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1 Multiple Choice Tutorial Chapter 10 Monopolistic Competition and Oligopoly
2 1. The two most extreme market structures in terms of performance and number of firms are a. perfect competition and monopolistic competitionb. monopolistic competition and pure monopolyc. monopolistic competition and oligopolyd. perfect competition and pure monopolyD. 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 which there are no close substitutes.
3 2. The market structure of monopolistic competition is best described as a. many firms with some control over price, and some product differentiationb. many firms with no control over price, producing identical products with no differentiationc. a few firms with some control over price, producing highly differentiated productsA. 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.
4 3. Firms in monopolistic competition and perfect competition typically a. are price takersb. produce identical productsc. earn zero economic profit in the long rund. face a downward-sloping demand curveC. 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, some firms will leave the market.
5 4. Monopolistic competition is similar to a. perfect competition, in that firms face downward-sloping demand curves and earn zero long-run economic profitb. pure monopoly because it can earn economic profits both in the short run and in the long runc. pure monopoly, in that firms face downward-sloping demand curves, and similar to perfect competition, in that long-run economic profit is zeroC. 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 because of easy entry and exit.
6 5. In the market structure of monopolistic competition, new firms a. have no incentive to enter the industry, even if an economic profit is presentb. may freely enter and leave the industryc. entering the industry tends to shift the demand curve of the existing firms in the industry outwardd. cannot profitably enter the industryB. 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.
7 6. When firms in an industry produce differentiated products a. long-run economic profit will always be zerob. short-run economic profit will always be positivec. the demand curves facing firms will always be perfectly elasticd. the demand curves facing firms will always be downward-slopingD. 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.
8 7. Firms in a monopolistically competitive industry act a. independently of each otherb. interdependentlyc. independently in some conditions and interdependently in other conditionsd. the same as perfect competitorsC. 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.
9 8. Monopolistic competitors are known as a. price takersb. price searchersc. price maximizersd. price ignorersB. 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.
10 9. In economics, products are considered “differentiated” only if a. they are physically or chemically differentb. sellers decide that they are differentc. buyers think that they are differentd. the government determines that they are differentC. 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.
11 10. Compared to regular grocery stores, convenience stores tend to have a. higher prices and more limited selectionb. higher prices and greater selectionc. lower prices and more limited selectiond. lower prices and greater selectionA. 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.
12 11. The market power of a monopolistically competitive firm is a. zerob. limitedc. extremely strongd. absoluteB. 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.
13 12. The demand curve facing a monopolistically competitive firm is typically GRAPH a. perfectly elasticb. more elastic than the demand curves facing either monopolists or perfect competitorsc. more elastic than the demand curves facing monopolists, but less elastic than the demand curves facing perfect competitorsC. 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.
14 Last slide viewedARMCMR = MCPATCACDQMRExhibit 23.1
15 13. The firm in Exhibit 23-1 is operating a. in both c and db. in the long runc. when it should close immediatelyd. in the short run GRAPHD. 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.
16 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 shoulda. charge more and sell lessb. charge less and sell morec. charge less and sell lessd. charge more and sell more GRAPHB. 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.
17 15. By charging price P and selling output Q, the firm in Exhibit 23-1 GRAPH a. breaks evenb. has an economic profit which would be greater if it adjusted its price and outputc. has the greatest economic profit possibled. has an economic loss which would be smaller if it adjusted its price and outputB. We know that it has an economic profit because average revenue, AR, is greater than average cost, AC, at price P and quantity Q.
18 Last slide viewedMCARMR = MCATC$7ACD100MRExhibit 23.2
19 16. At 100 units of output the firm in Exhibit 23-2 would have GRAPH a. total revenue which exceeds $700b. total costs which exceed $700c. total revenue which is less than $700d. total revenue equal to $700D. The price for each unit is $7 and the quantity it is selling is 100, so 7 times 100 equals $700.
