Full Test Bank Ch13 Between Competition And Monopoly - Microeconomics Principles and Policy 14e | Test Bank by Baumol by William J. Baumol. DOCX document preview.
Indicate whether the statement is true or false. |
1. A cartel is a group of sellers of a single product who have joined together in order to enjoy the advantages of perfect competition.
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2. Society definitely benefits by reducing the number of monopolistically competitive firms.
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3. Firms in oligopoly markets are unable to collude effectively because cooperation is difficult with a large number of firms.
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4. Oligopolists behave independently of each other.
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5. OPEC became a successful cartel in the 1970s by deciding to restrict oil production.
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6. A perfectly contestable market is one in which there are excessive costs to entry and exit.
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7. Monopolistic competition is a market structure characterized by many small firms selling a homogeneous product.
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8. Firms in a perfectly contestable market will earn higher profits than firms in markets that are not perfectly contestable.
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9. The maximin criterion seeks to minimize the maximum payoffs in order to win.
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10. There are a smaller number of firms that operate in both monopolistic competition and perfect competition.
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11. An airline can easily move its aircraft from one route to another. One interpretation of this is that the airline industry is an example of a contestable market.
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12. Monopolistic competition differs from perfect competition only in the number of firms participating in the market.
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13. A monopolistic competitor can expect to earn an economic profit in the long run.
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14. A firm in perfect competition and one in monopolistic competition are very similar in that MR = P for firms in both markets.
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15. Society benefits from monopolistic competition because the firms are allocatively efficient.
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16. If a market situation is an example of a prisoners’ dilemma, society can benefit by preventing the firms in the market from cooperating with each other.
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17. The entry of new firms into a monopolistically competitive industry will cause the long-run equilibrium price to rise.
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18. Oligopolists seldom change prices, because they don’t like change.
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19. Firms that practice tacit collusion may receive some of the benefits of a cartel without explicitly organizing a group of firms.
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20. Oligopolistic firms never collude because they have almost no incentive to do so.
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21. Monopolistically competitive firms can earn large profits in the long run.
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22. Price leadership may sometimes be an example of covert collusive behavior by oligopolies.
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23. The cost-revenue diagrams for a monopolist and a monopolistic competitor are similar except that the demand curve for the monopolistic competitor is flatter.
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24. Price leadership works only if there is a single, dominant firm in the oligopoly.
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25. In the long run, a monopolistically competitive firm produces at minimum average cost.
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26. The models of perfect competition and monopoly are the most realistic.
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27. In the long run, a monopolistically competitive firm and a perfectly competitive firm both produce at minimum average cost.
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28. The demand curve for a monopolistic competitor is likely to be flatter than that of a monopolist.
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29. Advertising never makes sense for an oligopolistic firm.
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30. If five firms constitute all of the producers in the wristwatch industry, we would call this market a duopoly.
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31. If a player in a game has a dominant strategy, her choice will depend upon the strategy that another player has chosen.
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32. Oligopolists almost always cooperate in making price and output decisions.
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33. Game theory is not useful for analyzing perfectly competitive markets.
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34. Monopolies can misallocate resources by restricting output in an attempt to raise prices and profits.
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35. If a game is a prisoners’ dilemma, neither player has dominant strategy.
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36. Under perfect competition and monopolistic competition, profits are zero in long-run equilibrium.
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37. Because members of a cartel have a strong incentive to cheat on production and pricing agreements, these groups often develop complicated enforcement arrangements.
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38. The demand curve for a monopolistic competitor has a negative slope.
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39. Repeated games can lead to tacit collusion.
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40. The excess capacity theorem states that society would clearly benefit from a reduction in the number of monopolistic competitors.
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41. Sticky prices are a direct result of the kinked demand curve.
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42. Unlike the situation for a firm in perfect competition, positive economic profit exists for firms in monopolistic competition for both the short run and in the long run.
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43. Oligopolies are difficult to analyze because of the interdependent nature of management decisions.
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44. The kinked demand curve model is based on the assumption that rival firms will match a price cut but ignore a price increase.
