1215

Characteristics of monopolistic competition include all of the following EXCEPT:

A) high barriers to entry.

B) large numbers of independent sellers.

C) differentiated products.

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Monopolistic competition has low barriers to entry.

1215

An oligopolistic firm:

A) is likely to be formed when the minimum-cost output is only a small portion of the market output.

B) will seldom use product quality as a competitive weapon.

C) will consider the potential response of its rivals when making business decisions.

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Oligopolists are highly dependent upon the actions of their rivals when making business decisions. Price determination in the auto industry is a good example. Automakers tend to play "follow the leader" and announce price increases in close synchronization. They are not working explicitly together, but the actions of one producer have a large impact on the others when products are differentiated, quality may be a competitive strategy.

1215

An oligopolistic industry does NOT have:

A) high barriers to entry.

B) large economies of scale.

C) many sellers.

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An oligopolistic industry has a few sellers with large economies of scale, a great deal of interdependence among firms, and high barriers to entry.

1215

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.

1215

 

Assume that the market for paper supplies and the market for toothpicks have the following characteristics:

The Market for Paper Supplies is comprised of:

• A large number of independent sellers

• Differentiated products

• Low barriers to entry/exit

The Market for Toothpicks is comprised of:

• A large number of independent sellers

• Homogeneous products

• No barriers to entry/exit

The Papyrus Company operates in the market for paper supplies and Wudden Floss operates in the toothpick market. The sales managers for both companies want to know how a change in price will affect the quantity sold.

Which of the following choices best completes the following sentence? If both firms increase prices, the quantity sold by Papyrus Company will:

A) increase, and the quantity sold by Wudden Floss will decrease.

B) decrease, and Wudden Floss will sell nothing.

C) decrease, and so will the quantity sold by Wudden Floss.

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Papyrus Company is an example of a price searcher engaged in monopolistic competition (low barriers to entry). Thus, the company faces a downward sloping demand curve and highly elastic demand. An increase in price will result in fewer units sold. Wudden Floss is an example of a price taker operating in a purely competitive market. Thus, the firm faces a horizontal demand curve and perfectly elastic demand. An increase in price will result in no units sold. In a purely competitive market, the firm must take the market price.

1215

Which of the following is most likely to be considered a characteristic of an oligopolistic industry?

A) Few barriers to entry.

B) Many sellers.

C) A great deal of interdependence among firms.

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An oligopolistic industry has a great deal of interdependence among firms. One firm’s pricing decisions or advertising activities will affect the other firms' demand curves.

1215

Consider the following statements:

Statement 1: “When oligopoly firms cheat on price fixing agreements, the resulting price and output quantity approaches that of perfect competition.”

Statement 2: “Monopolistic competition is inefficient because a large deadweight loss from advertising and marketing costs is a characteristic of this form of competition.”

With respect to these statements:

A) only one is correct.

B) both are correct.

C) both are incorrect.

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The efficiency of monopolistic competition is not clear. While increased opportunity cost is associated with the intensive marketing and advertising activities that are characteristic of monopolistic competition, consumers definitely benefit from these selling activities because they receive information that often enables them to make better purchasing decisions. Hence the advertising and marketing costs may be more than the efficient amount, but do not represent a deadweight loss.

1215

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.

1215

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.

1215

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.