CHAPTER 11—MONOPOLISTIC COMPETITION AND OLIGOPOLY
MULTIPLE CHOICE
1) If a market has more than one seller, but fewer sellers than under perfect competition, it is
referred to as
a. a monopoly
b. competitive
c. imperfect competition
d. an efficient market
e. optimal
Answer: C
2) Monopolistic competition exists when there is one large firm in an otherwise perfectly
competitive market.
a. True
b. False
Answer: B
3) A major difference between monopolistic competition and perfect competition is the
degree of product differentiation. Pure competition has none and differentiation always exists
in monopolistic competition.
a. True
b. False
Answer: A
4) Monopolistically competitive firms are similar to perfectly competitive firms in the sense
that both face horizontal demand curves for their product.
a. True
b. False
Answer: B
5) When there are many buyers and sellers, no significant barriers to entry, and a
differentiated product, the market structure is called
a. an oligopoly
b. perfect competition
c. monopolistic competition
d. a monopoly
e. unbalanced monopoly
Answer: C
6) All of the following, except one, are characteristics of monopolistic competition. Which is
the exception?
a. There is a large number of sellers.
b. Each seller faces a horizontal demand curve for its product.
c. There are no significant barriers to entry or exit.
d. Sellers produce differentiated products.
e. There is a large number of buyers.
Answer: B
7) All of the following, except one, are sources of product differentiation. Which is the
exception?
a. product quality
b. location
c. price
d. consumer tastes
e. buyers' perceptions
Answer: C
8) Each of the following, except one, is a characteristic of a monopolistically competitive
market. Which is the exception?
a. differentiated products
b. no significant barriers to entry
c. many buyers
d. a standardized product
e. many sellers
Answer: D
9) An important difference between a perfectly competitive market and a monopolistically
competitive market is that, in the latter,
a. there are more sellers of the good
b. there are only a few large sellers
c. there are no barriers to entry or exit
d. there is only one seller of the good
e. the product is not standardized
Answer: E
10) A firm in a monopolistically competitive market is similar to a monopolist in the sense
that it
a. must overcome significant barriers to entry
b. faces a downward-sloping demand curve
c. produces a large share of the market output
d. is dependent on the actions of other firms
e. produces the same product as its competitors do
Answer: B
11) Of the following markets, which is most likely to be monopolistically competitive?
a. automobiles
b. corn
c. overnight package delivery
d. air travel between a small city and a larger one
e. fast food
Answer: E
12) If a monopolistically competitive firm raises its price,
a. quantity demanded falls to zero
b. quantity demanded declines, but not to zero
c. the market supply curve shifts outward
d. the market supply curve shifts inward
e. quantity demanded remains constant
Answer: B
13) The demand curve faced by a monopolistically competitive firm
a. is the same as the market demand curve
b. is less elastic than the one faced by firms in perfect competition
c. is perfectly elastic
d. is perfectly inelastic
e. has a constant slope
Answer: B
14) The model of monopolistic competition assumes that
a. there are only a few sellers
b. there are significant barriers to exit
c. each firm charges the same price for its output
d. the buyers are price setters
e. firms are strategically independent
Answer: E
15) Firms in a monopolistically competitive market follow the same MR = MC profit
maximization rule used by firms in other market structures.
a. True
b. False
Answer: A
16) Firms in a monopolistically competitive market will produce where the difference
between TR and TC are maximized.
a. True
b. False
Answer: A
17) The demand curve facing a monopolistic competitor is
a. a horizontal line at the market price
b. upward sloping
c. perfectly elastic
d. perfectly inelastic
e. downward sloping
Answer: E
18) For the monopolistically competitive firm,
a. competition is blocked by barriers to entry
b. limit pricing can forestall competition indefinitely
c. marginal revenue is less than the product's price
d. price discrimination is a key tool
e. marginal revenue is equal to the product's price
Answer: C
19) In the short run, a monopolistic competitor can
a. not earn an economic profit because of competition
b. use limit pricing to reduce competition
c. maximize profits by charging the highest price the market will bear
d. earn an economic profit
e. maximize profit by selecting the minimum efficient scale
Answer: D
20) Firms in a monopolistically competitive industry maximize profits by
a. equating total revenue and total cost
b. treating price as given and maximizing output
c. minimizing costs
d. producing the level of output at which MR = MC
e. producing the level of output at which TR = TC
Answer: D
21) In the short run, a monopolistically competitive firm
a. must earn zero economic profit
b. may earn positive or negative economic profits
c. will produce output up at the point where TR = TC
d. will be protected from competition by barriers to entry
e. will equate price and marginal cost
Answer: B
22) Consider the monopolistically competitive firm whose demand curve and cost structure
are illustrated in Figure 11-1. Which of the following statements is correct in the short run?
a. The firm will produce 100 units and suffer a loss of $400 per week.
b. The firm will produce 100 units and suffer a loss of $300 per week.
c. The firm will produce 100 units and suffer a loss of $1,000 per week.
d. The firm will produce 100 units and suffer a loss of $100 per week.
e. The firm will produce zero units and suffer a loss of $300 per week.
