Tutorial Review-5.Docx

MONOPOLISTIC AND OLIPOGOLY
1. The key characteristics of a monopolistically competitive market structure include
A) many small (relative to the total market) sellers acting independently.
B) all sellers sell a homogeneous product.
C) barriers to entry are strong.
D) sellers have no incentive to advertise their products.
2. All of the following characteristics are common to both monopolistic competition and
perfect competition except
A) firms act to maximize profit.
B) entry barriers into the industries are low.
C) the market demand curves are downward-sloping.
D) firms take market prices as given.
3. The key characteristics of a monopolistically competitive market structure include
A) few sellers.
B) sellers selling similar but differentiated products.
C) high barriers to entry.
D) sellers acting to maximize revenue.
4. A monopolistically competitive firm will
A) charge the same price as its competitors do.
B) always produce at the minimum efficient scale of production.
C) have some control over its price because its product is differentiated.
D) produce an output level that is productively and allocatively efficient.
5. For a monopolistically competitive firm, marginal revenue
A) equals the price.
B) is greater than the price.
C) is less than the price.
D) and the price are unrelated.
6. When a monopolistically competitive firm cuts its price to increase its sales, it
experiences a gain in revenue due to the
A) substitution effect.
B) income effect.

C) price effect.
D) output effect.
7. When a monopolistically competitive firm cuts its price to increase its sales, it
experiences a loss in revenue due to the
A) substitution effect.
B) income effect.
C) price effect.
D) output effect.
8. Which of the following is not a characteristic of monopolistic competition?
A) Firms are price takers.
B) There are many buyers and sellers.
C) Barriers to entry are low.
D) Firms sell similar, but not identical, products.
Figure 13-3


9. Refer to Figure 13-3. The marginal revenue from one additional unit sold is the sum of
the gain in revenue from selling the additional unit and the loss in revenue from having to
charge a lower price to sell the additional unit. Based on the diagram in the figure,
A) X represents the gain (price effect) and Y the loss (output effect).
B) X + Z represents the loss (output effect) and Y the gain (price effect).
C) Y represents the gain (output effect) and X the loss (price effect).
D) X represents the loss (price effect) and Y + Z the gain (output effect).
10. Refer to Figure 13-3. What is the marginal revenue of the sixth unit of output?
A) $4 (MR=P+Qx(dP/dQ)
B) $5
C) $9
D) $54
11. For the monopolistically competitive firm,
A) Price (P) = Marginal Revenue (MR) = Average Revenue (AR).

B) P = MR > AR.
C) P = AR > MR.
D) P > MR = AR.
12. When a firm faces a downward-sloping demand curve, marginal revenue
A) must exceed price because the price effect outweighs the output effect.
B) is less than price because a firm must lower its price to sell more.
C) equals price because the firm sells a standardized product.
D) must exceed price because the output effect outweighs the price effect.
13. A monopolistically competitive firm maximizes profit where
A) price = marginal revenue.
B) price > marginal cost.
C) marginal revenue > average revenue.
D) total revenue > marginal cost.
Figure 13-4


Figure 13-4 shows short-run cost and demand curves for a monopolistically competitive firm in
the market for designer watches.
14. Refer to Figure 13-4. If the firm represented in the diagram is currently producing and
selling Qa units, what is the price charged?
A) P0
B) P1
C) P2
D) P3
15. Refer to Figure 13-4. What is the area that represents the total revenue made by the firm?
A) 0P0aQa
B) 0P1bQa
C) 0P2cQa
D) 0P3dQa
16. Refer to Figure 13-4. What is the area that represents the total variable cost of

production?
P
aQ
A) 0 0 a
B) 0P1bQa
C) P0abP1
D) P1bdP3
17. Refer to Figure 13-4. What is the area that represents the total fixed cost of production?
A) 0P1aQa
B) P0adP3
C) P1bdP3
D) That information cannot be determined from the graph.
18. Refer to Figure 13-4. What is the area that represents the loss incurred by the firm?
A) the area P0adP3


B) the area P1bcP2
C) the area P0acP2
D) the area P2cdP3
19. A characteristic found only in oligopolies is
A) break-even level of profits.
B) interdependence of firms.
C) independence of firms.
D) products that are slightly different.
20. Which of the following is the best example of an oligopolistic industry?
A) the wheat markets
B) the pharmaceutical industry
C) public education
D) the beauty products industry
21. Producing a homogeneous product occurs in which of the following industries?

A) oligopoly, monopolistic competition, and perfect competition
B) perfect competition only
C) oligopoly and perfect competition
D) monopolistic competition and perfect competition
22. Producing a differentiated product occurs in which of the following industries?
A) oligopoly, monopolistic competition, and perfect competition
B) monopolistic competition only
C) oligopoly only
D) monopolistic competition and oligopoly
23. A four-firm concentration ratio measures
A) the fraction of an industry's sales accounted for by the four largest firms.
B) the production of any four firms in an industry.
C) how the four largest firms became so concentrated.
D) the fraction of employment of the four largest firms in an industry.
24. The value of the four-firm concentration ratio that many economists consider indicative
of the existence of an oligopoly in a particular industry is
A) anything greater than 10 percent.
B) anything greater than 20 percent.
C) anything greater than 30 percent.
D) anything greater than 40 percent.
25. Oligopolies are difficult to analyze because
A) the firms are so large.
B) demand and cost curves do not exist for these types of industries.
C) how firms respond to a price change by a rival is uncertain.
D) oligopolies are a recent development so economists have not had time to develop models.
26. In an oligopoly market,
A) the pricing decisions of all other firms have no effect on an individual firm.
B) individual firms pay no attention to the behavior of other firms.
C) advertising of one firm has no effect on all other firms.
D) one firm's pricing decision affects all the other firms.

