Question 1

Which of the following best describes the long-run equilibrium for a monopolistically competitive firm?

Accepted Answer

Price equals average total cost, but exceeds marginal cost, and firms produce below the efficient scale.

Question 2

Suppose a coffee shop in a monopolistically competitive market is earning positive economic profit in the short run. What is most likely to happen in the long run?

Accepted Answer

New firms will enter, shifting the firm's demand curve leftward until economic profit is zero.

Question 3

A monopolistically competitive firm faces the following demand and cost conditions: $$P = 20 - Q$$, $$TC = 5 + Q^2$. What is the profit-maximizing output in the short run?

Accepted Answer

$$Q = 5$$

Question 4

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

Accepted Answer

There are barriers to entry and exit.

Question 5

In the context of game theory, what is a Nash equilibrium?

Accepted Answer

A set of strategies where no player can improve their payoff by unilaterally changing their own strategy.

Question 6

Consider two firms in a duopoly deciding whether to set a high price or a low price. If both set a high price, each earns $$100. If both set a low price, each earns 50. If $$one sets a high price and the other sets a low price, the low-price firm earns $$120 and the high-price firm earns 20. $$What is the Nash equilibrium?

Accepted Answer

Both firms set a low price.

Question 7

Which of the following statements about cartels is TRUE?

Accepted Answer

Cartels are unstable because each firm has an incentive to cheat by lowering price or increasing output.

Question 8

In the Cournot model, firms compete by choosing:

Accepted Answer

Quantities

Question 9

A monopolistically competitive firm is producing at a quantity where $$MC = MR$$ and $$P \u003e MC. $$What does this imply about the efficiency of the market outcome?

Accepted Answer

There is allocative inefficiency because price exceeds marginal cost.

Question 10

Which of the following best explains why repeated interaction in an oligopoly can make cooperation (such as cartel behavior) more sustainable?

Accepted Answer

Firms can punish defectors in future periods, making cheating less attractive.

Question 11

Which of the following is an example of excess capacity in monopolistic competition?

Accepted Answer

A clothing store produces less than the output that minimizes average total cost.

Question 12

In the Bertrand model, firms compete by choosing:

Accepted Answer

Prices

Question 13

Suppose two airlines operate a route and can choose to collude (set high prices) or compete (set low prices). If both collude, each earns $$200,000. If both compete, each earns 100$$,000. If one colludes and the other competes, the competitor earns $$250,000 and the colluder earns 50$$,000. What is the dominant strategy for each airline?

Accepted Answer

Compete, because it yields a higher payoff regardless of the other airline's choice.

Question 14

Which of the following is a benefit of monopolistic competition compared to perfect competition?

Accepted Answer

Greater product variety and consumer choice.

Question 15

A firm in a monopolistically competitive market increases its advertising budget. What is the most likely effect?

Accepted Answer

The firm's demand curve shifts rightward and becomes less elastic.

Question 16

Which of the following statements about the Stackelberg model is correct?

Accepted Answer

One firm moves first and the other firm responds, leading to a first-mover advantage.

Question 17

If entry by new firms occurs in an oligopoly market, what is the likely effect on market outcomes?

Accepted Answer

The market will become more competitive, with lower prices and higher output.

Question 18

Which of the following best describes the prisoner's dilemma in the context of oligopoly?

Accepted Answer

Individual incentives lead firms to choose non-cooperative strategies, resulting in a less efficient outcome.

Question 19

A monopolistically competitive firm faces the following cost and revenue functions: $$TR = 30Q - Q^2$, TC = 10 + 10Q$. What is the profit-maximizing output?

Accepted Answer

$$Q = 5$$

Question 20

Which of the following is NOT a feature of oligopoly?

Accepted Answer

There are many firms, each too small to affect market price.

Monopolistic Competition and Oligopoly: Market Structures and Strategic Behavior

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