Answer: E
23) Consider the monopolistically competitive firm whose demand curve and cost structure
are illustrated in Figure 11-1. In the short run the firm’s fixed costs are
a. $100
b. $200
c. $300
d. $400
e. $500
Answer: D
24) Figure 11-2 illustrates a monopolistically competitive firm. In order to maximize profit,
or minimize loss, the firm will
a. close down
b. produce approximately 10 units of output and charge approximately $500
c. produce approximately 7.5 units of output and charge nearly $600
d. produce approximately 12.5 units of output and charge approximately $425
e. produce 5 units of output and charge $650
Answer: B
25) The maximum total economic profit, or minimum economic loss, for the monopolistically
competitive firm in Figure 11-2 is
a. zero
b. a profit of $575.00
c. a profit of $1,562.50
d. a profit of $2,000.00
e. a loss of $375.00
Answer: D
26) The firm in Figure 11-2 is monopolistically competitive. The diagram illustrates a
a. shut-down case
b. long-run economic loss
c. short-run economic loss
d. long-run economic profit
e. short-run economic profit
Answer: E
27) At the profit-maximizing, or loss-minimizing, output level, the firm in Figure 11-2 has
total cost approximately equal to
a. $2,000
b. $3,000
c. $3,600
d. $800
e. $1,625
Answer: B
28) Assume the firm in Figure 11-2 is currently producing 13 units of output and charging
$380 each. The firm
a. will increase its profit if it raises its price and reduces its production level
b. will increase its profit if it lowers its price and expands its production level
c. cannot increase economic profit by changing its price and output since it is already
maximizing its profit
d. will increase its profit if it raises its price and expands its production level
e. will increase its profit by lowering its price and reducing its production level
Answer: A
29) The total fixed cost in Figure 11-2 is
a. increasing as more is produced
b. decreasing as more is produced
c. larger than variable costs
d. less than $1,000
e. more than $1,000
Answer: D
30) In monopolistic competition, nonprice competition
a. allows firms to earn above-normal profit in the long run
b. initially causes a leftward shift in the demand curve for each firm's output
c. causes each firm to move upward along a given average total cost curve
d. might lead to economic profit in the short run
e. causes each firm to move toward the right along the given demand curve for its output
Answer: D
31) Given the environment illustrated in Figure 11-3, the best outcome the firm can achieve
in the short run is
a. both c and e
b. an economic profit
c. to shut down to minimize short-run loss
d. a break-even outcome
e. an economic loss
Answer: E
32) The profit-maximizing, or loss-minimizing, output for the firm in Figure 11-3 is
a. zero units
b. 50 units
c. 70 units
d. 75 units
e. 83 units
Answer: C
33) The profit-maximizing price for the firm in Figure 11-3 is
a. $165
b. $150
c. less than $150, but more than $100
d. irrelevant because the firm should shut down immediately
e. less than $100
Answer: B
34) The best outcome the firm illustrated in Figure 11-3 can achieve is a(n)
a. economic loss equal to its fixed cost
b. economic loss of $3,500
c. economic loss of slightly more than $7,000
d. economic loss of approximately $4,000
e. profit per unit of output approximately equal to $40
Answer: B
35) At the profit-maximizing, or loss-minimizing, level of output for the firm in Figure 11-3,
total revenue is approximately
a. $10,500
b. $11,000
c. $5,600
d. $8,250
e. zero because the firm should shut down immediately
Answer: A
36) At the profit-maximizing, or loss-minimizing, level of output in Figure 11-3, the firm's
total cost is approximately
a. $14,000
b. $12,750
c. $9,100
d. $16,185
e. $8,400
Answer: A
37) The monopolistically competitive firm shown in Figure 11-4
a. achieves a break-even outcome as its best alternative
b. earns an economic profit in the long run
c. suffers an economic loss in the long run
d. shuts down since it suffers an economic loss
e. produces at the minimum point of its LRATC curve
Answer: A
38) The monopolistic competitor in Figure 11-4 will maximize its economic profits, or
minimize its losses, by
a. producing 100 units of output and charging $200
b. producing 100 units of output and charging slightly more than $300
c. producing 125 units of output and charging $300
d. shutting down, since it has greater losses at any level of production than at zero
e. producing approximately 180 units of output and charging approximately $225
Answer: B
39) Consider the typical monopolistically competitive firm whose demand curve and cost
structure is illustrated in Figure 11-5. Which of the following statements is correct in the long
run?
a. Some firms will exit this market, and the demand curves facing the remaining firms will
shift rightward.
b. Some firms will exit this market, and the demand curves facing the remaining firms will
shift leftward.
c. Firms will enter this market, and the demand curves facing the remaining firms will shift
rightward.
d. Firms will enter this market, and the demand curves facing the remaining firms will shift
leftward.
e. Firms will enter this market, but the demand curves facing the remaining firms will not
change
Answer: A
40) If the firms in a monopolistically competitive market are earning short-run economic
profits, then
a. each existing firm will increase output in the long run as its marginal revenue curve shifts
rightward
b. each firm will experience an increase in the demand for its output in the long run
c. each firm's profit will drop to normal in the long run as its demand curve shifts leftward
due to entry of new firms
d. barriers to entry will enable them to earn economic profits in the long run
e. decreased demand for a key input will reduce that input's price in the long run and lower
each firm's average total cost curve
Answer: C
41) In the long run, equilibrium for a monopolistically competitive firm resembles
equilibrium for a monopoly in the sense that
a. both types of firms are able to earn economic profits
b. marginal cost exceeds marginal revenue
c. price equals marginal cost
d. price exceeds marginal cost
e. average revenue exceeds price
Answer: D
42) At the long-run equilibrium output level, a monopolistically competitive firm's average
total cost curve
a. lies below the demand curve
b. is tangent to (just touches but does not cross) the demand curve
c. crosses the demand curve from below
d. crosses the demand curve from above
e. is at its minimum point
Answer: B
43) Given the marginal cost and average total cost curves in Figure 11-6, a monopolistically
competitive firm in long-run equilibrium will produce
a. 250 units and charge a price of $6
b. less than 250 units and charge a price below $6
c. more than 250 units and charge a price below $6
d. more than 250 units and charge a price above $6
e. less than 250 units and charge a price above $6
Answer: E
44) In the long run, entry ensures that the typical monopolistically competitive firm will
a. produce at minimum efficient scale
b. earn an economic profit
c. earn a normal profit
d. price its output at marginal cost
e. standardize its product
Answer: C
45) In the long run, a monopolistic competitor will
a. always produce at minimum efficient scale
b. produce too little output to achieve minimum cost per unit
c. use limit pricing to forestall competition
d. earn economic profits
e. standardize its product
Answer: B
46) Cecilia's Cafe is a monopolistic competitor. If Cecilia's is currently producing at the
output level at which her average total cost is minimized and the cafe is earning an economic
profit, then, in the long run, output will
a. decline and average total cost will increase
b. decline and average total cost will decrease
c. remain unchanged as Cecilia's strives to minimize costs
d. increase and average total cost will be greater
e. increase and average total cost will be smaller
Answer: A
47) If the firm represented in Figure 11-7 is typical of other firms in the industry, then, as the
long run approaches,
a. some firms will exit, and the demand curves facing the remaining firms will shift to the left
b. some firms will exit, and the demand curves facing the remaining firms will shift to the
right
c. some firms will enter, and the demand curves facing the remaining firms will shift to the
left
d. some firms will enter, and the demand curves facing the remaining firms will shift to the
right
e. the industry will eventually disappear
Answer: B
48) In the long run, monopolistically competitive firms earn zero economic profits because
a. each firm produces a small share of total market output
b. each firm produces a standardized product
c. firms do not equate marginal cost and marginal revenue in the long run
d. there is only one seller in the market
e. entry of new firms eliminate profits
Answer: E
49) If the monopolistically competitive firm in Figure 11-8 is typical of its competitors, the
industry will likely experience
a. increasing returns to scale
b. entry of new firms
c. exit of existing firms
d. no change in the long run
e. exit of all firms
Answer: D
50) Excess capacity arises when firms cannot sell all of their output at the current market
price.
