CHAPTER 23 

Monopolistic Competition and Oligopoly

Topic     Question numbers

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1.  Monopolistic competition: definition; characteristics 1-17

2.  Demand curve             18-24

3.  Price-output behavior              25-78

4.  Efficiency aspects       79-88

5.  Oligopoly: definition; characteristics  89-112

6.  Concentration ratio; Herfindahl Index               113-140

7.  Game theory               141-156

8.  Kinked-demand curve model               157-176

9.  Collusion; cartels; price leadership      177-194

10.  Advertising 195-200

11.  Efficiency aspects    201-204

12.  Review of four structures    205-226

Consider This     227-228

Last Word            229-233

True-False           234-258

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Multiple Choice Questions

Monopolistic competition: definition; characteristics

1.            Monopolistic competition means:

A)           a market situation where competition is based entirely on product differentiation and advertising.

B)            a large number of firms producing a standardized or homogeneous product.

C)            many firms producing differentiated products.

D)           a few firms producing a standardized or homogeneous product.

Ans:

2.            Monopolistic competition is characterized by a:

A)           few dominant firms and low entry barriers.

B)            large number of firms and substantial entry barriers.

C)            large number of firms and low entry barriers.

D)           few dominant firms and substantial entry barriers.

Ans:

3.            Under monopolistic competition entry to the industry is:

A)           completely free of barriers.

B)            more difficult than under pure competition but not nearly as difficult as under pure monopoly.

C)            more difficult than under pure monopoly.

D)           blocked.

Ans:

4.            Monopolistic competition resembles pure competition because:

A)           both industries emphasize nonprice competition.

B)            in both instances firms will operate at the minimum point on their long-run average total cost curves.

C)            both industries entail the production of differentiated products.

D)           barriers to entry are either weak or nonexistent.

Ans:

                Econ:  445-446     LO:  23-1     Micro:  211-212     Topic:  1     Type:  Application of Concept

5.            Which of the following is not a basic characteristic of monopolistic competition?

A)           the use of trademarks and brand names               C)            recognized mutual interdependence

B)            product differentiation D)           a relatively large number of sellers

Ans:

                Econ:  446     LO:  23-1     Micro:  212     Topic:  1     Type:  Definition

6.            Nonprice competition refers to:

A)           competition between products of different industries, for example, competition between aluminum and steel in the manufacture of automobile parts.

B)            price increases by a firm that are ignored by its rivals.

C)            advertising, product promotion, and changes in the real or perceived characteristics of a product.

D)           reductions in production costs that are not reflected in price reductions.

Ans:

                Econ:  447     LO:  23-1     Micro:  213     Status:  New     Topic:  1     Type:  Application of Concept

7.            Which of the following is not characteristic of monopolistic competition?

A)           relatively large numbers of sellers

B)            production at minimum ATC in the long-run

C)            product differentiation

D)           relatively easy entry to the industry

Ans:

8.            The restaurant, legal assistance, and clothing industries are each illustrations of:

A)           countervailing power.    C)            monopolistic competition.

B)            homogeneous oligopoly.              D)           pure monopoly.

Ans:

9.            If the number of firms in a monopolistically competitive industry increases and the degree of product differentiation diminishes:

A)           the likelihood of realizing economic profits in the long run would be enhanced.

B)            individual firms would now be operating at outputs where their average total costs would be higher.

C)            the industry would more closely approximate pure competition.

D)           the likelihood of collusive pricing would increase.

Ans:

10.          Economic analysis of a monopolistically competitive industry is more complicated than that of pure competition because:

A)           of product differentiation and consequent product promotion activities.

B)            monopolistically competitive firms cannot realize an economic profit in the long run.

C)            the number of firms in the industry is larger.

D)           monopolistically competitive producers use strategic pricing strategies to combat rivals.

Ans:

11.          A monopolistically competitive industry combines elements of both competition and monopoly. The monopoly element results from:

A)           the likelihood of collusion.

B)            product differentiation.

C)            high entry barriers.

D)           mutual interdependence in decision making.

Ans:

                Econ:  446     LO:  23-1     Micro:  212     Topic:  1     Type:  Definition

12.          Nonprice competition refers to:

A)           low barriers to entry.

B)            product development, advertising, and product packaging.

C)            the differences in information which consumers have regarding various products.

D)           an industry or firm in long-run equilibrium.

Ans:

13.          A significant difference between a monopolistically competitive firm and a purely competitive firm is that the:

A)           former does not seek to maximize profits.

B)            latter recognizes that price must be reduced to sell more output.

