Ydydyudd

1. 1
Multiple Choice Tutorial
Chapter 10
Monopolistic Competition
and Oligopoly

2. 2
1. The two most extreme market structures in
terms of performance and number of firms are
a. perfect competition and monopolistic
competition
b. monopolistic competition and pure monopoly
c. monopolistic competition and oligopoly
d. perfect competition and pure monopoly
D. Perfect competition is a market structure in
which there are a large number of informed
buyers and sellers of a homogeneous product,
with no obstacles to entry or exit of firms in the
long run. Monopoly is a market structure in
which there is a sole producer of a product for
which there are no close substitutes.

3. 3
2. The market structure of monopolistic
competition is best described as
a. many firms with some control over price,
and some product differentiation
b. many firms with no control over price,
producing identical products with no
differentiation
c. a few firms with some control over price,
producing highly differentiated products
A. Monopolistic competition is a market
structure characterized by a large number of
firms selling products that are close
substitutes yet different enough that each
firm’s demand curve slopes downward.

4. 4
3. Firms in monopolistic competition and
perfect competition typically
a. are price takers
b. produce identical products
c. earn zero economic profit in the long run
d. face a downward-sloping demand curve
C. Economic profit is a firm’s total revenue
minus its explicit and implicit costs; it is the
minimum amount of profit that will keep a
business owner operating a business. Zero
economic is earned in the long run because of
the characteristic of easy entry and easy exit.
If economic profits are made, more firms will
enter the market; if losses are being made,
some firms will leave the market.

5. 5
4. Monopolistic competition is similar to
a. perfect competition, in that firms face
downward-sloping demand curves and earn
zero long-run economic profit
b. pure monopoly because it can earn
economic profits both in the short run and
in the long run
c. pure monopoly, in that firms face
downward-sloping demand curves, and
similar to perfect competition, in that long-
run economic profit is zero
C. A firm that is a part of a monopolistic
competitive industry faces a downward
sloping demand curve because it can
differentiate itself from its competitors. It
makes zero economic profit over the long run
because of easy entry and exit.

6. 6
5. In the market structure of monopolistic
competition, new firms
a. have no incentive to enter the industry,
even if an economic profit is present
b. may freely enter and leave the industry
c. entering the industry tends to shift the
demand curve of the existing firms in the
industry outward
d. cannot profitably enter the industry
B. Entry and exit from the market is not as
easy as in perfect competition, but is much
easier than monopoly and oligopoly. It takes
very little resources to enter into a
monopolistic competitive industry and exiting
is easy because of low fixed costs.

7. 7
6. When firms in an industry produce
differentiated products
a. long-run economic profit will always be
zero
b. short-run economic profit will always be
positive
c. the demand curves facing firms will always
be perfectly elastic
d. the demand curves facing firms will always
be downward-sloping
D. The demand curves are downward-sloping
because firms may be able to charge a higher
price than competitors for a similar product.
The higher prices are possible because of some
advantage the firm has over competitors.

8. 8
7. Firms in a monopolistically competitive
industry act
a. independently of each other
b. interdependently
c. independently in some conditions and
interdependently in other conditions
d. the same as perfect competitors
C. The less competition there is in a market
(the market is a local one, for example, the
neighborhood convenience store) the more
independent the business can be. The more
competition in the market, the more the firm
is dependent on what its competitors do.

9. 9
8. Monopolistic competitors are known as
a. price takers
b. price searchers
c. price maximizers
d. price ignorers
B. Any firm that faces a downward sloping
demand curve is a price searcher. The lower
the price the firm charges the greater the
quantity demanded, and vice versa.

10. 10
9. In economics, products are considered
“differentiated” only if
a. they are physically or chemically different
b. sellers decide that they are different
c. buyers think that they are different
d. the government determines that they are
different
C. Differentiation can take many forms, for
example, location, name recognition, quality (
either perceived or real), packaging, service,
and credit policies to name a few. Sometimes
there is very little difference between
competitors, but if consumers think there is a
difference they will act accordingly.

11. 11
10. Compared to regular grocery stores,
convenience stores tend to have
a. higher prices and more limited selection
b. higher prices and greater selection
c. lower prices and more limited selection
d. lower prices and greater selection
A. Convenience stores can charge a higher
price than a regular grocery store because it
is offering a greater degree of convenience,
however, its selections are smaller because
the store itself is much smaller than a full
fledged grocery store.