27. Marginal revenue for an oligopolist is
A) identical to the demand for the firm's product.


B) difficult to determine because the firm's demand curve is typically unknown.
C) downward sloping beneath the firm's demand curve.
D) horizontal on a price-quantity diagram.
28. An example of a barrier to entry is
A) product differentiation.
B) high profits.
C) occupational licensing.
D) increasing marginal costs.
29. The profit-maximizing level of output and the profit-maximizing price for an oligopolist
cannot be calculated when we don't know
A) what the concentration ratio for the oligopolist's industry is.
B) what the minimum efficient scale in the oligopolist's industry is.
C) the demand curve and the marginal revenue curve of the oligopolist.
D) the type of barrier to entry that exists in the oligopolist's industry.
30. The study of how people make decisions in situations where attaining their goals depends
on their interactions with others is called
A) Nash equilibrium.
B) the prisoner's dilemma.
C) game theory.
D) dominant strategy equilibrium.
Table 14-1

LimoZeenz and AirPorter and are the only two airport shuttle and limousine rental service
companies in the mid-sized town of Shady Shores. Each firm must decide on whether to offer its
customers a mid-week discount for airport transportation. Table 14-1 shows the payoff matrix for
profits earned by each company based on either offering or not offering the discount.

31. Refer to Table 14-1. Is there a dominant strategy for LimoZeenz and if so, what is it?
A) No, its outcome depends on what AirPorter does.
B) Yes, LimoZeenz should offer the mid-week discount.
C) Yes, LimoZeenz should not offer the mid-week discount.
D) Yes, LimoZeenz' dominant strategy is to collude with AirPorter.
32. Refer to Table 14-1. Is there a dominant strategy for AirPorter and if so, what is it?
A) No, its outcome depends on what LimoZeenz does.
B) Yes, AirPorter should offer the mid-week discount.
C) Yes, AirPorter should not offer the mid-week discount.


D) Yes, AirPorter's dominant strategy is to collude with LimoZeenz.
33. Refer to Table 14-1. Let's suppose the game starts with each firm offering the mid-week
discount so that LimoZeenz earns a profit of $6,000 and AirPorter earns a profit of
$12,000. Is there an incentive for any one firm to stop offering the mid-week discount?
A) No, neither firm has an incentive to stop offering the discount.
B) Yes, both firms have an incentive to stop offering the discount.
C) Yes, AirPorter has an incentive to stop offering the discount, but LimoZeenz does not.
D) Yes, LimoZeenz has an incentive to stop offering the discount, but AirPorter does not.
34. Refer to Table 14-1. What is the Nash equilibrium in this game?
A) There is no Nash equilibrium.
B) LimoZeenz offers the discount, but AirPorter does not.
C) AirPorter offers the discount, but LimoZeenz does not.
D) Both LimoZeenz and AirPorter do not offer the discount.
Table 14-2

Table 14-2 shows the payoff matrix for Walmart and Target from every combination of pricing
strategy for the popular PlayStation 4. At the start of the game each firm charges a low price and
each earns a profit of $7,000.
35. Refer to Table 14-2. Is the current strategy in which each firm charges the low price and

earns a profit of $7,000 a Nash equilibrium? If not, why and what is the Nash
equilibrium?
A) No, it is not a Nash equilibrium because each firm can do better by charging the high price.
The Nash equilibrium occurs when each firm charges the high price and earns a profit of
$10,000.
B) No, the current situation is not a Nash equilibrium; it is a dominant strategy equilibrium.
There is no Nash equilibrium in this game.
C) No, the current situation is not a Nash equilibrium. The Nash equilibrium for each firm is to
have the other charge a high price and for the firm in question charge a low price.
D) Yes, the current situation is a Nash equilibrium.
36. Refer to Table 14-2. For each firm, is there a better outcome than the current situation in
which each firm charges the low price and earns a profit of $7,000?
A) Yes, the firms can implicitly collude and agree to charge a higher price.
B) No, there is no incentive for each firm to consider any other strategy.
C) No, any other strategy hurts consumers.
D) Yes, each firm can implicitly agree to increase output and not to deviate from a low price.