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45. An oligopoly is a market dominated by a few sellers.
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46. In the long run, zero economic profit exists in monopolistic competition and perfect competition.
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47. Economists place cartels among the least-desirable forms of market organization.
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48. Since firms in both monopolistic competition and perfect competition earn zero economic profit, price must be equal to average cost for both types of firms.
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49. An oligopolist cares very much about what other firms in her industry are doing.
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50. Game theory may be used to solve problems of interdependent decision making by large firms.
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51. An oligopoly is a market in which at least some firms are large enough to influence market price.
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52. When comparing industries, a monopolistically competitive industry is less competitive than an oligopoly.
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53. An oligopoly can be characterized by production of either identical goods or differentiated goods.
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54. Oligopolists use advertising as a way of differentiating their products.
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55. Monopolistically competitive markets and monopoly market have a common characteristic: high barriers to entry.
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56. An oligopoly will always use game theory to maximize sales rather than profits.
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57. An oligopoly firm with a differentiated product will generally earn the largest profits without advertising.
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58. A dominant strategy is one that is best for one player regardless of the strategy chosen by the other player.
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59. Game theory is based on the idea that each participant makes decisions based on how she believes the competition will react.
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60. Cartels provide uniform management, but none of the advantages of economies of scale.
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61. Monopolistic competition has at least one similarity to perfect competition: firms are free to enter and leave the industry.
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62. Monopolistically competitive markets feature high barriers to entry.
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63. A duopoly is a form of oligopoly with two firms.
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64. An oligopoly using a maximin strategy must believe that the losses from underestimating a competitor’s skill are worse than those from overestimating it.
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65. A monopolistic competitor faces a horizontal demand curve.
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66. All players have dominant strategies.
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67. An oligopolist who sets the price for the industry is a price leader.
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68. Price leadership is an example of explicit collusion by oligopolies.
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69. International trade can be correctly considered as an example of a zero-sum game.
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70. The demand curve for a monopolistic competitor is likely to be steeper than that of a monopolist.
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71. Perfect competition and pure monopoly are concepts useful primarily for realistic applications.
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72. The kinked demand curve model explains pricing in monopoly markets.
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73. For the monopolistic competitor, MR = P.
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74. Average cost is higher with a monopolistically competitive firm than with a perfectly competitive firm.
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75. An oligopoly is a market structure in which a few large firms dominate the sale of a single product.
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76. The key difference between oligopoly and other market structures is the interdependence among producers.
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77. In the long run, a monopolistically competitive firm earns small economic profits.
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78. Under monopolistic competition, profits cannot persist because new firms will be attracted to the market.
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79. In a monopoly market, no dominant strategies are possible.
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80. A dominant strategy is one that gives a player in a game a bigger payoff than the other player receives.
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81. Monopolistically competitive markets feature heterogeneous products.
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82. One of the most famous cartels is OPEC.
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83. In the long run, a monopolistically competitive firm’s demand curve must be tangent to its average cost curve.
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84. The kinked demand curve is an explanation of sticky prices.
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85. Most economic activity in the United States is carried out by monopolies.
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86. The short-run equilibrium of the firm under monopolistic competition has excess capacity.
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87. A perfectly contestable market is one which a firm can enter and exit without losing its investment.
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88. Excess capacity and inefficiency result under monopolistic competition.
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Indicate the answer choice that best completes the statement or answers the question. |
89. Economists would describe cartels as
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90. A common characteristic in oligopolistic markets is
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91. Displayed below is the payoff matrix of firm B for four different strategies, B1, B2, B3, and B4, and the potential retaliatory responses of firm A (A1, A2, A3, A4).
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92. The behavior of the monopolistic firm
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Figure 13-3 
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93. Oligopolist A cuts price in an attempt to enlarge his share of the market. His competitors fail to retaliate with price cuts. In this case, in Figure 13-3, oligopolist A will move from point A to which point?
