1. What are the characteristics of monopolistic competition? A. B. C. D. E. Many firms, homogeneous product, and barriers to entry.

Many firms, differentiated product, and no barriers to entry. Few firms, homogeneous product, and barriers to entry. Few firms, differentiated product, and no barriers to entry. Many firms, differentiated product, and barriers to entry.

2. Product differentiation and advertising are characteristics more commonly found in what type of market structure? A. B. C. D. Perfect competition. Monopolistic competition. Monopoly. Oligopoly.

3. The fact that firms cannot influence market price by virtue of their size is the feature that differentiates monopolistic competition from: A. B. C. D. Perfect competition and monopoly. Perfect competition and oligopoly. Oligopoly and monopoly. Perfect competition and oligopoly.

4. The fact that good substitutes are available is the feature that differentiates monopolistic competition from: A. B. C. D. Perfect competition. Monopoly. All of the other market structures. None of the other market structures. Any industry has good substitutes for the good it produces.

5. Which of the following is the preferred strategy of the monopolistic competitor to achieve market power? A. B. C. D. E. Cost. Try to minimize the cost of production. Size. Expand plant size in order to achieve economies of scale. Product differentiation. Try to produce a unique product or establish a good reputation. Price. Try to charge the lowest price possible. Close substitutes. Try to reproduce the output of other firms as accurately as possible.

6. The term monopolistic competition applies to each firm in the sense that: A. Each firm is monopolistic because it is similar to a natural monopoly, with high fixed costs and economies of scale. B. Each firm is monopolistic because it produces a homogeneous product. C. Each firm is competitive because it is a price taker. D. Each firm is competitive because it produces a good for which there are close substitutes.

E. All of the above. 7. Product differentiation and advertising have its supporters and its critics. The supporters of advertising argue that: A. B. C. D. Advertising helps people make informed, rational choices. Product differentiation is about innovation. Product differentiation improves the standard of living. All of the above.

8. Advertising has its supporters and its critics. The critics of advertising argue that: A. Advertising leads to unproductive warfare, creates a barrier to entry, and by its very nature, imposes a cost on society. B. Advertising is intended to change peoples preferences and to create wants that otherwise would not have existed. C. The information content of advertising is minimal at best and deliberately deceptive at worst. D. All of the above. 9. Fill in the blanks. The demand curve faced by a monopolistically competitive firm is likely to be __________ elastic than the demand curve faced by a perfectly competitive firm, and _________ elastic than the demand curve faced by a monopoly. A. B. C. D. less, more more, more more, less less, less

10. To maximize profit, the monopolistically competitive firm: A. B. C. D. E. Tries to maximize revenue rather than minimize cost. Sets price equal to marginal cost. Sets marginal revenue equal to marginal cost. Uses a different rule from the rule used by a perfectly competitive firm. Sets price equal to the minimum average total cost of production.

11. Refer to the figure below. In order to maximize profit, what price should the firm charge?

A. B. C. D.

$8 $15 $4 $18

12. Refer to the figure below and select the best answer choice. Assume that the firm is producing 600 units. What should the firm do in order to maximize profit?

A. The firm should increase the level of output because at 600 units, marginal revenue is greater than marginal cost. B. The firm should increase the level of output until it reaches the minimum average cost. C. The firm should increase output because at 600 units price is above marginal cost. D. The firm should maintain output at 600 units, because at this output level, marginal revenue is greater than marginal cost, marginal cost is minimized, and price is the highest. 13. Refer to the figure below. Which area represents the formula: (P ATC)Q?

A. B. C. D.

Area A. Area A + B Area B. None of the above.

14. Refer to the figure below. When total cost is subtracted from total revenue, which area remains?

A. B. C. D.

Area B. Area A. Area A + B. None of the above. That information can not be obtained from this graph.

15. Refer to the figure below. Which of these monopolistically competitive firms is operating in the long run?

A. B. C. D.

The firm on the left. The firm on the right. Both firms. Neither firm.

16. Refer to the figure below. An inefficiency associated with the monopolistic competitor is that more output could be produced at a resource cost below the value that consumers place on the product. Which condition below best describes this outcome?

A. B. C. D. E.

Average total cost is not minimized. Marginal cost and average cost are equal when average total cost is minimum. Price is greater than marginal cost. Marginal revenue equals marginal cost. Price is greater than marginal revenue.

17. In the long run, a monopolistically competitive firm does not realize all of the economies of scale available. Which condition below best describes this outcome? A. Marginal cost and average cost are equal when average total cost is minimum. B. Average total cost is not minimized. C. Marginal revenue equals marginal cost.

D. Price is greater than marginal cost. E. Price is greater than marginal revenue. 18. The long-run outcome in monopolistically competitive industries is such that more output could be produced at a resource cost below the value that consumers place on the product. Which condition below best describes this outcome? A. B. C. D. E. Marginal revenue equals marginal cost. Average total cost is not minimized. Marginal cost and average cost are equal when average total cost is minimum. Price is greater than marginal revenue. Price is greater than marginal cost.

19. Which of the following concepts apply to oligopoly more than to any other market structure? A. B. C. D. E. Concentration and interdependence. Advertising and product differentiation. Homogeneous product and perfect information. Economies of scale and significant barriers to entry. Easy entry and more than one firm in the market.