12. 12
11. The market power of a monopolistically
competitive firm is
a. zero
b. limited
c. extremely strong
d. absolute
B. Firms that a part of a monopolistic
competitive industry have very little market
power because of the characteristics of easy
entry and exit, and the fact that there are
limitations to how much a firm can
differentiate itself from its competitors.

13. 13
12. The demand curve facing a monopolistically
competitive firm is typically GRAPH
a. perfectly elastic
b. more elastic than the demand curves facing
either monopolists or perfect competitors
c. more elastic than the demand curves facing
monopolists, but less elastic than the
demand curves facing perfect competitors
C. The demand curve is more elastic (more
horizontal) than a monopolists because it has
so much less control over its price; it is less
elastic (more vertical) than in perfect
competition because it can differentiate itself
from its competitors.

14. 14
D
MR
ATC
MC
MR = MC
Q
P
AR
AC
Exhibit 23.1
Last slide viewed

15. 15
13. The firm in Exhibit 23-1 is operating
a. in both c and d
b. in the long run
c. when it should close immediately
d. in the short run GRAPH
D. Because this chapter is about monopolistic
competition and oligopoly, we can assume
that the graph is not a monopoly. We also
know that is not an oligopoly because it does
not have a kinked demand curve. Therefore,
we know that Exhibit 23-1 is a short run
situation because a profit is being made. In a
monopolistic competitive industry economic
profit is zero in the long run.

16. 16
14. Assume the firm in Exhibit 23-1 is currently
charging price P and producing at output level
Q. In order to maximize profits (or minimize
losses), the firm should
a. charge more and sell less
b. charge less and sell more
c. charge less and sell less
d. charge more and sell more GRAPH
B. To maximize profit a firm will produce
where MR = MC. Locate where MR = MC
and draw a vertical line so that it touches the
demand curve and the horizontal axis. In any
market, demand determines the price.
Therefore, the price is lower and quantity is
greater at the point where MR = MC.

17. 17
15. By charging price P and selling output Q, the
firm in Exhibit 23-1 GRAPH
a. breaks even
b. has an economic profit which would be
greater if it adjusted its price and output
c. has the greatest economic profit possible
d. has an economic loss which would be
smaller if it adjusted its price and output
B. We know that it has an economic profit
because average revenue, AR, is greater than
average cost, AC, at price P and quantity Q.

18. 18
D
MR
ATC
MC
MR = MC
100
$7
AR
AC
Exhibit 23.2
Last slide viewed

19. 19
16. At 100 units of output the firm in
Exhibit 23-2 would have GRAPH
a. total revenue which exceeds $700
b. total costs which exceed $700
c. total revenue which is less than $700
d. total revenue equal to $700
D. The price for each unit is $7 and the
quantity it is selling is 100, so 7 times 100
equals $700.

20. 20
17. The firm in Exhibit 23-2 is operating GRAPH
a. in both c and d
b. in the long run
c. when it should close immediately
d. in the short run
D. It is the short run because a profit (economic
profit) is being made. In the long-run, zero
economic profit (normal profit) is made. We
know this because the graph does not
represent a monopoly or an oligopoly.

21. 21
18. Assume the firm in Exhibit 23-2 is currently
charging $7 and producing at output level 100.
In order to maximize profit (or minimize
losses), the firm should GRAPH
a. charge more and sell less
b. charge less and sell more
c. charge less and sell less
d. charge more and sell more
A. To maximize profit a firm will produce
where MR = MC. Locate where MR = MC
and draw a vertical line so that it touches the
demand curve and the horizontal axis. At this
point where MR = MC, price is higher and
quantity is lower.

22. 22
19. By charging $7 and selling 100, the firm in
Exhibit 23-2 GRAPH
a. breaks even
b. has an economic profit which would be
greater if it adjusted its price and output
c. has the greatest economic profit possible
d. has an economic loss which would be
smaller if it adjusted its price and output
B. We know an economic profit is being made
because at the price of $7 and quantity 100
average revenue (AR) is greater than average
cost (AC).

23. 23
D
MR
ATC
MC
MR = MC
85
$33
AR
AC
Exhibit 23.3
Last slide viewed
$23

24. 24
20. The firm in Exhibit 23-3 is operating in
GRAPH
a. both c and d
b. the long run
c. when it should close immediately
d. in the short run
D. We know that exhibit 23-3 is the short run
because an economic profit (profit) is being
made. In the long run, only a normal profit
(zero economic profit) would be made.

