Reading 20: Monopolistic Competition and Oligopoly-LOS a 习题 2011, include, likely, border, center

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Session 5: Economics: Market Structure and Macroeconomic Analysis
Reading 20: Monopolistic Competition and Oligopoly

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

 

 

Characteristics of an oligopoly least likely include:

A) interdependence among competitors.

B) identical products.

C) significant barriers to entry.

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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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Which of the following regarding monopolistic competition is most accurate?

A) Each firm produces a differentiated product.

B) Zero barriers to entry and exit exist.

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

B) elastic due to the availability of many 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) monopolists maximize profit; monopolistic competitors do not.

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

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

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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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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) Dominant firm model.

B) Variable elasticity model.

C) Kinked demand 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.

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Firms in perfectly competitive markets and firms operating in a market characterized by monopolistic competition have several things in common. Which of the following is least likely one of them? Both:

A) operate in markets that have low or no barriers to entry.

B) face perfectly elastic demand curves.

C) maximize economic profit.

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The only item listed in the question that monopolistic competition and pure competition do not have in common is a perfectly elastic demand curve. Under pure competition, producers face a perfectly elastic demand curve, whereas price searchers face downward sloping demand curves.

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Which of the following is NOT a characteristic of an oligopoly?

A) Products can either be similar or differentiated.

B) There are few sellers.

C) Relatively small economies of scale.

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Oligopolies have large economies of scale and interdependence among competitors.