a. True
b. False
Answer: B
51) In monopolistic competition, product differentiation causes
a. the firms to earn economic profits in the long run
b. a horizontal demand curve for each firm's output
c. the firms to operate with excess capacity
d. significant barriers to entry
e. high concentration ratios
Answer: C
52) In the long run, a monopolistically competitive firm will produce too little output to
minimize average cost. Therefore, it will have
a. positive economic profit
b. negative economic profit
c. excess profit
d. X-inefficiency
e. excess capacity
Answer: E
53) Which of the following is not true of the firm in Figure 11-9?
a. It has excess capacity.
b. It produces at the minimum efficient scale of production.
c. It cannot earn an economic profit.
d. It is operating in the long run.
e. It has no fixed costs.
Answer: B
54) Which of the following best describes the idea of excess capacity in monopolistic
competition?
a. Firms produce more output than is socially desirable.
b. The output produced by a typical firm is less than what would occur at the minimum point
on its ATC curve.
c. Due to product differentiation, firms choose output levels at which P > ATC.
d. Firms keep some surplus output on hand in case there is a shift in demand for their product.
e. The collective output of all firms in the market typically exceeds the quantity demanded.
Answer: B
55) Since the demand curve faced by a monopolistically competitive firm is downward
sloping,
a. the firm is a price-taker in the short run
b. in the long run there will be excess capacity
c. the output decisions of one firm will influence profits of all other firms
d. the product in the market is viewed by consumers as being standardized
e. the ATC curve is U-shaped
Answer: B
56) Any action, other than lowering its price, that a firm undertakes to increase the demand
for its output is called
a. limit pricing
b. price enhancement
c. illicit competition
d. nonprice competition
e. price intensive competition
Answer: D
57) Camille's Chicken operates in a monopolistically competitive market. If Camille
implements a new free delivery service for customers,
a. this is an example of advertising
b. this is a form of nonprice competition
c. total revenue will increase
d. total cost will decrease
e. her firm will be acting as if it were perfectly competitive market
Answer: B
58) Which of the following is an example of nonprice competition?
a. giving coupons for 10 percent discounts to potential customers
b. having a Memorial Day Sale
c. lowering the price on several selected brands
d. offering a product in three colors-blue, green, and red-in addition to the standard black
e. increasing the price on all products
Answer: D
59) An oligopoly is a market
a. dominated by a single seller
b. dominated by a single buyer
c. dominated by a small number of strategically interdependent firms
d. with many buyers and sellers, no barriers to entry and differentiated products
e. with many buyers and sellers, no barriers to entry and a standardized product
Answer: C
60) A market in which a small number of strategically interdependent firms produce the
dominant share of output is called
a. perfect competition
b. a monopoly
c. monopolistic competition
d. regulated
e. an oligopoly
Answer: E
61) A market with more than one seller and significant barriers to entry is called
a. perfect competition
b. monopolistic competition
c. an oligopoly
d. collusive
e. regulated
Answer: C
62) The airline and long-distance telephone service industries are examples of
a. monopolistic competition
b. monopolies
c. oligopolies
d. perfect competition
e. oligopolistic competition
Answer: C
63) If a market is dominated by a few large, interdependent firms, it is said to be a(n)
a. oligopoly
b. monopoly
c. integrated monopoly
d. monopolistically competitive market
e. perfectly competitive market
Answer: A
64) If the sellers in a market are aware of their strategic interdependence, then
a. each firm bases its pricing and output decisions on the monopoly model
b. each firm, when making pricing or output decisions, must consider the reactions of its
competitors
c. the firms have little incentive to collude in their pricing and output decisions
d. the firms undertake little advertising because they cannot recoup the cost through higher
prices
e. no firm is able to earn above-normal profit in the long run
Answer: B
65) Which of the following must be true in an oligopoly?
a. The firms produce a differentiated product.
b. There is one dominant firm in the market.
c. The firms are strategically interacting.
d. The market is international in scope.
e. There are no significant barriers to entry.
Answer: C
66) In order for a market to be classified as an oligopoly,
a. there must be fewer than 10 firms
b. the four largest firms must have 90 percent of the market
c. there must be fewer than 5 firms
d. the firms must be strategically interacting
e. the firms must be strategically independent
Answer: D
67) Which of the following is a distinguishing characteristic of oligopolies?
a. a standardized product
b. the goal of profit maximization
c. the interdependence among firms
d. downward-sloping demand curves faced by firms
e. a downward-sloping market demand curve
Answer: C
68) Oligopolies feature
a. the absence of barriers to entry
b. extensive competition
c. the goal of profit maximization
d. strategic interaction of firms
e. product differentiation
Answer: D
69) In which market structure do firms consider the actions of their rivals when setting prices
and output?
a. monopoly
b. oligopoly
c. perfect competition
d. both monopoly and perfect competition
e. monopolistic competition
Answer: B
70) Oligopoly
a. is a market structure of many small firms
b. is the only seller of a good or service
c. is a market structure of a few consumers of a product
d. is a market structure of a few interdependent firms
e. is a more efficient market structure than perfect competition
Answer: D
71) The key characteristic of oligopoly is
a. that firms are price takers
b. strategic interaction among firms
c. strategic independence among firms
d. that firms deal with few resource suppliers
e. a low minimum efficient scale of production
Answer: B
72) A firm's minimum efficient scale occurs where the long-run average total cost curve
reaches its minimum.
