CH 13 FINAL

Question 1

Perfect competition and monopolistic competition are similar in that both market structures
include
A) price-taking behavior by firms.
B) a homogeneous product.
C) no barriers to entry.
D) very few firms.

Answer 1

C) no barriers to entry.

Question 2

A competitive market structure differs from the monopoly, oligopoly, and monopolistic
competition structures in the
A) producers’ ability to set price.
B) profit maximization condition.
C) amount of long-run profit.
D) entry conditions.

Answer 2

A) producers’ ability to set price.

Question 3

Monopolistic competition and monopoly have all of the following in common EXCEPT
A) P > MC.
B) firms are price setters.
C) barriers to entry.
D) MR = MC.

Answer 3

C) barriers to entry.

Question 4

What is the aspect of imperfect competition that is most distinct from perfect competition?
A) free entry/exit
B) perfect information
C) differentiated products
D) zero profits

Answer 4

C) differentiated products

Question 5

In which of the following market structures are firms’ strategies dependent on individual
rival firms’ behaviors?
A) oligopoly
B) monopolistic competition
C) perfect competition
D) Both A and B.

Answer 5

D) Both A and B.

Question 6

If a cartel is unable to monitor its members and punish those firms that violate the agreement,
then
A) the member firms will each act as price setters.
B) the cartel will prosper in the long run.
C) the market will become a monopoly.
D) the cartel will fail.

Answer 6

D) the cartel will fail.

Question 7

A typical firm in a cartel will hold which of the following attitudes?
A) If everyone cheats, I’m better off, and so is everyone in the cartel.
B) If I alone cheat, I’m better off; if everyone cheats, I’m worse off.
C) I can never do better for myself than following agreed-upon cartel rules.
D) If I suspect others are planning to cheat, I’ll do best for myself by deciding not to cheat.

Answer 7

B) If I alone cheat, I’m better off; if everyone cheats, I’m worse off.

Question 8

There are only two firms in an industry with demand curves q1 = 30 - P and q2 = 30 - P.
Both have no fixed costs and each has a marginal cost of 10 per unit produced. If they behave as
profit-maximizing price takers, each produces 10 units and sells them at a price of 10 so that
each firm makes zero economic profits. If they form a cartel, their inverse demand curve is
A) Q = 30 - P.
B) Q = 60 - 2P.
C) P = 60 - 2Q.
D) P = 30 - Q/2

Answer 8

D) P = 30 - Q/2

Question 9

The Cournot Model of Oligopoly assumes that
A) firms decide what quantity to produce.
B) firms make their decisions simultaneously.
C) firms do not cooperate.
D) All of the above.

Answer 9

D) All of the above.

Question 10

Suppose two Cournot duopolist firms operate at zero marginal cost. The market demand is
p = a - bQ. Each firm will produce
A) a/b.
B) a/2b.
C) a/3b.
D) a/4b.

Answer 10

C) a/3b.

Question 11

In the Cournot model, a firm maximizes profit by selecting
A) its output, assuming that other firms keep their output constant.
B) its price, assuming that other firms keep their price constant.
C) its output, assuming that other firms will retaliate.
D) its price, assuming that other firms will retaliate.

Answer 11

A) its output, assuming that other firms keep their output constant.

Question 12

In the Cournot model, the output that a firm chooses to produce increases as
A) the total output of other firms increases.
B) the number of firms in the market increases.
C) the number of firms in the market decreases.
D) its marginal cost increases.

Answer 12

C) the number of firms in the market decreases.

Question 13

Suppose a market with a Cournot structure has five firms and a market price elasticity of
demand equal to -2. What is a Cournot firm’s Lerner Index?
A) .1
B) .2
C) .5
D) 1

Answer 13

A) .1

Question 14

Suppose Cournot duopolists firms (A and B) face the same market demand curve, and
initially have identical costs. Firm A figures out a way of reducing its marginal cost. At the new
Nash-Cournot equilibrium,
A) firm A’s price falls.
B) firm A’s output expands and firm B’s output contracts.
C) firm B’s profits expand.
D) the price charged by both firms increases.

Answer 14

B) firm A’s output expands and firm B’s output contracts.

Question 15

The Stackelberg model is more appropriate than the Cournot model in situations where
A) there are more than two firms.
B) all firms enter the market simultaneously.
C) one firm makes its output decision before the other.
D) firms will be likely to collude.

Answer 15

C) one firm makes its output decision before the other.

Question 16

) Which of the following is a necessary condition for government subsidies to influence a firm
to choose an output level as if it were a Stackelberg leader?
A) The subsidy must be announced before the firms choose output levels.
B) The subsidy must be equal to the firm’s marginal cost.
C) The subsidy must be equal to the firm’s rival’s marginal cost.
D) The firm does not have any fixed costs.

Answer 16

A) The subsidy must be announced before the firms choose output levels.

Question 17

What strategic advantage compared to a Cournot Oligopoly results in the Stackelberg
outcome?
A) the ability to move first
B) the ability to set price
C) the ability to set quantity
D) the ability to make independent decisions by the Stackelberg leader

Answer 17

A) the ability to move first

Question 18

If only two identical firms operate in a market, consumers prefer
A) a Cournot equilibrium.
B) a Stackelberg equilibrium.
C) a collusive equilibrium.
D) any equilibrium since they all result in the same consumer surplus.

Answer 18

B) a Stackelberg equilibrium.

Question 19

The profitability of the second mover in a Stackelberg model is
A) guaranteed to be negative.
B) smaller than that of the first mover.
C) greater than that of the first mover.
D) greater than the Cournot profits.

