Test Bank + Answers Chapter 13 Monopolistic Competition and - Microeconomics Theory and Applications 13th Edition | Test Bank with Answer Key by Edgar K. Browning, Mark A. Zupan. DOCX document preview.
Package: Test Bank
Title: Microeconomics: Theory and Application, 13e
Chapter Number: 13
Question Type: Multiple Choice
1. Which of the following is a characteristic of monopolistic competition?
a. Inelastic demand
b. Free entry and exit
c. Homogeneous products
d. A small number of buyers
Learning Objective: Explain how price and output are determined under monopolistic competition.
2. A monopolistically competitive industry is similar to a perfectly competitive industry in that:
a. there is free entry and exit in both markets.
b. products are differentiated in both markets.
c. firms in both markets decide output and prices on the basis of strategic interaction.
d. the demand curves in both markets are downward-sloping.
Learning Objective: Explain how price and output are determined under monopolistic competition.
3. Unlike a perfectly competitive firm, a monopolistically competitive firm:
a. makes zero economic profits in the short run.
b. caters to a large portion of the market.
c. does not face barriers to entry and exit.
d. sells a differentiated product.
Learning Objective: Explain how price and output are determined under monopolistic competition.
4. Unlike a monopolistically competitive market, firms in a perfectly competitive market:
a. equate marginal cost and marginal revenue.
b. set price at a level that is greater than marginal cost.
c. do not have any entry or exit barriers.
d. produce homogeneous goods.
Learning Objective: Explain how price and output are determined under monopolistic competition.
5. A monopolistically competitive firm differs from a perfectly competitive firm in that:
a. the monopolistically competitive firm faces a downward-sloping demand curve.
b. the demand for the monopolistically competitive firm’s product is fairly inelastic.
c. entry into a monopolistic market is restricted while entry is free in a perfectly competitive market.
d. a monopolistically competitive firm is a price taker in the market.
Learning Objective: Explain how price and output are determined under monopolistic competition.
6. From the shape of the monopolistically competitive firm’s demand curve, you can imply that:
a. the firm has some degree of market power.
b. the firm sells a homogeneous good.
c. the firm's product has no substitutes.
d. the firm’s level of output is efficient.
Learning Objective: Explain how price and output are determined under monopolistic competition.
7. Product differentiation and a certain degree of monopoly power are characteristics of:
a. perfectly competitive firms.
b. monopolistically competitive firms.
c. monopoly markets.
d. monopsony markets.
Learning Objective: Explain how price and output are determined under monopolistic competition.
8. The demand curve that a monopolistically competitive firm faces is _____.
a. relatively elastic compared to a monopoly
b. perfectly elastic at the equilibrium price
c. relatively elastic compared to a perfectly competitive firm
d. perfectly inelastic at the equilibrium output
Learning Objective: Explain how price and output are determined under monopolistic competition.
9. The demand curve that a monopolistically competitive firm faces is _____.
a. downward-sloping but fairly elastic
b. upward-sloping but fairly inelastic
c. horizontal
d. vertical
Learning Objective: Explain how price and output are determined under monopolistic competition.
10. The demand curve facing a monopolistically competitive firm is downward-sloping because:
a. substitutes for the good are easily available.
b. the firm produces homogeneous products.
c. there is only one seller in the market.
d. the price/marginal-cost markup is zero.
Learning Objective: Explain how price and output are determined under monopolistic competition.
11. Which of the following is true of product differentiation?
a. Product differentiation ensures that firms face a horizontal market demand curve.
b. Product differentiation allows monopolistically competitive firms to make positive economic profits in the long run.
c. Prices of differentiated products have to vary substantially for product differentiation to be successful.
d. Successful product differentiation can be based on differences that are perceived by consumers.
Learning Objective: Explain how price and output are determined under monopolistic competition.
12. Product differentiation in monopolistically competitive markets:
a. can reflect real or perceived differences in the product.
b. cannot be done on the basis of a simple difference in packaging.
c. is not easily identifiable.
d. reduces each firm’s ability to control prices.
Learning Objective: Explain how price and output are determined under monopolistic competition.
13. ABC Inc., is a leading consumer goods conglomerate. ABC launched a new variant of their existing brand of toothpaste that claimed not only to whiten teeth within 4 weeks but also fight cavities. In other words, ABC was practicing _____.
a. market segmentation
b. product differentiation
c. product customization
d. price skimming
Learning Objective: Explain how price and output are determined under monopolistic competition.
14. Long-run equilibrium in a monopolistically competitive market satisfies all of the following conditions, except:
a. zero economic profit.
b. excess capacity.
c. price equal to marginal cost.
d. marginal revenue equal to marginal cost.
Learning Objective: Explain how price and output are determined under monopolistic competition.
