Question 1

Which of the following is a defining characteristic of monopolistic competition?

Accepted Answer

Firms sell differentiated products and have some control over price.

Question 2

Suppose a monopolistically competitive firm faces the following demand curve: $$P = 50 - 2Q. If $$the firm's marginal cost is constant at $$MC = 10$$, what is the profit-maximizing quantity?

Accepted Answer

$$Q = 20$$

Question 3

Which of the following best explains why firms in monopolistic competition advertise heavily?

Accepted Answer

To differentiate their products from those of competitors.

Question 4

In the long run, a monopolistically competitive firm will:

Accepted Answer

Earn zero economic profit as new firms enter the market.

Question 5

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

Accepted Answer

Firms are price takers with no market power.

Question 6

Suppose two firms in an oligopoly can either cooperate (collude) or compete. If both firms collude, each earns $$100. If both compete, each earns 50. If $$one colludes and the other competes, the competitor earns $$150 and the colluder earns 0. $$What is the Nash equilibrium?

Accepted Answer

Both firms compete.

Question 7

A monopolistically competitive firm is producing where $$MR = MC$$ and $$P \u003e ATC. $$What does this indicate?

Accepted Answer

The firm is earning a positive economic profit.

Question 8

Which of the following best describes the kinked demand curve theory in oligopoly?

Accepted Answer

Firms believe rivals will match price cuts but not price increases.

Question 9

If a monopolistically competitive firm increases its advertising budget, what is the most likely short-run effect?

Accepted Answer

Its demand curve shifts to the right and becomes more elastic.

Question 10

Suppose a monopolistically competitive firm faces the following cost and revenue data: At $$Q = 10$$, $$P = 20$$, $$ATC = 18$$, $$MC = 20$$, $$MR = 20. $$What should the firm do to maximize profit?

Accepted Answer

Maintain current output because $$MR = MC$$ and $$P \u003e ATC.$$

Question 11

Which of the following is most likely to be true in the long run for a monopolistically competitive firm?

Accepted Answer

Price equals average total cost.

Question 12

Which of the following is an example of product differentiation?

Accepted Answer

A gas station offering a loyalty rewards program.

Question 13

If a monopolistically competitive firm is producing at a quantity where $$P = ATC$$ and $$MR = MC$$, what is the firm's economic profit?

Accepted Answer

Zero

Question 14

Which of the following is a likely outcome if firms in an oligopoly engage in price wars?

Accepted Answer

Prices will fall, reducing profits for all firms.

Question 15

Suppose a monopolistically competitive restaurant is earning zero economic profit. What will happen if a new restaurant opens nearby?

Accepted Answer

The original restaurant will earn negative economic profit.

Question 16

Which of the following best describes a Nash equilibrium in a duopoly?

Accepted Answer

Both firms choose their best strategy given the strategy of the other.

Question 17

A monopolistically competitive firm faces the following cost and revenue data: At $$Q = 8$$, $$P = 15$$, $$ATC = 17$$, $$MC = 15$$, $$MR = 15. $$What should the firm do?

Accepted Answer

Decrease output because $$P \u003c ATC.$$

Question 18

Which of the following is a real-world example of an oligopoly?

Accepted Answer

The automobile industry.

Question 19

If a monopolistically competitive firm is producing where $$MR \u003c MC$$, what should the firm do to maximize profit?

Accepted Answer

Decrease output.

Question 20

Which of the following is most likely to occur if all firms in a monopolistically competitive market are earning positive economic profits?

Accepted Answer

New firms will enter the market.

Study Guide: Monopolistic Competition, Oligopoly, and Game Theory

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