25. 25
21. Assume the firm in Exhibit 23-3 is currently
charging $33 and producing at output level 85.
In order to maximize profits (or minimize
losses), the firm should GRAPH
a. charge more and sell less
b. charge less and sell more
c. charge less and sell less
d. continue to charge $33 and sell 85 units.
D. The firm will continue charging a price of
$33 and produce 85 because this is the point
where MR = MC.

26. 26
22. By charging $33 and selling 85, the firm in
Exhibit 23-3 GRAPH
a. breaks even
b. has an economic profit which would be
greater if it adjusted its price and output
c. has the greatest economic profit possible
d. has an economic loss which is the least that
it could lose
C. Is maximizing profit because it is producing
where MR = MC and its AR is greater then
its ATC on the vertical line where MR = MC.

27. 27
23. At the profit maximizing price and output,
the firm in Exhibit 23-3 has an average profit
of _______ and a total profit of ________.
GRAPH
a. $10 and 850.
b. $20 and 425
c. $40 and 1700
A. AR at the point where MR = MC is $33 and
AC at the point where MR = MC is $23, so
AR - AC = $10, average profit. Total profit is
price times quantity, $10 times 85 equals 850.

28. 28
24. When a firm in monopolistic competition
raises its price, it
a. loses all of its customers (sales drop to zero)
b. loses many, but not all of its customers
c. loses very few customers
d. loses no customers at all
B. This is because it faces a downward sloping
demand curve. At higher prices fewer units
will be demanded and at lower prices more
units will be demanded.

29. 29
25. Which of the following is true with regard to
the price elasticity of demand for a
monopolistically competitive firm?
a. the less product differentiation, the more
elastic demand will be
b. the more product differentiation, the more
elastic demand will be
c. the smaller the number of firms in the
industry, the more elastic demand will be
A. A firm that faces a elastic demand curve will
experience a decrease in total revenue when it
raises its price and an increase in total
revenue when it lowers its price. The less
product differentiation, the larger will be the
effect of a change in price.

30. 30
ATC
D
MR
MC
MR = MC
200
$17
AR
AC
AVC
AVC
Exhibit 23.4
Last slide viewed
Loss
$27

31. 31
26. The profit maximizing firm in monopolistic
competition illustrated in Exhibit 23-4 should
GRAPH
a. stay open even though it is making a loss
because its fixed costs are greater than its
losses at the level of output where MR = MC.
b. produce more than 200 units of output and
charge less than $17
c. produce less than 200 units of output and
charge more than $17
A. This firms average fixed cost is the distance
between its AVC curve and its ATC curve.
Average loss is the distance between AR and AC.
Because its average loss is less than its AFC, this
firm should stay open even though it is making a
loss where MR = MC.

32. 32
27. How much loss is the firm making in
Exhibit 23-4 ? GRAPH
a. $500
b. $1,000
c. $2,000
d. $4,000
C. The firm is making a loss of $2,000
because its AR at the level of output where
MR = MC is $27 and its AC is $17.
Therefore, its average loss is $10 (27 - 17)
and $10 times 200 is $2,000.

33. 33
MR = MC ATC
D
MR
MC
100
50 AR
AC
AVC
Loss AVC
Last slide viewed
Exhibit 23.5
55
75

34. 34
28. The firm in Exhibit 23-5 should GRAPH
a. stay open even though it is making a loss
because its average fixed cost is less then its
average loss.
b. shut down because its losses are greater
than its fixed costs.
c. one cannot tell from the graph what the
firm should do.
B. The distance between its ATC curve and its AVC
curve is the firm’s AFC. The distance between its
AR curve and its ATC curve is the firm’s average
profit or loss, in this case we know it is average
loss because its AR is less then its AC at the level
of output where MR = MC.

35. 35
29. In Exhibit 23-5 the firm’s fixed cost is
________ and its loss is _________?
GRAPH
a. $2,500 and $2,000.
b. $2,500 and $1,000.
c. $2,000 and $2,000.
d. $2,000 and $2,500.
D. Its fixed cost is $2,000 because that is the
distance between its ATC curve and its AVC
curve at the level of output where MR = MC.
$2,500 is the firms loss because that is the
distance between its AR curve and its ATC
curve at the level of output where MR = MC.

36. 36
30. Which of the following could make the firm
in Exhibit 23-5 a profitable business?
GRAPH
a. its demand curve could increase to the
extent that the firm’s AR would be greater
than its ATC at the level of output where
MR = MC.
b. its ATC curve could fall to the extent that
the firm’s AR would be greater than its ATC
at the level of output where MR = MC.
c. both b and c are correct answers.
C. As long as AR is greater than ATC at the
level of output where MR = MC a firm is
making a profit.

