Question 1

Suppose a market has four firms with market shares of 40%, 30%, 20%, and 10%. Calculate the Herfindahl-Hirschman Index (HHI) for this market.

Accepted Answer

$$HHI = 40^2$ + 30^2$ + 20^2$ + 10^2$ = 1600 + 900 + 400 + 100 = 3000$$

Question 2

Which of the following best describes a characteristic of monopolistic competition?

Accepted Answer

Firms sell differentiated products and have some control over price.

Question 3

In the long run, what is the economic profit of a firm in monopolistic competition?

Accepted Answer

$$0$$

Question 4

Which of the following is a limitation of using the four-firm concentration ratio as a measure of market concentration?

Accepted Answer

It ignores the distribution of market shares among the largest firms.

Question 5

A firm in monopolistic competition faces which type of demand curve?

Accepted Answer

Downward sloping, but more elastic than a monopoly.

Question 6

Which of the following best explains why firms in monopolistic competition engage in advertising?

Accepted Answer

To increase demand for their differentiated products.

Question 7

If all firms in a monopolistically competitive market advertise, what is the likely outcome compared to when no firms advertise?

Accepted Answer

Each firm's demand curve shifts right, but the net effect may be higher costs with little change in market share.

Question 8

Which of the following is NOT a characteristic of an oligopoly?

Accepted Answer

Firms are price takers.

Question 9

In the context of the Prisoner's Dilemma, what is a dominant strategy?

Accepted Answer

A strategy that yields the highest payoff for a player, regardless of the other player's action.

Question 10

Consider two firms in an oligopoly choosing between high and low prices. The payoff matrix is as follows: if both choose low price, each earns $$10; if both choose high price, each earns 15$$; if one chooses low and the other high, the low-price firm earns $$20 and the high-price firm earns 5. $$What is the Nash equilibrium?

Accepted Answer

Both firms choose low price.

Question 11

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

Accepted Answer

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

Question 12

Why might product development in monopolistic competition not achieve efficiency?

Accepted Answer

Firms may over-invest in differentiation, increasing costs without proportional benefits.

Question 13

In a repeated game, what strategy can sustain cooperation between firms that would otherwise cheat in a one-shot game?

Accepted Answer

Tit-for-tat strategy.

Question 14

Which of the following is true about the Herfindahl-Hirschman Index (HHI)?

Accepted Answer

It is calculated by summing the squares of the market shares of all firms in the market.

Question 15

Which market structure is most likely to have zero economic profit in the long run due to free entry and exit?

Accepted Answer

Monopolistic competition.

Question 16

In a sequential entry game, what is the method called where players reason backward from the end of the game to determine optimal strategies?

Accepted Answer

Backward induction.

Question 17

Which of the following is a reason why advertising might not increase overall market efficiency in monopolistic competition?

Accepted Answer

Advertising can increase costs without significantly increasing total market demand.

Question 18

If the four largest firms in a market have market shares of 50%, 25%, 15%, and 10%, what is the four-firm concentration ratio?

Accepted Answer

$$50\% + 25\% + 15\% + 10\% = 100\%$$

Question 19

Which of the following best describes the difference between monopolistic competition and perfect competition in the long run?

Accepted Answer

Monopolistic competition has markup and excess capacity; perfect competition does not.

Monopolistic Competition, Oligopoly, and Game Theory in Microeconomics

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