a. True
b. False
Answer: A
73) The output level at which a firm's long-run average total cost is minimized is known as its
a. profit-maximizing output level
b. long-run marginal cost
c. minimum efficient scale
d. revenue maximization level
e. equilibrium cost structure
Answer: C
74) Natural oligopolies occur when
a. the government establishes a market with a few large producers
b. the market output could be produced at a higher cost by several large firms rather than
many small firms
c. there are no barriers to entry
d. the total market output could be produced at a lower cost by several large firms rather than
many small firms
e. one large firm can produce the total market output at a lower cost than several smaller
firms could
Answer: D
75) All of the following are examples of barriers to entry, except one. Which is the
exception?
a. significant economies of scale
b. reputation of established firms
c. special deals with distributors
d. excessive prices
e. patents
Answer: D
76) By keeping new firms from entering the market, oligopolies are more likely to have
a. long-run economic profit
b. low prices
c. great efficiency
d. decreasing marginal costs
e. economies of scale
Answer: A
77) One explanation for why oligopolies exist is that
a. it is easier to regulate a smaller number of firms
b. minimum efficient scale is small relative to the market, allowing a large number of firms to
achieve minimum long-run average total cost
c. minimum efficient scale is large relative to the market, allowing only a few firms to
achieve minimum long-run average total cost
d. minimum efficient scale may be greater than the market quantity demanded at the price
equal to minimum long-run average total cost
e. competitive pricing drives firms from the market
Answer: C
78) A natural oligopoly occurs when
a. few firms can afford to compete in the industry
b. the minimum efficient scale is a large fraction of the market
c. there are a large number of buyers and sellers of a standardized product
d. minimum efficient scale is greater than total market demand at the price equal to minimum
long run average total cost
e. competitive pricing drives firms from the market
Answer: B
79) If consumers are loyal to the products of an existing firm, this loyalty may
a. reduce the incentives for the firm to invest
b. result in more responsive management and better quality products
c. reduce the demand for imported goods
d. serve as a barrier to new entry into the market
e. force the firm to produce at higher costs
Answer: D
80) One strategic barrier that may keep new firms out of a market is
a. producing where marginal cost equals marginal revenue
b. a low minimum efficient scale
c. bounded markup pricing
d. efficiency wages, which may make it impossible for new entrants to compete profitably
e. excess capacity, which may serve as a signal to new entrants to stay away
Answer: E
81) One barrier to entry that may maintain an oligopoly is
a. government policy designed to limit foreign competition
b. a low minimum efficient scale
c. bounded markup pricing
d. efficiency wages that make it impossible for new entrants to compete profitably
e. executive payoffs
Answer: A
82) With economies of scale, a firm can continue to lower its cost per unit by increasing
output
a. without limit
b. up to the minimum efficient scale
c. until the firm is meeting market demand single-handedly
d. to some point between the minimum efficient scale and the market demand curve
e. halfway to the minimum efficient scale
Answer: B
83) Figure 11-10 shows the long-run market demand curve and the cost structure for a typical
monopolistic competitor. The minimum efficient scale (MES) is
a. 0
b. 200 units
c. 400 units
d. 800 units
e. 1,200 units
Answer: C
84) Figure 11-10 illustrates the long-run market demand curve and a typical firm's costs. How
many firms are likely to exist in the long run in this industry?
a. none
b. 1
c. 2
d. 3
e. 4
Answer: C
85) Figure 11-10 represents the costs of a typical firm along with the market demand curve.
In the long run, this industry is most likely going to be a
a. declining industry
b. natural monopoly
c. natural oligopoly
d. natural monopolistically competitive industry
e. perfectly competitive industry
Answer: C
86) All of the following, except one, can be a barrier to entry into an oligopoly market.
Which is the exception?
a. heavy advertising by existing firms
b. zoning regulations
c. excess production capacity among existing firms
d. tariffs and quotas
e. a small minimum efficient scale
Answer: E
87) The minimum efficient scale for the firm in Figure 11-11
a. is less than Q1
b. is Q1
c. is Q2
d. is Q3
e. cannot be determined from this graph
Answer: E
88) If the minimum efficient scale of production is small relative to the size of a market, then
a. the industry will tend to be highly concentrated
b. there will be much strategic interdependence among the sellers in the industry
c. the industry is unlikely to be an oligopoly
d. it is more likely that sellers in the industry will successfully collude
e. there will be much merger activity in the industry
Answer: C
89) Oligopolistic firms are the only ones that consider their rivals' actions when making
decisions about output and price.
a. True
b. False
Answer: A
90) Oligopolistic firms are the only ones that do not consider their rivals' actions when
making decisions about output and price.
a. True
b. False
Answer: B
91) It is difficult to explain how firms behave in an oligopoly because
a. they produce differentiated products
b. there are many suppliers and few buyers
c. they do not attempt to maximize profits
d. each takes into account the behavior of other firms when making pricing decisions
e. there are no barriers to entry or exit
Answer: D
92) Which concept is best illustrated by the "prisoner's dilemma"?
