Chs.

12 & 13 Monopolistic Competition and Oligopoly and Game Theory

Revised Spring 2008
Multiple Choice (100 points):
Scenario 1:
Suppose mountain spring water can be produced at no cost and that the demand and marginal
revenue curves or mountain spring water are given as ollows:
! " #000 $ %& MR " 1200 $ 0'(!
1) Reer to Scenario 1' )hat will be the price in the long run i the industr* is a Cournot duopol*+
a) Competition will drive the price to ,ero
b) -.00
c) -(00
d) -#00
e) -800
2) Reer to Scenario 1' )hat is the proit ma/imi,ing price o a monopolist+
a) -.00
b) -(00
c) -#00
d) -800
e) none o the above
0) 1 cartel selects the proit$ma/imi,ing level o output b*:
a) setting the industr* price e2ual to the sum o individual producers3 marginal costs'
b) setting each irm3s marginal revenue e2ual to its marginal cost'
c) setting the marginal revenue derived rom the industr* demand curve e2ual to the hori,ontal sum o the
individual producers3 marginal costs'
d) setting each irm3s price e2ual to its marginal cost'
() )hich o the ollowing is 456 a good e/ample o a monopolisticall* competitive industr*+
a) 1griculture'
b) 6he hotel industr*'
c) 6he retail clothing industr*'
d) 6he restaurant industr*'
%) )hich o the ollowing is 456 regarded as a source o ineicienc* in monopolistic competition+
a) the act that long$run average cost is not minimi,ed'
b) the act that price e/ceeds marginal cost'
c) e/cess capacit*'
d) product diversit*'
e) all o the above'
#) 1 monopolisticall* competitive mar7et is characteri,ed b* all o the ollowing e/cept
a) downward sloping demand curves'
b) economic proits in the long$run'
c) eas* entr*'
d) dierentiated products'
8) Monopolistic competition diers rom pure competition in that:
a) each irm sells a somewhat dierentiated product
b) there are ewer irms in the industr*'
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c) each irm has perect mar7et power'
d) signiicant barriers to entr* e/ist'
8) 9n the Cournot duopol* model: each irm assumes that
a) the price o its rival is i/ed'
b) the output level o its rival is i/ed'
c) rivals will match price cuts but will not match price increases'
d) rivals will match all reasonable price changes'
.) ;irms with onl* limited mar7et power:
a) ace the same downward$sloping demand as irms with unlimited mar7et power'
b) ace a perectl* price$elastic demand'
c) ace a much more price$elastic demand than irms with unlimited mar7et power'
d) ace a much more price$inelastic demand than irms with unlimited mar7et power'
10) 1 situation in which each irm is doing the best it can: given what its rivals are doing is called a
a) Cooperative e2uilibrium'
b) 4ash e2uilibrium'
c) ,ero sum game'
d) Stac7elberg e2uilibrium'
11) 9n the 7in7ed demand curve model: i one irm reduces its price
a) other irms will also reduce their price'
b) other irms will raise their price'
c) other irms will compete on a non$price basis'
d) both (a) and (c) are correct'
e) both (b) and (c) are correct'
12) )hich o the ollowing is 456 conducive to the successul operation o a cartel+
a) Mar7et demand or the good is relativel* inelastic'
b) Cartel members have substantial cost advantages over non$member producers'
c) 6he suppl* o non$cartel members is ver* price elastic'
d) 6he cartel supplies all o the world3s output o the good'
10) 6he demand acing a monopolisticall* competitive irm is drawn assuming that:
a) all irms in the industr* have implicitl* agreed on a set price'
b) the irm3s competition will match all price changes'
c) because the irm is relativel* small: it ma7es short$run decisions considering whether other irms will
react'
d) because the irm is relativel* small: its competition will generall* not react to an* change in price'
1() )hat happens to an incumbent irm3s demand curve in monopolistic competition as new irms enter+
a) 9t becomes hori,ontal'
b) 4ew entrants will not aect an incumbent irm3s demand curve'
c) 9t shits right'
d) 9t shits let'
1%) 1 monopolisticall* competitive irm ma/imi,es short$run proits b*:
a) setting marginal revenue e2ual to marginal cost'
b) setting price e2ual to marginal cost'
c) producing at the minimum point on the 16C curve'
d) setting price e2ual to marginal revenue'
1#) )hich o the ollowing is an e/ample o an attempt at product dierentiation+
a) pac7aging'
2
b) credit terms'
c) ree deliver*'
d) all o the above'
18) <ow proits in monopolisticall* competitive industries are most li7el* attributed to:
a) intense competition brought about b* ease o entr* and e/it'
b) the act that there are too ew sellers'
c) poor business decisions'