Answer 19

B) smaller than that of the first mover.

Question 20

Which of the following models results in the highest level of output assuming a fixed number
of firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Cartel

Answer 20

B) Stackelberg

Question 21

Which of the following market models results in the highest level of consumer surplus
assuming a fixed number of firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Cartel

Answer 21

B) Stackelberg

Question 22

As the number of firms increases in a market, the differences between the Cournot,
Stackelberg, and price-taking market structures
A) decrease.
B) increase.
C) remain the same.
D) Cannot be determined.

Answer 22

A) decrease.

Question 23

The Bertrand model is a more plausible model of firm behavior than the Cournot model
A) when firms set the quantity to be sold.
B) when firms sell a differentiated product.
C) because firms that sell a non-differentiated product typically act as price takers.
D) because the Bertrand model predicts that firms will price at marginal cost.

Answer 23

B) when firms sell a differentiated product.

Question 24

The Bertrand model of price setting assumes that a firm chooses its price
A) independently of what price other firms charge.
B) subject to what price rival firms are charging.
C) so that joint profits are maximized.
D) without considering the shape of the demand curve.

Answer 24

B) subject to what price rival firms are charging.

Question 25

One criticism of the Bertrand pricing model is that
A) the model is implausible when there is product differentiation.
B) when there is an oligopoly with no product differentiation, the model’s prediction is
inconsistent with reality.
C) the model’s predicted price is solely a function of demand conditions.
D) the model’s predicted price is dependent on the number of firms.

Answer 25

B) when there is an oligopoly with no product differentiation, the model’s prediction is
inconsistent with reality.

Question 26

In a Bertrand model with identical firms and a non-differentiated product, price will increase
in response to
A) an increase in the number of firms.
B) a decrease in the number of firms.
C) an increase in marginal cost.
D) a decrease in marginal cost.

Answer 26

C) an increase in marginal cost.

Question 27

Product differentiation allows a firm to charge a higher price because the residual demand
curve facing the firm
A) is more elastic than the residual demand curve without product differentiation.
B) is less elastic than the residual demand curve without product differentiation.
C) is horizontal.
D) shifts to the left.

Answer 27

B) is less elastic than the residual demand curve without product differentiation.

Question 28

Two identical firms that share a market and produce a homogeneous good will find which of
the following market outcomes LEAST desirable?
A) Bertrand Oligopoly
B) Cournot Oligopoly
C) Cartel
D) All are equally preferable.

Answer 28

A) Bertrand Oligopoly

Question 29

Monopolistically competitive firms face downward-sloping residual demand curves because
these firms
A) have relatively few rivals (compared to competition).
B) sell differentiated products.
C) A and/or B.
D) None of the above.

Answer 29

C) A and/or B.

Question 30

In the long run, a monopolistically competitive firm
A) earns zero economic profit.
B) produces at minimum average cost.
C) operates at full capacity.
D) All of the above.

Answer 30

A) earns zero economic profit.

Question 31

Monopolistically competitive firms
A) have market power because they can set price above marginal cost.
B) have no market power because they earn zero economic profit.
C) have no market power because of free entry.
D) have no market power because price equals marginal cost.

Answer 31

A) have market power because they can set price above marginal cost.

Question 32

) In the short run, a monopolistic competitor
A) produces at minimum efficient scale.
B) produces where P = AC.
C) sets P = MC.
D) sets MR = MC.

Answer 32

D) sets MR = MC.

Question 33

In the long run, a monopolistic competitor
A) sets MR = MC.
B) produces where P = AC.
C) sets P > MC.
D) All of the above.

Answer 33

D) All of the above.

Question 34

) The number of firms in a monopolistically competitive market will be smaller if
A) the market demand curve shifts rightward.
B) the minimum efficient scale is lower.
C) fixed costs are smaller.
D) fixed costs are larger.

Answer 34

D) fixed costs are larger.

Question 35

Suppose a monopolistically competitive industry evolved into a perfectly competitive
industry. Which of the following statements is correct?
A) The industry would produce more output and charge a lower price after the change.
B) The industry would produce at decreasing returns to scale.
C) Elasticity of demand for the firm’s product would remain the same after this change occurred.
D) This industry would produce the same level of output at lower prices in the long run than
before the change.

Answer 35

A) The industry would produce more output and charge a lower price after the change.

Question 36

In monopolistically competitive markets,
A) price is greater than it would be in perfect competition.
B) price is less than it would be in perfect monopoly.
C) quantity is greater than it would be in perfect monopoly.
D) All of the above.

Answer 36

D) All of the above.

Question 37

Product differentiation
A) is possibly welfare enhancing if new products match consumer preferences better.
B) is welfare reducing even if new products match consumer preferences better.
C) is welfare enhancing even if new products do not match consumer preferences better.
D) is welfare reducing even if new products do not match consumer preferences better.

Answer 37

A) is possibly welfare enhancing if new products match consumer

Question 38

In a monopolistically competitive market, the lower the firms’ fixed costs,
A) the higher the deadweight loss.
B) the less firms are active in equilibrium.
C) the more firms are active in the equilibrium.
D) the higher the prices charged.

Answer 38

C) the more firms are active in the equilibrium.

Question 39

In a monopolistically competitive market, each identical firm has a fixed cost of $42, a
marginal cost of $4, and an output level of 7. What is the equilibrium price?
A) p = 10
B) p = 4
C) p = 8
D) p = 11

Answer 39

A) p = 10