15. When a monopolistically competitive firm is maximizing its profit:
a. marginal revenue is also maximized.
b. average revenue exceeds marginal revenue.
c. total revenue declines to zero.
d. marginal revenue equals average revenue.
Learning Objective: Explain how price and output are determined under monopolistic competition.
16. A monopolistically competitive firm that is maximizing profit will choose to produce at the level where:
a. total revenue is maximized.
b. average total cost exceeds average revenue.
c. marginal revenue equals marginal cost.
d. marginal revenue exceeds average revenue.
Learning Objective: Explain how price and output are determined under monopolistic competition.
17. Which of the following conditions holds for a monopolistically competitive firm that is in equilibrium in the long run?
a. Price equal to marginal cost
b. Marginal cost equal to average cost
c. Price equal to average cost
d. Marginal cost equal to average revenue
Learning Objective: Explain how price and output are determined under monopolistic competition.
18. Which of the following is not true of a monopolistically competitive firm in long run equilibrium?
a. Price exceeds marginal cost
b. The average total cost curve lies above the demand curve
c. Marginal revenue equals marginal cost
d. The price elasticity of demand is zero
Learning Objective: Explain how price and output are determined under monopolistic competition.
19. The markup of price over marginal cost of a profit-maximizing firm in the long run is _____.
a. higher in a perfectly competitive market than in a monopoly market
b. higher in a monopoly market than in a monopolistically competitive market
c. higher in a perfectly competitive market than in an oligopoly
d. higher in a monopolistically competitive market than in a competitive market
Learning Objective: Explain how price and output are determined under monopolistic competition.
20. A monopolistically competitive firm is similar to a monopoly in that the firm:
a. has no rivals that produce close substitutes.
b. is very large relative to the market.
c. produces on the inelastic portion of its demand curve.
d. faces a downward-sloping demand curve.
Learning Objective: Explain how price and output are determined under monopolistic competition.
21. Monopolistically competitive firms _____.
a. earn positive economic profit both in the short run and the long run
b. suffer an economic loss in the long run
c. earn positive economic profit in the long run
d. earn zero economic profit in the long run
Learning Objective: Explain how price and output are determined under monopolistic competition.
22. The output of a monopolistically competitive industry is inefficient because firms:
a. produce at the highest point on the average cost curve.
b. do not produce at the minimum point on their average cost curve.
c. produce at the highest point on the marginal cost curve.
d. do not produce at the minimum point on the marginal cost curve.
Learning Objective: Explain how price and output are determined under monopolistic competition.
23. A monopolistically competitive firm is considered to have excess capacity because it:
a. does not operate at the minimum point on its long-run average cost curve.
b. does not operate at the minimum point on its marginal cost curve.
c. operates at the point where average cost is greater than average revenue.
d. operates at the point where marginal cost is above average revenue.
Learning Objective: Explain how price and output are determined under monopolistic competition.
24. For a monopolistically competitive firm, excess capacity is the difference between the equilibrium level of output and the level of output where:
a. marginal cost is minimum.
b. average total cost is minimum.
c. marginal revenue is maximum.
d. total revenue is maximum.
Learning Objective: Explain how price and output are determined under monopolistic competition.
25. Long-run equilibrium under monopolistic competition is characterized by:
a. a positive deadweight loss.
b. a positive but small economic profit.
c. an equilibrium price that is equal to marginal cost.
d. an equilibrium price that is greater than average cost.
Learning Objective: Explain how price and output are determined under monopolistic competition.
26. A monopolistically competitive industry is characterized by:
a. excess capacity.
b. an efficient level of output.
c. inelastic demand for its products.
d. positive economic profits in the long run.
Learning Objective: Explain how price and output are determined under monopolistic competition.
27. When a firm in a monopolistically competitive market is operating at excess capacity it implies that:
a. it is producing the efficient level of output.
b. it is producing more than the competitive level of output
c. it can produce output at a lower cost
d. it is facing an upward-sloping average cost curve
Learning Objective: Explain how price and output are determined under monopolistic competition.
28. Which of the following would weaken the argument that monopolistically competitive firms should be regulated by the government?
a. Monopolistically competitive firms and perfectly competitive firms are similar in that their equilibrium prices and quantities are efficient.
b. Monopolistically competitive firms earn zero economic profits in the short run just as perfectly competitive firms do.
c. The benefits of increased product variety produced by monopolistic competition offsets the relatively small welfare costs.
d. The cost of regulating a monopolistically competitive firm could possibly be lower than the deadweight loss from monopolistic competition.
Learning Objective: Explain how price and output are determined under monopolistic competition.
29. Government intervention in monopolistically competitive industries is probably not warranted because:
a. monopolistic firms produce the efficient level of output.
b. deadweight losses from monopolistic competition are hard to quantify.
c. the cost of regulation may be higher than the deadweight loss.
d. price regulation usually leads to a decline in total surplus.
