Question 1

Which of the following best describes a monopolistically competitive market?

Accepted Answer

A market with many firms selling differentiated products and free entry and exit.

Question 2

In the long-run equilibrium of a monopolistically competitive firm, which of the following conditions must hold?

Accepted Answer

$$MR = MC$$ and $$P = ATC$$

Question 3

Which of the following is a key inefficiency associated with monopolistic competition?

Accepted Answer

Firms have excess capacity and charge a price above marginal cost.

Question 4

Suppose two identical firms face the market demand $$P = 30 - Q$$ and have zero marginal cost. In Cournot equilibrium, what is the output of each firm?

Accepted Answer

$$Q_1$$ = $$Q_2 = 10$

Question 5

If the two firms in the previous question collude to maximize joint profits, what is the total quantity produced?

Accepted Answer

$$Q = 15$$

Question 6

Which of the following best describes the Nash equilibrium in an oligopolistic market?

Accepted Answer

Each firm chooses its best strategy given the strategies chosen by all other firms.

Question 7

In the Bertrand model with two firms producing a homogeneous good and identical marginal costs, what is the Nash equilibrium price?

Accepted Answer

Equal to marginal cost.

Question 8

In the Stackelberg model, what advantage does the leader have over the follower?

Accepted Answer

The leader can set output first, anticipating the follower's reaction, and thus earns higher profit.

Question 9

Which of the following equations represents the profit-maximizing condition for a Cournot firm with $$n$$ firms and demand elasticity $$\varepsilon$$?

Accepted Answer

$$MR = p \left( 1 + \frac{1}{n\varepsilon} \right) = MC$$

Question 10

Why do cartels often fail in practice?

Accepted Answer

Non-cartel members can supply large quantities, and cartel members have incentives to cheat.

Question 11

Suppose the market demand is $$Q = 500 - 2p$$ and each of three firms has a marginal cost of $$5. $$What is the cartel solution for total output and price?

Accepted Answer

$$Q = 245$$, $$P = 127.5$$

Question 12

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

Accepted Answer

Barriers to entry.

Question 13

In the long run, what happens to economic profits in a monopolistically competitive market?

Accepted Answer

They become zero as new firms enter the market.

Question 14

Which of the following best explains why monopolistically competitive firms have excess capacity in the long run?

Accepted Answer

They produce less than the efficient scale due to downward-sloping demand.

Question 15

Which of the following is true about the price and output in Cournot equilibrium compared to monopoly and perfect competition?

Accepted Answer

Cournot price is lower than monopoly price but higher than competitive price.

Question 16

Which of the following is a positive externality associated with entry in monopolistic competition?

Accepted Answer

Product-variety externality.

Question 17

In the Bertrand model, why do firms set price equal to marginal cost?

Accepted Answer

Because each firm can capture the entire market by slightly undercutting its rival.

Question 18

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

Accepted Answer

OPEC (Organization of Petroleum Exporting Countries)

Oligopoly and Monopolistic Competition: Market Structures and Strategic Firm Behavior

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