Question 1

Which of the following best describes the main difference between monopolistic competition and oligopoly?

Accepted Answer

Oligopoly involves strategic behaviour among a few large firms, while monopolistic competition involves many small firms with little strategic interaction.

Question 2

In the context of imperfect competition, what does it mean for a firm to be a 'price setter'?

Accepted Answer

The firm faces a downward-sloping demand curve and chooses its price, knowing that quantity sold depends on the price it sets.

Question 3

Which of the following is NOT a characteristic of monopolistic competition?

Accepted Answer

Firms behave strategically, anticipating rivals’ reactions.

Question 4

Suppose a monopolistically competitive firm is earning positive economic profits in the short run. What will happen in the long run?

Accepted Answer

New firms will enter the market, shifting the demand curve for each existing firm to the left until profits are zero.

Question 5

In the long-run equilibrium of monopolistic competition, which of the following is true?

Accepted Answer

Firms produce at a level where their demand curve is tangent to their long-run average cost curve, earning zero economic profit.

Question 6

What is the main implication of the 'excess-capacity theorem' in monopolistic competition?

Accepted Answer

Firms produce less than the output that minimizes average cost, resulting in higher unit costs.

Question 7

Which of the following best describes a Nash equilibrium in the context of oligopoly?

Accepted Answer

Each firm chooses the action that maximizes its own profit, given the actions of other firms, and no firm has an incentive to change its strategy.

Question 8

Consider two grocery chains in an oligopoly. If both chains agree to restrict output and keep prices high, but one chain cheats and increases its output, what is the likely outcome?

Accepted Answer

The cheating chain will earn higher profits, while the cooperating chain will earn lower profits.

Question 9

Which of the following is a real-world example of non-price competition in imperfectly competitive markets?

Accepted Answer

A firm offering a longer warranty and advertising its superior quality.

Question 10

Suppose the concentration ratio for an industry is 80%. What does this indicate?

Accepted Answer

The four largest firms control 80% of the market’s total sales.

Question 11

In the context of the prisoners’ dilemma, why do both players often end up choosing to 'defect' (plead guilty or compete), even though mutual cooperation would make them better off?

Accepted Answer

Because each player’s dominant strategy is to defect, regardless of what the other does.

Question 12

Which equation represents the profit-maximizing condition for a firm in monopolistic competition in both the short run and the long run?

Accepted Answer

$$MR = MC$$

Question 13

A firm in monopolistic competition faces the following demand and cost curves: $$P = 100 - 2Q$$, $$TC = 20 + 40Q + Q^2$. What is the profit-maximizing output in the short run?

Accepted Answer

$$Q = 20$$

Question 14

Which of the following is NOT a typical barrier to entry in oligopolistic industries?

Accepted Answer

Perfect information and zero transaction costs.

Question 15

If a monopolistically competitive firm’s demand curve lies entirely below its long-run average cost curve, what will happen in the long run?

Accepted Answer

Firms will exit the industry until the remaining firms’ demand curves are tangent to their LRAC curves.

Question 16

Which of the following best explains why prices in imperfectly competitive markets change relatively infrequently?

Accepted Answer

There are significant costs to changing prices, such as printing new price lists and potential loss of consumer goodwill.

Question 17

Which of the following is a prediction of the theory of monopolistic competition?

Accepted Answer

Firms will earn zero economic profit in the long run.

Question 18

Which of the following is an example of strategic behaviour in an oligopoly?

Accepted Answer

A firm anticipates and reacts to the likely responses of its rivals when making output decisions.

Imperfect Competition and Strategic Behaviour: Monopolistic Competition, Oligopoly, and Game Theory

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