing policies than with low barriers.87

Last slide viewed MC LRAC 85 50 D AR Exhibit 23.10 9 11 12 MR 88

78. The profit maximizing oligopoly in Exhibit 23-10 will GRAPH a. produce 9 units of output b. produce 11 units of output c. produce 12 units of output d. produce more than 12 units of output A. 9 units of output is that output that exists where the kink is at. Where the kink is, draw a vertical line down to the horizontal axis. 89

79. The profit maximizing oligopoly in Exhibit 23-10 will GRAPH a. charge 85 b. charge 50 c. charge between 50 and 85 d. charge less than 50 A. 85 dollars is the price that exists at the kink. Where the kink is at, draw a horizontal line across to the vertical axis. 90

80. Consider the oligopoly in Exhibit 23-10 . The optimal price from society’s perspective (the socially desirable price) would be GRAPH a. 85 b. 50 c. less than 50 d. between 50 and 85 D. 50 is the price at the lowest point on the long run average cost (LRAC) curve. 85 is the price that, all factors considered, the oligopolists decide is the best. 91

81. The socially optimal output (the socially desirable output) in Exhibit 23-10 would be GRAPH a. 9 b. 11 c. 12 d. more than 12 B. 11 units is the number of units at the lowest point on the firm’s LRAC curve. 92

82. The profit maximizing oligopoly in Exhibit 23-10 GRAPH a. breaks even in the long run b. would close in the long run c. would earn an economic profit in the long run d. incurs an economic loss in the long run C. At 85 and 9 units an economic profit is being made because each firms TR is greater than its TC. These profits can continue because of the large barriers to entry. 93

83. A vertical merger occurs when a. the merging firms produce the same products b. one firm merges with another that supplies its inputs c. the merging firms are from different industries B. A vertical merger is a merger in which one firm combines with another form which it purchases inputs or to which it sells output. A horizontal merger is a merger in which one firm combines with another firm that produces the same product. 94

84. A merger between a tobacco company and a food processing firm is called a a. horizontal merger b. vertical merger c. diagonal merger d. conglomerate merger D. A conglomerate merger is a merger involving the combination of firms producing is different industries. 95

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