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94. The existence of interdependence among firms in an oligopoly market
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95. A firm in monopolistically competitive market is producing 30 units of output. At this level of production, the firm charges $50 per unit. Its marginal cost is $24 and marginal revenue is $24, and average cost is $20 per unit. Given this information, this firm should
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96. The Organization of Petroleum Exporting Countries (OPEC) is an example of
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Figure 13-3
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97. In Figure 13-3, demand curve CAD represents a market in which oligopolists will match the price changes of rivals and demand curve EAB represents a market in which oligopolists will ignore the price changes of rivals. According to the kinked demand model, the relevant demand curve will be
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98. If firms meet together to decide on prices and outputs, there is
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99. In the short run, firms in monopolistically competitive markets
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100. The monopolistically competitive firm differs from monopoly in that its
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101. To understand most of today’s economic activity in the U.S. economy, we should look at which of the following models?
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102. In the long run, a monopolistically competitive industry is characterized by all of the following, except
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103. If an oligopolist cuts the prices of its products,
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104. In the long run, which of the following conditions is true for a monopolistically competitive firm?
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105. Monopolistic competition is different from perfect competition in that every manufacturer
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106. ____ is one in which exactly the amount one competitor gains must be lost by other competitors.
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107. A monopolistically competitive firm
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108. The key difference between monopolistic competition and perfect competition is that in monopolistic competition the tangency of
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109. If an oligopolistic manufacturer believes that he faces a kinked demand curve for his product, he thinks his competitors will ______ if he lowers his price and ____ if he raises his price.
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110. Cartels are relatively rare because
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111. Which of the following attitudes will be held by a typical firm in a typical cartel?
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112. If the firms in a market reach an agreement about pricing and output shares, we would call this
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113. All of the following are possible characteristics of oligopoly except
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114. For collusion to make sense, the payoff matrix must be a
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115. Which of the following best expresses the attitude toward competition of a firm engaged in tacit collusion with its rivals?
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116. What is the long-run effect on the demand curve of a monopolistically competitive firm when more firms enter the market?
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117. A good example of a market that resembles a contestable market would be
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Figure 13-2  |
118. In Figure 13-2, which of the graphs represents a firm that is a sales revenue maximizer?
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119. Cartels usually succumb to divisive forces caused by
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120. After its early success in the 1970s, OPEC experienced a drop in world oil prices and a corresponding drop in oil revenues for its members, due to
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Figure 13-1  |
121. In Figure 13-1, for a monopolistically competitive firm, long-run equilibrium can occur only at the quantity indicated by which point?
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122. Suppose that two drug manufacturers represent the only two producers in the industry and further suppose that the companies can spend a lot of money on research to develop new drug treatment. If only one develops a product, they make very high profits, but if they produce similar drugs, their profits are lower given the high research costs and they split the market for their products. But if they both sell their current products and spend little on research, they can still make good profits. This description sounds like a
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123. In the cigarette industry either R. J. Reynolds or Phillip Morris, for a time, raised prices twice a year by about 50 cents per carton. The other firms in the industry raised their prices by the same amount. Economists call this
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124. Everything else equal, the more rivals a firm has, the
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125. Suppose that Bill and Steve are duopolists in the smartphone apps industry. At the beginning of the year, the two agree to work jointly as a monopoly, producing the monopoly level of output and the monopoly price for their apps. Halfway through the year each app firm is seriously considering breaking this agreement. Given these facts, what’s likely to happen next?
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126. If two firms form a successful cartel, then the output that the two produce in total will
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127. In an economist’s view, a cartel usually offers to society
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128. A perfectly competitive firm and a monopolistically competitive firm are similar in each of the following respects except
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129. One market that fits the characteristics of monopolistic competition is
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130. In the past, the Department of Transportation allowed airline mergers that gave the merged airlines market shares of 79 and 82 percent, respectively, in their hub cities. The concept the dot used to allow mergers where there was obvious concentration was most likely
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131. According to the excess capacity theorem, if every firm under monopolistic competition expanded its output,
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132. Unlike a perfectly competitive firm, a monopolistically competitive firm
