tips and samples ch 11, micro

8/16/2019 Tips and Samples Ch 11, MICRO

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Tips for Chapter 11, Micro

Two remaining market structures of Monopolistic Competition and

Oligopoly are discussed in this chapter.

Monopolistic Competition is based on three assumptions: many

buyers and sellers, rms produce a slightly dierentiated product,

and easy entryeasy e!it. "ierentiation of product could be real or

imagined as location, ser#ices pro#ided with, brand names,

ad#ertisement, color, packaging, etc. would be dierent. "emand

cur#e is $atter %more elastic& than Monopoly, but not hori'ontal as in

(erfect Competition. (rinciples of Ma!imi'ation of prot or

Minimi'ation of loss where MC)M* is still the golden rule in

determining the output le#el and computation of prot or loss as

before. +n the short run, rms could make prot or incur losses but

in the long run, economic prot is e-ual to 'ero %ee /!hibits 0 and

1.& Monopolistically Competiti#e rm produces an output smaller

than the output at its minimum of 2TC. This is known as /!cess

Capacity Theorem %ee /!hibit 3.&

Oligopoly %the theory of 4ust a few big businesses& is also based on

three assumptions: there are a few sellersmany buyers, rmsproduce either a homogeneous or dierentiated products, and there

is a signicant barrier to entry. The Concentration *atio is the

criterion of the si'e and degree of an oligopolistic rm %(lease read

page 156 on C*.& 7nlike other market structures, there is no one

accepted theory of oligopoly. The Cartel Theory and 8ame Theory

are the only two models of oligopoly discussed at this introductory

le#el of microeconomics.

The Cartel Theory is a theory of oligopoly in which rms act as ifthere were only one rm in the industry %+ndustry is used as

synonym for a market.& Cartel is an organi'ation of rms that

reduces production of output and increases price in an eort to raise

4oint prots of the members. The issue in#ol#ed in a cartel



organi'ation is the incenti#e for a member rm to 9cheat. %ee

/!hibits ; and 5.&

+nterdependence among 4ust a few rms, trying to reach an optimal

position by each rm, the interacti#e nature of the rms, and theneed for strategies in oligopolistic rms is the sub4ect of Game

Theory. 2 well<known game theory is the (risoner=s "ilemma that

illustrates a case in which indi#idually rational beha#ior leads to a

4ointly ine>cient outcome. The lesson learned in prisoner=s dilemma

has been described this way: 9?ou do what is best for you, + will do

what is best for me, and somehow we end up in a situation that is

not best for either of us. %Carefully read pp. 15@<160, and see

e!hibit 6 for e!planation of prisoner=s dilemma.&

Contestable markets, *e#iew of market structures, and 2pplications

of game theory are discussed in the rest of chapter 00.

Sample Questions for Chapter 11, MICRO

Multiple Choices

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

____ 1. The demand curve facing a monopolistic competitive firm will be __________ thanthe demand curve facing a perfectly competitive firm, because the price elasticity ofdemand for the monopolistic competitive firm's product is __________ than that forthe perfectly competitive firm.a. steeper; greater

b. flatter; greater c. steeper; lessd. flatter; less

____ 2. If a perfectly competitive firm and a monopolistic competitive firm face the samedemand and cost curves, thena. the perfectly competitive firm will attain resourceallocative efficiency,

but the monopolistic competitive firm will not. b. the perfectly competitive firm will attain resourceallocative efficiency,



but the monopolistic competitive firm may or may not, dependingupon the demand for its product.

c. the perfectly competitive firm will not attain resourceallocativeefficiency, but the monopolistic competitive firm will.

d. both the perfectly competitive firm and the monopolistic competitivefirm will attain resourceallocative efficiency.

e. neither the perfectly competitive firm nor the monopolistic competitivefirm will attain resourceallocative efficiency.

____ !. " firm in a monopolistic competitive industry will produce an output level at whicha. # $ %&.

b. # %&.c. # ( %&.

d. # %).

____ *. There are few sellers and many buyers in thea. perfectly competitive mar+et structure.

b. monopolistic competitive mar+et structure.c. oligopoly mar+et structure.d. monopoly mar+et structure.

____ . Total industry sales are -// million. The four largest firms have sales of -22/million, -120 million, - million, and -*2 million. The industry's fourfirmconcentration ratio isa. /.01.

b. /.*.c. /.!.d. /..

