1. 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.
2. 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.
3. 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 which 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 which are not reflected in price reductions.
4. Economic analysis of a monopolistically competitive industry is more complicated than that of pure competition because:
A) the number of firms in the industry is larger.
B) monopolistically competitive firms cannot realize an economic profit in the long run.
C) of product differentiation and consequent product promotion activities.
D) monopolistically competitive producers are mutually interdependent in their pricing strategies.
5. 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.
6. 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.
7. 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.
8. In long-run equilibrium a monopolistically competitive firm’s price will:
A) be less than both MC and ATC.
B) exceed ATC, but equal MC.
C) exceed MC, but equal ATC.
D) exceed both MC and ATC.
9. The term “oligopoly” indicates:
A) a one-firm industry.
B) many producers of a differentiated product.
C) a few firms producing either a differentiated or a homogeneous product.
D) an industry whose four-firm concentration ratio is low.
10. Barriers to entry in oligopolistic industries may consist of:
A) economies of scale.
B) patents.
C) ownership of essential resources.
D) all of the above.
11. Oligopolistic industries:
A) are characterized by a relatively large number of small sellers.
B) may produce either standardized or differentiated products.
C) always produce differentiated products.
D) always produce standardized products.
12. Prices are likely to be least flexible:
A) in oligopoly.
B) in monopolistic competition.
C) where product demand is inelastic.
D) in pure competition.
13. Concentration ratios:
A) may overstate the degree of competition because they ignore imported products.
B) may overstate the degree of competition because interindustry competition is ignored.
C) may understate the degree of competition because they ignore imported products.
D) provide detailed insights as to the price and output behavior of firms which comprise the various industries.
14. Assume six firms comprising an industry have market shares of 30, 30, 10, 10, 10, and 10 percent. The Herfindahl Index for this industry:
A) is 2,525.
B) is 1,600.
C) is 2,200.
D) is 80.
E) cannot be determined from the information given.
15. Game theory can be used to demonstrate:
A) that oligopolistic firms are mutually interdependent.
B) that independent pricing will lead to low-price policies.
C) that oligopolists can increase their profits through collusion.
D) all of the above.
16. The kinked-demand curve of an oligopolist is based on the assumption that:
A) competitors will follow a price cut but ignore a price increase.
B) competitors will match both price cuts and price increases.
C) competitors will ignore a price cut but follow a price increase.
D) there is no product differentiation.
17. The kinked-demand curve model of oligopoly is useful in explaining:
A) the way that collusion works.
B) why oligopolistic prices and outputs are extremely sensitive to changes in marginal cost.
C) why oligopolistic prices might change only infrequently.
D) the process by which oligopolists merge with one another.
18. If competing oligopolists completely ignore oligopolist X’s price changes, then X’s:
A) demand curve will be less elastic than if the other oligopolists matched X’s price changes.
B) demand curve will be more elastic than if the other oligopolists matched X’s price changes.
C) marginal revenue curve will have a vertical gap.
D) demand and marginal revenue curves will coincide.
19. The kinked-demand curve model of oligopoly:
A) assumes a firm’s rivals will ignore a price cut but match a price increase.
B) embodies the possibility that changes in unit costs will have no effect upon equilibrium price and output.
C) assumes a firm’s rivals will match any price change it may initiate.
D) assumes a firm’s rivals will ignore any price change it may initiate.
20. A kink may exist in an oligopolist’s demand curve because:
A) products are differentiated.
B) an abrupt change in price elasticity occurs.
C) the firm will ignore price cuts by rivals, but will match their price increases.
D) there is a gap in marginal costs.
Answer Key
1. C
2. D
3. C
4. C
5. D
6. C
7. C
8. C
9. C
10. D
11. B
12. A
13. C
14. C
15. D
16. A
17. C
18. B
19. B
20. B