a. product standardization
b. interaction
c. profit maximization
d. marginal analysis
e. average total cost
Answer: B
93) An oligopolist cannot use the MR = MC rule to find its equilibrium output level because
a. oligopolists do not face stable demand curves for their output
b. oligopolists do not try to maximize profits in the long run
c. it is too difficult to estimate marginal cost
d. the rule applies only in perfect competition
e. the minimum efficient scale exceeds total quantity demanded
Answer: A
94) In the prisoner's dilemma,
a. the prisoners easily collude in order to achieve the best possible payoff for both
b. only one player has a dominant strategy
c. each player has a dominant strategy
d. playing the dominant strategy leads to a better payoff for one prisoner than if the two
jointly selected a strategy
e. playing the dominant strategy leads to a better payoff for both prisoners than if the two
jointly selected a strategy
Answer: C
95) The prisoner's dilemma demonstrates that
a. breaking out of prison may be too costly for most prisoners
b. the opportunity cost of being a prisoner is indeterminate
c. the dominant strategies followed by two prisoners may lead to disequilibrium that is
unpredictable
d. the weak strategy may be followed by both prisoners if the opportunity cost is low
e. the dominant strategies followed by two players may lead to an equilibrium that is less not
optimal for both players together
Answer: E
96) Game theory is based on the idea that
a. government determines the rules of the game
b. firms are strategically independent
c. firms are price takers
d. a player's strategy must take account of the strategies followed by other players
e. a player's strategy must be independent of the strategies followed by other players
Answer: D
97) In game theory a listing of the rewards or punishments that each player will receive for
each possible combination of strategies is called
a. the marginal strategy schedule
b. the payoff matrix
c. strategic planning
d. the input-output matrix
e. the game listing payoff
Answer: B
98) A strategy that is best for a player regardless of the strategy of the other player is called
a(n)
a. subsistence strategy
b. determinant strategy
c. dominant strategy
d. independent strategy
e. autonomous strategy
Answer: C
99) A dominant strategy is one that
a. makes every player better off
b. makes at least one player better off without hurting the competitiveness of any other player
c. increases the total payoff for one player
d. is best for a player, regardless of what strategy other players follow
e. leads to quicker convergence to market equilibrium
Answer: D
100) An equilibrium occurs in a game when
a. price equals marginal cost
b. quantity supplied equals quantity demanded
c. all independent strategies counterbalance all determinate strategies
d. all players follow a strategy that negates the strategies of at least one other player
e. all players follow a strategy that they have no incentive to change
Answer: E
101) We may not be able to predict the outcome of a two-player game when
a. each player follows a strategy that negates the strategy of the other player
b. price exceeds marginal cost
c. neither player has a subsistence strategy
d. neither player has a dominant strategy
e. at least one player has a bilateral strategy
Answer: D
102) We can predict the outcome of a two-player game as long as
a. each player follows a strategy that negates the other player's strategy
b. at least one player has a bilateral strategy
c. neither player has a subsistence strategy
d. neither player has a dominant strategy
e. at least one of the players has a dominant strategy
Answer: E
105) The outcomes of different combinations of strategies by two players in a game are
indicated in the
a. strategy box
b. payoff matrix
c. competition matrix
d. outcome dilemma
e. collusion matrix
Answer: B
106) The players in a two-person game are choosing between Strategy X and Strategy Y. If
the second player chooses Strategy X, the first player's best outcome is also to select X. If the
second player chooses Strategy Y, the first player's best outcome is to select X. For the first
player, Strategy X is called a
a. dominant strategy
b. collusive strategy
c. tit-for-tat strategy
d. repeated-trial strategy
e. tacit strategy
Answer: A
107) The U.S. market for locomotives is divided between two producers; General Electric has
70 percent of the market and General Motors has 30 percent. This market is an example of
a. a bilateral monopoly
b. monopolistic competition
c. a collusive monopoly
d. a duopoly
e. a cartel
Answer: D
108) Brian and Matt own the only two bicycle repair shops in town. Each must choose
between a low price for repair work and a high price. The yearly economic profits from each
strategy are indicated in Figure 11-12. The upper right side of each rectangle shows Brian's
profits; the lower left side shows Matt's profits. Which of the following statements is correct?
a. Matt's dominant strategy is to charge a low price.
b. Brian's dominant strategy is to charge a high price.
c. The dominant strategy for both Brian and Matt is to charge a low price.
d. Matt's dominant strategy is to charge a high price.
e. Neither Brian nor Matt has a dominant strategy.
Answer: A
109) Brian and Matt own the only two bicycle repair shops in town. Each must choose
between a low price for repair work and a high price. The yearly economic profits from each
strategy are indicated in Figure 11-12. The upper right side of each rectangle shows Brian's
profits; the lower left side shows Matt's profits. Which of the following statements is correct
for a one-trial game?
a. The market equilibrium price is the high price.
b. A market equilibrium price cannot be established unless Brian and Matt collude.
c. A market equilibrium price cannot be established unless Brian or Matt engages in tit-for-tat
strategy.
d. A market equilibrium price cannot be established without repeated trials.
e. The market equilibrium price is the low price.
Answer: E
110) A two-player game has an equilibrium outcome
a. only if both players have dominant strategies
b. if neither player has a dominant strategy
c. whenever one player has a dominant strategy
d. only with tit-for-tat strategy
e. only with repeated trials
Answer: C
111) If an Industry consists of two large firms, it is known as a(n)
a. monopoly
b. perfect competition
c. monopolistic competition
d. natural monopoly
e. duopoly
Answer: E
112) Figure 11-13 shows the payoff matrix for the only two auto dealerships in a community,
Jim's Autos and Tim's Autos. The matrix shows the profits that each firm would earn from
choosing either a low price or a high price. In this example,
a. both firms would be best off if they charged a low price
b. there is no equilibrium to the market
c. both firms would be best off if they charged a high price
d. both firms will go out of business in the long run
e. the market is more efficient than a perfectly competitive market
Answer: C
113) Figure 11-13 shows the payoff matrix for two large auto dealerships, Jim's Autos and
Tim's Autos. These intense rivals are the largest automobile dealers in the market by far. The
matrix shows the profits that each firm would earn from choosing either a low price or a high
price. Jim's dominant strategy is to
a. always charge a low price
b. always charge a high price
c. charge a high price if Tim charges a low price
d. charge a low price only when Tim charges a low price
e. follow the price leadership of Tim's Autos
Answer: A
114) Figure 11-13 shows the payoff matrix for two large auto dealerships, Jim's Autos and
Tim's Autos. The matrix shows the profits that each firm would earn from choosing either a
low price or a high price. The equilibrium level of profit for Jim's Autos would be
a. $250,000
b. $100,000
c. $200,000
d. -$50,000
e. $150,000
Answer: B
115) Sarah and Marisa are the only two baby-sitters available in a small town. Figure 11-14
indicates different combinations of hourly rates charged by the two teenagers, along with
their weekly net earnings. If Sarah and Marisa do not collude, then
a. in equilibrium, both will charge $4 per hour
b. in equilibrium, both will charge $5 per hour
c. in equilibrium, Sarah will charge $5 per hour; Marisa will charge $4 per hour
d. in equilibrium, Sarah will charge $4 per hour; Marisa will charge $5 per hour
e. there is no predictable equilibrium
Answer: A
116) Tacit collusion among firms involves explicit agreements on pricing and output levels.
a. True
b. False
Answer: B
117) Tacit collusion among firms does not involve explicit agreements on pricing and output
levels.