d) the act that irms do not operate at the minimum point on the short$run average cost curve'
18) )hich o the ollowing is 456 necessaril* a characteristic o an oligopolistic mar7et+
a) 1 highl* dierentiated product'
b) 6he presence o signiicant barriers to entr*'
c) 1 small number o irms'
d) ;irms which are large relative to the mar7et'
1.) 9n e2uilibrium: Cournot duopolists
a) charge higher prices than i the* were monopolists'
b) produce about the same 2uantit* as i the* were in a perectl* competitive industr*'
c) produce about the same 2uantit* as a monopolist'
d) earn greater proit than i the* ormed a perect cartel'
e) earn greater proit than i the* were perect competitors'
20) 1 monopolisticall* competitive irm in long run e2uilibrium:
a) will ma7e positive proit'
b) an* o the above are possible
c) will ma7e negative proit'
d) will ma7e ,ero proit'
21) 9n monopolistic competition: e/cess capacit* is said to e/ist because
a) price is greater than marginal cost in e2uilibrium'
b) output is less than that which minimi,es <R1C'
c) irms ma7e e/cess proits'
d) irms operate in the region o diseconomies o scale'
e) all o the above'
22) 1 cartel is deined to be:
a) a orm o oligopol* in which irms ormall* agree to establish a common price: in eect acting as a
monopol*'
b) a orm o oligopol* in which irms ormall* agree to establish a common price: in eect acting as pure
competitors'
c) a orm o oligopol* in which irms tacitl* agree to set prices'=
d) an* oligopolistic industr* with ewer than our irms'
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Scenario 2:
>ou are stud*ing a mar7et or which the 7in7ed demand curve model applies' 6he 7in7ed
demand curve is as ollows:
! " 1200 $ %& or 0 ?" ! ? 1%0
! " 0#0 $ & or 1%0 ?" !
6he marginal cost is given as:
MC " !
20) Reer to Scenario 2' )hat is the proit ma/imi,ing price+
a) 2(0
b) 210
c) 20%'82
d) all o the above
e) none o the above
2() Reer to Scenario 2' )hat is the proit ma/imi,ing level o output+
a) 120
b) 1%0
c) 181'(0
d) all o the above
e) none o the above
2%) Reer to Scenario 2' Suppose that the marginal cost increases such that:
MC " ! @ 10
)hat is the proit ma/imi,ing level o output+
a) 1%0
b) 181'(0
c) 120
d) all o the above
e) none o the above
2#) 9n ininitel* repeated games the optimal strateg* is
a) reciprocal punishing
b) prisoner3s retaliation
c) undercutting
d) tit or tat
28) 9n 1ugustin Cournot3s duopol* model: each irm assumes that:
a) rivals will match all reasonable price changes
b) each irm treats the price o its rival as i/ed
c) each irm treats the output level o its rival as i/ed
d) rivals will match price cuts: but will not match price increases
28) 1 monopolisticall* competitive irm has a:
a) highl* elastic demand curve'
b) perectl* elastic demand curve'
c) perectl* inelastic demand curve'
d) highl* inelastic demand curve'
2.) 6he 7in7ed demand curve aced b* an oligopolist is based on the assumption that:
a) rivals will ollow both a price decrease and a price increase'
4
b) rivals will ignore both a price increase and a price decrease'
c) rivals will ollow a price increase but not a price cut'
d) rivals will ollow a price decrease but not a price increase'
00) <ong$run e2uilibrium under monopolistic competition corresponds to:
a) &rice e2ual to marginal cost'
b) Aero economic proits'
c) Minimum per unit costs'
d) all o the above'
01) 6he incentive or a member o a cartel to BcheatB is great because:
a) members oten have the same costs o production and long$term obCectives
b) it is in the individual interest o the irm to restrict its own output
c) it is in the individual interest o the irm to charge a higher price than the price set b* the cartel
d) it is in the individual interest o the irm to sell as much as possible at or even below the cartel price
02) 9n the Cournot duopol* model: the reaction curves:
a) are hori,ontal i the irms are competitive
b) cross at the Coint proit ma/imi,ing levels o output
c) show the irm3s reaction to mar7et price
d) relate one irm3s optimum 2uantit* to the other irm3s 2uantit*
e) relate the irm3s 2uantit* to its price and the price o the other irm
00) )hich o the ollowing is 456 a characteristic o an oligopolistic irm'
a) control over price
b) perectl* elastic demand curves
c) mutual interdependence
d) ew sellers
0() Dnli7e a monopolisticall* competitive irm: an oligopol* is characteri,ed b*:
a) independence among irms
b) product dierentiation
c) e/tensive use o advertising
d) interdependence among irms
DSE 6FE ;5<<5)94G ;9GDRE 65 14S)ER 6FE 4EH6 6FREE !DES6954S: Ia7eJs proits are
shown beore the comma: IaneJs ater the comma'
