Department of Economics
University of Lethbridge
Econ 1010A
Practice Questions – Chapter 12
1. Under oligopoly
A) there are many sellers in the industry.
B) there are only a few sellers in the industry.
C) the demand for each firm's output is perfectly elastic.
D) there are no barriers to entry.
2. For a cartel to be successful in increasing economic profits for its members
A) entry of new firms must be blocked.
B) price must be set equal to marginal cost.
C) individual firms must be encouraged to adjust output so as to maximize their own
profits at the cartel price.
D) price must be set equal to average total cost.
3. There is only one firm in __________________ industry.
A) a monopolistic
B) an oligopolistic
C) a monopolistic competitive
D) a perfectly competitive
4. Under monopolistic competition a firm's ability to influence the price of the product it
sells arises because
A) sellers in the market have large market shares.
B) sellers in the market have small market shares.
C) the product of each seller is differentiated from that of others.
D) each seller sells a standardized product.
5. The price set by a monopolistically competitive firm
A) exceeds the marginal cost of production.
B) produces economic profits in both the long run and the short run.
C) equals the marginal cost of production.
D) is less than the marginal cost of production.
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6. The prisoner's dilemma
A) occurs because firms trust one another but cannot collude.
B) produces optimal outcomes for all participants.
C) explains why two firms might cut prices even though the price cuts reduce the joint
profits of the two firms.
D) exists in monopolistically competitive industries.
Use the following to answer question 7:
Price, cost, revenue
$100
$90
MC
$80
AC
$70
$60
MR
$50
0
D
7000
14000
21000
12000
Dresses per year
7. Refer to the graph above. The firm in this monopolistically competitive industry will
A) earn economic profits of $70,000 per year.
B) earn economic profits of $140,000 per year.
C) incur economic losses of $140,000 per year.
D) incur economic losses of $70,000 per year.
8. Under monopolistic competition, a long-run equilibrium exists when price equals
A) marginal cost.
B) average total cost.
C) minimum average total cost.
D) marginal revenue.
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9. The North American Industry Classification System categorizes firms by
A) market structure, ranking them from perfectly competitive to monopoly.
B) profits, since profits tend to be higher in more concentrated industries.
C) type of economic activity and groups firms with like production processes.
D) market share and groups firms with like market power.
10. The prisoner's dilemma is a well-known game in which
A) there are no gains from cooperative action.
B) there are gains from cooperative action.
C) there are no individual gains from independent action.
D) individuals always act in their best joint interest.
Price
Use the following to answer question 11:
$1.40
MC
ATC
$1.00
$0.95
$0.85
$0.60
MR
0
300 500
D
900 1000
Quantity
11. Refer to the graph above. The short-run equilibrium output level for the
monopolistically competitive firm represented in the graph is
A) 300.
B) 500.
C) 900.
D) 1,000.
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12. The market has the following characteristics: There is strategic pricing, output is
somewhat restricted, there is interdependent decision-making, and some long-run
economic profits are possible. This market is
A) a monopoly.
B) an oligopoly.
C) monopolistically competitive.
D) perfectly competitive.
Price
Use the following to answer question 13:
P1
P2
P4
D1
D2
Q1 Q2 Q3
Q4
Q5
Quantity
13. Refer to the graph above. If a firm in a duopoly believes that if it raises price from P2 to
P1, its rival will not go along, then
A) the demand curve used by the firm for decision-making is highly inelastic.
B) it probably won't raise price, since doing so would cause sales to drop from Q3 to
Q1.
C) it probably will raise price, since lower output means lower costs and greater profit.
D) D2 is the relevant demand curve.
14. The central characteristic of oligopolistic industries is
A) interdependence of pricing decisions.
B) flexible prices.
C) price competition.
D) few or no economies of scale.
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15. Under monopolistic competition, there
A) are few barriers to entry.
B) are only a small number of sellers in the market.
C) are significant barriers to entry.
D) are only a few buyers in the market.
16. When a monopolistically competitive industry is in long-run equilibrium
A) firms earn economic profits.