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Figure 13-2 |
133. In Figure 13-2, which of the graphs represents a monopolistic competitor in long-run equilibrium?
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134. In oligopoly, one expects
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135. Cartels are
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136. When a monopolistically competitive firm’s demand curve is tangent to it average cost curve,
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137. The apparent stickiness of the price of goods sold by oligopolists can be explained by the
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138. The demand curve for a monopolistic competitor slopes downward because
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139. An oligopolist’s effective demand curve will be kinked if the firm
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140. Where interdependence is especially pronounced, competition among oligopolists will
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141. If a firm decides to ignore the reactions of its rivals to its policies, the appropriate model to analyze its behavior is
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142. A profit-maximizing, monopolistically competitive car wash washes 40 cars per day, and its total cost $200 and currently makes an economic profit of $280. In the long run, everything else equal, the
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143. A firm in a monopolistically competitive market makes no economic profit in the long run because
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144. The monopolistically competitive firm in short-run equilibrium
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145. Displayed below is the payoff matrix of firm A for four different strategies, A1, A2, A3, and A4, and the potential retaliatory responses of firm B (B1, B2, B3, B4).
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146. The difficulty in analyzing oligopolistic behavior arises from the
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147. The analysis of oligopolistic behavior is difficult because
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148. Which of the following conditions distinguishes monopolistic competition from perfect competition?
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149. A market in which firms can enter if they choose and exit without losing money invested is
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150. Monopolistic competition is characterized by
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151. The prisoner’s dilemma has implications for the workings of oligopoly markets. The outcome in the prisoner’s dilemma situation for oligopoly firms is
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152. Probably the simplest approach to the problem of oligopolistic interdependence is to
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153. Heavy advertising expenditures usually indicate
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154. An oligopoly is a market
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155. In the long run, the prices charged by a firm in monopolistic competition will be
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156. An article in The Economist reported that prices of CDs in Britain were much higher than prices in the United States or other European countries. There were only a few major companies, and a report from a Parliament committee said there was no serious price competition. The best explanation for this is that
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157. Tacit collusion is
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158. Deviations from the perfectly competitive market can lead to
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159. A cartel is
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160. The force that leads to zero economic profits for monopolistically competitive firms in the long run is
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161. Suppose that two drug manufacturers represent the only two producers in the industry and further suppose that the companies can spend a lot of money on research to develop new drug treatment. If only one develops a product, they make very high profits, but if they produce similar drugs, their profits are lower given the high research costs and they split the market for their products. But if they both sell their current products and spend little on research, they can still make good profits. The best outcome that they could achieve would be for the two firms to
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162. The contestable market theory best applies to
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163. Oligopoly occurs when
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164. Industries, where economies of scale dictate that only a few firms produce, will be efficient if the markets in which they sell are
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165. A cartel is
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166. In ____, each competing firm is determined to sell at a price that is lower than the prices of its rivals, often regardless of whether that price covers the pertinent cost.
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167. The Organization of Petroleum Exporting Countries is a
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168. One indication that an industry might be oligopolistic is that prices change
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169. Which of the following characteristics of perfect competition does not apply in monopolistic competition?
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170. Which of the following is an example of tacit collusion?
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171. Price leadership is a form of
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172. The game theory approach to the analysis of oligopoly assumes that oligopolists
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173. If a market is contestable, then
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174. Which of the following conditions distinguishes the monopolistic competitor from the monopolist?
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175. Monopolistic competition in long-run equilibrium is characterized by
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176. At any given airport, the airlines hold long-term leases for passenger loading gates. New gates cannot be added without approval of the airlines. Frequent flier programs are also common in the industry. It is, therefore, more difficult for a new airline to enter a given airport (market). Such factors: (i) are called barriers to entry. (ii) tend to decrease the contestability of the air travel market.
