CHAPTER 11 TESTName: __________________________ Date: _____________
Use the following to answer question 1:
1. (Exhibit: Monopoly Through Collusion) The exhibit illustrates the situation in an industry that consists of two firms facing identical demand curves; the demand curve for each firm is D1. Which of the following assumptions is part of the analysis illustrated by the model?
A) The two firms sell differentiated products.
B) The ATC curve of each firm lies exactly twice as high as the MC curve.
C) If the two firms collude in order to maximize their combined economic profits, each firm will operate as if its demand curve is given by D2.
D) Both firms have the same marginal revenue curve.
Use the following to answer question 2:
2. (Exhibit: Profit Maximization in Monopolistic Competition) In Panel (b), the long-run equilibrium will result in:
A) economic profits = 0.
B) accounting profits = 0.
C) a tangency of the ATC curve with the MR curve.
D) A and C.
3. If the only two firms in an industry agree to fix the price at a given level, this is an example of:
A) collusion.
B) satisfying.
C) price extortion.
D) price leadership.
4. Tacit collusion occurs if:
A) smaller firms in an industry silently agree to charge the same price as the largest firm.
B) two or more firms in an industry agree to fix the price at a given level.
C) competition among a large number of small firms generates a stable market price.
D) competition among a large number of small firms generates similar, but slightly different, prices.
5. Price discrimination is seldom done by the airlines.
A) True
B) False
Use the following to answer question 6:
6. (Exhibit: Firms in Monopolistic Competition) Long-run equilibrium is illustrated at the profit-maximizing price _______ in Panel _______ .
A) F; (a)
B) G; (a)
C) H; (b)
D) I; (c)
7. If a firm wants to discriminate in regard to prices, it must be a price setter.
A) True
B) False
8. If a firm wants to charge different customers different prices:
A) the firm must be a price taker.
B) firm must be in perfect competition.
C) firm must be a price setter.
D) A and B must be true.
Use the following to answer question 9:
9. (Exhibit: Monopoly Through Collusion) The exhibit illustrates the situation in an industry that consists of two firms facing identical demand curves; the demand curve for each firm is D1. If the firms collude and agree to share the market demand equally, then each firm will act as if its demand curve is given by _______ and the market demand curve is given by _______ .
A) D1; MR2
B) D2; D1
C) D1; D2
D) MR1; MR2
10. Firms in a duopoly industry could achieve the maximum combined profit possible if they colluded.
A) True
B) False
11. A monopolist or an imperfectly competitive firm practices price discrimination primarily to:
A) increase profits.
B) expand plant size.
C) lower total costs.
D) reduce marginal costs.
Use the following to answer questions 12-14:
12. (Exhibit: Monopoly Through Collusion) Given the duopoly industry illustrated in the exhibit, if the two firms colluded to maximize their joint profits, the market price they would set would be _______ and each firm’s economic profit would be _______ .
A) P2; given by the area of the rectangle bounded by P1P2EF = FEBG
B) P1; P1P3AF
C) P3; given by the area of the rectangle bounded by 0P3AQ1
D) P2; given by the area of the rectangle bounded by P1P2BG
13. (Exhibit: Monopoly Through Collusion) The exhibit illustrates the situation in an industry that consists of two firms facing identical demand curves; the demand curve for each firm is D1. Which of the following assumptions is not a part of the analysis illustrated by the model?
A) The two firms are identical.
B) The two firms sell identical products.
C) While the firms face the same MC curves, their respective TC curves have unequal slopes.
D) Each firm has a horizontal marginal cost curve.
14. (Exhibit: Monopoly Through Collusion) Given the industry illustrated in the exhibit, the efficient solution is found where price is _______ and quantity is _______ .
A) P1; Q4
B) P2; Q2
C) P2; Q1
D) P3; Q1
15. Monopolistic competition is an industry characterized by:
A) a product with many close substitutes.
B) a horizontal demand curve.
C) a small number of firms.
D) barriers to entry and exit.
16. In general, the higher the concentration ratio in an industry, the:
A) greater the ratio of MC to ATC.
B) lower the ratio of MC to ATC.