37. 37
31. Describe the relationship between market
price (P), average revenue (AR), and marginal
revenue (MR) for a firm in monopolistic
competition.
a. P = AR = MR
b. P > AR = MR
c. P = AR > MR
C. Price is equal to AR because once price is
determined all units are sold for the same
price, therefore, TR / Q will always equal the
price. AR is greater than MR, beyond the
first unit, because in order to sell additional
units the firm has to lower the price, and
once the price is lowered the same price
applies to all units at one point in time.

38. 38
32. If marginal revenue is less than price for a
firm, it must be true that the firm
a. is a monopoly
b. is in perfect competition
c. faces a downward-sloping demand curve
C. If a firm can differentiate itself from its
competitors, it has some control over its
prices, and therefore, at higher prices the
quantity demanded decreases and at lower
prices the quantity demanded increases.
Because demand determines price, in order
for a firm to sell more units it has to lower its
price. Any price cut has to apply to all
identical units at one point in time, therefore,
MR is less than price for all units but the first.

39. 39
33. If a firm’s demand curve slopes downward,
the firm’s
a. marginal revenue will rise as price is
reduced
b. marginal revenue will generally be less
than price
c. total revenue will decline continuously as
price is reduced
B. Suppose a firm charges $20 to sell one unit,
so its MR is also $20. To sell two units it
lowers its price to $15; so its MR now is $10
which is less than the price of $20. This is
because its TR at one unit is $20 and its TR at
two units is $30, so the firm added $10 to its
TR by selling two units instead of one.

40. 40
34. A profit-maximizing firm in monopolistic
competition should shut down in the short run
a. if marginal revenue is less than price
b. if price is less than average total cost
c. if price is less than fixed cost
d. if price is less than average variable cost
D. To shut down a firm stops production, it
does not go out of business. If its price is less
than its AVC its losses will exceed its fixed
costs, and therefore, it should shut down
because it will lose less money by shutting
down than it would lose by staying open.

41. 41
35. Firms in any market structure should
maximize economic profit where
a. price equals marginal cost
b. total revenue is maximized
c. average total cost is minimized
d. marginal revenue equals marginal cost
D. If MR > MC a firm should produce that last
unit because it is making money on the last
unit. If MR < MC a firm should not produce
that last unit because it would lose money on
that last unit. If a firm produces at the level of
output where MR = MC no money is made and
no money is lost on that last unit of output.

42. 42
36. Firms in monopolistic competition
a. are guaranteed to earn short-run economic
profits
b. may earn economic profits both in the
short run and in the long run
c. earn zero economic profit in the long run
C. A normal profit is the minimum profit a firm
can make and still have the incentive to stay in
business. An economic profit is the profit made
above a normal profit. In the long run, firms in
monopolistic competition will only make a
normal profit (zero economic profit) because of
the characteristic of easy entry and exit into
and out of the industry.

43. 43
37. A firm can earn a short-run economic profit
if there is a rate of output at which
a. price equals marginal cost
b. marginal revenue equals marginal cost
c. price (or the demand curve) is greater than
average variable cost
d. price (or the demand curve) is greater than
average total cost
D. In the short run, if price is greater than
ATC its TR is greater than TC, and therefore,
it makes a profit (economic profit). But in the
long run, more firms will enter the industry
to partake in the profits and prices will
decline, erasing the economic profits.

44. 44
38. In the long run, economic profit for a firm in
monopolistic competition
a. is zero, due to the lack of barriers to entry
b. is zero, due to product differentiation
c. may be positive, due to strong barriers to
entry
d. may be positive due to product
differentiation
A. The lower the barriers to entry the easier it
is for firms to enter the industry to partake in
the profits, thus an increase in supply (the
supply curve shifts to the right) will lower
prices and eliminate economic profits. The
more a firm can differentiate itself, the higher
will be the barriers to entry.

45. 45
D=AR
MR
LRAC
MC
MR = MC
Q
P
Exhibit 23.6
Last slide viewed
3.25
3.00
2.50
700 1000

46. 46
39. The profit maximizing (or loss minimizing)
output for the firm in Exhibit 23-6 would be
GRAPH
a. zero (that is, a close down case)
b. 700
c. 1000
d. more than 700 and less than 1000
B. 700 units is the number of units where MR
= MC. Look where MR = MC and then drop
down to the horizontal axis to determine the
number of units where MR = MC.