C)            former sells similar, although not identical, products.

D)           former’s demand curve is perfectly inelastic.

Ans:

14.          A monopolistically competitive industry combines elements of both competition and monopoly. It is correct to say that the competitive element results from:

A)           a relatively large number of firms and the monopolistic element from product differentiation.

B)            product differentiation and the monopolistic element from high entry barriers.

C)            a perfectly elastic demand curve and the monopolistic element from low entry barriers.

D)           a highly inelastic demand curve and the monopolistic element from advertising and product promotion.

Ans:

15.          Monopolistically competitive and purely competitive industries are similar in that:

A)           both are assured of short-run economic profits.

B)            both produce differentiated products.

C)            the demand curves facing individual firms are perfectly elastic in both industries.

D)           there are few, if any, barriers to entry.

Ans:

16.          The monopolistic competition model predicts that:

A)           allocative efficiency will be achieved.

B)            productive efficiency will be achieved.

C)            firms will engage in nonprice competition.

D)           firms will realize economic profits in the long run.

Ans:

17.          Use your basic knowledge and your understanding of market structures to answer this question.  Which of the following companies most closely approximates a monopolistic competitor?

                A)  Subway Sandwiches    B)  Pittsburgh Plate Glass    C)  Ford Motor Company    D)  Microsoft.

Ans:

Demand curve

18.          A monopolistically competitive firm has a:

A)           highly elastic demand curve.       C)            highly inelastic demand curve.

B)            perfectly inelastic demand curve.             D)           perfectly elastic demand curve.

Ans:

19.          The monopolistically competitive seller’s demand curve will become more elastic the:

A)           more significant the barriers to entering the industry.

B)            greater the degree of product differentiation.

C)            larger the number of competitors.

D)           smaller the number of competitors.

Ans:

20.          The larger the number of firms and the smaller the degree of product differentiation the:

A)           greater the divergence between the demand and the marginal revenue curves of the monopolistically competitive firm.

B)            larger will be the monopolistically competitive firm’s fixed costs.

C)            less elastic is the monopolistically competitive firm’s demand curve.

D)           more elastic is the monopolistically competitive firm’s demand curve.

Ans:

21.          The demand curve of a monopolistically competitive producer is:

A)           less elastic than that of either a pure monopolist or a pure competitor.

B)            less elastic than that of a pure monopolist, but more elastic than that of a pure competitor.

C)            more elastic than that of a pure monopolist, but less elastic than that of a pure competitor.

D)           more elastic than that of either a pure monopolist or a pure competitor.

Ans:

22.          A monopolistically competitive firm’s marginal revenue curve:

A)           is downsloping and coincides with the demand curve.

B)            coincides with the demand curve and is parallel to the horizontal axis.

C)            is downsloping and lies below the demand curve.

D)           does not exist because the firm is a “price maker.”

Ans:

23.          In comparing the demand curve of a pure monopolist with that of a monopolistically competitive firm, we would expect the monopolistic competitor to have a:

A)           perfectly elastic demand curve and the monopolist to have a perfectly inelastic demand curve.

B)            generally more elastic demand curve.

C)            generally less elastic demand curve.

D)           demand curve whose elasticity coefficient is 1 at all possible prices.

Ans:

24.          The price elasticity of a monopolistically competitive firm’s demand curve varies:

A)           inversely with the number of competitors and the degree of product differentiation.

B)            directly with the number of competitors and the degree of product differentiation.

C)            directly with the number of competitors, but inversely with the degree of product differentiation.

D)           inversely with the number of competitors, but directly with the degree of product differentiation.

Ans:

Price-output behavior

25.          In the short-run, a profit-maximizing monopolistically competitive firm sets it price:

A)           equal to marginal revenue.         C)            equal to marginal cost.

B)            above marginal cost.      D)           below marginal cost.

Ans:

26.          In the long-run, a profit-maximizing monopolistically competitive firm sets it price:

A)           above marginal cost.      C)            below marginal cost.

B)            equal to marginal revenue.         D)           equal to marginal cost.

Ans:

27.          In the short-run, the price charged by a monopolistically competitive firm attempting to maximize profits:

A)           must be less than ATC.

B)            must be more than ATC.

C)            may be either equal to ATC, less than ATC, or more than ATC.

D)           must be equal to ATC.

Ans:

28.          In the long-run, the price charged by the monopolistically competitive firm attempting to maximize profits:

A)           must be less than ATC.

B)            must be more than ATC.

C)            may be either equal to ATC, less than ATC, or more than ATC.