C) less firms need to pay attention to individual rivals.
D) more firms need to pay attention to individual rivals.
17. The market for plumbing services in a city can be characterized by the model of monopolistic competition. Suppose that the market is initially in long-run equilibrium, and then there is an increase in demand for plumbing services. We expect that in the long run the economic profits of typical firms in the industry will be:
A) typical of those earned by monopoly firms.
B) negative.
C) zero.
D) positive but less than the level typically earned by monopoly firms.
18. A feature of monopolistic competition that makes it different from monopoly is the:
A) fact that firms in the model of monopolistic competition follow the marginal decision rule while monopolies do not.
B) downward-sloping demand curve.
C) downward-sloping marginal revenue curve.
D) number of firms in the industry.
19. Product differentiation under monopolistic competition means that each firm:
A) charges the same price.
B) maximizes profit where MC = P.
C) faces a downward-sloping demand curve.
D) receives economic profits.
Use the following to answer question 20:
20. (Exhibit: Profit Maximization in Monopolistic Competition) In Panel (a), the profit-maximizing price and quantity are _______ and _______ .
A) S; M
B) P; M
C) P; Q
D) T; Q
21. Game theory is an analysis that provides insight into the behavior of firms in oligopoly.
A) True
B) False
22. The excess capacity in monopolistic competition may be viewed as:
A) the cost of product diversity.
B) efficient.
C) the reason P = MR = MC in monopolistic competition.
D) all of the above.
23. For a firm to maximize profits in monopolistic competition it should produce where P = MC.
A) True
B) False
Use the following to answer question 24:
24. (Exhibit: The Restaurant Market) The exhibit shows curves facing a typical restaurant in a community. Assume that the market is characterized by many firms, differentiated products, easy entry and easy exit. If the restaurant shown here is typical of others in the community, then in the long run, we would expect to observe:
A) restaurants leaving the market.
B) new restaurants entering the market.
C) neither entry nor exit.
D) There is not enough information given to answer the question.
25. A way to measure the degree of concentration in oligopoly is to use:
A) an elasticity ratio.
B) a demand ratio.
C) a ratio that reports the percentage of output accounted for by the largest firms in the industry.
D) the ratio of MC to ATC.
26. A cartel is an example of secretive, informal collusive agreements.
A) True
B) False
27. An industry that consists of two firms is:
A) a duopoly.
B) a monopoly.
C) a monopsony.
D) monopolistic competition.
28. Monopolistic competition is characterized by a single firm producing a product that has no close substitutes.
A) True
B) False
29. The profit-maximizing rule MC = MR is followed by firms under:
A) monopolistic competition, but not perfect competition.
B) perfect competition, but not monopolistic competition.
C) either monopolistic competition or perfect competition, depending on the costs of production.
D) both monopolistic competition and perfect competition.
30. Oligopoly is a market structure characterized by:
A) independence in decisionmaking.
B) a horizontal demand curve.
C) a small number of interdependent firms.
D) relatively easy entry and exit.
31. The main characteristic that distinguishes monopolistic competition from perfect competition is:
A) easy entry and exit.
B) many firms.
C) differentiated products.
D) that in perfect competition to maximize profits, a firm will produce where MR = MC.
32. The concentration ratio in a duopoly industry is likely to be lower than industries characterized by monopolistic competition.
A) True
B) False
33. A restaurant is a price setter.
A) True
B) False
34. On the spectrum of market structures, oligopoly lies:
A) between perfect competition and monopoly.
B) to the left of both perfect competition and monopoly.
C) to the right of both perfect competition and monopoly.
D) at the same location as monopoly.
35. In order to engage in price discrimination a firm must be:
A) a price taker.
B) a price setter.
C) able to identify consumers whose elasticities differ.
D) both B and C.
36. If the only two firms in an industry openly agree to fix the price at a given level, then this is an example of:
A) overt collusion.
B) price leadership.
C) contestability.
D) tacit collusion.
37. A(n) _______ is a single firm with _______ , whereas _______ implies an industry with ________ firm(s) who have (has) _______ .