47. 47
40. The profit maximizing (or loss minimizing)
price the firm would charge in Exhibit 23-6
would be GRAPH
a. nonexistent since the firm should close
b. $3.25
c. $3.00
d. $2.50
B. $3.25 is the price where MR = MC. Look
where MR = MC and then move to the left to
the vertical axis.

48. 48
41. At the profit maximizing (or loss minimizing)
output and price, the firm in Exhibit 23-6
would GRAPH
a. be earning zero economic profit (break
even)
b. be earning an economic profit
c. be earning an economic loss
d. have to expand to stay in business in the
long run
A. At a price of $3.25 and a quantity of 700 AR
(average revenue) equals AC (average cost),
so TR (total revenue) equals TC (total cost).
When TR = TC a normal profit (zero
economic profit) is being made.

49. 49
42. At the profit maximizing (or loss minimizing)
price and output, the firm operating in
monopolistic competition in Exhibit 23-6
would have GRAPH
a. total cost equal to $3000
b. to close, so the price isn’t important
c. total costs equal to $1750
d. total revenue equal to $2275
D. TR equals price times quantity. In this case
that is $3.25 times 700 units equals $2275.

50. 50
43. In the long run, a firm in monopolistic
competition will find
a. its supply curve shifting until price equals
average total cost
b. its cost curve shifting until price equals
average total cost
c. its demand curve shifting until marginal
revenue equals marginal cost
A. If firms in the industry are making a profit
(profit always means economic profit) more
firms will enter the industry, thus driving price
down toward where a normal profit is made; if
firms are making a loss, some of the firms will
leave the industry, thus driving prices up
toward where a normal profit is made.

51. 51
44. Firms in a monopolistically competitive
industry are earning short-run economic
profits. In the long run, the supply curve
facing each individual firm can be expected to
a. shift to the left
b. stay the same
c. shift to the right
C. The supply curve will shift to the right as
more firms enter the industry to partake in
the profits being made. This will happen
because of the characteristic of easy entry
and easy exit that is prevalent in a
monopolistic competitive industry.

52. 52
45. In monopolistic competition, if the firm’s
demand curve is tangent to its average total
cost curve,
a. it must be maximizing its economic profit
b. it will earn an economic loss at all rates of
output
c. it will earn an economic profit at all rates
of output
d. there is only one rate of output at which
economic profit is zero-all other rates of
output create economic loss
D. If a firm’s demand curve is tangent to its
ATC curve then MR = MC = AR. When it is
stated that an economic loss is made, this
means that less than a normal profit is made.

53. 53
46. The market for VCR videotape rentals
a. is an example of perfect competition
b. has experienced consistently rising prices
and economic profits since the early 1980’s
c. has experienced stable prices and zero
economic profit since the early 1980’s
d. has experienced declining prices and
decreasing economic profit since the early
1980’s
D. When the supply curve for a product
increases, there will be a decline in the
market price, the decline in prices will, in
turn, lead to lower profits.

54. 54
47. In the market for VCR videotape rentals
during the past 15 years,
a. demand and supply have both remained
stable, resulting in constant prices
b. demand and supply have both decreased,
resulting in stable prices
c. supply has increased faster than demand,
resulting in falling prices
C. Any change in either demand or supply
results in a change in the equilibrium price. If
both curves shift, the impact on the
equilibrium price is determined by how much
one curve shifts in relation to the other.

55. 55
48. When comparing the long-run efficiency of
monopolistic competition with that of perfect
competition (assuming firms in both market
structures have identical cost curves),
a. they are equally efficient since both produce
where demand equals average total cost
b. monopolistic competition is more efficient
because such firms produce more output than
do perfect competitors
c. perfect competition is more efficient because
such firms produce at lower average cost
C. Because firms in monopolistic competition
can differentiate themselves, efficiency is not
the only factor that determines their
profitability.

56. 56
49. Compared to perfect competition, a firm in
monopolistic competition tends to produce
a. more output and charge higher prices
b. more output and charge lower prices
c. less output and charge higher prices
d. less output and charge lower prices
C. This is true because a firm in a monopolistic
competitive industry faces a downward
sloping demand curve; whereas a firm that is
a part of a perfectly competitive industry
faces a horizontal demand curve at the
market price.

57. 57
50. In which market structure is excess capacity
most likely to occur after all long-run
adjustments have been made?
a. perfect competition
b. monopolistic competition
c. oligopoly
d. pure monopoly
D. Excess capacity is defined as the difference
between the minimum average cost and a
firm’s profit-maximizing level of output. In
this case, production is short of the level that
would achieve the lowest average cost. The
more steeply sloped the demand curve, as in a
monopolistic industry, the more this is true.