D)           will be equal to ATC.

Ans:

29.          Monopolistically competitive firms:

A)           realize normal profits in the short run but losses in the long run.

B)            incur persistent losses in both the short run and long run.

C)            may realize either profits or losses in the short run, but realize normal profits in the long run.

D)           persistently realize economic profits in both the short run and long run.

Ans:

30.          The monopolistically competitive seller maximizes profit by producing at the point where:

A)           total revenue is at a maximum. C)            marginal revenue equals marginal cost.

B)            average costs are at a minimum.               D)           price equals marginal revenue.

Ans:

31.          In the long-run, the price charged by a monopolistically competitive firm seeking to maximize profit will:

A)           be less than both MC and ATC.  C)            exceed ATC, but equal MC.

B)            exceed MC, but equal ATC.         D)           exceed both MC and ATC.

Ans:

32.          Which of the following is correct for a monopolistically competitive firm in long-run equilibrium?

                A)  MC = ATC    B)  MC exceeds MR    C)  P exceeds minimum ATC    D)  P = MC

Ans:

33.          In the long-run, economic theory predicts that a monopolistically competitive firm will:

A)           earn an economic profit.              C)            realize all economies of scale.

B)            equate price and marginal cost. D)           have excess production capacity.

Ans:

34.          Excess capacity refers to the:

A)           amount by which actual production falls short of the minimum ATC output.

B)            fact that entry barriers artificially reduce the number of firms in an industry.

C)            differential between price and marginal costs which characterizes monopolistically competitive firms.

D)           fact that most monopolistically competitive firms encounter diseconomies of scale.

Ans:

Use the following to answer questions 35-38:

35.          Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. This firm’s profit-maximizing price will be:

                A)  $10.    B)  $13.    C)  $16.    D)  $19.

Ans:

36.          Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. The profit-maximizing output for this firm will be:

                A)  210.    B)  180.    C)  160.    D)  100.

Ans:

37.          Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. This firm will realize an economic:

                A)  loss of $320.    B)  loss of $480.    C)  profit of $280.    D)  profit of $600.    E)  profit of $360.

Ans:

38.          Refer to the above diagram for a monopolistically competitive firm in short-run equilibrium. Assume the firm is part of an increasing-cost industry. In the long run firms will:

A)           leave this industry, causing both demand and the ATC curve to shift upward.

B)            enter this industry, causing demand to rise and the ATC curve to shift downward.

C)            enter this industry, causing demand to fall and the ATC curve to shift upward.

D)           enter this industry, causing both demand and the ATC curve to shift upward.

Ans:

39.          In the short run a monopolistically competitive firm’s economic profit:

A)           will be maximized where price equals average total cost.

B)            may be positive, zero, or negative.

C)            are always positive.

D)           will always be zero.

Ans:

Use the following to answer questions 40-42:

40.          In short-run equilibrium, the monopolistically competitive firm shown above will set its price:

                A)  below ATC.    B)  above ATC.    C)  below MC.    D)  below MR.

Ans:

41.          The monopolistically competitive firm shown in the above figure:

A)           is in long-run equilibrium.

B)            might realize an economic profit or a loss, depending on its choice of output level.

C)            cannot operate profitably, at least in the short run.

D)           can realize an economic profit.

Ans:

42.          If all monopolistically competitive firms in the industry have profit circumstances similar to the firm shown above:

A)           new firms will enter the industry.             C)            all firms will exit the industry.

B)            some firms will exit the industry.              D)           no firms will exit the industry.

Ans:

Use the following to answer questions 43-45:

43.          In short-run equilibrium, the monopolistically competitive firm shown in the above figure will set its price:

                A)  below ATC.    B)  above ATC.    C)  below MC.    D)  below MR.

Ans:

44.          The monopolistically competitive firm shown in the above figure:

A)           will realize allocative efficiency at its profit-maximizing output.

B)            cannot operate at a loss.

C)            is in long-run equilibrium.

D)           is realizing an economic profit.

Ans:

45.          If all monopolistically competitive firms in the industry have profit circumstances similar to the firm shown above:

A)           new firms will enter the industry.             C)            some firms will exit the industry.

B)            all firms will exit the industry.     D)           no firms will enter the industry.

Ans:

Use the following to answer questions 46-48:

46.          Refer to the above diagrams, which pertain to monopolistically competitive firms. Short-run equilibrium entailing economic loss is shown by:

                A)  diagram a only.    B)  diagram b only.    C)  diagram c only.    D)  both diagrams a and c.

Ans:

47.   &nbs