Which of the following conditions distinguishes monopolistic competition from perfect competition?

Econ 102 Test 4

Multiple Choice Identify the choice that best completes the statement or answers the question.

____ 1. Who is a price taker in a competitive market?

a. buyers only b. sellers only c. both buyers and sellers d. neither buyers nor sellers

____ 2. In a competitive market, a. no single buyer or seller can influence the price of the product. b. there are only a small number of sellers. c. the goods offered by the different sellers are unique. d. accounting profit is driven to zero as firms freely enter and exit the market.

____ 3. Which of the following firms is the closest to being a perfectly competitive firm? a. the New York Yankees b. Apple, Inc. c. DeBeers diamond wholesalers d. a wheat farmer in Kansas

____ 4. Suppose that in a competitive market the equilibrium price is $2.50. What is marginal revenue for the last unit sold by the typical firm in this market? a. less than $2.50 b. more than $2.50 c. exactly $2.50 d. The marginal revenue cannot be determined without knowing the actual quantity sold by

the typical firm.

Table 14-7 Suppose that a firm in a competitive market faces the following revenues and costs:

Marginal Marginal Quantity Cost Revenue

12 $5 $9 13 $6 $9 14 $7 $9 15 $8 $9 16 $9 $9 17 $10 $9

____ 5. Refer to Table 14-7. If the firm is currently producing 14 units, what would you advise the owners?

a. decrease quantity to 13 units b. increase quantity to 17 units c. continue to operate at 14 units d. increase quantity to 16 units

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____ 6. Competitive firms that earn a loss in the short run should a. shut down if P < AVC. b. raise their price. c. lower their output. d. All of the above are correct.

____ 7. When fixed costs are ignored because they are irrelevant to a business's production decision, they are called a. explicit costs. b. implicit costs. c. sunk costs. d. opportunity costs.

____ 8. Which of the following statements is correct? a. Both a competitive firm and a monopolist are price takers. b. Both a competitive firm and a monopolist are price makers. c. A competitive firm is a price taker, whereas a monopolist is a price maker. d. A competitive firm is a price maker, whereas a monopolist is a price taker.

____ 9. Because a monopolist does not face competition from other firms, the outcome in a market with a monopoly a. does not illustrate profit maximization. b. is often not in the best interest of society. c. is characterized by unlimited profits. d. would be improved if the government produced the product rather than a private firm.

____ 10. The simplest way for a monopoly to arise is for a single firm to a. decrease its price below its competitors’ prices. b. decrease production to increase demand for its product. c. make pricing decisions jointly with other firms. d. own a key resource.

____ 11. Which of the following is not a reason for the existence of a monopoly? a. sole ownership of a key resource b. patents c. copyrights d. diseconomies of scale

____ 12. Most markets are not monopolies in the real world because a. firms usually face downward-sloping demand curves. b. supply curves slope upward. c. firms usually equate price with marginal cost. d. there are reasonable substitutes for most goods.

____ 13. Encouraging firms to invest in research and development and individuals to engage in creative endeavors such as writing novels is one justification for a. resource monopolies. b. natural monopolies. c. government-created monopolies. d. breaking up monopolies into smaller firms.

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____ 14. When a firm's average total cost curve continually declines, the firm is a a. government-created monopoly. b. natural monopoly. c. revenue monopoly. d. All of the above are correct.

____ 15. When a single firm can supply a product to an entire market at a lower cost than could two or more firms, the industry is called a a. resource industry. b. exclusive industry. c. government monopoly. d. natural monopoly.

____ 16. Economists assume that monopolists behave as a. cost minimizers. b. profit maximizers. c. price maximizers. d. maximizers of social welfare.

____ 17. Which of the following statements is correct? a. The demand curve facing a competitive firm is horizontal, as is the demand curve facing a

monopolist. b. The demand curve facing a competitive firm is downward sloping, whereas the demand

curve facing a monopolist is horizontal. c. The demand curve facing a competitive firm is horizontal, whereas the demand curve

facing a monopolist is downward sloping. d. The demand curve facing a competitive firm is downward sloping, as is the demand curve

facing a monopolist.

____ 18. The first major piece of antitrust legislation was the a. Clayton Act. b. Reagan-Bush Act. c. Sherman Act. d. Clinton-Gore Act.

____ 19. The market for novels is a. perfectly competitive. b. a monopoly. c. monopolistically competitive. d. an oligopoly.

