Question 1

Which of the following best describes the Herfindahl-Hirschman Index (HHI) and how it is calculated for a market with four firms having market shares of 50%, 25%, 15%, and 10%?

Accepted Answer

HHI is the sum of the squares of the market shares of the four largest firms: $$HHI = 50^2$ + 25^2$ + 15^2$ + 10^2$ = 2500 + 625 + 225 + 100 = 3450$$

Question 2

In monopolistic competition, what happens to a firm's economic profit in the long run?

Accepted Answer

Economic profit becomes zero due to entry of new firms.

Question 3

Which of the following is a key difference between monopolistic competition and perfect competition in the long run?

Accepted Answer

Monopolistic competition has excess capacity and markup, while perfect competition does not.

Question 4

Suppose a market has four firms with market shares of 40%, 30%, 20%, and 10%. What is the Four-Firm Concentration Ratio?

Accepted Answer

The Four-Firm Concentration Ratio is $$40\% + 30\% + 20\% + 10\% = 100\%$$

Question 5

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

Accepted Answer

Barriers to entry are high.

Question 6

In the context of oligopoly, what is a Nash equilibrium?

Accepted Answer

A situation where each player chooses the action that maximizes their own payoff, given the actions of the other players.

Question 7

In the Prisoner's Dilemma, what is the dominant strategy for each player?

Accepted Answer

To confess, regardless of the other player's choice.

Question 8

Which of the following best explains why advertising may not always increase a firm's profit in monopolistic competition?

Accepted Answer

If all firms advertise, the increase in demand is offset and costs rise, so profit may not increase.

Question 9

Which market structure is characterized by a small number of firms and significant barriers to entry?

Accepted Answer

Oligopoly

Question 10

In a sequential entry game, what is the purpose of backward induction?

Accepted Answer

To determine the optimal strategy by analyzing the game from the end to the beginning.

Question 11

If a firm in monopolistic competition is earning positive economic profit in the short run, what is likely to happen in the long run?

Accepted Answer

New firms will enter, driving economic profit to zero.

Question 12

Which of the following is a limitation of using concentration measures like the Four-Firm Concentration Ratio?

Accepted Answer

It does not account for the distribution of market shares among all firms.

Question 13

In the context of repeated games, what is the 'Tit for Tat' strategy?

Accepted Answer

A strategy where a player mimics the other player's previous action in each round.

Question 14

Which of the following best describes excess capacity in monopolistic competition?

Accepted Answer

Firms produce less than the output at which average total cost is minimized.

Question 15

Why might product development in monopolistic competition not achieve efficiency?

Accepted Answer

Because the marginal cost of innovation may exceed the marginal benefit.

Question 16

In a duopoly, if both firms choose high prices, each earns a profit of $$15. If both choose low prices, each earns 10. If $$one chooses high and the other low, the low-price firm earns $$20 and the high-price firm earns 5. $$What is the Nash equilibrium?

Accepted Answer

Both firms choose low prices.

Question 17

Which of the following is a reason why advertising can increase demand in monopolistic competition?

Accepted Answer

Advertising differentiates products and informs consumers, leading to higher demand.

Question 18

What is the main barrier to entry in an oligopoly?

Accepted Answer

Significant economies of scale and control over key resources.

Question 19

Which of the following statements about the efficiency of monopolistic competition is correct?

Accepted Answer

Monopolistic competition does not achieve allocative or productive efficiency.

Monopolistic Competition, Oligopoly, and Game Theory in Microeconomics

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