Practice Problems – Chapter 10
1.
Monopolistic competition exists when there is one large firm in an otherwise perfectly
competitive market.
a. True
b. False
ANS: B
2.
All of the following, except one, are characteristics of monopolistic competition. Which is the
exception?
a. There is a large number of sellers.
b. Each seller faces a horizontal demand curve for its product.
c. There are no significant barriers to entry or exit.
d. Sellers produce differentiated products.
e. There is a large number of buyers.
ANS: B
3.
An important difference between a perfectly competitive market and a monopolistically
competitive market is that, in the latter,
a. there are more sellers of the good
b. there are only a few large sellers
c. there are no barriers to entry or exit
d. there is only one seller of the good
e. The product is not standardized
ANS: E
4. The demand curve faced by a monopolistically competitive firm
a. is the same as the market demand curve
b. is less elastic than the one faced by firms in perfect competition
c. is perfectly elastic
d. is perfectly inelastic
e. Has a constant slope
ANS: B
5. Firms in a monopolistically competitive industry maximize profits by
a. equating total revenue and total cost
b. treating price as given and maximizing output
c. minimizing costs
d. producing the level of output at which MR = MC
e. producing the level of output at which TR = TC
ANS: D
6. Consider the monopolistically competitive firm whose demand curve and cost structure are
illustrated in Figure 10-1. Which of the following statements is correct in the short run?
a. The firm will produce 100 units and suffer a loss of $400 per week.
b. The firm will produce 100 units and suffer a loss of $300 per week.
c. The firm will produce 100 units and suffer a loss of $1,000 per week.
d. The firm will produce 100 units and suffer a loss of $100 per week.
e. The firm will produce zero units and suffer a loss of $300 per week.
ANS: E
7. Figure 10-2 illustrates a monopolistically competitive firm. In order to maximize profit, or
minimize loss, the firm will
a. close down
b. produce approximately 10 units of output and charge approximately $500
c. produce approximately 7.5 units of output and charge nearly $600
d. produce approximately 12.5 units of output and charge approximately $425
e. produce 5 units of output and charge $650
ANS: B
8. The maximum total economic profit, or minimum economic loss, for the monopolistically
competitive firm in Figure 10-2 is
a. Zero
b. a profit of $575.00
c. a profit of $1,562.50
d. a profit of $2,000.00
e. a loss of $375.00
ANS: D
9. The firm in Figure 10-2 is monopolistically competitive. The diagram illustrates a
a. shut-down case
b. long-run economic loss
c. short-run economic loss
d. long-run economic profit
e. short-run economic profit
ANS: E
10.
At the profit-maximizing, or loss-minimizing, output level, the firm in Figure 10-2 has
total cost approximately equal to
a. $2,000
b. $3,000
c. $3,600
d. $800
e. $1,625
ANS: B
11. Assume the firm in Figure 10-2 is currently producing 13 units of output and charging $380 each.
The firm
a. will increase its profit if it raises its price and reduces its production level
b. will increase its profit if it lowers its price and expands its production level
c. cannot increase economic profit by changing its price and output since it is already
maximizing its profit
d. will increase its profit if it raises its price and expands its production level
e. will increase its profit by lowering its price and reducing its production level
ANS: A
12. The total fixed cost in Figure 10-2 is
a. increasing as more is produced
b. decreasing as more is produced
c. larger than variable costs
d. less than $1,000
e. more than $1,000
ANS: D
13. If the firms in a monopolistically competitive market are earning short-run economic profits, then
a. each existing firm will increase output in the long run as its marginal revenue curve shifts
rightward
b. each firm will experience an increase in the demand for its output in the long run
c. each firm's profit will drop to normal in the long run as its demand curve shifts leftward
due to entry of new firms
d. barriers to entry will enable them to earn economic profits in the long run
e. decreased demand for a key input will reduce that input's price in the long run and lower
each firm's average total cost curve
ANS: C
14.