58. 58
51. Which of the following describes the market
structure of oligopoly?
a. many firms with some control over price,
differentiated products, and strong barriers
to entry
b. many firms with no control over price,
identical products, and very weak barriers
to entry
c. a few firms with some control over price
and strong barriers to entry
d. a few firms with no control over price and
very weak barriers to entry
C. Definition.

59. 59
52. The primary characteristic of oligopoly
which is rare in other market structures is
a. product differentiation
b. the interdependence of firms
c. strong barriers to entry
d. advertising and other nonprice competition
B. Interdependence means that one firm will
not do anything until it considers what its
competitors will do as a result of what it does.
Consider 3 firms, A, B, and C. everything else
being equal, if A raises price, B and C will not
raise theirs; if A lowers its price, B and C will
follow suit and raise theirs also.

60. 60
53. Oligopolists are more sensitive to the pricing
and output policies of their rivals when
a. all firms produce identical products
b. their products are highly differentiated
c. there is freedom of entry and exit
d. there are many firms in the industry
A. Consider 3 firms in an industry A, B, and C,
everything else being equal, the more
identical the products the easier it is for
consumers to buy from firms B and C if A
raises its prices.

61. 61
MC
ATC
AVC
D = AR
MR
90
$5
Exhibit 23.7
Last slide viewed

62. 62
54. The market structure in which the firm
represented in Exhibit 23-7 is most likely to be
operating is GRAPH
a. any of the following is equally likely
compared to the others
b. perfect competition
c. monopolistic competition
d. oligopoly
D. We know this is an oligopolistic industry
because of the kinked demand curve.

63. 63
55. The profit maximizing firm in Exhibit 23-7
would GRAPH
a. produce 90 units of output
b. produce more than 90 units of output
c. produce slightly less than 90 units of output
d. close to minimize loss
A. This is a given because 90 units is where the
demand curve is kinked. It is difficult for an
oligopolists to follow the MR = MC rule of
profit maximization because of the
characteristic of mutual interdependence.
Therefore, price is determined by other
methods. In exhibit 23-7, the price that all
firms are charging is assumed to be $5.

64. 64
56. The profit maximizing firm in Exhibit 23-7
would GRAPH
a. charge $5
b. charge more than $5
c. charge slightly less than $5 (somewhere in
the $4 to $4.50 range)
d. charge substantially less than $5
A. $5 is the price that exists where the demand
curve is kinked.

65. 65
MC ATC
AVC
D = AR
MR
20
$9
Exhibit 23.8
Last slide viewed

66. 66
57. At the profit maximizing (or loss
minimizing) price and output, the firm in
Exhibit 23-8 GRAPH
a. is operating in the long run
b. breaks even
c. has an economic profit
d. has an economic loss
D. This is because AR is less than ATC at 20
units of output. If AR is less than ATC then
TR is less than TC which means that this
firm is experiencing a loss.

67. 67
58. The profit maximizing or loss minimizing
oligopoly in Exhibit 23-8 would GRAPH
a. produce slightly more than 20 units of
output
b. produce slightly less than 20 units of
output
c. close to minimize losses
d. produce 20 units of output
D. 20 units is the number of units at the point
where the demand curve is kinked.

68. 68
59. The profit maximizing or loss minimizing
oligopoly in Exhibit 23-8 would GRAPH
a. charge $9
b. charge a price which is somewhat higher
than $9
c. charge a price which is much lower than $9
d. charge a price which is slightly lower than
$9
A. $9 is the price that exists at the point where
the demand curve is kinked.

69. 69
60. The profit maximizing or loss minimizing
firm in Exhibit 23-8 would have GRAPH
a. both d and e
b. both c and e
c. variable costs equal to $180
d. total costs equal to $180
e. total revenue equal to $180
E. TR equals price times quantity. The price
in this case is $9 and 20 is the number of
units, 9 times 20 is $180.

70. 70
D=AR
MR
ATC
MC
Q
P
Exhibit 23.9
Last slide viewed
$95
$80
$70
36 44
AVC
50

71. 71
61. The profit maximizing or loss minimizing
firm in Exhibit 23-9 would produce
GRAPH
a. nothing, since it should close
b. 36
c. 44
d. 50
B. 36 units is the number of units where
MR = MC. Look where MR = MC then
draw a vertical line down to the horizontal
axis.