Learning Objective: Explain how price and output are determined under monopolistic competition.
30. Which of the following is a defining characteristic of an oligopoly?
a. A large number of sellers
b. Mutual interdependence between firms
c. Economies of scale in production
d. A large number of buyers
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
31. Unlike monopolistically competitive firms, oligopolistic firms:
a. face a downward-sloping demand curve.
b. exhibit a strong mutual interdependence.
c. produce at the point where price is equal to marginal cost.
d. do not have a supply curve.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
32. Which of the following, if true, will be the best example of an oligopoly market?
a. The cigarette industry where a similar product is produced by a small number of sellers
b. Dine-in pizza outlets where a differentiated product is produced by a large number of sellers
c. The milk industry where a homogeneous product is provided by a large number of sellers
d. The market for electricity where a single firm can produce electricity at the lowest possible cost
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
33. Which of the following is true of monopolistically competitive markets?
a. The economic profits of firms in a monopolistically competitive market are positive in the long run.
b. The cost of government regulation is small relative to the social losses from monopolistic competition.
c. Since the price and output combination in a monopolistically competitive market is efficient, there is no need for government regulation.
d. It is possible that the value created through product differentiation outweighs the efficiency loss from monopolistic competition.
Learning Objective: Explain how price and output are determined under monopolistic competition.
34. Oligopoly cannot be explained using a single theoretical model because:
a. oligopolistic markets are not really found in the real world.
b. the assumptions of the oligopoly model are not realistic.
c. product differentiation makes the model too complex.
d. mutual interdependence makes it difficult to analyze strategic behavior.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
35. Which of the following is true of a firm in an oligopoly market?
a. Each firm in an oligopoly market faces a downward-sloping demand curve with a kink at the current price.
b. Firms in oligopoly markets are very small relative to the market.
c. Products in oligopoly markets could either be differentiated or homogeneous.
d. The profit-maximizing output in an oligopoly market is determined by equating price and marginal cost.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
36. In Cournot’s duopoly model, a firm’s profit-maximizing level of output:
a. depends on the market price of the good.
b. is based on the assumption that the other firm produces zero output.
c. based on the other firm’s expected level of output, which is assumed to remain unchanged.
d. is equal to the other firm’s expected level of output, which is assumed to remain unchanged.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
37. Which of the following is true of the Cournot duopoly model?
a. It shows how the interaction of uncoordinated output decisions of rival firms leads to equilibrium in the oligopoly market.
b. It explains how prices are determined in a market that has a large number of firms and a homogeneous product.
c. It shows how equilibrium is attained in a market where two firms collude to set output and price equal to the monopoly output and price.
d. It explains how prices are determined in a market with a single dominant firm and a large number of competitive fringe firms.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
38. A duopoly is defined as an industry with _____.
a. two distinct types of buyers
b. two sellers
c. multiple product lines
d. a homogeneous product
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
39. Which of the following is a key element of the Cournot model?
a. The price in an oligopoly market increases proportionally for both firms.
b. The output of one firm is determined keeping the output of other firms fixed.
c. The output of both firms in an oligopoly market is kept fixed.
d. The price in an oligopoly market will not increase above a certain level.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
40. Assume that there are only three sellers in the aluminum industry each producing identical aluminum sheets. Given that these three firms own all the known sources of aluminum, the _____ model of the market is most applicable to the aluminum industry.
a. oligopoly
b. monopoly
c. dominant firm model
d. monopolistic competition
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
41. Assume that there are only two full-service airline firms in a country. The service provided to the consumers by each of them is marginally different. Given that the full-service airline industry has high entry costs, the _____ model of the market is most applicable to this industry.
a. oligopoly
b. monopoly
c. dominant firm model
d. perfectly competitive
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
42. In the Cournot duopoly model, the reaction curve shows:
a. one firm’s best possible price as a function of the profit of the other firm.
b. one firm’s most possible profit as a function of the costs of the other firm.
c. one firm’s best possible revenue as a function of the profit of the other firm.
d. one firm’s most profitable output as a function of the output of the other firm.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
43. A _____ shows the relationship between one firm’s profit-maximizing output as a function of the output of a rival firm in a duopoly market.
a. demand curve
b. supply curve
c. joint output curve
d. reaction curve
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
44. For firms with constant and equal long-run marginal cost curves, the Cournot equilibrium occurs at:
a. the point of intersection of the firms’ reaction curves.
b. the point where price equals marginal cost.
c. the point where the demand curve is tangent to the marginal cost curve.
d. the point of intersection of one firm’s reaction curve and the demand curve.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
45. If, in the Cournot model of a duopoly, the firms colluded instead of behaving independently:
a. the outcome would be closer to the competitive equilibrium.
b. the outcome would be indeterminate.
c. firms could increase their combined profit.