20 17. The firm in Exhibit 23-2 is operating GRAPH a. in both c and db. in the long runc. when it should close immediatelyd. in the short runD. It is the short run because a profit (economic profit) is being made. In the long-run, zero economic profit (normal profit) is made. We know this because the graph does not represent a monopoly or an oligopoly.
21 a. charge more and sell less 18. Assume the firm in Exhibit 23-2 is currently charging $7 and producing at output level In order to maximize profit (or minimize losses), the firm should GRAPHa. charge more and sell lessb. charge less and sell morec. charge less and sell lessd. charge more and sell moreA. 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.
22 19. By charging $7 and selling 100, the firm in Exhibit 23-2 GRAPH a. breaks evenb. has an economic profit which would be greater if it adjusted its price and outputc. has the greatest economic profit possibled. has an economic loss which would be smaller if it adjusted its price and outputB. 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).
23 Last slide viewedARMCMR = MCATC$33AC$23D85MRExhibit 23.3
24 20. The firm in Exhibit 23-3 is operating in GRAPH a. both c and db. the long runc. when it should close immediatelyd. in the short runD. 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.
25 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 GRAPHa. charge more and sell lessb. charge less and sell morec. charge less and sell lessd. 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.
26 22. By charging $33 and selling 85, the firm in Exhibit 23-3 GRAPH a. breaks evenb. has an economic profit which would be greater if it adjusted its price and outputc. has the greatest economic profit possibled. has an economic loss which is the least that it could loseC. 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.
27 23. At the profit maximizing price and output, the firm in Exhibit 23-3 has an average profit of _______ and a total profit of ________. GRAPHa. $10 and 850.b. $20 and 425c. $40 and 1700A. 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.
28 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 customersc. loses very few customersd. loses no customers at allB. 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.
29 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 beb. the more product differentiation, the more elastic demand will bec. the smaller the number of firms in the industry, the more elastic demand will beA. 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 the effect of a change in price.
30 Loss D AC AR ATC AVC MC MR = MC $27 AVC $17 200 MR Last slide viewed Exhibit 23.4
31 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 $17c. produce less than 200 units of output and charge more than $17A. 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 loss where MR = MC.
32 27. How much loss is the firm making in Exhibit 23-4 ? GRAPH d. $4,000C. 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 ( ) and $10 times 200 is $2,000.
33 D Loss AVC AC MR = MC 75 55 50 AR MR MC ATC AVC 100 Last slide viewed Exhibit 23.5
34 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.
35 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.
36 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.
37 31. Describe the relationship between market price (P), average revenue (AR), and marginal revenue (MR) for a firm in monopolistic competition.a. P = AR = MRb. P > AR = MRc. P = AR > MRC. 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.
38 32. If marginal revenue is less than price for a firm, it must be true that the firm a. is a monopolyb. is in perfect competitionc. faces a downward-sloping demand curveC. 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, MR is less than price for all units but the first.
39 33. If a firm’s demand curve slopes downward, the firm’s a. marginal revenue will rise as price is reducedb. marginal revenue will generally be less than pricec. total revenue will decline continuously as price is reducedB. 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.
40 34. A profit-maximizing firm in monopolistic competition should shut down in the short run a. if marginal revenue is less than priceb. if price is less than average total costc. if price is less than fixed costd. if price is less than average variable costD. 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.
41 35. Firms in any market structure should maximize economic profit where a. price equals marginal costb. total revenue is maximizedc. average total cost is minimizedd. marginal revenue equals marginal costD. 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.
42 36. Firms in monopolistic competition a. are guaranteed to earn short-run economic profitsb. may earn economic profits both in the short run and in the long runc. earn zero economic profit in the long runC. 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.
43 37. A firm can earn a short-run economic profit if there is a rate of output at which a. price equals marginal costb. marginal revenue equals marginal costc. price (or the demand curve) is greater than average variable costd. price (or the demand curve) is greater than average total costD. 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.
