MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) In a monopolistically competitive industry, the freedom of entry and exit leads to 1) A) zero profits in long-run equilibrium. B) deficient capacity in the industry. C) a negatively sloped demand curve for the industry. D) brand proliferation. E) strategic behaviour with regard to other firms in the industry. Answer: A
Explanation: A) B) C) D) E) 2)
When the firms in an oligopoly are in a cooperative equilibrium and are maximizing their joint
profits, which of the following statements is true? 2) A) The firms in the industry will jointly be earning monopoly profits. B) An individual firm could increase profits by cheating. C) P > MC for each individual firm. D) MR > MC for each individual firm. E) All of the above statements are true. Answer: E
Explanation: A) B) C) D) E) 3) Which of the following are characteristic of a monopolistically competitive market? 3) A) Firms engage in strategic behaviour. B) Each firm faces a horizontal demand curve. C) All firms are price takers. D) Economic profits are often positive in the long run. E) There are many small firms in the industry. Answer: E
Explanation: A) B) C) D) E)
4) A characteristic of a monopolistically competitive market is that 4) A) the firms in the industry engage in strategic, non-price competition. B) each firm’s marginal revenue curve lies above its demand curve. C) each firm faces a downward-sloping demand curve. D) the firms sell an identical product. E) entry into the industry is difficult. Answer: C
Explanation: A) B) C) D) E)
6)
Suppose that a monopolistically competitive firm decides to raise its price. The theory of
monopolistic competition predicts that 6) A) this firm would lose all of its customers. B) this firm would lose some, but not all of its customers. C) increasing the price has no effect on profits. D) a large loss of customers as the demand facing the firm is quite inelastic. E) this firm would increase its profits. Answer: B
Explanation: A) B) C) D) E)
8)
Refer to Figure 11-3. A monopolistically competitive firm is said to be inefficient because in the
long-run equilibrium 8) A) price is greater than MC at Q1.
B) price is greater than LRAC at Q1.
C) LRAC at Q1 is not at its minimum. D) MC is greater than LRAC.
E) MC is greater than price. Answer: C
Explanation: A) B) C) D) E) 9)
The following statements describe a cooperative equilibrium in an oligopoly where the firms are
jointly maximizing profits by restricting output. Which statement is false? 9) A) MR > MC for each individual firm. B) No individual firm will have an incentive to change output. C) An individual firm could increase profits by cheating. D) The firms in the industry will jointly be earning monopoly profits. E) P > MC for each individual firm. Answer: B
Explanation: A) B) C) D) E)
10)
Refer to Figure 11-1. If this firm is maximizing its profits, does the diagram depict a long-run
equilibrium situation? 10) A) Yes, because this firm is producing where MC = MR and is earning economic profits. B) No, because this firm is suffering losses and firms will exit this market. C) Yes, because this firm is producing where MC = MR and is earning zero profits. D) No, because this firm is earning profits which will attract new firms to this market. E) No, because this firm is a natural monopoly. Answer: D
Explanation: A) B) C) D) E)
11)
Which of the following industries in Canada can best be thought of as oligopolies?
1) breweries
2) women’s clothing retailers
3) automobile manufacturers 11) A) 1 only B) 2 only C) 3 only D) 1 and 3 only E) 1, 2, and 3 Answer: D
Explanation: A) B) C) D) E)
12)
Refer to Figure 11-3. If an increase in industry demand led to an outward shift in each firm’s
demand curve, and no change to the firm’s costs, the typical firm would 12) A) be making profits and new firms would enter the industry in the long run. B) be making losses and some firms would exit the industry in the long run. C) decrease costs in order to break even at P1 and Q1 in the long run. D) increase costs in order to break even at P1 and Q1 in the long run. E) would expand its output in the long run. Answer: A
Explanation: A) B) C) D) E)
13)
Consider an example of the prisoner’s dilemma where 2 firms are making sealed bids on a contract
and each firm is allowed to bid either $100 or $180. If both firms bid the same price, the job is
shared equally and each firm earns half the value of its bid. Otherwise the lowest bidder wins the
contract and receives the full value of its bid (and the other bidder earns zero). The
non-cooperative outcome in this situation is 13) A) both firms bid $50. B) both firms bid $100. C) one firm bids $100, the other firm bids $180. D) both firms bid $90. E) both firms bid $180. Answer: B
Explanation: A) B) C) D) E)
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