FINAL EXAM 5: Pricing & Output Decisions: Monopolistic Competition & Oligopoly

Multiple-Choice Questions

1) Which of the following industries is most likely to represent the Monopolistic competition market structure?

A) automobiles B) tobacco products C) utility companies D) farm equipment

2) The main difference between perfect competition and monopolistic competition is:A) the number of sellers in the market.B) the ease of exit from the market.C) the difference in the firm’s profits in the long run.D) the degree of product differentiation.

3) If firms are earning economic profit in a monopolistically competitive market, which of the following is most likely to happen in the long run?

A) Some firms will leave the market. B) Firms will join together to keep others from entering. C) New firms will enter the market, thereby eliminating the economic profit. D) Firms will continue to earn economic profit.

4) In the long run, the most helpful action that a monopolistically competitive firm can take to maintain its economic profit is to:

A) continue its efforts to differentiate its product.B) raise its price.C) lower its price.D) do nothing, because it will inevitably experience a decline in profits.

5) Mutual interdependence occurs when: A) All firms in an industry are affected by the same macro economic conditions, such as a recession, inflation, interest rates, exchange rates, etc. B) The actions of firms are independent of each other C) The actions of one firm in an industry are easily recognized and perhaps copied by others D) Monopolists recognize that they must face eventual competition in the long run

6) Mutual interdependence means that:A) all firms are price takers.B) each firm sets its own price based on its anticipated reaction by its competitors.C) all firms collaborate to establish one price.D) all firms are free to enter or leave the market.

7) The Herfindahl-Hirschman (HH) Index is used toA) measure the degree of nonprice competition.B) measure the degree of market concentration in an industry.C) measure the extent of price leadership.D) None of the above.

8) The demand curve, which assumes that competitors will follow price decreases but not price increases, is called

A) an industry demand curve. B) an inelastic demand curve.C) a kinked demand curve. D) a competitive demand curve.

9) The Kinked-Demand Curve model best reflectsA) mutual interdependence among sellers.B) a game theory approach to price-output decisions.C) price rigidities in oligopolistic markets.D) All of the above.

10). In the Kinked Demand curve model, the demand curve is ________ for prices increases and _______ for price decreases A) unit elastic; relatively elastic B) relatively inelastic; relatively elastic C) relatively elastic; relatively inelastic D) perfectly elastic; perfectly inelastic

11) The existence of a kinked demand curve under oligopoly conditions may result inA) price flexibility. B) price rigidity.C) competitive pricing. D) None of the above.

12) When a company is faced by a kinked demand curve, the marginal revenue curve:A) will be upward sloping.B) will be horizontal.C) will always be zero at the quantity produced.D) will be discontinuous.

13) In which of these markets would the firms be facing the least elastic demand curve?A) perfect competition B) pure monopolyC) monopolistic competition D) oligopoly

14) Porter's "Five Forces Model" is based on:A) the laws of supply and demand.B) the law of diminishing returns.C) the Structure-Conduct-Performance model.D) the key factors affecting demand.

15) The four-firm concentration ratio:A) indicates the total profitability among the top four firms in an industry.B) is an indicator of the degree of monopolistic competition.C) indicates the presence and intensity of an oligopoly market.D) is used by the government as a basis for anti-trust cases.

Analytical Question

Convenience stores with gas stations tend to sell an essentially identical variety of products and services. Yet this is generally considered to be a monopolistically competitive industry selling differentiated products. How can this be considered a differentiated product?

Reference:Chapter 9 - Pricing and Output Decisions: Monopolistic Competition and OligopolyKeat, Paul and Philip K.Y. Young (2003). Managerial Economics: Economic Tools for Today’s Decision Makers.