Chapter 10
Monopolistic Competition and Oligopoly
1. Clothing stores in cities are an illustration of
a. perfect competition.
b. monopoly.
c. monopolistic competition.
d. oligopoly.
ANS
a. Incorrect. This market structure requires so many firms that none has a significant
market share.
b. Incorrect. Only a single firm must have 100 percent of the market.
c. Correct. Clothing stores in cities are an illustration of monopolistic competition.
d. Incorrect. This market structure requires competition among a few firms.
2. Firms in a monopolistically competitive industry produce
a. homogeneous goods and services.
b. differentiated products.
c. competitive goods only.
d. consumption goods only.
ANS
a. Incorrect. This is a characteristic of perfect competition.
b. Correct. Firms in a monopolistically competitive industry produce differentiated
products.
c. Incorrect. This answer is meaningless.
d. Incorrect. This answer is meaningless.
3. Monopolistic competitive firms in the long run earn
a. positive economic profits.
b. zero pure economic profits.
c. negative economic profits.
d. none of the above answers is correct.
ANS
a. Incorrect. This outcome is possible only in the short run.
b. Correct. Monopolistic competitive firms in the long run earn zero pure economic
profits.
c. Incorrect. This outcome is possible only in the short run.
d. Incorrect. Answer b. is correct.
1
4. The theory of monopolistic competition predicts that in long-run equilibrium a
monopolistically competitive firm will
a. produce at the level in which price equals long-run average cost.
b. operate at minimum long-run average cost.
c. overutilize its insufficient capacity.
d. none of the above answers is correct.
ANS
a. Correct. The theory of monopolistic competition predicts that in long-run equilibrium a
monopolistically competitive firm will produce at the level in which price equals longrun average cost.
b. Incorrect. A monopolistic competition firm operates at an output below the minimum
point on LRAC.
c. Incorrect. A monopolistic competitive firm operates at below full capacity.
d. Incorrect. Answer a. is correct.
5. Which of the following statements best describes the price, output, and profit
conditions of monopolistic competition?
a. Price will equal marginal cost at the profit-maximizing level of output; profits will be
positive in the long-run.
b. Price will always equal average variable cost in the short run and either profits or
losses may result in the long run.
c. Marginal revenue will equal marginal cost at the short run, profit-maximizing level of
output; in the long run, economic profit will be zero.
d. Marginal revenue will equal average total cost in the short run; long-run economic
profits will be zero.
ANS
a. Incorrect. Price does not equal MC, and profits are zero in the long run.
b. Incorrect. Price does not necessarily equal AVC in the short run, and profits equal zero
in the long run.
c. Correct. Marginal revenue will equal marginal cost at the short run, profit-maximizing
level of output; in the long run, economic profit will be zero.
d. Incorrect. Marginal revenue does not equal ATC in the short run.
6. Entry of new firms will occur in a monopolistic competitive industry until
a. marginal cost equals zero.
b. marginal revenue equals zero
c. marginal revenue equals marginal cost
d. economic profit equals zero.
e. economic profit is negative
2
ANS
a. Incorrect. Price does not equal MR = MC, and profit is zero in the long run.
b. Incorrect. Price does not necessarily equal AVC in the short run and profit only equals
zero in the long run.
c. Incorrect. The question concerns the entry of firms-not the MR = MC condition.
d. Correct. In the long run, Entry of new firms will occur in a monopolistic competitive
industry until economic profit equals zero.
Exhibit 10 A monopolistic competitive firm
7. As presented in Exhibit 10, the short-run profit-maximizing output for the
monopolistic competitive firm is
a. zero units per day.
b. 200 units per day.
c. 400 units per day.
d. 600 units per day.
ANS
a. Incorrect. At zero units MR does not equal MC.
b. Incorrect. At 200 units MR does not equal MC.
c. Correct. At 400 units MR = MC.
d. Incorrect. At 600 units MR does not equal MC.