____ 0. If you were to ran+ the four mar+et structures in terms of lowest concentration ratio tohighest concentration ratio, which of the following ran+ings would be correcta. oligopoly, monopoly, perfect competition, monopolistic competition

b. monopoly, oligopoly, monopolistic competition, perfect competitionc. perfect competition, monopolistic competition, oligopoly, monopolyd. monopolistic competition, perfect competition, oligopoly, monopolye. monopolistic competition, oligopoly, perfect competition, monopoly



____ 3. The ma4or economic ob4ective of cartels is toa. impose their political will on others.

b. restrict output, push up price, and increase profits.c. reduce costs.d. develop new ways of doing things.e. b and d

____ . The assumption that precludes economic profits in monopolistic competition in thelong run is thata. there are many buyers and sellers.

b. the firms produce a homogeneous product.

c. there is easy entry and e5it in this mar+et structure.d. buyers and sellers have all relevant information.

____ . 6hich of the following is not correct about contestable mar+etsa. There is easy entry into and costless e5it from the mar+et.

b. 7ew firms entering the mar+et can produce the product at the samecost as current firms.

c. 8irms e5iting the mar+et can easily dispose of their fi5ed assets byselling them elsewhere.

d. 8irms already in the mar+et have technological advantages.e. b and c

____1/. The monopolistic competitor's demand curve isa. perfectly elastic because of the many buyers and sellers in the mar+et.

b. downward sloping because of product differentiation.c. perfectly elastic because of identical products.d. downward sloping because of the few buyers and sellers in the mar+et.

e. none of the above

Exhibit 25-



____11. &efer to 95hibit 2!. Total revenue of this profit ma5imi:ing monopolistic

competitor is represented by the areaa. /#1"2.

b. /#!)2.c. #!#1").d. #*#1"<.

____12. 6hich of the following assumptions do the mar+et structures of monopolisticcompetition and perfect competition share

a. many buyers and sellers b. homogeneous productsc. difficult entry into the mar+etd. difficult e5it from the mar+et

____1!. 95cess capacity results from aa. downwardsloping demand curve and a =shaped "T) curve.

b. downwardsloping demand curve and no fi5ed costs.c. hori:ontal demand curve and an upwardsloping marginal cost curve.

d. perfectly inelastic demand curve and a downwardsloping "T) curve.e. none of the above

____1*. If the top four firms account for -2 million in sales and total industry sales are -3million, it follows that the fourfirm concentration ratio isa. /.2.



b. /.0.c. 1.3*.d. /./!.

____1. The +ey behavioral assumption of the cartel theory is that oligopolists in the industryact as if a. all firms in the industry are the same si:e.

b. all firms in the industry are price ta+ers.c. there is a dominant firm in the industry and many fringe firms.d. there is only one firm in the industry.e. none of the above

____10. 6hich of the following is not a condition of a contestable mar+eta. There is easy entry into the mar+et.

b. There is costless e5it from the mar+et.c. 7ew firms entering the mar+et can produce the product at lower cost

than current firms.d. 8irms e5iting the mar+et can easily dispose of their fi5ed assets by

selling them elsewhere >less depreciation?.e. 7one of the above; that is, all of the above are conditions of a

contestable mar+et.

95hibit 20



____13. &efer to 95hibit 20. The monopolistic competitor in the e5hibit isa. earning positive economic profits.

b. ta+ing losses.c. earning a normal profit.d. e5hibiting productive efficiency.e. a and d

____1. In long run e@uilibrium, a monopolistic competitive firmAs price will most li+ely bea. e@ual to average total cost, but higher than marginal cost.

b. greater than both average total cost and marginal cost.c. less than both average total cost and marginal cost.d. e@ual to marginal cost, but higher than average total cost.

____1. 6hich if the following is an e5ample of an oligopoly mar+et in which the firms produce a homogeneous producta. aluminum

b. soapc. brea+fast cerealsd. tirese. all of the above

Exhibit 25-!

Quantit"

Sol#

$rice %units& 'otal Cost

-1/ 1// -0//

2// 1,1//

!// 1,*//3 *// 1,//

0 // 2,*//

0// !,2//

* 3// *,2//



____2/. &efer to 95hibit 23. "ssuming that the firm is ma5imi:ing profits, the marginal costof the last unit produced e@ualsa. -*.

b. -*/.c. -.d. -/.e. -0.

Exhibit 25-(

Quantit"

'otal

Re)enue 'otal Cost

2 -1*/ -1//

! -1/ -11/

* -2// -1!/

-2// -10/

0 -1/ -2//

____21. &efer to 95hibit 2. " profitma5imi:ing monopolistic competitive firm will set the price ata. -3/ per unit.

b. -0/ per unit.c. -/ per unit.d. -*/ per unit.e. -!/ per unit.

____22. &efer to 95hibit 2. " profitma5imi:ing monopolistic competitive firm will produce ______________ units of output and charge a price of a. !; -0/.

b. *; -/.c. ; -*/.



d. 0; -!/.

