Reading 20: Monopolistic Competition and Oligopoly LOS A习题 border, likely, market, 2010

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LOS a: Describe the characteristics of monopolistic competition and an oligopoly.

A market that is characterized by monopolistic competition is least likely to feature:

A) low barriers to entry.

B) a small number of independent sellers.

C) sellers that produce a differentiated product.

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In monopolistic competition, there is a large, not small, number of independent sellers.

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Characteristics of an oligopoly least likely include:

A) interdependence among competitors.

B) significant barriers to entry.

C) identical products.

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In an oligopoly, a small number of producers sell products that can be similar or differentiated. An oligopoly typically features significant barriers to entry including economies of scale. Pricing and output decisions by each firm directly influence the decisions of competing firms.

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The type of economic market that features a large number of competitors offering differentiated products is best characterized as:

A) perfect competition.

B) oligopoly.

C) monopolistic competition.

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Monopolistic competition is used to describe markets where there are a large number of competitors producing differentiated products.

In perfect competition all firms produce identical products. In an oligopoly there is a small number of firms.

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Which of the following regarding monopolistic competition is most accurate?

A) Zero barriers to entry and exit exist.

B) Each firm produces a differentiated product.

C) There are very few independent sellers.

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Other characteristics of monopolistic competition (also known as competitive price searcher markets) are: a large number of independent sellers, low barriers to entry, and an elastic downward sloping demand curve.

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The demand curves faced by monopolistic competitors is:

A) elastic due to the availability of many close substitutes.

B) not sensitive to price due to absence of close substitutes.

C) inelastic due to the availability of many complementary goods.

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The demand for products from monopolistic competitors is elastic due to the availability of many close substitutes. If a firm increases its product price, it will lose customers to firms selling substitute products.

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Monopolistic competition differs from pure monopoly in that:

A) barriers to entry are high under monopoly, but low under monopolistic competition.

B) monopolists maximize profit; monopolistic competitors do not.

C) monopolistic competitors are price takers, monopolists are not.

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Monopolistic competition is characterized by the low barriers to enter its competitive markets. In contrast, a monopoly exists only where there are high barriers to market entry.

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Under which type of market structure are the production and pricing alternatives of a firm most affected by the decisions of its competitors?

A) Oligopoly.

B) Monopolistic competition.

C) Perfect competition.

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An oligopoly market structure is characterized by a small number of firms producing similar or differentiated products, with a high degree of interdependence among competitors. Each firm’s optimal price and output are strongly affected by the pricing and output decisions of its competitors.

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Statement 1: “The kinked demand curve model of oligopoly assumes that a decrease in price will not be followed by other firms in the industry, but a price increase will.”

Statement 2: “Firms in monopolistic competition have high advertising expenses because they want to create the perception that their product is different from their competitors’ products when the competing products are actually quite similar.”

With respect to these statements:

A) both are correct.

B) only one is correct.

C) both are incorrect.

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Statement 1 is incorrect because the kinked demand curve model contends that each firm in oligopoly competition believes that an increase (not decrease) in its price will not be followed by the competition, but a decrease (not increase) in price will. Each firm believes that it faces a demand curve that is more elastic (flatter) above a given price, i.e., the kink, than it is below the given price.

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If a market features differentiated products but has low barriers to entry, in long-run equilibrium the firms in the market will earn:

A) substantial economic losses.

B) substantial economic profits.

C) zero economic profits.

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Low barriers to entry suggest free entry and exit, which implies zero economic profits in the long run.

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Assume that a firm in an oligopoly market believes the demand curve for its product is more elastic above a specific price than below this price. This belief is most closely associated with which of the following models?

A) Kinked demand model.

B) Dominant firm model.

C) Variable elasticity model.

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The kinked demand model assumes that each firm in a market believes that at some price, demand is more elastic in respect to price increases than it is to price decreases.