d. the price will be below average cost.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
46. A significant criticism of the Cournot model is that:
a. markets do not operate according to the Cournot model in the real world.
b. its key assumption does not hold if the market is still adjusting toward equilibrium.
c. firms cannot estimate reaction curves of other firms.
d. the Cournot model cannot be applied to industries with more than two firms.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
47. The main assumption of the Cournot model:
a. is more plausible the larger the number of firms in the industry.
b. is that each firm takes the other firm’s price as given.
c. is not valid once equilibrium is established in the market.
d. takes into account the reactions of other firms.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
48. The Stackelberg model is different from the Cournot model because:
a. the Stackelberg model assumes that firms compete by varying their prices while the Cournot model assumes that firms compete by varying their output.
b. the Stackelberg model assumes that one firm selects its output on the basis of the other firm’s reaction curve while the Cournot model assumes that both firms take each other’s output as given.
c. the Stackelberg model assumes that both firms try to predict each other’s reaction curves while the Cournot model assumes that the level of output of both firms is fixed.
d. the Stackelberg model assumes that one firm dominates the market through its market share while the Cournot model assumes that all firms are small relative to the market.
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
49. The residual demand curve shows:
a. the quantity that the dominant firm sells at each price after accounting for the fringe firms’ output.
b. the quantity that fringe firms sell at each price based on the output of the dominant firm.
c. the quantity that the dominant firm supplies at each price irrespective of the market output.
d. the combined quantity that is sold at each price in the market by the dominant and fringe firms.
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
50. In the Stackelberg model of oligopoly:
a. each firm takes the other firm’s output as constant in deciding its own output level.
b. the leader firm’s output is determined at the point where demand equals price.
c. the leader firm selects its output first, taking the reactions of follower firms into account.
d. each firm decides its output based on the interaction of demand and supply.
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
51. In the Stackelberg model of oligopoly, the dominant firm:
a. will equate marginal cost with the residual demand curve to maximize profits.
b. faces a perfectly elastic demand curve.
c. can maximize profits ignoring the actions of other firms in the industry.
d. faces a marginal revenue curve that lies under the residual demand curve.
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
52. The figure below shows the Stackelberg model of a duopoly. Both firms face constant marginal costs equal to OJ and the market demand curve is AD. The Stackelberg firm produces an output of OF and OF is equal to FL.
The Stackelberg firm’s residual demand curve is given by:
a. AC
b. BCD
c. BE
d. JCD
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
53. The figure below shows the Stackelberg model of a duopoly. Both firms face constant marginal costs equal to OJ and the market demand curve is AD. The Stackelberg firm produces an output of OF and OF is equal to FL.
The difference between the total industry output produced under a perfect competition model and a Stackelberg model is represented by the distance _____.
a. KF
b. KL
c. LE
d. FL
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
54. The figure below shows the Stackelberg model of a duopoly. Both firms face constant marginal costs equal to OJ and the market demand curve is AD. The Stackelberg firm produces an output of OF and OF is equal to FL.
In the Stackelberg equilibrium, the total industry output is _____.
a. OF
b. OK
c. OE
d. OL
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
55. The figure below shows the Stackelberg model of a duopoly. Both firms face constant marginal costs equal to OJ and the market demand curve is AD. The Stackelberg firm produces an output of OF and OF is equal to FL.
The output of the follower firm is represented by the distance _____.
a. OF
b. OK
c. KL
d. FK
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
56. In the Stackelberg model, the leader firm’s residual demand curve _____.
a. has a slope that is twice that of the market demand curve
b. has a slope that is half the slope of the market demand curve
c. is the same as the market demand curve
d. is more inelastic than the market demand curve
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
57. In the Stackelberg model of oligopoly, the leader firm:
a. sets the price in the market which the follower firms take as given.
b. produces a larger quantity than follower firms and enhances its profits.
c. chooses output and prices irrespective of the other firms in the market.
d. produces a level of output which is equal to that of the follower firms.
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
58. In _____, one firm uses its knowledge of the other firms’ reaction functions to enhance its own profits.
a. the Cournot duopoly
b. a monopolistically competitive market
c. a perfectly competitive market
d. the Stackelberg model
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
59. Compared to a Cournot equilibrium, the _____ in a Stackelberg equilibrium.
a. price paid by the consumers is higher
b. total industry output is higher
c. profit made by the leader firm is lower
d. output is closer to monopoly output
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
60. Given the same demand and cost conditions, _____ for a Stackelberg model as compared to a Cournot duopoly model.
a. total output is lower and price is higher
b. total output is higher and price is lower
c. total output and price are both lower
d. total output and price are both higher
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
61. In an industry with a small number of equal-sized firms where none of the firms have superior knowledge, the _____ is most likely to apply.
a. Cournot model of oligopoly
b. perfectly competitive model
c. dominant firm model of oligopoly
d. Stackelberg model of oligopoly
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
62. How does the Cournot model of oligopoly differ from the Stackelberg model?
a. The Cournot model cannot be extended to include more than two firms unlike the Stackelberg model.
b. The Cournot model explains the mutual interdependence of firms in an oligopoly market unlike the Stackelberg model.
c. The equilibrium output in the Stackelberg model is relatively higher than the Cournot model.
d. The Cournot model assumes that a single firm is the market leader while the Stackelberg model assumes no single firm has a large market share.
