Economics 251 – Chapter 25 Review Questions – Monopolistic Competition and Oligopoly
(1) Which of the following companies most closely approximates a monopolistic competitor?
(a) Subway (sandwiches).
(b) Northern Indiana Public Service Company (NIPSCO) – natural gas and electric utility.
(c) Ford Motor Company.
(d) Microsoft.
Utilize Figure 1 to answer Questions (2) and (3).
Figure 1
$/Q 19 16 13 10
0
(2) Figure 1 refers to a monopolistic competitive firm in short run equilibrium. The firm's profit maximizing or loss minimizing price will be:
(a) $10
(b) $13
(c) $16
(d) $19
(3) The firm in Figure 1 will realize an economic:
(a) loss of $330
(b) loss of $990
(c) profit of $330
(d) profit of $660
(4) Which of the following is an illustration of differentiated oligopoly?
(a) the aluminium industry.
(b) the steel industry.
(c) the cement industry.
(d) the soft drink industry.
(5) Cartels are difficult to maintain in the long run because:
(a) they are illegal in all countries.
(b) individual members may find it profitable to cheat on agreements.
(c) entry barriers are insignificant in oligopolistic industries.
(d) None of the above.
Utilize Figure 2 in answering Question (6).
Figure 2
$/Q 16 13 10
0
(6) In Figure 2, the monopolistically competitive firm is:
(a) minimizing losses in the long run.
(b) minimizing losses in the short run.
(c) realizing a normal profit in the long run.
(d) about to leave the industry.
Consider Table 1 in answering Questions (7) and (8).
Table 1
Firm Market Share Firm Market Share
A 20% D 20%
B 20% E 10%
C 20% F 10%
(7) The four firm concentration ratio for the above industry is:
(a) 100 percent.
(b) indeterminate, we cannot determine which firms to include.
(c) 80 percent.
(d) 20 percent.
(8) The Herfindahl index for the above industry is:
(a) 1,600.
(b) 1,800
(c) 18,000.
(d) 80.
(9) Advertising can enhance economic efficiency when it:
(a) increases brand loyalty.
(b) raises entry barriers.
(c) increases customer awareness of substitute products.
(d) boosts average total cost.
Utilize Table 2 in answering Questions (10) and (11).
Table 2
Profit Payoff Matrix
Alpha's Price Strategies High Price Low Price Beta's Price Strategies High Price Low Price
(10) In Table 2, with independent pricing, the outcome of this duopoly game will gravitate to cell:
(a) A.
(b) B.
(c) C.
(d) D.
(11) In Table 2, if Alpha and Beta engage in collusion, the outcome of the game will be at cell:
(a) A.
(b) B.
(c) C.
(d) D.
(12) A primary difference between monopolistic competition and oligopoly is:
(a) monopolistically competitive industries have higher barriers to entry into the industry.
(b) the Herfindahl index is much higher for industries organized as oligopolies.
(c) it is much easier to organize firms in monopolistically competitive industries to undertake collusive behavior.
(d) each firm in an oligopoly has a very small market share.
(13) Which of the following statements are true about a monopolistically competitive industry?
(a) Economic profits if they exist attract new rivals because entry into the industry is relatively easy.
(b) In the long run, productive and allocative efficiency are assured.
(c) Excess capacity is reduced to zero in the long run.
(d) Normally, in the long run firms earn an economic profit.
Utilize Figure 3 in answering Questions (14) and (15).
Figure 3
$/Q B C D E F G H
J Quantity(Q)
(14) In Figure 3, equilibrium output is:
(a) J
(b) H
(c) G
(d) F
(15) In Figure 3, equilibrium price is:
(a) E
(b) D
(c) C
(d) B
Marginal Cost
Utilize Figure 4 in answering Questions (16),
(17), and (18).
Average Total Cost
Figure 4
$/Q $/Q Q Panel D
(16) In Figure 4, the purely competitive market model is portrayed in Panel:
(a) A
(b) B
(c) C
(d) D
(17) In Figure 4, we are experiencing zero long run economic profits in Panel:
(a) A only.
(b) B only.
(c) A and C.
(d) B and C.
(18) In Figure 4, both allocative and productive efficiency are being realized in Panel:
(a) A, B, C, and D. (all panels).
(b) B and D.
(c) C only.
(d) D only.