3
8. As presented in Exhibit l0, the short-run profit per unit of output for the monopolistic
competitive firm is
a. zero.
b. $5.
c. $10.
d. $15.
ANS
a. Incorrect. See the calculation in answer b.
b. Correct. At 400 units, the profit per unit is $15 - $10 = $5.
c. Incorrect. See the calculation in answer b.
d. Incorrect. See the calculation in answer b.
9. As represented in Exhibit 10, the maximum long-run economic profit earned by this
monopolistic competitive firm is
a. zero.
b. $200 per day.
c. $1,000 per day.
d. $20,000 per day.
ANS
a. Correct. In the long run, a monopolistic competitive firm earns zero economic profits.
b. Incorrect. In the long run, a monopolistic competitive firm earns zero economic profits.
c. Incorrect. In the long run, a monopolistic competitive firm earns zero economic profits.
d. Incorrect. In the long run, a monopolistic competitive firm earns zero economic profits.
10. An oligopoly is a market structure in which
a. one firm has 100 percent of a market.
b. there are many small firms.
c. there are many firms with no control over price.
d. there are few firms selling either a homogeneous or differentiated product.
ANS
a. Incorrect. This is a monopoly.
b. Incorrect. This is monopolistic competition.
c. Incorrect. This is perfect competition.
d. Correct. An oligopoly is a market structure in which there are few firms selling either a
homogeneous or differentiated product.
11. Mutual interdependence among firms in an oligopoly means that
a. firms never practice price leadership.
b. firms never form a cartel.
c. it is difficult to know how firms will react to decisions of rivals.
d. no formal agreement is possible among firms.
4
ANS
a. Incorrect. Firms in an oligopoly can practice price leadership.
b. Incorrect. Firms in an oligopoly can form a cartel.
c. Correct. Mutual interdependence among firms in an oligopoly means that it is
difficulty to know how firms will react to decisions of rivals.
d. Incorrect. If not illegal, as in the United States, firms in an oligopoly can have formal
agreements.
12. A common characteristic of oligopolies is
a. interdependence in pricing decisions.
b. independent pricing decisions.
c. low industry concentration.
d. few or no plant-level economies of scale.
ANS
a. Correct. A common characteristic of oligopolies is interdependence in pricing
decisions.
b. Incorrect. In an oligopoly, pricing decisions are interdependent.
c. Incorrect. In an oligopoly, industry concentration is not low because at least one firm
can have a high market share.
d. Incorrect. In an oligopoly firms can experience economies of scale.
13. Which of the following best describes a cartel?
a. A group of monopolistically competitive firms that jointly reduce output and raise
price in imitation of a monopolist. When entry is very costly, these high prices can
persist.
b. A group of cooperating oligopolists that jointly reduce output and raise price in
imitation of a monopolist. When entry is very costly, these high prices can persist.
c. A monopolist that reduces output and raises price. When entry is very costly, these
high prices can persist.
d. A group of identical non-cooperative oligopolists that is able to reproduce a monopoly
equilibrium through price rivalry.
ANS
a. Incorrect. Entry is low-cost under monopolistic competition.
b. Correct. This is an accurate description of a cartel.
c. Incorrect. This is a monopoly, not a cartel.
d. A group of identical non-cooperative oligopolists that is able to reproduce amonopoly
equilibrium through price rivalry.
5
14. Which of the following is true about an oligopoly equilibrium in comparison with
equilibrium under similar circumstances but with perfect competition?
a. Output is larger and price is lower than under perfect competition.
b. Output is larger but price is higher than under perfect competition.
c. Output is smaller and price is higher than under perfect competition.
d. Output is smaller and price is lower than under perfect competition.
ANS
a. Incorrect. The opposite is true.
b. Incorrect. Output will be lower.
c. Correct. This is an accurate description of oligopoly equilibrium.
d. Incorrect. Price will be higher.
15. Which of the following market structures describes an industry in which a group of
firms formally agree to control prices and output of a product?
a. Perfect competition.
b. Monopoly.
c. Oligopoly.
d. Cartel.
e. Monopolistic competition.