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
63. A single firm serves a large part of the market. The rest of the market is served by a large number of competitive firms. Which market model is best applicable to this type of industry?
a. Monopoly
b. Monopolistic competition
c. Dominant firm model
d. Cournot duopoly
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
64. In the dominant firm model of oligopoly, the rival firms will:
a. equate marginal cost with marginal revenue.
b. produce at the point where marginal cost is equal to residual demand.
c. produce on the inelastic portion of the demand curve.
d. equate marginal cost with the dominant firm’s price.
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
65. In the dominant firm model of oligopoly, the dominant firm assumes that the other firms in the market:
a. will charge a higher price than it does.
b. will together produce a lower quantity of output than it does.
c. behave like competitive firms.
d. behave like monopolistic firms.
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
66. In the dominant firm model of oligopoly, the dominant firm maximizes profits by producing at the point where:
a. its marginal revenue is equal to its marginal cost.
b. the market demand equals the supply by the competitive fringe firms.
c. its marginal cost curve intersects the market demand curve.
d. its demand curve coincides with the market demand curve.
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
67. How is total output determined in the dominant firm model?
a. The dominant firm produces the highest level of output given its production function.
b. All firms in the market produce at the level where marginal cost equals marginal revenue.
c. The dominant firm produces at the level where marginal cost equals marginal revenue.
d. The fringe firms produce at the point where marginal revenue equals marginal cost.
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
68. Consider a dominant firm model in which the elasticity of market demand is 1, the dominant firm's market share is 0.5, and the elasticity of supply of the competitive fringe firms is 4. What would be the dominant firm's elasticity of demand?
a. 2
b. 4
c. 6
d. 8
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
69. In the dominant firm model, if the elasticity of market demand is 0.75, the dominant firm's market share is 0.25, and the elasticity of supply of the competitive fringe is 2, then the dominant firm's elasticity of demand is _____.
a. 3
b. 5
c. 7
d. 9
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
70. Consider a dominant firm model where the elasticity of market demand is 2, the elasticity of supply of the competitive fringe is 4, and the elasticity of the dominant firm’s demand is 10. Calculate the dominant firm's market share.
a. 2/3
b. 2/5
c. 3/5
d. 3/7
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
71. In the dominant firm model, if the dominant firm's market share is 3/7, its elasticity of demand is 10 and the elasticity of supply of the competitive fringe firms is 4, then the elasticity of market demand must be _____.
a. 4
b. 3
c. 2
d. 1
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
72. Which of the following will determine the elasticity of a dominant firm’s demand curve?
a. The dominant firm‘s marginal cost of production
b. The demand elasticity of the fringe firms
c. The total output in the market
d. The supply elasticity of the fringe firms
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
73. In an industry where one firm with a high market share uses the reaction curves of other firms to set output, the _____ model is most applicable.
a. Cournot duopoly
b. perfectly competitive
c. Stackelberg
d. dominant firm
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
74. How does the Stackelberg model of oligopoly differ from the dominant firm model?
a. The Stackelberg model assumes a single leader firm unlike the dominant firm model where all firms share output equally.
b. In the dominant firm model, the fringe firms are competitive while in the Stackelberg model, the follower firms display Cournot behavior.
c. The dominant firm model is only applicable to a duopoly while the Stackelberg model can be applied to all oligopolistic markets.
d. The Stackelberg leader produces along the market demand curve while the dominant firm produces along the residual demand curve.
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
75. The Organization of the Petroleum Exporting Countries [OPEC] serves the global oil market. Suppose Saudi Arabia, an OPEC member country, produces 50% of the oil supplied to this market. The elasticity of market demand is 0.4 and the elasticity of supply for the other eleven OPEC countries is 1. What is the elasticity of demand for oil produced by Saudi Arabia?
a. 0.4
b. 2.4
c. 1.8
d. 3.4
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
76. Suppose ABC Concrete is the dominant firm in a market consisting of five firms. ABC’s market share is 40% of the market. The elasticity of market demand is 0.8 and the elasticity of
supply for the remaining firms is 6. What is the elasticity of demand for ABC’s product?
a. 6
b. 8
c. 11
d. 13
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
77. Which of the following the best example of a cartel?
a. An association of tobacco companies that attempts to influence anti-tobacco legislation
b. A labor union that raises wages above competitive level by restricting the supply of labor
c. A group of countries that sign an agreement to lower trade barriers and exchange goods and services
d. Firms that register their headquarters in the Cayman Islands in order to evade corporate taxes
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
78. The output of a cartel that maximizes profits is closest to the equilibrium output of:
a. a perfectly competitive firm.
b. a monopoly.
c. a monopolistically competitive firm.
d. an oligopoly.