a. True
b. False
Answer: A
118) Cartels are more likely to succeed the larger the number of firms in an industry.
a. True
b. False
Answer: B
119) When the oil-producing countries of the Middle East meet to set prices and output
levels, this is an example of
a. monopoly behavior
b. profit sharing
c. market distribution
d. explicit collusion
e. tacit collusion
Answer: D
120) When oligopolists make joint decisions concerning their prices and output levels, they
are
a. a natural oligopoly
b. colluding
c. a duopoly
d. a homogeneous oligopoly
e. practicing bilateralism
Answer: B
121) If a cartel is formed in order to maximize the total profits of its members, it will
a. charge the monopoly price, but produce more output than a monopoly would
b. produce the monopoly output, but charge a lower price than a monopoly would
c. charge the same price, and produce the same quantity that a monopoly would
d. charge a higher price and produce more output than a monopoly would
e. charge the monopoly price, but total output may be higher or lower than a monopoly's
Answer: C
122) A successful tit-for-tat strategy leads to
a. explicit collusion
b. a cartel
c. a duopoly
d. tacit collusion
e. market disequilibrium
Answer: D
123) Under price leadership
a. the leader must be the dominant firm in the industry
b. all firms follow price changes initiated by the leader
c. price cuts are followed by other firms in the industry, but price increases are not
d. price increases are followed by other firms in the industry, but price cuts are not
e. price wars often occur as a result of tit-for-tat strategies
Answer: B
124) When oligopolists secretly cooperate for their mutual benefit they are engaging in
a. inclusion
b. collusion
c. seclusion
d. exclusion
e. discrimination
Answer: B
125) When colluding oligopolists meet and formally agree on mutually beneficial strategies
this is called
a. implicit exclusion
b. beneficial inclusion
c. reciprocal inclusion
d. implicit exclusionary pricing
e. explicit collusion
Answer: E
126) A cartel is a(n)
a. form of explicit collusion in which the parties collectively behave like a monopoly
b. market that changes very little as firms enter and exit
c. implicit pricing scheme that does not involve explicit communication between the parties
d. form of nonprice competition
e. group of firms engaged in price discrimination
Answer: A
127) A cartel
a. has one firm that acts as the price leader
b. is a group of firms engaged in price discrimination
c. acts like a monopoly
d. involves competition between rival firms
e. prices its output equal to marginal cost
Answer: C
128) A famous cartel that dramatically increased the price of oil in the mid-1970s was
a. OTEC
b. IMF
c. OECD
d. OPEC
e. LDC
Answer: D
129) With successful collusion that maximizes the total profits of the firms in the market,
a. the market demand curve shifts leftward
b. monopoly power allows the sellers to charge whatever price they want for their joint output
level
c. each firm faces a horizontal demand curve for its output
d. each firm can sell as much output as it chooses at the price set by the cartel
e. the pricing decision is constrained by the market demand curve
Answer: E
130) When firms cooperate without an explicit agreement, they are engaging in
a. explicit collusion
b. tacit collusion
c. reverse collusion
d. inclusion
e. rent seeking
Answer: B
131) In the airline industry, tit-for-tat strategies have frequently led to
a. reciprocal hiring practices
b. cost-reducing innovations
c. profit-destroying price wars
d. pricing policies that encouraged the entry of new firms
e. profit-enhancing wage bargains
Answer: C
132) An oligopolistic industry in which one firm sets the price is
a. a cartel
b. a duopoly
c. a monopoly
d. price leadership
e. a price-discriminating duopolist
Answer: D
133) With price leadership,
a. price equals marginal cost
b. the industry output is generally greater than a competitive industry
c. prices are set by explicit collusion
d. firms price discriminate among different classes of customers
e. there is no formal agreement regarding prices
Answer: E
134) In a price-leadership oligopoly, it is much simpler for the price leader to identify its
dominant strategy when
a. at least one price follower has a terminal strategy
b. it expects competition from the other firms
c. it expects other firms to match its prices
d. the government actively seeks antitrust penalties
e. price equals marginal cost
Answer: C
135) Collusive arrangements tend to collapse when
a. there is a small number of sellers
b. the benefits of cheating are great and the costs are low
c. inflation is high
d. interest rates are low
e. there is a powerful price leader
Answer: B
136) Limits to collusion include
a. price discrimination
b. economies of scale
c. horizontal market demand curves
d. high prices
e. incentives to cheat on the collusive agreement
Answer: E
137) Cheating on a collusive agreement is more likely when
a. a price floor is in effect
b. firms are located in the same state
c. it is easy to observe the other firms' prices
d. there is a small number of firms
e. market demand is unstable
Answer: E
138) An oligopolistic firm that is part of a collusive agreement is less likely to cheat
a. the more punishment it expects if the cheating is detected
b. the lower is the possibility of detection
c. the less likely is the collapse of the entire agreement as a result of cheating
d. the greater is the additional profit from charging a lower price than the other firms
e. the higher is the chance of taking customers away from competitors by charging a lower
price
Answer: A
139) Which of the following types of markets would be the most likely to maintain a
successful collusive agreement?
a. a market with many sellers, many buyers, unstable market demand, and privately
negotiated prices
b. a market with few sellers, many buyers, stable market demand, and privately negotiated
prices
c. a market with few sellers, many buyers, stable market demand, and publicized prices
d. a market with many sellers, few buyers, stable market demand, and privately negotiated
prices
e. a market with few sellers, few buyers, unstable market demand, and publicized prices
Answer: C
140) Which of the following would make cheating on a collusive agreement more likely?
a. greater ease of observing other firms' prices
b. a reduction in the number of sellers in the market
c. close monitoring by the Department of Justice
d. more frequent shifts in market demand
e. an increase in the number of customers in the market
Answer: D
141) After much success during the 1970s, the OPEC cartel saw the price of oil and the
revenues of its members decline during the 1980s due, in part, to
a. the low elasticity of demand for oil in the short run
b. the large number of buyers from each member nation
c. surging demand for oil in the early 1980s
d. publicity concerning the prices negotiated with each member
e. the greater long-run elasticity of demand for oil
Answer: E
142) The firm depicted in Figure 11-15 is one of three identical noncollusive oligopolists in
an industry, where each charges price P2 and sells Q3. If the three firms form a cartel, the
price and output combination for this firm will involve a
a. higher price and lower output
b. higher price and higher output
c. higher price and the same output
d. lower price and more output
e. lower price and the same output
Answer: A
143) Cartels frequently break down in the long run because
a. they are illegal
b. tacit collusion is illegal
c. contracts and agreements are legally binding
d. cooperative behavior usually lowers profits for the entire industry
e. members have an incentive to increase output
Answer: E
144) Which of the following is an example of a cartel?