ANS
a. Incorrect. In perfect competition, there is not control of prices.
b. Incorrect. A monopolist is a single price maker.
c. Incorrect. In an oligopoly, pricing is interdependent.
d. Correct. A cartel is a group of firms that formally agree to control prices and output of
a good.
e. Incorrect. In monopolistic competition, firms are price competitive.
Exhibit 11 Two-Firm Payoff Matrix
6
16. Assume costs are identical for the two firms in Exhibit 11. If both firms were allowed
to form a cartel and agree on their prices, equilibrium would be established by
a. Widget Co. charging the low price and Ajax Co. charging the high price.
b. Widget Co. charging the high price and Ajax Co. charging the low price.
c. Widget Co. charging the low price and Ajax Co. charging the low price.
d. Widget Co. charging the high price and Ajax Co. charging the high price.
ANS
a. Incorrect. In this case, profit is not maximum for both firms.
b. Incorrect. In this case, profit is not maximum for both firms.
c. Incorrect. In this case, profit is not maximum for both firms.
d. Correct. In this case, profit is not maximum for both firms.
17. Suppose costs are identical for the two firms in Exhibit 11. If both firms assume the
other will compete and charge a lower price, equilibrium will be established by
a. Widget Co. charging the low price and Ajax Co. charging the low price.
b. Widget Co. charging the high price and Ajax Co. charging the low price.
c. Widget Co. charging the low price and Ajax Co. charging the high price.
d. Widget Co. charging the high price and Ajax Co. charging the high price.
ANS
a. Correct. The fear of competition forces both firms to change the low price.
b. Incorrect. The fear of competition forces both firms to change the low price.
c. Incorrect. The fear of competition forces both firms to change the low price.
d. Incorrect. The fear of competition forces both firms to change the low price.
18. Suppose costs are identical for the two firms in Exhibit 11. Each firm assumes
without formal agreement that if it sets the high price its rival will not charge a lower
price. Under these “tit-for-tat” conditions, equilibrium will be established by
a. Widget Co. charging the high price and Ajax Co. charging the low price.
b. Widget Co. charging the high price and Ajax Co. charging the high price.
c. Widget Co. charging the low price and Ajax Co. charging the low price.
d. Widget Co. charging the low price and Ajax Co. charging the high price.
ANS
a. Incorrect. Without the fear of competition, both firms charge the high price.
b. Correct. Without the fear of competition, both firms charge the high price.
c. Incorrect. Without the fear of competition, both firms charge the high price.
d. Incorrect. Without the fear of competition, both firms charge the high price.
19. As a result of a kinked demand curve, the price
a. fluctuates.
b. falls below the kink.
c. settles at the kink.
d. rises above the kink.
7
ANS
a. Incorrect. As a result of a kinked demand curve, the price settles at the kink.
b. Incorrect. As a result of a kinked demand curve, the price settles at the kink.
c. Correct. As a result of a kinked demand curve, the price settles at the kink.
d. Incorrect. As a result of a kinked demand curve, the price settles at the kink.
20. The “kinked” oligopoly demand curve is a result of the assumption by an
oligopolist that
a. price increases will be matched, but price reductions will not.
b. price increases will not be matched, but prices reductions will.
c. both price increases and price reductions will be matched.
d. neither price increases, no price reductions will be matched.
ANS
a. Incorrect. The “kinked” oligopoly demand curve is a result of the assumption by an
oligpolist that price increases will not be matched, but price reductions will.
b. Correct. The “kinked” oligopoly demand curve is a result of the assumption by an
oligopolist that price increases will not be matched, but price reductions will.
c. Incorrect. The “kinked” oligopoly demand curve is a result of the assumption by an
oligopolist that price increases will not be matched, but price reductions will.
d. Incorrect. The “kinked” oligopoly demand curve is a result of the assumption by an
oligopolist that price increases will not be matched, but price reductions will.
8