____ 20. Monopolistic competition is a type of a. oligopoly. b. market structure. c. price discrimination. d. advertising strategy.

____ 21. Which of the following pairs illustrates the two extreme examples of market structures? a. competition and oligopoly b. competition and monopoly c. monopoly and monopolistic competition d. oligopoly and monopolistic competition

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____ 22. The two types of imperfectly competitive markets are a. markets with differentiated products and monopoly. b. markets with differentiated products and oligopoly. c. oligopoly and monopoly. d. monopolistic competition and oligopoly.

____ 23. Which of the following is an example of a monopolistically competitive industry? a. computer operating systems b. tennis balls c. movies d. cable television

____ 24. Which of the following is an example of a monopolistically competitive industry? a. breakfast cereals b. cigarettes c. restaurants in New York City d. milk

____ 25. Which of the following markets is not likely characterized by a monopolistically competitive market? a. piano lessons b. corn c. cookies d. clothing

____ 26. Which of the following is not a characteristic of monopolistic competition? a. a large number of sellers b. firms are price takers c. free entry into the market d. a differentiated product

____ 27. A monopolistically competitive market a. has some features of monopoly and some features of competition. b. has one large, dominant firm and many other smaller firms. c. is difficult to enter. d. occurs whenever firms earn zero economic profit.

____ 28. Monopolistically competitive markets differ from perfectly competitive markets due to (i) the number of sellers.

(ii) the barriers to entry. (iii) the product differentiation among the sellers. a. (i) only b. (iii) only c. (i) and (iii) only d. (ii) and (iii) only

____ 29. Which of the following conditions distinguishes monopolistic competition from perfect competition? a. the number of sellers in the market b. the freedom of entry and exit by firms in the market c. the size of firms in the market d. product differentiation

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____ 30. In perfect competition as well as in monopolistic competition, a. marginal revenue is equal to price for each firm. b. profit is positive in a long-run equilibrium for each firm. c. entry and exit by firms are restricted. d. there are many firms in a single market.

____ 31. In markets where restrictions on advertising have been used to curtail competition, the U.S. courts have generally a. referred the matters of advertising restrictions to executive regulators. b. enforced industry-wide agreements to restrict advertising. c. been silent on the effect of explicit advertising restrictions. d. overturned laws that prohibit advertising.

____ 32. In the study done by Lee Benham on advertising for eyeglasses, a. advertising increased the average price. b. advertising decreased the average price. c. there was no difference in price, but quality was better in the states that didn't allow

advertising. d. advertising appeared to have no effect whatsoever in the states that permitted advertising.

____ 33. Edward Chamberlin argued that governments should a. ban the use of brand names. b. not enforce the trademarks that companies use to identify their products. c. vigorously enforce the trademarks that companies use to identify their products. d. tax companies whose products have brand names in proportion to how much consumers

recognize their products.

____ 34. Which of the following statements regarding brand names in advertising is not correct? a. Brand names provide consumers with information about quality when quality cannot be

easily judged in advance of purchase. b. Brand names give firms an incentive to maintain high quality to maintain the reputation of

the firm. c. Brand names allow firms to produce and sell inferior products in the long run since people

will continue to purchase the brand-name product. d. Brand names can cause consumers to perceive differences in products that do not actually

exist.

____ 35. A market is comprised of many firms as opposed to just one firm or a few firms a. only when it is perfectly competitive. b. only when it is perfectly competitive or oligopolistic. c. only when it is perfectly competitive or monopolistically competitive. d. when it is perfectly competitive, monopolistically competitive, or oligopolistic.

____ 36. In choosing among alternative courses of action, Raj must consider how others might respond to the action he takes. In the language of game theory, we say that Raj must think a. openly. b. strategically. c. dominantly. d. cooperatively.

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____ 37. There are two types of markets in which firms face some competition yet are still able to have some control over the prices of their products. Those two types of market are a. monopolistic competition and oligopoly. b. duopoly and triopoly. c. perfect competition and monopolistic competition. d. duopoly and imperfect competition.

____ 38. An agreement among firms regarding price and/or production levels is called a. an antitrust market. b. a free-trade arrangement. c. collusion. d. a Nash agreement.

