1 Chapter 9 Practice Quiz Tutorial Monopolistic Competition and Oligopoly ©2004 South-Western

2 1. An industry with many small sellers, a differentiated product, and easy entry would best be described as which of the following? a. Oligopoly. b. Monopolistic competition. c. Perfect competition. d. Monopoly. B. An oligopoly has only a few sellers. A monopoly only has one, and perfect competition has homogeneous products.

3 2. Which of the following industries is the best example of monopolistic competition? a. Wheat. b. Restaurant. c. Automobile. d. Water service. B. Wheat would be in a perfectly competitive market. Automobiles would be an oligopoly. And the water service is an example of a regulated monopoly.

4 3. Which of the following is not a characteristic of monopolistic competition? a. A large number of small firms. b. A differentiated product. c. Easy market entry. d. A homogeneous product. D. A characteristic of monopolistic competition is differentiated products.

5 4. A monopolistically competitive firm will a. maximize profits by producing by producing where MR = MC. b. not earn an economic profit in the long run. c. shut down if price is less than average variable cost. d. do all of the above. D. Both a monopolistically competitive firm and a perfectly competitive firm share these characteristics.

6 5. 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

7 $20 $15 $10 $ $25 $30 $35 $ ATC MC D MR Monopolistic Competition AVC Minimum LRAC P Q

8 6. A monopolistically competitive firm is inefficient because the firm a. earns positive economic profit in the long run. b. is producing at an output where marginal cost equals price. c. is not maximizing its profit. d. produces an output where average total cost is not minimum. D.

9 $20 $15 $10 $ $25 $30 $35 $ ATC MC D MR Monopolistic Competition AVC Minimum LRAC P Q

10 7. A monopolistically competitive firm in the long run earns the same economic profit as a a. perfectly competitive firm. b. monopolist. c. cartel. d. none of the above. A. In the long-run, a normal profit is made because of the ease of entry and exit. Once economic profits are made, more firms will enter the industry driving the price down. When losses are made, firms leave the industry, driving the price up, restoring profits.

11 8. One possible effect of advertising on a firm’s long-run average cost curve is to a. raise the curve. b. lower the curve. c. shift the curve rightward. d. shift the curve leftward. A. The ATC curve is raised because of the added expense of the advertising.

12 9. Monopolistic competition is an inefficient market structure because a. firms earn zero profit in the long-run. b. marginal cost is less than price in the long- run. c. a wider variety of products available compared to perfect competition. d. all of the above. B. In the long-run, marginal cost is less than price because of the downward sloping demand curve and a marginal revenue curve that is more steeply sloped beneath the demand curve.

The “Big Three” U.S. automobile industry is described as a. a monopoly. b. perfect competition. c. monopolistic competition. d. an oligopoly. D. An oligopoly is a market form with only a few sellers.

The cigarette industry in the United States is described as a. a monopoly. b. perfect competition. c. monopolistic competition. d. an oligopoly. D. The cigarette industry has only a few sellers.

A characteristic of an oligopoly is a. mutual interdependence in pricing decisions. b. easy market entry. c. both (a) and (b). d. neither (a) nor (b). A. The distinguishing feature of an oligopoly is mutual interdependence. No one firm will make a decision without first considering the reaction of its competitors to its policy change.

Which of the following is evidence that OPEC is a cartel? a. Agreement on price and output quotas by oil ministries. b. Ability to raise prices regardless of demand. c. Mutual interdependence in pricing and output decisions. d. Ability to completely control entry. A. A cartel is characterized by collusion, the coming together and agreeing to certain policies, for example, the level of prices.

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