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
79. The price that is set by a cartel is most likely to be:
a. lower than the marginal cost.
b. lower than the competitive price.
c. higher than average revenue.
d. equal to the monopoly price.
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
80. Relative to the non-cartelized market outcome, if the member of a cartel cheats and sells more than the agreed upon output:
a. the violator will not be able to sell the additional output at a price above his marginal cost.
b. the violator will make a smaller profit per unit that he sells.
c. the violator will face a more elastic demand curve for the additional output.
d. the demand curve facing the violator will be unchanged.
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
81. Which of the following has contributed to the success of OPEC [Organization of the Petroleum Exporting Countries] as an oil cartel?
a. The product supplied by OPEC is homogeneous and has few substitutes.
b. The supply elasticity of non-OPEC oil suppliers is relatively high.
c. The demand for oil is relatively price elastic, especially in the short run.
d. OPEC is formed by a large number of member countries that differ in size, cost, and other aspects.
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
82. Prior to the collapse of the Soviet Union, a cartel on the supply of caviar was successful. Which of the following is the best explanation for this success?
a. The global demand for caviar was low.
b. The Soviet government tightly regulated the annual production of caviar.
c. Due to the high price of caviar, production in other countries increased.
d. Sturgeon fish, the source of caviar, was abundantly available in most parts of the world.
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
83. Cartels and collusion are more common in oligopolistic industries because:
a. products are differentiated.
b. there are no barriers to entry and exit.
c. there are a smaller number of firms.
d. the market demand curve is horizontal.
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
84. The following figure shows the market demand curve [DD’], the supply curve of the fringe firms [SF], the cartel’s marginal cost curve [MC0], and the cartel’s marginal revenue curve [MR0]. Assume that the cartel behaves like a dominant firm.
If the market had been perfectly competitive, the equilibrium price and output would be _____ respectively.
a. PC and QT
b. P and Q0
c. PC and QF
d. P and QF
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
85. The following figure shows the market demand curve [DD’], the supply curve of the fringe firms [SF], the cartel’s marginal cost curve [MC0], and the cartel’s marginal revenue curve [MR0]. Assume that the cartel behaves like a dominant firm.
Which of the following statements is true?
a. The residual demand curve is less elastic than the market demand curve.
b. The difference between QF and Q0 represent the inefficiency in output from a monopoly.
c. The total industry output is equal to TC.
d. The total industry output is the sum of QF and Q0.
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
86. The following figure shows the market demand curve [DD’], the supply curve of the fringe firms [SF], the cartel’s marginal cost curve [MC0], and the cartel’s marginal revenue curve [MR0]. Assume that the cartel behaves like a dominant firm.
On the AD’ portion of the demand curve _____.
a. the cartel and fringe firms will produce equal quantities of output
b. only the fringe firms will produce output
c. the demand curve is more elastic
d. only the cartel acting as a dominant firm will produce output
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
87. Suppose a cartel is formed by the tomato farmers. Which of the following would increase the ability of this cartel to set output and prices in the domestic market?
a. Acreage restrictions by the government
b. Highly inelastic demand for tomatoes
c. A high supply elasticity for other tomato farmers
d. A high import tariff on tomatoes
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
88. Given that OPEC [Organization of the Petroleum Exporting Countries] has been a successful cartel, all of the following factors could have contributed to its success, except:
a. a low price elasticity of demand for oil.
b. an increase in the consumption of products that require oil.
c. OPEC's ownership of a large percentage of known oil reserves.
d. a high supply elasticity of crude oil by non-OPEC producers.
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
89. Assume that a group of countries that produce 50 percent of the world's coffee decide to limit their coffee production and exports to increase their income from the sale of coffee. Which of the following are necessary for this cartel to operate successfully?
a. The world demand for coffee should be price elastic and the supply of coffee by other coffee producers should be price inelastic.
b. The world demand for coffee and the supply of coffee by other producers should be price inelastic.
c. The world demand for coffee and supply of coffee by other coffee producers should be price elastic.
d. The world demand for coffee should be price inelastic and supply of coffee by other coffee producers should be price elastic.
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
Question Type: True/False
90. The demand curve facing a monopolistically competitive firm is downward-sloping because substitutes for the good are easily available.
Learning Objective: Explain how price and output are determined under monopolistic competition.
91. The demand curve facing a monopolistically competitive firm is downward-sloping because the firm produces homogeneous products.