44 38. In the long run, economic profit for a firm in monopolistic competition a. is zero, due to the lack of barriers to entryb. is zero, due to product differentiationc. may be positive, due to strong barriers to entryd. may be positive due to product differentiationA. 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 higher will be the barriers to entry.
45 P Q D=AR MR MC MR = MC LRAC 3.25 3.00 2.50 700 1000 Last slide viewed Exhibit 23.6
46 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. 700c. 1000d. more than 700 and less than 1000B 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.
47 40. The profit maximizing (or loss minimizing) price the firm would charge in Exhibit 23-6 would be GRAPHa. nonexistent since the firm should closeb. $3.25c. $3.00d. $2.50B. $3.25 is the price where MR = MC. Look where MR = MC and then move to the left to the vertical axis.
48 41. At the profit maximizing (or loss minimizing) output and price, the firm in Exhibit 23-6 would GRAPHa. be earning zero economic profit (break even)b. be earning an economic profitc. be earning an economic lossd. have to expand to stay in business in the long runA. 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.
49 42. At the profit maximizing (or loss minimizing) price and output, the firm operating in monopolistic competition in Exhibit 23-6 would have GRAPHa. total cost equal to $3000b. to close, so the price isn’t importantc. total costs equal to $1750d. total revenue equal to $2275D. TR equals price times quantity. In this case that is $3.25 times 700 units equals $2275.
50 43. In the long run, a firm in monopolistic competition will find a. its supply curve shifting until price equals average total costb. its cost curve shifting until price equals average total costc. its demand curve shifting until marginal revenue equals marginal costA. 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.
51 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 toa. shift to the leftb. stay the samec. shift to the rightC. 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.
52 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 profitb. it will earn an economic loss at all rates of outputc. it will earn an economic profit at all rates of outputd. there is only one rate of output at which economic profit is zero-all other rates of output create economic lossD. 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 means that less than a normal profit is made.
53 46. The market for VCR videotape rentals a. is an example of perfect competitionb. has experienced consistently rising prices and economic profits since the early 1980’sc. has experienced stable prices and zero economic profit since the early 1980’sd. has experienced declining prices and decreasing economic profit since the early 1980’sD. 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.
54 47. In the market for VCR videotape rentals during the past 15 years, a. demand and supply have both remained stable, resulting in constant pricesb. demand and supply have both decreased, resulting in stable pricesc. supply has increased faster than demand, resulting in falling pricesC. 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.
55 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 costb. monopolistic competition is more efficient because such firms produce more output than do perfect competitorsc. perfect competition is more efficient because such firms produce at lower average costC. Because firms in monopolistic competition can differentiate themselves, efficiency is not the only factor that determines their profitability.
56 49. Compared to perfect competition, a firm in monopolistic competition tends to produce a. more output and charge higher pricesb. more output and charge lower pricesc. less output and charge higher pricesd. less output and charge lower pricesC. 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.
57 50. In which market structure is excess capacity most likely to occur after all long-run adjustments have been made?a. perfect competitionb. monopolistic competitionc. oligopolyd. pure monopolyD. 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.
58 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 entryb. many firms with no control over price, identical products, and very weak barriers to entryc. a few firms with some control over price and strong barriers to entryd. a few firms with no control over price and very weak barriers to entryC. Definition.
59 52. The primary characteristic of oligopoly which is rare in other market structures is a. product differentiationb. the interdependence of firmsc. strong barriers to entryd. advertising and other nonprice competitionB. 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.
60 53. Oligopolists are more sensitive to the pricing and output policies of their rivals when a. all firms produce identical productsb. their products are highly differentiatedc. there is freedom of entry and exitd. there are many firms in the industryA. 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.