In the long run, entry ensures that the typical monopolistically competitive firm will
a. produce at minimum efficient scale
b. earn an economic profit
c. earn a normal economic profit
d. price its output at marginal cost
e. standardize its product
ANS: C
15. Camille's Chicken operates in a monopolistically competitive market. If Camille implements a
new free delivery service for customers,
a. this is an example of advertising
b. this is a form of nonprice competition
c. total revenue will increase
d. total cost will decrease
e. her firm will be acting as if it were perfectly competitive market
ANS: B
16. A market in which a small number of strategically interdependent firms produce the dominant
share of output is called
a. perfect competition
b. a monopoly
c. monopolistic competition
d. regulated
e. an oligopoly
ANS: E
17.
If consumers are loyal to the products of an existing firm, this loyalty may
a. reduce the incentives for the firm to invest
b. result in more responsive management and better quality products
c. reduce the demand for imported goods
d. serve as a barrier to new entry into the market
e. force the firm to produce at higher costs
ANS: D
18. In a game, a dominant strategy is one that
a. makes every player better off
b. makes at least one player better off without hurting the competitiveness of any other
player
c. increases the total payoff for oneplayer
d. is best for a player, regardless of what strategy other players follow
e. leads to quicker convergence to market equilibrium
ANS: D
19. We can predict the outcome of a two-player game as long as
a. each player follows a strategy that negates the other player's strategy
b. at least one player has a bilateral strategy
c. neither player has a subsistence strategy
d. neither player has a dominant strategy
e. at least one of the players has a dominant strategy
ANS: E
20. A Nash equilibrium
a. occurs when quantity demanded equals quantity supplied
b. exists when each player in a game is taking its best action -- given the actions taken by the
other players
c. exists when each player in a game picks the collectively optimal strategy
d. is a kind of equilibrium that exists only in an oligopoly
e. is a kind of equilibrium that exists only in a duopoly
ANS: B
21. When oligopolists make joint decisions concerning their prices and output levels, they are
a. a natural oligopoly
b. colluding
c. a duopoly
d. a homogeneous oligopoly
e. practicing bilateralism
ANS: B
22. A famous cartel that dramatically increased the price of oil in the mid-1970s was
a. OTEC
b. IMF
c. OECD
d. OPEC
e. LDC
ANS: D
DIF: 2
TOP: Cooperative Behavior in Oligopoly
23. Regardless of whether advertising is effective or not, it results in an increase in both fixed and
total costs.
a. True
b. False
ANS: A
24. Which of the following might be an effect of advertising?
a. all of the following
b. increased product differentiation
c. increased total costs of production
d. increased average total costs of production
e. increased demand for the product
ANS: A
25. In the long run when monopolistically competitive firms advertise,
a. they will still earn zero economic profit
b. they can earn positive economic profit by increasing market share
c. the market price must fall
d. the market price must rise
e. there will be fewer units sold than in the short run
ANS: A
26. If market structures are ranked from the one in which firm(s) face the flattest demand curve to the
one where they face the steepest, the correct order is
a. monopoly, monopolistic competition, perfect competition
b. monopolistic competition, perfect competition, monopoly
c. monopolistic competition, monopoly, perfect competition
d. perfect competition, monopoly, monopolistic competition
e. perfect competition, monopolistic competition, monopoly
ANS: E
27. Figure 10-13 shows the payoff matrix for the only two auto dealerships in a community, Jim's
Autos and Tim's Autos. The matrix shows the profits that each firm would earn from choosing
either a low price or a high price. In this example,
a. both firms would be best off if they charged a low price
b. there is no equilibrium to the market
c. both firms would be best off if they charged a high price
d. both firms will go out of business in the long run
e. the market is more efficient than a perfectly competitive market
ANS: C
28. Figure 10-13 shows the payoff matrix for two large auto dealerships, Jim's Autos and Tim's
Autos. These intense rivals are the largest automobile dealers in the market by far. The matrix
shows the profits that each firm would earn from choosing either a low price or a high price. Jim's
dominant strategy is to
a. always charge a low price
b. always charge a high price
c. charge a high price if Tim charges a low price
d. charge a low price only when Tim charges a low price
e. follow the price leadership of Tim's Autos
ANS: A
29. Figure 10-13 shows the payoff matrix for two large auto dealerships, Jim's Autos and Tim's
Autos. The matrix shows the profits that each firm would earn from choosing either a low price or
a high price. The equilibrium level of profit for Jim's Autos would be
a. $250,000
b. $100,000
c. $200,000
d. -$50,000
e. $150,000
ANS: B