1. If Family Travel Agency, a monopolistic competitor,
offers services that are differentiated from the services of other producers
in the industry, it
a. faces a perfectly elastic demand curve
b. is a price taker
c. has some power to control the price it charges
d. faces a perfectly inelastic demand curve
e. produces a product with no close substitutes
2. When firms in an industry produce differentiated products,
a. long-run economic profit will always be zero
b. short-run economic profit will always be positive
c. the demand curves facing firms will always be perfectly
elastic
d. the demand curves facing firms will always be downward-sloping
e. new firms will always have an incentive to enter the
industry in the long run
3. In the short run, Sam Malone's bar, Cheers, a firm
in monopolistic competition, is
a. guaranteed to earn zero economic profit
b. guaranteed to earn economic profit
c. guaranteed to earn an economic loss
d. guaranteed to earn either zero or positive economic
profit
e. not guaranteed any level of economic profit
4. Assume a monopolistically competitive firm is earning
an economic profit. The marginal revenue from selling an additional unit
is $30 and the marginal cost of producing that additional unit is $23.
The firm should
a. change neither its price nor its output level
b. reduce its price and increase its output level
c. increase its price and reduce its output level
d. reduce both its price and its output level
e. increase both its price and its output level
5. Monopolistic competition is similar to
a. perfect competition because the firms face downward-sloping
demand curves and can only earn normal profit in the long run
b. pure monopoly because the firms face downward-sloping
demand curves and can only earn normal profit in the long run
c. perfect competition because the firms face downward-sloping
demand curves and similar to pure monopoly in that the firms can only earn
normal profit in the long run
d. pure monopoly because the firms face downward-sloping
demand curves and similar to perfect competition in that the firms can
only earn normal profit in the long run
e. pure monopoly because the firms face downward-sloping
demand curves and can only earn economic profit in the long run
6. In the long run, the economic profits of Hoot's Pump
Chicken 'n' Ribs, a monopolistic competitor,
a. are not eliminated because competition is not perfect
b. are not eliminated because the demand curve slopes
downward
c. are eliminated due to firms entering the industry
d. are eliminated due to firms leaving the industry
e. are not eliminated because firms cannot enter the
industry
7. If the demand curve facing the Acme Awl Company
is tangent to its average total cost curve, all of the following statements
are true except one. Which is the exception?
a. Economic profit is zero.
b. A normal profit exists.
c. Marginal cost must exceed marginal revenue.
d. Acme has excess capacity.
e. Firms have no incentive to enter or leave this industry.
8. In the long run, a firm in monopolistic competition
will find
a. its demand curve shifting until price equals average
total cost
b. its cost curve shifting until price equals average
total cost
c. its demand curve shifting until marginal revenue equals
marginal cost
d. its cost curve shifting until marginal revenue equals
marginal cost
e. no changes in its demand or cost curves if it is making
an economic profit
9. In the long run, the output of a monopolistically
competitive firm
a. exceeds that of the perfectly competitive firm
b. is less than that of a perfectly competitive firm
c. is at the point at which LRAC is minimized
d. equals that of a perfectly competitive firm
e. is less than that of a monopolist
10. Monopolistic competition is similar to
a. perfect competition, in that firms face downward-sloping
demand curves and earn zero long-run economic profit
b. pure monopoly, in that firms face downward-sloping
demand curves and can earn economic profits both in the short run and in
the long run
c. perfect competition, in that firms face perfectly
elastic demand curves and earn zero long-run economic profit
d. pure monopoly, in that firms can earn economic profits
both in the short run and in the long run, and similar to perfect competition,
in that firms face perfectly elastic demand curves
e. pure monopoly, in that firms face downward-sloping
demand curves, and similar to perfect competition, in that long-run economic
profit is zero
11. An intersection known as Four Corners lies
300 miles from the nearest town. At this intersection are three independently
owned gas stations and one small pharmacy. Which of the following is true?
a. The firms are all perfectly competitive because of
their size.
b. It would be easier for all four firms to form a cartel
than for only the gas stations to do so.
c. The gas stations are monopolistically competitive
because there are so few of them that they are almost monopolists.
d. The gas stations are perfectly competitive; the pharmacy
is not.
e. The gas stations are oligopolists; the pharmacy is
a monopolist.
12. There are multiple models of firm pricing behavior
in oligopolistic markets because
a. it is difficult to predict how rival firms will react
to any pricing decision
b. the demand curve slopes upward for these firms
c. firms could earn profit in the long run unlike other
markets
d. price has a direct impact on profit for a firm in
oligopoly
e. the products are not identical in terms of quality,
image, location
13. If a firm must produce a significant share of market
output before low average costs can be achieved, the structure of this
industry will tend to be
a. monopolistic competition
b. perfect competition
c. oligopoly
d. either monopolistic competition or oligopoly
e. either perfect competition or monopolistic competition
14. A cartel's profit-maximizing price is
a. on the demand curve at the quantity where marginal
cost equals marginal revenue
b. on the demand curve where it intersects its marginal
cost curve
c. the highest price possible
d. determined by using the cost-plus pricing model
e. where the kink in the demand curve occurs
15. If zinc suppliers are successful in forming
an international zinc cartel, they will experience
a. lower output and higher prices, which discourage
the entry of new firms into the industry
b. lower output, higher prices, and the need to organize
an effort to prevent the entry of new firms into the industry
c. higher output and higher prices, which discourage
the entry of new firms into the industry
d. higher output, higher prices, and the need to organize
an effort to prevent the entry of new firms into the industry
e. none of the above
16. Suppose that Caterpillar increases its prices
and International Harvester and John Deere follow this with their own price
increases. Which of the following is true?
a. This conduct is consistent with the kinked demand
curve theory but not the price leadership theory.
b. This conduct is consistent with the price leadership
theory.
c. The kinked demand curve theory cannot be applied to
the farm implement industry because it is not an oligopoly.
d. The kinked demand curve theory cannot be applied because
it is a theory of monopolistic competition and the tractor industry is
an oligopoly.
e. This conduct is consistent with both the nature of
perfect competition and the price leadership theories.
17. One of the following statements about the kinked demand
curve theory is correct. Which one?
a. The theory explains why a change in marginal cost
may not lead to a change in price.
b. The theory assumes that a firm's competitors follow
a price increase but ignore a price decrease.
c. It is the only theory of oligopoly behavior in economics.
d. The theory predicts that oligopoly prices will tend
to rise over time.
e. The theory suggests an oligopolist's demand curve
will be more elastic below the current price.
18. In the kinked demand theory, the firm faces a less
elastic demand
a. above the kink because there the firm will not lose
many customers to its rivals
b. above the kink because there its customers will be
more willing to switch to its rivals' products than they would be below
the kink
c. below the kink because there the firm will not gain
many customers from its rivals
d. below the kink because there its customers will be
more willing to switch to its rivals' products than they would be above
the kink
e. at the kink than at any other place on the demand
curve
19. In the long run, firms in an oligopoly will
a. sell only differentiated products
b. produce only a standardized product
c. probably earn a positive economic profit
d. probably incur losses
e. earn only a normal profit
20. Which of the following is not common
to all market structures?
a. The demand curve for the firm's output and the firm's
average revenue curve are the same.
b. The firm must be able to earn sufficient revenue to
cover total cost in order to continue operating in the long run.
c. The firm must be able to earn sufficient revenue to
cover variable cost in order to continue producing in the short run.
d. The firm cannot earn economic profit in the long run.
e. The firm's marginal cost equals its average total
cost at the minimum point of its average total cost curve.