IaneJs Strategies
<et Right
Dp #:# 20:%
Ia7eJs Strategies
down %:20 1%:1%
0%) 9n the pa*o matri/ above: which is correct+
a) total pa*o is ma/imi,ed i Ia7e chooses BdownB and Iane chooses BrightB
b) 9 Iane chooses BrightB: Ia7e should choose BdownB
c) 9 Ia7e chooses BdownB: Iane should choose BrightB
5
d) Ia7e will alwa*s be better o choosing BdownB
e) Iane will alwa*s be better o choosing BrightB
0#) 6he pa*o matri/ above is an e/ample o the &risoners3 Kilemma because:
a) neither pla*er should choose to pla* this game
b) while the Coint proit$ma/imi,ing strateg* is clear: there is a dilemma when it comes to dividing the
proits
c) there are two pairs o strategies which would ma/imi,e Coint proits
d) one pla*er will choose upper right: and the other will choose lower let
e) although the Coint proit$ma/imi,ing solution is clear: i one pla*er chose it: the other deinitel* would
gain rom not choosing it
08) Ia7eJs ma/imin strateg* is:
a) up
b) down
08) 9n an oligopolistic industr* where the dominant irm acts as price leader: the dominant irm:
a) aces a perectl* elastic demand curve
b) ma/imi,es proits ignoring the actions o other irms in the industr*
c) aces a residual demand curve that determines its marginal revenue curve'
d) must e2uate marginal cost with the residual demand curve
0.) 5nce a cartel3s proit$ma/imi,ing price is set:
a) each member o the cartel is ree to sell all it can produce at that price
b) the cartel must restrict suppl* to avoid a mar7et shortage
c) the cartel must restrict suppl* to avoid a mar7et surplus
d) mar7et suppl* will automaticall* be restricted due to the lower demand resulting rom a higher price
(0) 6he oligopolistic model that is most appropriate when one large irm usuall* ta7es the lead in setting price is
the:
a) Stac7elberg model
b) prisoner3s dilemma model
c) Cournot model
d) game theor* model
(1) 6wo irms operating in the same mar7et must choose between a high price and a low price' ;irm 13s proit is
listed beore the comma: L3s outcome ater the comma'
;irm L
<ow &rice Figh &rice
;irm 1 <ow &rice 18: # 00: 8
Figh &rice #: 00 2(: 02
9 each irm tries to choose a price that is best or it: regardless o its competitor3s price: which o the ollowing
statements is correct+
a) both irms will charge a high price
b) both irms will charge a low price
c) ;irm 1 will charge a high price: ;irm L will charge a low price
d) ;irm 1 will charge a low price: ;irm L a high price
(2) 9n which o the ollowing situations is the Cournot model most appropriate in e/plaining oligopolistic
behavior+
a) 1n industr* composed o similar irms: and no one irm has a strong operating advantage
b) 1n industr* composed o similar irms: but one irm has a strong operating advantage
c) 1n industr* composed o similar irms: but one irm has a leadership position
d) 1n industr* dominated b* a large irm that usuall* ta7es the leadership position in setting price
6
Scenario 3:
Suppose a stream is discovered whose water has remar7able healing powers' >ou decide to
bottle the li2uid and sell it' 6he mar7et demand curve is linear and is given as ollows:
& " 00 $ !
6he marginal cost to produce this new drin7 is -0'
(0) Reer to Scenario 0' )hat price would this new drin7 sell or i it sold in a competitive mar7et+
a) -10'%0
b) -1#'%0
c) -28
d) -0
e) -0
(() Reer to Scenario 0' )hat is the monopol* price o this new drin7+
a) -1#'%0
b) -28
c) -0
d) -0
e) -10'%0
(%) Reer to Scenario 0' )hat will be the price o this new drin7 in the long run i the industr* is a Cournot
duopol*+
a) -.
b) -12
c) -10'%0
d) -0
e) none o the above
(#) Reer to Scenario 0' )hat will be the price o this new drin7 in the long run i the industr* is a Stac7elberg
duopol*+
a) -#'8%
b) -.'8%
c) -12'8%
d) -1('8%
e) none o the above
(8) 9n which o the ollowing situations is the Stac7elberg model most appropriate in e/plaining oligopolistic
behavior+
a) 1n industr* composed o similar irms: but one irm has a strong operating advantage
b) 1n industr* composed o similar irms: and no one irm has a strong operating advantage
c) 1n industr* dominated b* a large irm that usuall* ta7es the lead in setting price
d) 1n industr* dominated b* a large irm that does not ta7e the lead in setting price
Dse the ollowing diagram to answer the ne/t three 2uestions'
7
Q
2
Q
1
P
1
P
2
P
4
3 P
3
Q
3
P
0
Q
4
Demand
MC
dominant
MC ringe
irms
Price
Quantity
(8) )hat output does the dominant irm produce+
a) !
(
b) !
2
c) !
1

d) !
0
(.) )hat output do the ringe irms produce+
a) !
2
b) !
(
c) !
1
d) !
0
%0) )hat price is charged b* the dominant irm+
a) &
(
b) &
1

c) &
0

d) &
2

8