20. Which of the following statements is correct? A. Oligopolies produce goods that may be homogeneous or differentiated. B. The behavior of oligopolies is more difficult to analyze because firms make more decisions and devise more strategies than in any other market structure. C. To maximize profit, an oligopolist sets marginal revenue equal to marginal cost. D. When oligopolists collude on price and output, the result is exactly the same as if a monopoly controlled the industry. E. All of the above. 21. When a group of profit-maximizing oligopolists colludes on price and output, the result is exactly the same as: A. B. C. D. The monopolistically competitive case. The perfectly competitive case. The monopoly case. None of the above. The collusion model yields results is unlike any other market structure.

22. When does tacit collusion exist? A. B. C. D. When firms end up fixing price without a specific agreement. When price- and quantity-fixing agreements are executed by cartels. When price- and quantity-fixing agreements are explicit. When a large number of firms falls into the practice of setting the same prices through formal agreements.

23. Which of the following statements describes the Cournot model of oligopoly behavior? The model consists of a firm or group of firms which:

A. Make explicit agreements to fix price and quantity. B. Take the output of the other as given, and adjust output until the market finally produces an output level somewhere between competition and monopoly. C. Follow the price cuts of a single firm but not its price hikes. D. Make implicit agreements to fix price and quantity. 24. Which of the following statements describes a move along the elastic portion of the kinked demand curve? A. When a firm decreases its price, other firms will decrease their prices, so quantity will increase only by a small amount. B. When a firm increases its price, other firms will decrease theirs, so quantity will decrease by a large amount. C. When a firm increases its price, other firms will not change theirs, so quantity will decrease by a small amount. D. When a firm increases its price, other firms will also increase theirs, so quantity will not decrease very much. E. When a firm increases its price, other firms will not change theirs, so quantity will decrease by a large amount. 25. Among the predictions of the kinked demand curve model of oligopoly behavior is that: A. Oligopoly prices are more stable than costs. B. Firms can enter a market in search of profits, but lose nothing if they fail. C. Oligopoly behavior consists of a complex series of moves and anticipated countermoves among rival firms. D. The quantity of output produced by the oligopoly will be somewhere between the output of a competitive market and the output of a monopoly. E. A large, powerful firm will drive smaller firms out of the market by temporarily selling at an artificially low price. 26. Select the best answer for the following definition: An analysis of oligopolistic behavior as a complex series of strategic moves and reactive countermoves among rival firms? A. B. C. D. Nash equilibrium. Game theory. The dominant strategy. The prisoners dilemma.

27. The prisoners dilemma yields the following outcome: A. B. C. D. E. Both criminals would be better off confessing, but they choose not to confess. If both criminals confess, they both get the most lenient sentence possible. When both criminals confess, they get the maximum sentence. Both criminals would be better off not confessing, but they choose to confess. Whether the criminals confess or not, they get the maximum sentence.

28. In game theory, Nash equilibrium refers to:

A. B. C. D. E.

The strategy used to punish competitors that cheat on a price-fixing agreement. The strategy that maximizes the minimum gain that can be earned. The strategy that is best, given what the opposition is doing. A strategy that is best no matter what the opposition does. The strategy that consists of doing whatever the competitor has chosen to do in the previous period.

29. In game theory, the term tit-for-tat refers to: A. B. C. D. A game in which all players play their best strategy given what their competitors are doing. A strategy chosen to minimize the possible gains. A strategy that lets a competitor know the company will follow the competitors lead. A strategy chosen to maximize the minimum gain that can be earned.

30. In contestable markets, large oligopolistic firms tend to behave like: A. B. C. D. E. Monopolistically competitive firms. Monopolies. Cartels. Duopolies. Perfectly competitive firms.

31. Economists Joseph Schumpeter and John Kenneth Galbriaith argued that, under certain conditions: A. Oligopolistic industries result in underproduction of output and pricing above marginal costan inefficient outcome from societys point of view. B. Strategic behavior leads to outcomes that are not in the best interest of society. C. Advertising and product differentiation bring the promise of new products, but there remains the danger of waste and inefficiency. D. Industrial concentration increases the rate of technological advance. E. Entry barriers in many oligopolistic industries prevent new capital and other resources from responding to profit signals. 32. What is the Herfindahl-Hirschman Index (HHI) for an industry in which five firms each control 20% of the market? A. B. C. D. 20 100 2,000 5,000

33. It is difficult to tell if advertising is a good or a bad thing. A. True B. False 34. To maximize profit, a monopolistic competitor sets price equal to marginal cost.

A. True B. False 35. In long-run equilibrium, the demand curve of the monopolistic competitor is tangent to its average total cost curve. A. True B. False 36. A cartel is a form of tacit collusion. A. True B. False 37. The kink in the kinked demand curve follows from the assumption that firms follow price cuts but do not follow price increases. A. True B. False 38. The prisoner's dilemma is that, although the prisoners would be better off if they confess to the crime, they choose not to confess. A. True B. False 39. The dominant strategy is the best strategy a player can choose, given what their competitors are doing. A. True B. False 40. Game theory provides a set of conclusive propositions that can accurately predict the behavior of oligopolistic firms. A. True B. False 41. In contestable markets, entry is free, and exit is costless. A. True B. False 42. The rate of technological advance is greater in industries that are highly concentrated, where a few large firms dominate the industry. A. True B. False