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177. To maximize its profit, a monopolistically competitive firm produces at the output level at which
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178. Game theory can be used to investigate
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179. Suppose that a firm in monopolistically competitive market is producing 30 units of output. At this level of production, the firm charges $50 per unit. Its marginal cost is $24 and marginal revenue is $24, and average cost is $20 per unit. Given this information, in the long run you would expect
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180. Monopolistic competition is common in
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181. The market structure that is associated with big business in developed economies is
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182. In John Rawls’ A Theory of Justice, people choose the rules for distributing income from behind a veil of ignorance. People understand that ability determines income, but they do not know their abilities or the abilities of others. Rawls argues that people are risk averse and will choose the distribution rule that maximizes their income in the worst-case scenario (they have relatively little ability). An economist would call this strategy
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183. Monopolistic competitors and perfect competitors are alike in
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184. All four market forms discussed in the text maximize profit where
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185. The behavior of the perfectly competitive firm
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186. Suppose that firms in a monopolistically competitive industry are earning positive economic profits. In this situation, you would expect
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187. There are generally, in most areas, a large number of qualified physicians whose services are highly personalized. In addition to price, factors such as age, sex, location, and personality influence the choice of physician. Thus, the market is best described as
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188. Long-run equilibrium under monopolistic competition requires that
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189. The excess capacity theorem states that
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190. In monopolistic competition, the long-run equilibrium results in zero economic profit of the firms in these industries. The key factor in this is
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191. If the smartphone market has only two firms, this market would be a
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192. When oligopolists join together in a cartel, they
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193. A dominant strategy
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194. A Nash equilibrium is
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195. If, in a given market of multiple producers, there is a positive gap between price and average cost (P > AC) for an extended period of time, this would suggest that
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196. A market is contestable if
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197. Unlike a perfectly competitive firm, a monopolistically competitive firm
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198. The demand curve facing a monopolistically competitive firm is generally
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Figure 13-3
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199. In Figure 13-3, according to economic theory, the kink in the demand curve will occur at point
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200. A profit-maximizing, monopolistically competitive restaurant serves 60 burgers a day at a total cost of $180 and earns a total profit of $180. In the long run, everything else equal, the
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201. A monopolistically competitive firm in the long run will
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202. According to the kinked demand curve model, an oligopolist may face
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203. The theory of the kinked demand curve is used to explain
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Figure 13-3
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204. Oligopolist A cuts price in an attempt to enlarge his share of the market. His competitors retaliate with identical price cuts. In this case, in Figure 13-3, oligopolist A will move from point A to which point?
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205. The development of game theory was the work of
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206. Economic theory of market forms between pure monopoly and perfect competition was largely nonexistent until the work of
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207. The payoff matrix is a fundamental tool of
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208. The excess capacity theorem implies that
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209. Identify the market structure characterized by many small firms selling somewhat different products.
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210. In a perfectly contestable market in the long run, each firm
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211. An example of overt collusion is
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212. In an oligopoly market, the firms would earn the highest profit if they
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213. An advertising race among oligopolists may be rational if it
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214. The maximin criterion can be defined as which of the following?
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215. The most widely used approach for the analysis of oligopoly behavior is
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216. Jimmy’s java shop operates in a monopolistically competitive market. Jimmy’s current output is where average costs are minimized. If this is the case, we would expect Jimmy to
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217. An empirical study determines that price exceeds marginal cost at the levels of output of firms in long-run equilibrium in the widget industry. The widget industry may therefore
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218. Game theory applies to problems that arise in
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219. A duopoly is
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220. Which market is most likely to witness such actions and reactions as frequent new-product introductions, free samples, and aggressive advertising campaigns?
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221. Which of the following is not a requirement for the existence of monopolistic competition in a market?
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222. Given the characteristics: (1) many buyers and sellers, (2) free entry and exit, (3) perfect information, and (4) heterogeneity of products, monopolistic competition and perfect competition share
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223. A situation in which both players can adopt moves such that each player’s move is its most profitable response to the move of the other is the
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224. The theory of the kinked demand curve is that
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225. Contestable markets improve the performance of imperfect markets with
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226. Suppose that we learn that hotels in Los Angeles generally operate with an average vacancy rate of 15 percent (in other words, 85 percent of the hotel rooms are filled with guests). Given this information about excess capacity, we would judge this market to be
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227. In game theory, a prisoner’s dilemma
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228. Markets in which the behavior of the firms theoretically leads to an efficient allocation of resources that maximizes the benefits to consumers given the resources available to consumers are
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229. Oligopolists
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230. A successful cartel may end up charging the ____ price and obtaining ____ profits.
