Chapter 15. Monopolistic competition

Chapter 15: Monopolistic Competition and Oligopoly

Practice Questions

Question 1

  • True statements for firms in monopolistic competition:

    • a) Firms face barriers to enter the market. (False)

    • b) Firms sell differentiated products. (True)

    • c) The long-run economic profit is greater than zero. (False)

    • d) Firms are price-takers and thus do not have market power. (False)

Question 2

  • Nash Equilibrium in a Payoff Matrix:

    • a) Cheat and Cooperate

    • b) Cheat and Cheat (Correct)

    • c) Cooperate and Cooperate

    • d) Cooperate and Cheat

Question 3

  • Payoff Matrix Analysis:

    • Player 1 Strategy 1: (9,3) - A

    • Player 1 Strategy 1: (2,4) - B

    • Player 1 Strategy 2: (6,5) - A

    • Player 1 Strategy 2: (5,6) - B

    • Nash Equilibrium:

    • a) Strategy 1 and Strategy A

    • b) Strategy 1 and Strategy B

    • c) Strategy 2 and Strategy B (Correct)

    • d) This game does not have a Nash equilibrium.

Market Dynamics in Microtopia

Question 4

  • Impact of Reform on Market Conditions:

    • a) The price falls and the quantity increases. (Correct)

    • b) The price increases and the quantity falls.

    • c) Both the price and the quantity falls.

    • d) Both the price and the quantity increases.

Question 5

  • Cartel Impact on Output:

    • a) Increase from 5 to 10.

    • b) Increase from 3 to 6.

    • c) Decrease from 6 to 3. (Correct)

    • d) Decrease from 5 to 2.

Profit Maximization and Market Structure

Question 6

  • Profit Maximization Condition:

    • a) The firm is earning positive economic profit in the long-run equilibrium.

    • b) The firm is breaking even.

    • c) The firm is earning negative economic profit in the short-run.

    • d) The firm is earning a positive economic profit in the short-run. (Correct)

Question 7

  • Characteristics of Monopolistically Competitive Firms:

    • a) P < MR

    • b) P = ATC

    • c) MC = ATC

    • d) P > MC (Correct)

Rural Market for Hay

Question 8

  • Cartel Price per Bale of Hay:

    • a) $6 (Correct)

    • b) $5

    • c) $4

    • d) $3

Question 9

  • Dominant Strategy Analysis:

    • a) Player one has a dominant strategy.

    • b) Player two has a dominant strategy.

    • c) Both players have a dominant strategy.

    • d) Neither player has a dominant strategy. (Correct)

Monopolistically Competitive Firm Characteristics

Question 10

  • Inferring Firm’s Profit Status:

    • a) The firm is earning zero profit.

    • b) The firm is currently maximizing its profit. (Correct)

    • c) The profits of the firm are negative.

    • d) Firms are likely to leave this market in the long run.

Question 11

  • Market Structures Comparison:

    • a) Cola-flavored beverages: Oligopoly

    • b) Beer: Monopolistic Competition (Correct)

Question 12

  • Market Structure Predictive Analysis:

    • a) Monopoly due to government awarded patent. (Correct)

    • b) Monopolistically competitive market.

    • c) Perfectly competitive market.

    • d) Natural monopoly.

Market Classification and Characteristics

Question 13

  • Market Classification for Drinks:

    • a) Tap Water: Perfect Competition

    • b) Bottled Water: Monopolistic Competition

    • c) Cola: Oligopoly

    • d) Beer: Monopolistic Competition

Question 14

  • Market Classification and Explanation:

    • a) Wooden no. 2 pencils: Monopolistic Competition

    • b) Copper: Perfect Competition

    • c) Local electricity service: Monopoly

    • d) Peanut butter: Monopolistic Competition

    • e) Lipstick: Monopolistic Competition

Question 15

  • Characteristics of Competitive Firms:

    • a) Sells a product differentiated from competitors: Monopolistically Competitive

    • b) Has marginal revenue less than price: Both

    • c) Earns economic profit in the long run: Neither

    • d) Produces at minimum of average total cost in long run: Perfect Competition

    • e) Equates marginal revenue and marginal cost: Both

    • f) Charges a price above marginal cost: Monopolistically Competitive

Question 16

  • Characteristics of Specific Market Types:

    • a) Faces a downward-sloping demand curve: Both

    • b) Has marginal revenue less than price: Both

    • c) Faces the entry of new firms selling products: Monopolistically Competitive

    • d) Earns economic profit in the long run: Monopoly

    • e) Equates marginal revenue and marginal cost: Both

    • f) Produces the socially efficient quantity of output: Perfect Competition

Monopolistic Competition Analysis

Question 17

  • N Firms Market Assessment:

    • a) Number of firms (N) impacts demand curve by: More firms reduce each firm's market share.

    • b) Units produced by each firm depend on N.

    • c) Price charged by each firm depends on N.

    • d) Profit available for each firm varies with N.

    • e) Long-run existence of firms determined by market entry/exit.

Question 18

  • Long-Run Changes After Market Transformation:

    • a) Price: Decreases

    • b) Quantity: Increases

    • c) Average total cost: Stays the same or decreases

    • d) Marginal cost: Stays the same

Question 19

  • Advertising Engagement Likelihood:

    • a) Family-owned farm vs. restaurant: Restaurant more likely.

    • b) Forklift manufacturer vs. car manufacturer: Car manufacturer more likely.

    • c) Comfortable razor vs. less comfortable razor: Comfortable razor more likely.