61 Last slide viewedMCATC$5AVCD = AR90MRExhibit 23.7
62 54. The market structure in which the firm represented in Exhibit 23-7 is most likely to be operating is GRAPHa. any of the following is equally likely compared to the othersb. perfect competitionc. monopolistic competitiond. oligopolyD. We know this is an oligopolistic industry because of the kinked demand curve.
63 55. The profit maximizing firm in Exhibit 23-7 would GRAPH a. produce 90 units of outputb. produce more than 90 units of outputc. produce slightly less than 90 units of outputd. close to minimize lossA. 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.
64 56. The profit maximizing firm in Exhibit 23-7 would GRAPH a. charge $5b. charge more than $5c. charge slightly less than $5 (somewhere in the $4 to $4.50 range)d. charge substantially less than $5A. $5 is the price that exists where the demand curve is kinked.
65 Last slide viewedATCMC$9AVCD = AR20MRExhibit 23.8
66 57. At the profit maximizing (or loss minimizing) price and output, the firm in Exhibit 23-8 GRAPH a. is operating in the long runb. breaks evenc. has an economic profitd. has an economic lossD. 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.
67 58. The profit maximizing or loss minimizing oligopoly in Exhibit 23-8 would GRAPH a. produce slightly more than 20 units of outputb. produce slightly less than 20 units of outputc. close to minimize lossesd. produce 20 units of outputD. 20 units is the number of units at the point where the demand curve is kinked.
68 59. The profit maximizing or loss minimizing oligopoly in Exhibit 23-8 would GRAPH a. charge $9b. charge a price which is somewhat higher than $9c. charge a price which is much lower than $9d. charge a price which is slightly lower than $9A. $9 is the price that exists at the point where the demand curve is kinked.
69 60. The profit maximizing or loss minimizing firm in Exhibit 23-8 would have GRAPH a. both d and eb. both c and ec. variable costs equal to $180d. total costs equal to $180e. total revenue equal to $180E. TR equals price times quantity. The price in this case is $9 and 20 is the number of units, 9 times 20 is $180.
70 P Q D=AR MC ATC AVC MR $95 $80 $70 36 44 50 Last slide viewed Exhibit 23.9
71 61. The profit maximizing or loss minimizing firm in Exhibit 23-9 would produce GRAPH a. nothing, since it should closeb. 36c. 44d. 50B. 36 units is the number of units where MR = MC. Look where MR = MC then draw a vertical line down to the horizontal axis.
72 62. The profit maximizing or loss minimizing firm in Exhibit 23-9 would charge GRAPH 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.
73 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 graphb. economic profits of $360c. economic profits of $700d. economic profits of $900D. 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
74 64. The profit maximizing or loss minimizing firm in Exhibit 23-9 would have GRAPH a. total costs of $3500b. total costs of less than $3000c. total revenue of $3500d. total revenue of less than $3400B. See previous answer.
75 65. Which of the following is not an example of oligopolistic barriers to entry? a. diseconomies of scaleb. legal restrictionsc. advertising and brand proliferationd. high start-up costsA. 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.
76 66. Collusion is easier to achieve and maintain in oligopoly when a. there are many firms in the industryb. the firms’ products are homogeneousc. the firms’ cost structures are very differentd. there are very weak barriers to entryB. 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.
77 67. For oligopolists, which of the following is not an advantage of operating a cartel? a. the opportunity for increased economic profitb. decreased uncertaintyc. increased barriers to entryd. decreased competitione. increased output for each firmE. A cartel is a group of firms that agree to coordinate their production and pricing decisions, thereby behaving as a monopolist.
78 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 OPECb. war in the Middle East no longer affect either the supply or the price of oilc. OPEC is now much less powerful, due to the entry of new non-OPEC oil suppliers and due to cheating by OPEC membersC. To succeed cartels have to have complete cooperation among all members.
79 69. Price leadershipa. has all of the following featuresb. occurs only when the largest firm in the industry is the decision makerc. is subject to the same kinds of obstacles as other forms of collusiond. typically involves a formal written agreement among firmsC. 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.
