Question 1

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

Accepted Answer

Firms in monopolistic competition have excess capacity and charge a price greater than marginal cost.

Question 2

Suppose a Canadian industry has a concentration ratio of 80% for its top four firms. What does this imply about the market structure?

Accepted Answer

The industry is likely to be an oligopoly.

Question 3

A firm in a monopolistically competitive market faces a highly elastic demand curve. Which assumption of monopolistic competition explains this?

Accepted Answer

There are many firms, so each ignores competitors when making decisions.

Question 4

In the short run, a monopolistically competitive firm maximizes profit by producing the quantity where:

Accepted Answer

$MR = MC$

Question 5

Which of the following is an example of non-price competition in imperfectly competitive markets?

Accepted Answer

Spending heavily on advertising to differentiate products.

Question 6

In the long-run equilibrium of monopolistic competition, which of the following is true?

Accepted Answer

Firms have excess capacity and earn zero economic profit.

Question 7

Which of the following best describes a Nash equilibrium in the context of oligopoly?

Accepted Answer

Each firm chooses its best strategy given the strategies chosen by other firms, and no firm can benefit by changing its own strategy unilaterally.

Question 8

Suppose two firms in a duopoly can either cooperate or compete. If both compete, each earns $17$; if both cooperate, each earns $20$; if one competes and the other cooperates, the competitor earns $22$ and the cooperator earns $15$. What is the Nash equilibrium?

Accepted Answer

Both firms compete and earn $17$ each.

Question 9

Which of the following is NOT a typical barrier to entry in oligopolistic markets?

Accepted Answer

Perfect information.

Question 10

A monopolistically competitive firm in the short run is producing at a quantity where $P > ATC$. What does this imply?

Accepted Answer

The firm is earning positive economic profit.

Question 11

Which of the following statements about the excess-capacity theorem in monopolistic competition is correct?

Accepted Answer

In long-run equilibrium, firms have excess capacity because they do not produce at minimum average total cost.

Question 12

Which of the following real-world examples best fits the model of monopolistic competition?

Accepted Answer

The market for restaurants in a large city.

Question 13

In the context of game theory, what is the 'prisoners' dilemma' as it applies to oligopoly?

Accepted Answer

A situation where each firm has an incentive to cheat, leading to a worse outcome for all.

Question 14

Suppose a firm in an oligopoly market is considering lowering its price below cost to drive out a new entrant. This strategy is known as:

Accepted Answer

Predatory pricing.

Question 15

If a monopolistically competitive firm is in long-run equilibrium, which of the following must be true?

Accepted Answer

$P = ATC$ and $P > MC$

Question 16

Which of the following is a likely outcome of heavy advertising by incumbent firms in an oligopolistic industry?

Accepted Answer

It increases the MES for new entrants, making entry more difficult.

Question 17

In a market with monopolistic competition, what is the main tradeoff society faces?

Accepted Answer

Between product variety and lower cost per unit.

Question 18

Which of the following is true about the price volatility in oligopoly compared to perfect competition when there is a temporary demand shock?

Accepted Answer

Oligopoly markets experience less price volatility than competitive markets.

Question 19

Which of the following is an example of tacit collusion?

Accepted Answer

Firms independently match each other's prices without explicit agreement.

Question 20

Suppose two firms in an oligopoly are deciding whether to invest in a new technology. According to game theory, what must each firm consider when making its decision?

Accepted Answer

The expected reactions of the other firm to its own actions.

Chapter 11 - Imperfect Competition and Strategic Behaviour: Monopolistic Competition and Oligopoly

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