____ 39. In which case do firms have some control over their price? a. oligopoly and perfect competition b. oligopoly but not perfect competition c. perfect competition but not oligopoly d. neither perfect competition nor oligopoly

____ 40. The oligopoly price will be greater than marginal cost but less than the monopoly price when a. the oligopolists collude by jointly choosing a quantity to produce and maintaining their

agreement. b. the oligopolists collude by jointly choosing a price to charge and maintaining their

agreement. c. each oligopolist individually chooses a quantity to produce to maximize profit. d. each oligopolist’s objective is minimization of average total cost, rather than maximization

of profit.

____ 41. The likely outcome of the standard prisoners' dilemma game is that a. neither prisoner confesses. b. exactly one prisoner confesses. c. both prisoners confess. d. Not enough information is given to answer this question.

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Table 17-12 Each year the United States considers renewal of Most Favored Nation (MFN) trading status with Farland (a mythical nation). Historically, legislators have made threats of not renewing MFN status because of human rights abuses in Farland. The non-renewal of MFN trading status is likely to involve some retaliatory measures by Farland. The payoff table below shows the potential economic gains associated with a game in which Farland may impose trade sanctions against U.S. firms and the United States may not renew MFN status with Farland. The table contains the dollar value of all trade-flow benefits to the United States and Farland.

Farland Impose trade sanctions

against U.S. firms Do not impose trade sanctions

against U.S. firms

United States

Don't renew MFN status with Farland

U.S. trade value = $65 b Farland trade value = $75 b

U.S. trade value = $140 b Farland trade value = $5 b

Renew MFN status with Farland

U.S. trade value = $35 b Farland trade value = $285 b

U.S. trade value = $130 b Farland trade value = $275 b

____ 42. Refer to Table 17-12. If both countries follow a dominant strategy, the value of trade flow benefits for

Farland will be a. $5 b. b. $75 b. c. $275 b. d. $285 b.

Figure 17-4. Two companies, Acme and Bilco, are sellers in the same market. Each company decides whether to charge a high price or a low price. In the figure, the dollar amounts are payoffs and they represent annual profits for the two companies.

Acme's profit = $5 million Acme's profit = $7 million

Acme's profit = $2 million Acme's profit = $3.25 million

Bilco's profit = $5 million Bilco's profit = $2 million

Bilco's profit = $7 million Bilco's profit = $3.25 million

High price Low price

High price

Low price

Acme's Decision

Bilco's Decision

____ 43. Refer to Figure 17-4. If the two companies make their pricing decisions independently, then it is likely that

Bilco will a. charge a low price only if Acme charges a low price. b. charge a low price only if Acme charges a high price. c. charge a low price regardless of whether Acme charges a high price or a low price. d. None of the above are correct.

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____ 44. A law that encourages market competition by prohibiting firms from gaining or exercising excessive market power is a. a patent. b. impossible to enforce. c. an antitrust law. d. an externality law.

____ 45. To move the allocation of resources closer to the social optimum, policymakers should typically try to induce firms in an oligopoly to a. collude with each other. b. form various degrees of cartels. c. compete rather than cooperate with each other. d. cooperate rather than compete with each other.

____ 46. Which of the following groups or entities has the authority to initiate legal suits to enforce antitrust laws? a. the U.S. Justice Department b. private citizens c. corporations d. All of the above are correct.

____ 47. The Sherman Act made cooperative agreements a. unenforceable outside of established judicial review processes. b. enforceable with proper judicial review. c. a criminal conspiracy. d. a crime, but did not give direction on possible penalties.

____ 48. Acme Computer Co. sells computers to retail stores for $400. If Acme requires the retailers to charge customers $500 for the computers, then it is engaging in a. resale price maintenance. b. predatory pricing. c. tying. d. monopolistic competition.

____ 49. All cartels are inherently reliant on a. a horizontal demand curve. b. an inelastic demand for their product. c. the cooperation of their members. d. enforcement of antitrust laws.

____ 50. In the U.S. government’s 1998 suit against the Microsoft Corporation, a central issue was whether Microsoft should be allowed to integrate its Internet browser into its Windows operating system. Microsoft responded that a. this integration of products is an example of tying, and the U.S. Supreme Court has

consistently ruled that tying is a perfectly acceptable and legal business practice. b. this integration of products is an example of resale price maintenance, and the U.S.

Supreme Court has consistently ruled that fair trade is a perfectly acceptable and legal business practice.

c. putting new features into old products is a natural part of technological practice. d. it would discontinue this integration of products, provided a speedy resolution of the

government’s case could be reached.

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