72. 72
62. The profit maximizing or loss minimizing
firm in Exhibit 23-9 would charge GRAPH
a. $95
b. $80
c. $70
A. $95 is the price where MR = MC. Once you
find where MR = MC draw a vertical line up
and down from this point. Now all answers to
questions will be found on this vertical line.
Because demand determines price, take the
vertical line up to the demand curve and then
move across horizontally to the left. Where
this line hits the vertical axis is the profit
maximizing price.

73. 73
63. The profit maximizing or loss minimizing
firm in Exhibit 23-9 would have GRAPH
a. an economic loss of an amount which
cannot be determined on this graph
b. economic profits of $360
c. economic profits of $700
d. economic profits of $900
D. At the point where MR = MC the price is
$95 and the number of units is 36. So TR is
equal to $3,420 (36 times 95). ATC at MR =
MC is $70, so TC is equal to $2,520 (70 times
36). So profit is $3,420 - $2,520 = $900

74. 74
64. The profit maximizing or loss minimizing
firm in Exhibit 23-9 would have GRAPH
a. total costs of $3500
b. total costs of less than $3000
c. total revenue of $3500
d. total revenue of less than $3400
B. See previous answer.

75. 75
65. Which of the following is not an example of
oligopolistic barriers to entry?
a. diseconomies of scale
b. legal restrictions
c. advertising and brand proliferation
d. high start-up costs
A. Diseconomies of scale exists when as a firm
grows it becomes less efficient. This is not the
case with an oligopoly. One reason an
oligopolist becomes an oligopolist is because
of economies of scale. Economies of scale
exists when as a firm grows it experiences an
increase in productivity.

76. 76
66. Collusion is easier to achieve and maintain in
oligopoly when
a. there are many firms in the industry
b. the firms’ products are homogeneous
c. the firms’ cost structures are very different
d. there are very weak barriers to entry
B. A homogeneous product is a product that is
the same and cannot be distinguished from
one another. An example of a homogeneous
product would be a potato. When farmers
bring their potatoes to market, you cannot
distinguish one potato from another potato.

77. 77
67. For oligopolists, which of the following is not
an advantage of operating a cartel?
a. the opportunity for increased economic
profit
b. decreased uncertainty
c. increased barriers to entry
d. decreased competition
e. increased output for each firm
E. A cartel is a group of firms that agree to
coordinate their production and pricing
decisions, thereby behaving as a monopolist.

78. 78
68. During the 1970’s, OPEC exerted strong
control over the oil industry. Which of the
following is a result of OPEC’s early success
as a cartel?
a. as new sources of oil were discovered and
developed, the new suppliers quickly joined
OPEC
b. war in the Middle East no longer affect
either the supply or the price of oil
c. OPEC is now much less powerful, due to
the entry of new non-OPEC oil suppliers
and due to cheating by OPEC members
C. To succeed cartels have to have complete
cooperation among all members.

79. 79
69. Price leadership
a. has all of the following features
b. occurs only when the largest firm in the
industry is the decision maker
c. is subject to the same kinds of obstacles as
other forms of collusion
d. typically involves a formal written
agreement among firms
C. The most common way that an oligopolist
determines price is for the oligopoly to pick a
price leader and then let the price leader set
the price while all the others follow suit. This
practice only works as long as all members
fully cooperate.

80. 80
70. Game theory is relevant only when
a. there are exactly two firms in the industry
b. a firm’s decisions are independent of the
actions of other firms in the industry
c. oligopolists are actively colluding with
regard to production and pricing decisions
d. each firm has two or more possible
strategies, with results that depend on the
actions of other firms
D. Game theory is a model that analyzes
oligopolistic behavior as a series of strategic
moves and countermoves by rival firms.

81. 81
71. According to game theory,
a. firms will successfully collude to raise
prices and increase economic profit
b. firms will match other firms’ price
increases, but will not match price cuts
c. firms’ decisions are interrelated, but each
firm is uncertain about the actions of other
firms
C. One firm may know what the others will do
- but not how much? For example, with 3
firms in the industry, if A lowers price, we
know that B and C will lower their price - but
by how much? Yet, what B and C do will
determine what happens to A’s revenue.

82. 82
72. The kinked demand curve model is used to
explain
a. the industry’s long-run price and output in
an oligopolistic market structure
b. why oligopoly prices are stable, even in the
face of changing costs
c. why prices are stable in an oligopolistic
market.
C. For example, if A raises its prices, B and C
will not raise their prices and consumers will
demand more from B and C. If A lowers its
prices, B and C will follow suit, thus A will
not gain by lowering its prices in the first
place.