80 70. Game theory is relevant only when a. there are exactly two firms in the industryb. a firm’s decisions are independent of the actions of other firms in the industryc. oligopolists are actively colluding with regard to production and pricing decisionsd. each firm has two or more possible strategies, with results that depend on the actions of other firmsD. Game theory is a model that analyzes oligopolistic behavior as a series of strategic moves and countermoves by rival firms.
81 71. According to game theory, a. firms will successfully collude to raise prices and increase economic profitb. firms will match other firms’ price increases, but will not match price cutsc. firms’ decisions are interrelated, but each firm is uncertain about the actions of other firmsC. 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.
82 72. The kinked demand curve model is used to explain a. the industry’s long-run price and output in an oligopolistic market structureb. why oligopoly prices are stable, even in the face of changing costsc. 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.
83 73. The kinked demand curve a. is more elastic at higher prices and less elastic at lower pricesb. is more elastic at lower prices and less elastic at higher pricesc. is the result of price leadershipd. predicts that oligopolies will change prices more often than monopoliesA. 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.
84 74. The marginal revenue curve associated with a kinked demand curve is a. a horizontal lineb. a straight line sloping upwardc. a straight line sloping downwardd. discontinuous at the quantity of output associated with the kinkD. 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.
85 75. The kinked demand curve model describes an oligopoly where competitors a. ignore all price changesb. match all price changesc. match price increases but not price decreasesd. match price decreases but not price increasesD. 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.
86 76. Suppose that Toyota increases its car prices, while Honda and Mitsubishi respond with their own price increases. This behavior is consistent with thea. collusion, price leadership, and kinked demand curve modelsb. collusion and price leadership models, but not with the kinked demand curve modelc. kinked demand curve model, but not with the collusion or price leadership modelsB. 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.
87 77. A comparison of oligopoly and perfect competition reveals that a. prices and economic profit are usually higher in oligopolyb. prices are usually lower in oligopoly due to economies of scale, and economic profit is usually higher in oligopoly due to barriers to entryc. prices are usually higher in oligopoly and economic profit is usually lower in oligopoly, due to product differentiationA. Anytime the barriers to entry are high a firms in that industry will have more control over their pricing policies than with low barriers.
88 Last slide viewedMCLRAC$85$50D = AR91112MRExhibit 23.10
89 78. The profit maximizing oligopoly in Exhibit 23-10 will GRAPH a. produce 9 units of outputb. produce 11 units of outputc. produce 12 units of outputd. produce more than 12 units of outputA. 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.
90 79. The profit maximizing oligopoly in Exhibit 23-10 will GRAPH a. charge $85b. charge $50c. charge between $50 and $85d. charge less than $50A. $85 dollars is the price that exists at the kink. Where the kink is at, draw a horizontal line across to the vertical axis.
91 80. Consider the oligopoly in Exhibit 23-10 80. Consider the oligopoly in Exhibit The optimal price from society’s perspective (the socially desirable price) would be GRAPHa. $85b. $50c. less than $50d. between $50 and $85D. $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.
92 81. The socially optimal output (the socially desirable output) in Exhibit 23-10 would be GRAPH d. more than 12B. 11 units is the number of units at the lowest point on the firm’s LRAC curve.
93 82. The profit maximizing oligopoly in Exhibit 23-10 GRAPH a. breaks even in the long runb. would close in the long runc. would earn an economic profit in the long rund. incurs an economic loss in the long runC. 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.
94 83. A vertical merger occurs when a. the merging firms produce the same productsb. one firm merges with another that supplies its inputsc. the merging firms are from different industriesB. 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.
95 84. A merger between a tobacco company and a food processing firm is called a a. horizontal mergerb. vertical mergerc. diagonal mergerd. conglomerate mergerD. A conglomerate merger is a merger involving the combination of firms producing is different industries.