37. Refer to Table 14-2. Suppose Walmart and Target both advertise that they will match the
lowest price offered by any competitor. What is the purpose of such a strategy?
A) to signal to each other not to charge below the current low price
B) to signal to each other that they will not hesitate to initiate a price war
C) to signal to each other that they intend to charge the high price
D) to signal to each other to share the market equally
38. Refer to Table 14-2. Suppose pricing PlayStations is a repeated game in which Walmart
and Target will be selling the game system in competition over a long period of time. In
this case, what is the most likely outcome?
A) a noncooperative equilibrium in which each firm charges the high price
B) a cooperative equilibrium in which each firm charges the high price
C) a noncooperative equilibrium in which each firm charges the low price

D) a cooperative equilibrium in which each firm charges the low price
Table 14-3

Suppose OPEC has only two producers, Saudi Arabia and Ecuador. Saudi Arabia has far more
oil reserves and is the lower-cost producer compared to Ecuador. The payoff matrix in Table 143 shows the profits earned per day by each country. "Low output" corresponds to producing the
OPEC assigned quota and "high output" corresponds to producing the maximum capacity
beyond the assigned quota.
39. Refer to Table 14-3. Is there a dominant strategy for Saudi Arabia and, if so, what is it?
A) Yes, the dominant strategy is to produce a high output.
B) Yes, the dominant strategy is to produce a low output.
C) No, there is no dominant strategy.
D) Yes, it has a dominant strategy depending on what Ecuador does.
40. Refer to Table 14-3. Is there a dominant strategy for Ecuador and, if so, what is it?
A) Yes, it has a dominant strategy depending on what Saudi Arabia does.
B) No, there is no dominant strategy.
C) Yes, the dominant strategy is to produce a low output.
D) Yes, the dominant strategy is to produce a high output.
41. Refer to Table 14-3. What is the Nash equilibrium in this game?
A) In the Nash equilibrium both Saudi Arabia and Ecuador produce a low output and earn a
profit of $100 million and $15 million respectively.
B) In the Nash equilibrium both Saudi Arabia and Ecuador produce a high output and earn a
profit of $60 million and $15 million respectively.
C) In the Nash equilibrium Saudi Arabia produces a low output and earns a profit of $80 million


and Ecuador produces a high output and earns a profit of $22 million.
D) There is no Nash equilibrium.
42. Refer to Table 14-3. Which of the following statements is true?
A) The Nash equilibrium is a noncooperative, dominant strategy equilibrium.
B) The Nash equilibrium is a cooperative equilibrium.

C) The Nash equilibrium is a collusive equilibrium.
D) There is no Nash equilibrium in this game because each party pursues its dominant strategy.
Table 14-4

Alpha and Beta are the only firms selling gyros in the upscale town of Delphi. Each firm must
decide on whether to offer a discount to students to compete for customers. If one firm offers a
discount but the other does not, then the firm that offers the discount will increase its profit.
Table 14-4 shows the payoff matrix for this game.
43. Refer to Table 14-4. If Alpha assumes that Beta would offer a student discount, what
should it do?
A) Alpha should not offer a student discount.
B) Alpha should also offer a student discount.
C) Alpha should wait at least a year to see if Beta stops offering a student discount before
making a decision.
D) Being a duopolist, Alpha is not affected by Beta's choices because it has a secure 50 percent
market share.
44. Refer to Table 14-4. Does Alpha have a dominant strategy and if so, what is it?
A) Yes, Alpha should offer a student discount.
B) Yes, Alpha should not offer a student discount.
C) There are two dominant strategies: if Beta offers a student discount then Alpha's best bet is to
not offer a student discount, but if Beta does not offer a student discount then Alpha should offer
a student discount.
D) No, there is no dominant strategy.
45. Refer to Table 14-4. Does Beta have a dominant strategy and if so, what is it?
A) Yes, Beta should offer a student discount.
B) Yes, Beta should not offer a student discount.
C) There are two dominant strategies: if Alpha offers a student discount then Beta's best bet is to
not offer a student discount, but if Alpha does not offer a student discount then Beta should offer
a student discount.
D) No, there is no dominant strategy.

46. Refer to Table 14-4. What is the Nash equilibrium in this game?
A) There is no Nash equilibrium.
B) Beta offers a student discount but Alpha does not.
C) Alpha offers a student discount but Beta does not.
D) Both Alpha and Beta offer a student discount.
47. An example of a barrier to entry is
A) product differentiation.
B) high profits.
C) occupational licensing.
D) increasing marginal costs.
48. Economies of scale can lead to an oligopolistic market structure because
A) if larger firms have lower costs, new small entrants will not be able to produce at the low
costs achieved by the big established firms.
B) if economies of scale are insignificant, only a few firms are able to produce at the low costs
achieved by the big established firms.
C) a few firms can force rivals to produce at low levels of output.
D) a few firms can use high profits to keep out new entrants.
49. Patents, tariffs, and quotas are all examples of
A) government-imposed barriers.
B) economic regulations that increase efficiency.
C) entry barriers that improve a country's standard of living.
D) entry barriers that protect consumers.
50. What do Spotify and Apple have in common?
A) Each achieved a dominant position in its industry because it owned a key input in the
production of its product.
B) The industry in which each firm competes is an oligopoly because of government-imposed
barriers to entry.
C) Each company was founded in the same state.

D) The profitability of each firm depends on its interactions with other firms.
END QUIZ

Bud’s Strategies
10,000
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Wise’s
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20,000
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20,000
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100

100

150
-50

-50
150

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