Learning Objective: Explain how price and output are determined under monopolistic competition.
92. The demand curve facing a monopolistically competitive firm is downward-sloping because there is only one seller in the market.
Learning Objective: Explain how price and output are determined under monopolistic competition.
93. The demand curve facing a monopolistically competitive firm is downward-sloping because the price/marginal-cost markup is zero.
Learning Objective: Explain how price and output are determined under monopolistic competition.
94. Product differentiation ensures that firms face a horizontal market demand curve.
Learning Objective: Explain how price and output are determined under monopolistic competition.
95. Product differentiation allows monopolistically competitive firms to make positive economic profits in the long run.
Learning Objective: Explain how price and output are determined under monopolistic competition.
96. Prices of differentiated products have to vary substantially for product differentiation to be successful.
Learning Objective: Explain how price and output are determined under monopolistic competition.
97. Successful product differentiation can be based on differences that are perceived by consumers.
Learning Objective: Explain how price and output are determined under monopolistic competition.
98. Widgets Inc., is a leading consumer goods conglomerate. Widgets launched a new variant of their existing brand of toothpaste that claimed not only to whiten teeth within 4 weeks but also fight cavities. In other words, Widgets was practicing market segmentation/
Learning Objective: Explain how price and output are determined under monopolistic competition.
99. Widgets Inc., is a leading consumer goods conglomerate. Widgets launched a new variant of their existing brand of toothpaste that claimed not only to whiten teeth within 4 weeks but also fight cavities. In other words, Widgets was practicing product differentiation.
Learning Objective: Explain how price and output are determined under monopolistic competition.
100. Widgets Inc., is a leading consumer goods conglomerate. Widgets launched a new variant of their existing brand of toothpaste that claimed not only to whiten teeth within 4 weeks but also fight cavities. In other words, Widgets was practicing product customization.
Learning Objective: Explain how price and output are determined under monopolistic competition.
101. Widgets Inc., is a leading consumer goods conglomerate. Widgets launched a new variant of their existing brand of toothpaste that claimed not only to whiten teeth within 4 weeks but also fight cavities. In other words, Widgets was practicing price skimming.
Learning Objective: Explain how price and output are determined under monopolistic competition.
102. The economic profits of firms in a monopolistically competitive market are positive in the long run.
Learning Objective: Explain how price and output are determined under monopolistic competition.
103. The cost of government regulation is small relative to the social losses from monopolistic competition.
Learning Objective: Explain how price and output are determined under monopolistic competition.
104. Since the price and output combination in a monopolistically competitive market is efficient, there is no need for government regulation.
Learning Objective: Explain how price and output are determined under monopolistic competition.
105. It is possible that the value created through product differentiation outweighs the efficiency loss from monopolistic competition.
Learning Objective: Explain how price and output are determined under monopolistic competition.
106. Each firm in an oligopoly market faces a downward-sloping demand curve with a kink at the current price.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
107. Firms in oligopoly markets are very small relative to the market.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
108. Products in oligopoly markets could either be differentiated or homogeneous.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
109. The profit-maximizing output in an oligopoly market is determined by equating price and marginal cost.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
110. The Cournot duopoly model shows how the interaction of uncoordinated output decisions of rival firms leads to equilibrium in the oligopoly market.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
111. The Cournot duopoly model explains how prices are determined in a market that has a large number of firms and a homogeneous product.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
112. The Cournot duopoly model shows how equilibrium is attained in a market where two firms collude to set output and price equal to the monopoly output and price.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
113. The Cournot duopoly model explains how prices are determined in a market with a single dominant firm and a large number of competitive fringe firms.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
114. The demand curve facing each firm in a monopolistically competitive market is upward sloping but fairly elastic.
Learning Objective: Explain how price and output are determined under monopolistic competition.
115. Under monopolistic competition, entry into the market is restricted.
Learning Objective: Explain how price and output are determined under monopolistic competition.
116. Under monopolistic competition, long-run equilibrium is attained as a result of firms entering (or leaving) the industry in response to profit incentives.
Learning Objective: Explain how price and output are determined under monopolistic competition.
117. When firms fail to produce at lowest possible average cost, they are sometimes said to have excess capacity.
Learning Objective: Explain how price and output are determined under monopolistic competition.
118. A failure to operate at minimum average cost is potentially inefficient because it is possible to produce the same industry output at a lower cost.
Learning Objective: Explain how price and output are determined under monopolistic competition.
119. When there are a small number of competitors, their market decisions will exhibit strong mutual interdependence.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
120. Economists do not have one agreed-upon theory of oligopoly.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
121. A duopoly is an industry with one large firm (called the leader) and one much smaller firm (called the follower).
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
122. The key element in the Cournot model is that each firm determines its output based on the assumption that any other firms will not change their outputs at all.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
123. Each firm’s reaction curve shows its profit-maximizing output for each possible output that firm can produce
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
124. Cournot equilibrium occurs at the intersection of the two reaction curves.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
125. With the Stackelberg model: a leader firm selects its output first, taking the reactions of naive Cournot follower firms into account.