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231. Economists tend to be concerned about entry barriers. Why are entry barriers so important? |
Figure 13-4
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232. The above matrix (Figure 13-4) displays the possible profit results of two firms, A and B, from following two different possible strategies: charging a high price and charging a low price. In each cell, the first number is the profit of firm A, and the second number is the profit of firm B. a. Assume that collusion is not possible. Determine the optimal strategy for each firm. Explain why it is the best strategy to follow. b. Based on your answer to a., explain why firms collude. What are the pitfalls of collusion? |
233. In what way is monopolistic competition more like competition, and in what way is it more like monopoly? |
234. What quantity of output and price do they try to set, when a group of oligopoly firms form a cartel? Will there be any changes in the price and quantity supplied if the cartel gets broken down? |
235. Define the following terms and explain their importance to the study of economics. a. maximin criterion b. Nash equilibrium c. Dominant Strategy d. Zero-sum game e. Credible threat |
236. Here is an excerpt form an editorial praising capitalism in The Economist: “It is competition that delivers choice, holds prices down, encourages invention and service, and (through all these things) delivers economic growth.” To what type of competition does the writer refer? Is it the sort of competition that economists study? Explain. |
237. When an airline reduces its fares, other airlines typically match the action. But when an airline increases its fare, other airlines do not follow suit. Which oligopoly model cartel, price leadership, or kinked demand best fits the airline industry as described? Justify your choice and explain why the other models are less appropriate. |
238. Briefly and concisely define the following terms and explain their importance in the study of economics. a. excess capacity theorem b. price leadership c. kinked demand curve d. perfectly contestable market |
239. Explain how a large number of firms in the industry and product heterogeneity affect the likelihood of cartel success. |
240. Monopolistic competition tends to lead firms to have wasted capacity. Why? |
241. Can positive economic profits persist under monopolistic competition in the long run. Why? |
242. Explain the prisoner’s dilemma case in game theory and its relevance to the maximin criterion. |
243. What are the four types of industry structures? Compare and contrast them with the number of firms in the industry, whether firms produce homogeneous or heterogeneous products, whether there are economic profits in long-run equilibrium, and how frequently the model appears in the real world. |
244. The authors of this text argue that oligopolies are interdependent firms. What do they mean by this? Give three examples of the types of interdependence which might occur. |
245. Which oligopoly model leads to price rigidity? Graphically show why. |
246. What are the advantages and disadvantages of resource allocation under monopolistic competition compared to perfect competition? |
247. Is it likely that oligopolistic firms will be in both a kinked demand curve situation and also engage in price leadership? Why or why not? |
248. What are the assumptions of the kinked demand curve model? What is its main conclusion about oligopoly behavior? |
249. Firms in a perfectly contestable market will be forced to operate as efficiently as possible and to charge prices as low as long-run financial survival permits. Why? |
250. Explain how short-run and long-run equilibrium in monopolistic competition differ. Use graphs to illustrate your answer. Be sure that your graphs are completely and correctly labeled. |
251. The airline dominating Charlotte, North Carolina, once contended that it could not overcharge for fear of potential competition, if not at Charlotte, then at Raleigh, a two-hour drive away. Do you find this argument compelling, given the theory of contestable markets? |
252. Why is oligopoly more difficult to model than competition or monopoly? |
253. What is a repeated game? How does this helps the players in a game? |
254. Define the following terms and explain their importance to the study of economics. a. monopolistic competition b. oligopoly c. cartel d. oligopolistic interdependence |
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Microeconomics Principles and Policy 14e | Test Bank by Baumol
By William J. Baumol