83. 83
73. The kinked demand curve
a. is more elastic at higher prices and less
elastic at lower prices
b. is more elastic at lower prices and less
elastic at higher prices
c. is the result of price leadership
d. predicts that oligopolies will change prices
more often than monopolies
A. It is more elastic above the kink because if it
raises prices its revenues will decline a lot as
consumers buy more from B and C. It is more
inelastic below the kink because as any price
cut will be followed, their will not be much
change in total revenue with a price cut.

84. 84
74. The marginal revenue curve associated with
a kinked demand curve is
a. a horizontal line
b. a straight line sloping upward
c. a straight line sloping downward
d. discontinuous at the quantity of output
associated with the kink
D. The marginal revenue curve is broken at
the kink because of the change in slope of the
demand curve. The demand curve is more
elastic (horizontal) above the kink and less
elastic (more vertical) below the kink.

85. 85
75. The kinked demand curve model describes
an oligopoly where competitors
a. ignore all price changes
b. match all price changes
c. match price increases but not price
decreases
d. match price decreases but not price
increases
D. The term match means to follow. To match
a price decrease means firms B and C will
lower their prices if A lowers its prices. A
raise in price will not be matched as B and C
will not raise their prices as a result.

86. 86
76. Suppose that Toyota increases its car prices,
while Honda and Mitsubishi respond with
their own price increases. This behavior is
consistent with the
a. collusion, price leadership, and kinked
demand curve models
b. collusion and price leadership models, but
not with the kinked demand curve model
c. kinked demand curve model, but not with
the collusion or price leadership models
B. With the kinked demand curve theory we
always assume that when firm A raises or
lowers its price, B and C would react or not
react to the change in price at a time when no
other factors would change.

87. 87
77. A comparison of oligopoly and perfect
competition reveals that
a. prices and economic profit are usually
higher in oligopoly
b. prices are usually lower in oligopoly due to
economies of scale, and economic profit is
usually higher in oligopoly due to barriers
to entry
c. prices are usually higher in oligopoly and
economic profit is usually lower in
oligopoly, due to product differentiation
A. Anytime the barriers to entry are high a firms
in that industry will have more control over
their pricing policies than with low barriers.

88. 88
MC
LRAC
D = AR
MR
9
$85
Exhibit 23.10
Last slide viewed
$50
11 12

89. 89
78. The profit maximizing oligopoly in
Exhibit 23-10 will GRAPH
a. produce 9 units of output
b. produce 11 units of output
c. produce 12 units of output
d. produce more than 12 units of output
A. 9 units of output is that output that exists
where the kink is at. Where the kink is, draw
a vertical line down to the horizontal axis.

90. 90
79. The profit maximizing oligopoly in
Exhibit 23-10 will GRAPH
a. charge $85
b. charge $50
c. charge between $50 and $85
d. charge less than $50
A. $85 dollars is the price that exists at the
kink. Where the kink is at, draw a horizontal
line across to the vertical axis.

91. 91
80. Consider the oligopoly in Exhibit 23-10 .
The optimal price from society’s perspective
(the socially desirable price) would be
GRAPH
a. $85
b. $50
c. less than $50
d. between $50 and $85
D. $50 is the price at the lowest point on the
long run average cost (LRAC) curve. $85 is
the price that, all factors considered, the
oligopolists decide is the best.

92. 92
81. The socially optimal output (the socially
desirable output) in Exhibit 23-10 would be
GRAPH
a. 9
b. 11
c. 12
d. more than 12
B. 11 units is the number of units at the lowest
point on the firm’s LRAC curve.

93. 93
82. The profit maximizing oligopoly in
Exhibit 23-10 GRAPH
a. breaks even in the long run
b. would close in the long run
c. would earn an economic profit in the
long run
d. incurs an economic loss in the long run
C. At $85 and 9 units an economic profit is
being made because each firms TR is greater
than its TC. These profits can continue
because of the large barriers to entry.

94. 94
83. A vertical merger occurs when
a. the merging firms produce the same
products
b. one firm merges with another that supplies
its inputs
c. the merging firms are from different
industries
B. A vertical merger is a merger in which one
firm combines with another form which it
purchases inputs or to which it sells output. A
horizontal merger is a merger in which one
firm combines with another firm that
produces the same product.

95. 95
84. A merger between a tobacco company and a
food processing firm is called a
a. horizontal merger
b. vertical merger
c. diagonal merger
d. conglomerate merger
D. A conglomerate merger is a merger
involving the combination of firms producing
is different industries.

96. 96
END