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
Question Type: Essay
126. Answer the following:
a) Draw the diagram of a monopolistically competitive firm which makes positive economic profits and one which is in long-run equilibrium. In each case, identify the area that represents the profit earned by the firm in the short run and the long run.
b) Why is the demand curve downward-sloping?
Learning Objective: Explain how price and output are determined under monopolistic competition.
127. One of the earliest oligopoly models, as explained by Augustin Cournot, took the example of two firms that produced a homogeneous product: bottled spring water. Both firms faced zero marginal costs and a linear demand curve. Using this information, show that the Cournot equilibrium output is 2/3rd of the perfectly competitive equilibrium output.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
128. The market demand for personalized key chains is given by P = 150 – QD. Suppose that there are only two firms in this market; firm 1’s cost function is given by C1 = 5Q12 and firm 2’s cost function is given by C2 = 0.3Q2. Derive the reaction function that shows firm 1’s most profitable output as a function of firm 2’s output.
Learning Objective: Describe the characteristics of Oligopoly and the Cournot Model.
129. Amazon.com®, Starbucks®, and eBay® are all examples of firms that were the first to establish their presence in their respective markets. Would you consider any of these firms to be dominant in that they set the market price and other firms act as perfectly competitive firms using this market price?
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
130. Assume that Ikea® and Pottery Barn® are two new firms that are planning to enter the furniture market. They face the inverse market demand curve P = 60 – Q. Given that both firms have zero marginal costs, show that Ikea’s profit is lower in the Cournot model than in the Stackelberg model.
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
131. Suppose that most consumers who buy portable camping stoves buy the ones produced by Marshall and Blatt (M&B). Besides M&B, the portable stove market has a large number of smaller suppliers. The market demand curve for portable stoves is given by QD = 100 – 0.5P. The supply curve for all the other firms taken together is QS = 0.5P. M&B’s total cost function has been estimated to be C = 5QM. Given that M&B sets output first, calculate how the total quantity supplied in the market is divided between M&B and the other firms. What is the price in the market?
Learning Objective: Compare several key noncooperative oligopoly models, including Stackelberg and the dominant firm.
132. What is a cartel and why are cartels considered to be inherently unstable?
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
133. Answer the following:
(a) Assume two firms face a market demand curve of P = a – bQ, where a and b are positive constants, and marginal cost equals c for both firms. Fill in the following table, identify the respective points of equilibrium on the graph below, and explain the relevant characteristics of each model as you work through them.
Comparison of Oligopoly Models | ||||||||
Model | Firm 1’s quantity (q1) | Firm 2’s quantity (q2) | Total Output (Q) | Market Price (P) | Consumer Surplus (CS) | Firm 1’s profit (π1) | Firm 2’s profit (π2) | Total Profit (Π) |
Competitive | ||||||||
Cournot | ||||||||
Collusion | ||||||||
Stackelberg with Cournot follower (1 = leader) | ||||||||
b) Following your answers above, explain intuitively how output and price vary by market structure.
Comparison of Oligopoly Models | ||||||||
Model | Firm 1’s quantity (q1) | Firm 2’s quantity (q2) | Total Output (Q) | Market Price (P) | Consumer Surplus (CS) | Firm 1’s profit (π1) | Firm 2’s profit (π2) | Total Profit (Π) |
Competitive | (a-c)/2b | (a-c)/2b | (a-c)/b | c | (a-c)2 2b | 0 | 0 | 0 |
Cournot | (a-c)/3b | (a-c)/3b | 2(a-c)/3b | (a+2c)/3 | 2(a-c)2 9b | (a-c)2 9b | (a-c)2/9b | 2(a-c)2/9b |
Collusion | (a-c)/4b | (a-c)/4b | (a-c)/2b | (a+c)/2 | (a-c)2 8b | (a-c)2 8b | (a-c)2/8b | (a-c)2/4b |
Stackelberg with Cournot follower (1 = leader) | (a-c)/2b | (a-c)/4b | 3(a-c)/4b | (a+3c)/4 | 9(a-c)2 32b | (a-c)2 8b | (a-c)2 16b | 3(a-c)2 16b |
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
134. Using a graph, show the equilibrium price and output for a perfectly competitive firm. If all the firms in the industry colluded to increase their profits, how would the equilibrium change for each firm? Assume that each firm produces an equal share of the industry output.
Learning Objective: Show how price and output are determined under the cooperative oligopoly model of cartels.
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Connected Book
Microeconomics Theory and Applications 13th Edition | Test Bank with Answer Key
By Edgar K. Browning, Mark A. Zupan