Transcript Economics for Today 2nd edition Irvin B. Tucker

Chapter 9
Practice Quiz Tutorial
Monopolistic
Competition and
Oligopoly
©2004 South-Western
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1. An industry with many small sellers, a
differentiated product, and easy entry would
best be described as which of the following?
a. Oligopoly.
b. Monopolistic competition.
c. Perfect competition.
d. Monopoly.
B. An oligopoly has only a few sellers. A
monopoly only has one, and perfect
competition has homogeneous products.
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2. Which of the following industries is the best
example of monopolistic competition?
a. Wheat.
b. Restaurant.
c. Automobile.
d. Water service.
B. Wheat would be in a perfectly competitive
market. Automobiles would be an oligopoly.
And the water service is an example of a
regulated monopoly.
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3. Which of the following is not a
characteristic of monopolistic competition?
a. A large number of small firms.
b. A differentiated product.
c. Easy market entry.
d. A homogeneous product.
D. A characteristic of monopolistic
competition is differentiated products.
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4. A monopolistically competitive firm will
a. maximize profits by producing by
producing where MR = MC.
b. not earn an economic profit in the long
run.
c. shut down if price is less than average
variable cost.
d. do all of the above.
D. Both a monopolistically competitive
firm and a perfectly competitive firm
share these characteristics.
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5. The theory of monopolistic competition
predicts that in long-run equilibrium a
monopolistically competitive firm will
a. produce the output level at which price
equals long-run marginal cost.
b. operate at minimum long-run average
cost.
c. overutilize its insufficient capacity.
d. produce the output level at which price
equals long-run average cost.
D
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P
$40
$35
$30
$25
$20
$15
$10
$5
Monopolistic Competition
Minimum
LRAC
MC
ATC
AVC
MR
D
1 2 3 4 5 6 7 8 9
Q
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6. A monopolistically competitive firm is
inefficient because the firm
a. earns positive economic profit in the long
run.
b. is producing at an output where marginal
cost equals price.
c. is not maximizing its profit.
d. produces an output where average total
cost is not minimum.
D.
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P
$40
$35
$30
$25
$20
$15
$10
$5
Monopolistic Competition
Minimum
LRAC
MC
ATC
AVC
MR
D
1 2 3 4 5 6 7 8
Q
9
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7. A monopolistically competitive firm in the
long run earns the same economic profit as a
a. perfectly competitive firm.
b. monopolist.
c. cartel.
d. none of the above.
A. In the long-run, a normal profit is
made because of the ease of entry and
exit. Once economic profits are made,
more firms will enter the industry
driving the price down. When losses
are made, firms leave the industry,
driving the price up, restoring profits.
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8. One possible effect of advertising on a firm’s
long-run average cost curve is to
a. raise the curve.
b. lower the curve.
c. shift the curve rightward.
d. shift the curve leftward.
A. The ATC curve is raised because of
the added expense of the advertising.
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9. Monopolistic competition is an inefficient
market structure because
a. firms earn zero profit in the long-run.
b. marginal cost is less than price in the longrun.
c. a wider variety of products available
compared to perfect competition.
d. all of the above.
B. In the long-run, marginal cost is less
than price because of the downward
sloping demand curve and a marginal
revenue curve that is more steeply
sloped beneath the demand curve.
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10. The “Big Three” U.S. automobile
industry is described as
a. a monopoly.
b. perfect competition.
c. monopolistic competition.
d. an oligopoly.
D. An oligopoly is a market form with
only a few sellers.
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11. The cigarette industry in the United
States is described as
a. a monopoly.
b. perfect competition.
c. monopolistic competition.
d. an oligopoly.
D. The cigarette industry has only a few
sellers.
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12. A characteristic of an oligopoly is
a. mutual interdependence in pricing
decisions.
b. easy market entry.
c. both (a) and (b).
d. neither (a) nor (b).
A. The distinguishing feature of an oligopoly
is mutual interdependence. No one firm
will make a decision without first
considering the reaction of its competitors
to its policy change.
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13. Which of the following is evidence that
OPEC is a cartel?
a. Agreement on price and output quotas by
oil ministries.
b. Ability to raise prices regardless of
demand.
c. Mutual interdependence in pricing and
output decisions.
d. Ability to completely control entry.
A. A cartel is characterized by collusion, the
coming together and agreeing to certain
policies, for example, the level of prices.
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END
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