A) oligopoly; no barriers to entry; monopoly; many; easy entry and exit
B) monopoly; barriers to entry; monopolistic competition; many; easy entry and exit
C) monopoly; barriers to entry; oligopoly; few; no barriers to entry
D) monopolistic competitor; barriers to entry; monopoly; one; barriers to entry
Use the following to answer question 38:
38. (Exhibit: Monopoly Through Collusion) The exhibit illustrates the situation in an industry that consists of two firms facing identical demand curves; the demand curve for each firm is D1. If the firms collude and agree to share the market demand equally, then each firm will act as if its demand curve is given by:
A) D1.
B) D2.
C) MR1.
D) 2 x D1.
39. In order to engage in price discrimination, a firm must be:
A) a price setter.
B) able to prevent resale by the customers charged a lower price.
C) able to segment the market.
D) All of the above are true.
40. Which of the following is (are) true?
A) When choosing the profit-maximizing quantity, the short-run decisionmaking process for a firm in perfect competition and a firm in monopolistic competition is the same, since they produce the quantity where MR = MC.
B) In the long run in perfect competition economic profits = 0, and in monopolistic competition in the long-run economic profits are = 0.
C) In perfect competition P = MC and in monopolistic competition, MR = MC, but
P > MC and there is excess capacity.
D) All of the above are true.
41. Oligopoly is a market structure characterized by:
A) a horizontal demand curve.
B) a large number of small firms.
C) interdependence in decisionmaking.
D) relatively easy entry and exit.
42. Firms in a duopoly situation may collude to choose the monopoly solution to the determination of quantity to produce and the price at which to sell their products.
A) True
B) False
43. Mutually assured destruction among nuclear powers is an example of the tit-for-tat game theory strategy.
A) True
B) False
44. In the Case in Point on The Matzo Fix, the federal judge found that:
A) there was a monopoly in the industry.
B) Manischewitz was engaged in a conspiracy to fix prices.
C) the three firms in the so-called conspiracy were innocent of all charges.
D) three firms were equally guilty of fixing prices and imposed heavy fines on all of the co-conspirators.
45. Monopolistic competition is an industry characterized by:
A) a product with no close substitutes.
B) a horizontal demand curve.
C) a large number of firms.
D) barriers to entry and exit.
46. A well-known example of an international cartel is:
A) Japan.
B) OPEC.
C) Exxon.
D) General Motors.
47. The demand curve for a firm under monopolistic competition is:
A) U-shaped.
B) upward sloping.
C) downward sloping.
D) vertical.
48. The Case in Point on The Matzo Fix suggested that one way to avoid conspiring with your competitors in an oligopoly market is to:
A) simply refuse to follow the lead of the firm seeking to raise prices.
B) cut your price of the product drastically and take all of the market from your rivals.
C) call the cops.
D) buy out your rival(s).
49. Compare, contrast, and discuss the marginal rules involved in profit maximization in the pricing decisions of firms in perfect competition and monopolistic competition. Include a graph showing the long-run equilibrium for each market structure to support your answers.
50. The market for plumbing services in a city can be characterized by the model of monopolistic competition. Suppose that the market is initially in long-run equilibrium, and then there is an increase in demand for plumbing services. We expect that in the short run the price:
A) and output of plumbing services will fall.
B) and output of plumbing services will remain unchanged.
C) and output of plumbing services will rise.
D) of plumbing services will rise and the output will fall.
51. Imperfectly competitive markets include:
A) a category where many firms sell identical products.
B) an industry with a few firms, producing a similar product, and in some cases an identical product.
C) a category where P = MR = MC is the profit maximizing condition.
D) monopolies.
52. The largest HHI possible is in the case of _______ and the index is _______ .
A) monopoly; 10
B) monopoly; 10,000
C) monopoly; 100,000
D) oligopoly; 100,000
53. A firm in monopolistic competition maximizes its profit by producing at the level at which:
A) MC = ATC.
B) MC = AR.
C) MC = MR.
D) MC = P.
Use the following to answer question 54:
54. (Exhibit: Profit Maximization for a Firm in Monopolistic Competition) Suppose that an innovation reduces a firm’s fixed costs and reduces cost from ATC to ATC’ Before the innovation reduced the cost, the firm’s maximum economic profit was:
A) $0.