a. AFL-CIO
b. OPEC
c. United Auto Workers Union
d. NATO
e. Organization of American States
Answer: B
145) Under tacit collusion,
a. firms form an explicit agreement to cooperate
b. prices are usually lower than under perfect competition
c. firms are usually subject to prosecution in the United States
d. there is no explicit agreement for firms to cooperate
e. firms meet to set prices and output levels for the industry
Answer: D
146) Price leadership
a. is a form of explicit collusion
b. works only when firms have dominant strategies
c. is a form of tacit collusion
d. reduces long-run economic profit for individual firms
e. rarely is effective in setting prices in oligopolistic markets
Answer: C
147) In which of the following situations is cheating on a collusive agreement is most likely?
a. Prices are publicly posted.
b. There are few sellers in the market.
c. The market demand curve is elastic.
d. There are economies of scale.
e. Prices are difficult for competitors to observe.
Answer: E
148) Each of the following, except one, is a limitation on collusive behavior. Which is the
exception?
a. the market demand curve
b. a tit-for-tat strategy
c. the threat of prosecution
d. incentives for firms to lower prices
e. incentives for firms to raise output
Answer: B
149) If a market is not subject to large, frequent shifts in demand,
a. firms will have a tendency to lower prices to increase market share
b. the market will have few firms
c. prices will approach equilibrium very slowly
d. price leadership will rarely occur
e. cheating on collusive agreements is more difficult
Answer: E
150) If there are a large number of sellers in a market,
a. it is difficult for firms to cheat on a collusive agreement
b. a cartel is unlikely to break down
c. prices are higher than in smaller markets
d. a cartel is likely to break down
e. perfect competition occurs in the long run
Answer: D
151) Firms will have a greater incentive to cheat on a collusive agreement when
a. the number of sellers is relatively small
b. total market sales are small
c. the market is perfectly competitive
d. demand is rapidly changing
e. prices are known to all firms in the market
Answer: D
153) In the United States, price-fixing cartels are
a. ubiquitous
b. nonexistent
c. generally illegal
d. discouraged the Department of Labor
e. dominant in small industries with large numbers of firms
Answer: C
154) Oligopolies in the United States rarely engage in explicit collusion because
a. it leads to lower profits
b. firms are very wary of each other in this type of market
c. they may have different dominant strategies
d. it is illegal
e. dominant strategies may not exist
Answer: D
155) All of the following, except one, would serve to increase competition in an oligopoly.
Which is the exception?
a. increased imports from foreign firms
b. an increase in the minimum efficient scale
c. an increase in the size of the market
d. new technologies that reduce barriers to entry
e. action by the U.S. Justice Department to break up large firms
Answer: B
156) The influence of technological change on market structure
a. invariably leads to domination by a few firms
b. depends on whether it increases or decreases minimum efficient scale
c. tends to increase concentration
d. depends on whether it increases or decreases the product's value
e. depends on foreign competition
Answer: B
157) New technologies may reduce oligopoly power by
a. increasing the minimum efficient scale
b. raising barriers to entry
c. raising prices and lowering output
d. reducing barriers to entry
e. reducing the choices available to consumers in the market
Answer: D
158) Technological changes that decrease minimum efficient scale
a. reduce concentration
b. increase concentration
c. increase product diversification
d. increase the value of existing assets
e. decrease the exchange rate
Answer: A
162) Globalization of markets can reduce oligopoly power by
a. increasing the number of competitors
b. increasing market prices
c. bypassing antitrust legislation in a particular country
d. identifying new markets for goods and services
e. reducing the economies of scale
Answer: A
163) Which of the following has contributed to decreased concentration in U.S. industry
since the 1970s?
a. rising interest rates and disinflation
b. segmentation and economies of scale
c. devaluation and economies of scale
d. technological change and market globalization
e. marginal cost pricing and product differentiation
Answer: D
164) Firms use advertising to
a. standardize their products
b. differentiate their products
c. decrease market prices
d. reduce total cost
e. avoid antitrust penalties
Answer: B
165) Advertising always results in a more elastic demand curve for the firm's product.
a. True
b. False
Answer: B
166) Regardless of whether advertising is effective or not, it results in an increase in both
fixed and total costs.
a. True
b. False
Answer: A
167) Since advertising increases a firm's average total cost, consumers ultimately pay for the
cost of advertising in the form of a higher price in the long run. It is not possible for a firm to
end up with a lower profit-maximizing price as the result of advertising.
a. True
b. False
Answer: B
168) The typical monopolistically competitive firm earns no economic profit in the long run,
regardless of whether or not it advertises.
a. True
b. False
Answer: A
169) The typical monopolistically competitive firm always earns an economic profit in the
long run, regardless of whether or not it advertises.
a. True
b. False
Answer: B
170) If a firm launches a successful advertising campaign, then its
a. ATC curve shifts upward with a smaller rise at larger output levels
b. ATC curve shifts upward with a smaller rise at smaller output levels
c. demand curve shifts to the left and becomes flatter
d. demand curve shifts to the right and becomes flatter
e. demand curve shifts to the left and becomes steeper
Answer: A
171) As a result of advertising prices in monopolistic competition, are
a. higher because firms earn economic profits in the long run
b. higher because increased output leads to higher production costs per unit
c. lower if increased output allows lower average production costs per unit that more than
offset the advertising costs
d. lower if advertising costs per unit fall as output increases
e. higher because advertising shifts each firm's demand curve to the right and make it flatter
Answer: C
172) In addition to shifting its demand curve to the right, a firm may engage in advertising in
order to
a. make its demand curve more elastic
b. increase the elasticity of its supply curve
c. discourage competition
d. make its demand curve less elastic
e. decrease consumer awareness
Answer: D
173) Which of the following might be an effect of advertising?
