Question 1

Which of the following best describes the Herfindahl-Hirschman Index (HHI) and how is it 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. For these shares, $$HHI = 50^2$ + 25^2$ + 15^2$ + 10^2$ = 2500 + 625 + 225 + 100 = 3450.$$

Question 2

In monopolistic competition, what happens to economic profit in the long run and why?

Accepted Answer

Economic profit becomes zero in the long run because entry of new firms drives profits down.

Question 3

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

Accepted Answer

Firms produce identical products.

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

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 6

Which of the following best explains why advertising can increase demand in monopolistic competition?

Accepted Answer

Advertising differentiates products and makes consumers more aware, increasing demand for the advertised product.

Question 7

Consider the Prisoner's Dilemma in oligopoly games. If both firms choose to confess, what is the likely outcome?

Accepted Answer

Both firms receive a lower payoff than if they both did not confess.

Question 8

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

Accepted Answer

Oligopoly

Question 9

In monopolistic competition, what are the two key differences from perfect competition in the long run?

Accepted Answer

Markup and excess capacity

Question 10

A firm in monopolistic competition is considering product development. What must it weigh to make an efficient decision?

Accepted Answer

The marginal benefits and marginal costs of product development

Question 11

In a repeated game scenario, what strategy can sustain cooperation between firms over time?

Accepted Answer

Tit for Tat

Question 12

Which of the following is a limitation of 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

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

Accepted Answer

Demand for each firm's product may not increase significantly, but costs rise due to advertising.

Question 14

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 15

Which of the following is true about excess capacity in monopolistic competition?

Accepted Answer

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

Question 16

In the context of oligopoly, what is a dominant strategy?

Accepted Answer

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

Question 17

Which of the following is a reason for advertising in monopolistic competition?

Accepted Answer

To differentiate products and increase market share.

Question 18

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 the market, driving economic profit to zero.

Question 19

Which of the following best describes the efficiency of monopolistic competition?

Accepted Answer

It does not achieve allocative or productive efficiency due to markup and excess capacity.

Monopolistic Competition, Oligopoly, and Game Theory in Microeconomics

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