B) $30.
C) $750.
D) $4,500.
55. An industry characterized by many firms, producing similar but differentiated products, in a market with easy entry and exit is called:
A) perfect competition.
B) monopoly.
C) monopolistic competition.
D) oligopoly.
56. A key characteristic of monopolistic competition is product differentiation.
A) True
B) False
57. The industry characterized by a few interdependent firms where there are barriers to entry is called:
A) monopolistic competition.
B) perfect competition.
C) oligopoly.
D) monopoly.
58. Oligopoly is a market structure characterized by:
A) independence in decisionmaking.
B) uncertainty about the interaction of rival firms.
C) substantial diseconomies of scale.
D) a large number of small firms.
59. An example of monopolistic competition is the _______ market.
A) restaurant
B) soft drink
C) automobile
D) breakfast cereal
60. Firms will seek a price structure that offers customers with a _______ demand a ________ price and offers customers with a _______ demand a _______ price.
A) less elastic; lower; more elastic; higher
B) less elastic; higher; more elastic; lower
C) lower; higher; higher; lower
D) seasonal; lower; unchanging; higher
61. Monopolistic competition is an industry characterized by a:
A) small number of firms producing identical products, with barriers to entry for firms.
B) small number of firms producing similar products, with relatively easy entry for firms.
C) large number of firms producing similar products, with relatively easy entry for firms.
D) large number of firms producing identical products, with relatively easy entry for firms.
62. The sum of the squared market shares of each firm in an industry is the:
A) concentration ratio.
B) employment rate.
C) Herfindahl-Hirschman Index.
D) market number.
63. An example of monopolistic competition is the restaurant business.
A) True
B) False
64. Which of the following is (are) true?
A) According to the text, perfect competition is a goal toward which an economy should strive.
B) Monopolistic competition results in excess capacity, since in the long run MR = MC to the left of the minimum of the ATC curve.
C) One might characterize monopolistic competition as an industry, such as gasoline stations, which in the long run experiences economic profits.
D) All of the above are true.
65. OPEC is:
A) the Organization of Petroleum Exporting Countries.
B) an international cartel made up of 13 oil-producing countries.
C) the cartel that was responsible for the large increases in crude oil prices in the 1970s.
D) described by all of the above.
66. Price discrimination is the practice of:
A) charging different prices to buyers of the same good.
B) paying different prices to suppliers of the same good.
C) equating price to marginal cost.
D) equating price to marginal revenue.
67. In the eyeglasses industry it was found that advertising led to lower prices.
A) True
B) False
68. A dominant strategy is a special type of trigger strategy.
A) True
B) False
Use the following to answer question 69:
69. (Exhibit: Collusion) Panel (c) gives the combined marginal revenue, demand, and marginal cost curves for an industry containing several firms. Panels (a) and (b) give marginal cost curves for two of those firms. The price charged by the industry under collusion is given by:
A) W.
B) X.
C) Y.
D) Z.
70. In monopolistic competition, in the long run it is most likely that P = ATC and that there will be no excess capacity.
A) True
B) False
Use the following to answer question 71:
71. (Exhibit: Profit Maximization in Monopolistic Competition) A firm in monopolistic competition will maximize profits by producing the level of output where:
A) P = MC
B) MR = MC
C) P = MR
D) price minus ATC (i.e., economic profit per unit) is the largest.
Use the following to answer question 72:
72. (Exhibit: Firms in Monopolistic Competition) In Panel (c), the profit-maximizing quantity of output is generated by the intersection at point:
A) U.
B) V.
C) W.
D) X.
73. If advertising enhances competition, it will tend to _______ prices and ________ quantities demanded.
A) increase; lower
B) lower; increase
C) lower; decrease
D) increase; increase
74. An unwritten, unspoken agreement through which firms limit competition among themselves is:
A) satisficing.
B) tacit collusion.
C) overt collusion.
D) a cartel.
75. Discuss and explain how concentration ratios are used by economists in their analyses of industries. What are the strengths and weaknesses of concentration ratios?

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