B) firms earn zero economic profits.
C) price equals minimum average total cost.
D) price equals marginal cost.
17. In monopolistic competition
A) there are only a few sellers.
B) there is only one seller.
C) there are many sellers.
D) there is only one buyer.
18. From society's perspective, a possible benefit of a cartel is that it could
A) provide incentives for firms to cooperate in setting price and output.
B) not earn economic profits.
C) minimize average total costs.
D) provide incentives for the introduction of superior products by competitors.
19. If the market for tires is monopolistically competitive, then
A) the demand curve for each seller's product is perfectly elastic.
B) no seller can control the price of the product.
C) sellers can influence the market price of the product.
D) no firm has any monopoly power.
20. Price exceeds marginal cost for a monopolistically competitive firm in long-run
equilibrium because
A) economic profits are positive.
B) economic profits are negative.
C) demand is perfectly elastic.
D) demand is not perfectly elastic.
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21. A four-firm concentration ratio of 68 indicates that
A) the largest four firms in the industry produce 32 percent of the industry's output.
B) the smallest four firms in the industry produce 32 percent of the industry's output.
C) the smallest four firms in the industry produce 68 percent of the industry's output.
D) the largest four firms in the industry produce 68 percent of the industry's output.
22. According to contestable market theory
A) barriers to entry are much more important than market structure in determining the
degree of price competition in an industry.
B) barriers to entry are much less important than market structure in determining the
degree of price competition in an industry.
C) barriers to entry and market structure are both important in determining the degree
of price competition in an industry.
D) neither barriers to entry nor market structure affect the degree of price competition
in an industry.
Use the following to answer question 23:
Payoff Matrix
(Profits)
A Does not cheat
A Cheats
A $400,000
A $150,000
B Does not cheat
B -$150,000
B $150,000
A -$150,000
A0
B Cheats
B $400,000
B0
23. Refer to the figure above of a payoff matrix for a duopoly.
A) A's dominant strategy is to cheat.
B) A's dominant strategy is to not cheat.
C) A's has no dominant strategy but has a Nash strategy to not cheat.
D) A's has no dominant strategy but has a Nash strategy to cheat.
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24. If the fast-food industry is monopolistically competitive, then a profit-maximizing firm
in this industry sets price
A) equal to average variable cost.
B) so as to maximize the difference between marginal revenue and marginal cost.
C) so that marginal revenue and marginal cost are equal.
D) equal to marginal cost.
25. In which of the following models of firm behavior do firms make strategic pricing
decisions and also charge a perfectly competitive price?
A) Cartel model of oligopoly.
B) Contestable market model of oligopoly.
C) Perfectly competitive model.
D) Monopoly model.
26. The market structure in which firms are able to restrict output somewhat through
product differentiation is
A) monopoly.
B) oligopoly.
C) monopolistic competition.
D) perfect competition.
27. The contestable market model of oligopoly bases pricing and output decisions on
A) entry and exit conditions.
B) market structure.
C) the degree of product differentiation.
D) market share.
28. Which of the following characterizes the two extremes that an oligopoly model can
take?
A) The price leadership model in which the dominant firm sets the price to maximize
its own profit and the cartel model in which all firms must agree on a price.
B) The implicit collusion model in which firms refrain from competing whenever
possible and the price war model in which prices are driven to the competitive level.
C) The cartel model in which firms set a monopoly price and the contestable market
model in which firms set a competitive price.
D) The cartel model in which firms set a competitive price and the contestable market
model in which firms set a monopoly price.
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29. A monopolistic competitive industry has
A) a few firms producing identical products.
B) many firms producing differentiated products.
C) many firms producing identical products.
D) a few firms producing differentiated products.
30. The excess capacity theorem
A) says long-run output of a monopolistically competitive firm is greater than output at
minimum average cost.
B) says long-run output of a monopolistically competitive firm is less than output at
minimum average cost.
C) only applies to firms that face a horizontal demand curve.
D) says that firms will produce too much output.
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