Exhibit 25-*

Mar+et Structure umber

of Sellers

'"pe of

$ro#uct

arriers to

Entr"

#erfect competition >"? ><? >B?

%onopolistic)ompetition

>C? >9? >I?

Dligopoly >)? >8? >E?

%onopoly one >F? >G?

____2!. &efer to 95hibit 2. 8ill in blan+s >B?, >I?, >E?, and >G?, respectively.a. yes; yes; no; no

b. no; no; yes; yesc. no; yes; yes; yesd. no; yes; no; yes

Essa"

2*. Hist and describe the three assumptions upon which oligopoly behavior are based.

2. )ompare and contrast the following mar+et structures perfect competition andmonopolistic competition.



Sample Questions for Chapter 11, MICRO

.ns/er Section

M0'I$E COICES

1. "7J ) #TJ 1 <I8 %oderate 7"T "nalyticHD) %onopolistic competition

2. "7J " #TJ 1 <I8 %oderate 7"T "nalyticHD) %onopolistic competition

!. "7J ) #TJ 1 <I8 %oderate 7"T "nalyticHD) %onopolistic competition

*. "7J ) #TJ 1 <I8 9asy 7"T "nalyticHD) Dligopoly

. "7J " #TJ 1 <I8 %oderate 7"T "nalyticHD) Dligopoly 7DT 7ew

0. "7J ) #TJ 1 <I8 %oderate 7"T "nalyticHD) %onopoly

3. "7J C #TJ 1 <I8 %oderate 7"T "nalyticHD) Dligopoly

. "7J ) #TJ 1 <I8 %oderate 7"T "nalyticHD) %onopolistic competition

. "7J < #TJ 1 <I8 <ifficult 7"T "nalyticHD) Dligopoly

1/. "7J C #TJ 1 <I8 %oderate 7"T "nalyticHD) %onopolistic competition

11. "7J C #TJ 1 <I8 %oderate 7"T "nalyticHD) %onopolistic competition 7DT 7ew

12. "7J " #TJ 1 <I8 %oderate 7"T "nalytic



HD) %onopolistic competition

1!. "7J " #TJ 1 <I8 %oderate 7"T "nalyticHD) %onopolistic competition

1*. "7J " #TJ 1 <I8 %oderate 7"T "nalyticHD) %onopolistic competition

1. "7J < #TJ 1 <I8 %oderate 7"T "nalyticHD) Dligopoly

10. "7J ) #TJ 1 <I8 %oderate 7"T "nalyticHD) Dligopoly

13. "7J ) #TJ 1 <I8 <ifficult 7"T "nalyticHD) %onopolistic competition

1. "7J " #TJ 1 <I8 %oderate 7"T "nalyticHD) %onopolistic competition

1. "7J " #TJ 1 <I8 9asy 7"T "nalyticHD) Dligopoly

2/. "7J " #TJ 1 <I8 %oderate 7"T "nalyticHD) %onopolistic competition

21. "7J ) #TJ 1 <I8 %oderate 7"T "nalyticHD) %onopolistic competition

22. "7J C #TJ 1 <I8 <ifficult 7"T "nalyticHD) %onopolistic competition

2!. "7J C #TJ 1 <I8 %oderate 7"T "nalytic

HD) %onopolistic competition 7DT 7ew



ESS.3

2*. "7JThe three assumptions of oligopoly are 1? There are few sellers and many buyers;and firms are assumed to act interdependently; 2? 9ach firm in the industry

produces and sells either differentiated products or homogeneous products; and !?There are significant barriers to entry >with economies of scale being perhaps themost significant barrier to entry in oligopoly?.

#TJ 1 <I8 %oderate 7"T"nalytic HD) Dligopoly

2. "7JCoth mar+et structures share the following characteristics many buyers and sellersand no barriers to entry. %onopolistic competitive firms produce and sell a

slightly differentiated product, while perfectly competitive firms produce ahomogeneous product. In order to help differentiate their products, monopolisticcompetitive firms engage in advertising. #erfectly competitive firms typically donot advertise, although some advertising may be done by a perfectly competitiveindustry as a whole. #erfectly competitive firms are price ta+ers, and thus face ahori:ontal demand curve for their product. %onopolistic competitive firms are

price searchers, facing a downwardsloping demand curve. " profitma5imi:ingfirm in either mar+et structure should produce the level of output for whichmarginal revenue e@uals marginal cost.

#TJ 1 <I8 %oderate 7"T"nalytic HD) %onopolisticcompetition

7DT 7ew

tips and samples ch 11, micro

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