a. all of the following
b. increased product differentiation
c. increased total costs of production
d. increased average total costs of production
e. increased demand for the product
Answer: A
174) In the long run when monopolistically competitive firms advertise,
a. they will still earn zero economic profit
b. they can earn positive economic profit by increasing market share
c. the market price must fall
d. the market price must rise
e. there will be fewer units sold than in the short run
Answer: A
175) What characteristic is common to perfect competition, monopolistic competition, and
monopoly?
a. free entry and exit
b. zero economic profit in the long run
c. firms treat the market price as given
d. firms maximize profits by producing where MR = MC
e. small number of buyers relative to the number of sellers
Answer: D
176) If a firm earns zero economic profit in the long run, then it
a. must be in a perfectly competitive market
b. must be in a monopolistically competitive market
c. cannot be in a monopolistically competitive market
d. could be in any of the four major market structures
e. is not in an oligopoly
Answer: D
177) If market structures are ranked from the one in which firm(s) face the flattest demand
curve to the one where they face the steepest, the correct order is
a. monopoly, monopolistic competition, perfect competition
b. monopolistic competition, perfect competition, monopoly
c. monopolistic competition, monopoly, perfect competition
d. perfect competition, monopoly, monopolistic competition
e. perfect competition, monopolistic competition, monopoly
Answer: E
178) Which of the following best describes real-world U.S. markets?
a. In most markets, the firms face steep demand curves for their output.
b. They combine characteristics of monopolistic competition, oligopoly, and monopoly.
c. Effective competition exists in only about 25 percent of those markets.
d. The dominant share of U.S. manufacturing output is produced by firms with the power to
vary their prices over a wide range.
e. Perfect competition is useful as a model for very few U.S. markets.
Answer: B
179) Which of the following pairs of characteristics would be consistent with imperfect
competition?
a. Many buyers and sellers and no barriers to entry
b. Many buyers and sellers and a homogenous product
c. No barriers to entry and all buyers and sellers have perfect information
d. Many buyers and sellers and some barriers to entry
e. Many buyers and sellers and everyone has perfect information
Answer: D
180) Which of the following would likely be traded in a monopolistically competitive
market?
a. Electricity
b. Airline Tickets
c. Pizza
d. Wheat
e. Water
Answer: C
181) Compared to the market demand curve, a demand curve facing a monopolistically
competitive firm would be
a. more elastic.
b. vertical.
c. horizontal.
d. the same as the market demand curve.
e. less elastic.
Answer: A
182) If one were to rank the demand curve facing a firm from the least elastic to the most
elastic, the ranking would be
a. monopoly, perfectly competitive, monopolistically competitive
b. monopoly, monopolistically competitive, perfectly competitive
c. perfectly competitive, monopoly, monopolistically competitive
d. monopolistically competitive, monopoly, perfectly competitive
e. perfectly competitive, monopolistically competitive, monopoly
Answer: B
183) If a monopolistically competitive firm engages in a successful advertising campaign
resulting in above positive economic profits then in the long run that firm will
a. continue to earn positive economic profits because successful advertising is one of the
barriers to entry
b. earn zero economic profits because the government will begin to regulate the industry
c. earn negative economic profits because it won’t be able to advertise indefinitely
d. earn zero economic profits because other firms will also begin to advertise
e. continue to earn positive economic profits because most monopolistically competitive
firms can earn economic profits in the long run
Answer: D
184) Paul the Pizza Man used a new method to streamline pizza assembly that allowed him to
make more pizzas and thus make greater revenue. Paul began to earn positive economic
profits. In the long run, Paul will
a. continue to earn economic profits
b. earn zero economic profits because other pizza places will begin to use his system
c. continue to earn economic profits because Paul will get a patent on his new method
d. earn negative economic profits because innovators always loose money
e. earn zero economic profits because the government does not allow monopolistically
competitive firms to earn economic profits
Answer: B
185) The likelihood of collusion between fims is less when markets are highly concentrated..
a. True
b. False
Answer: B
186) The four firm concentration is a measure of
a. the percentage of total output of the four largest firms in an industry
b. the total output of the fourth largest firm in an industry
c. the percentage of total sales of the four largest firms in an industry
d. the total output or sales of the four largest firms in an industry
e. either a or c
Answer: E
187) Consider an industry with 6 firms. Firm A has sales of $6 mil., firm B has sales of $12
mil., firm C has sales of $30 mil., firm D has sales of $50 mil. and firm E has sales of $2 mil.
The four firm concentration ration in this industry is
a. 50%
b. $98 million
c. 98%
d. 80%
e. unknown, not enough information to tell
Answer: C
188) Consider an industry with 5 firms. Firm A has sales of $6 mil., firm B has sales of $12
mil., firm C has sales of $30 mil., firm D has sales of $50 mil. and firm E has sales of $2 mil.
The Herfindahl-Hirschman index for this industry is
a. 3580
b. 3584
c. 2500
d. 3400
e. unknown, not enough information to tell
Answer: B
189) The Department of Justice and the Federal Trade Commission use the HHI to determine
whether to challenge mergers.
a. True
b. False
Answer: A
190) The demand curve for Apple iTune music downloads is unstable because
a. consumers of music downloads are irrational
b. Apple‘s production costs are unstable
c. it is unclear how Amazon, its primary competitor, will react to Apple’s pricing strategy
d. the market for music downloads is unpredictable
e. consumers of music downloads have the option to download music for free
Answer: C
Figure 11-16
191) Figure 11-16 illustrates the market for bananas. If the market were competitive, the
market price and quantity would be
a. $.50 and 100 lbs of bananas
b. $.50 and 130 lbs. of bananas
c. $.75 and 100 lbs. of bananas
d. $.75 and 130 lbs. of bananas
e. indeterminate
Answer: B
192) Figure 11-16 illustrates the market for bananas. If the market consisted of two
competitors and they formed a cartel, the market price and quantity would be
a. $.50 and 100 lbs of bananas
b. $.50 and 130 lbs. of bananas
c. $.75 and 100 lbs. of bananas
d. $.75 and 130 lbs. of bananas
e. indeterminate
Answer: C
Test Bank for Microeconomics: Principles and Applications
Robert E. Hall, Marc Lieberman
9781111822569, 9781478405238, 9781478498056
