Oligopoly and Monopolistic Competition Review

Which of the following best describes an oligopistic market?

• Many sellers with identical barriers to entry

• Many sellers, each with a clearly differentiated product, and no barriers to entry

• A few competing sellers with similar products and high barriers to entry

• A few competing sellers of identical products and no barriers to entry

• No competition among sellers and high barriers to entry

• Neither company has a dominant strategy

• Both companies have an incentive to reduce production by %10

• Both companies have an incentive to reduce production by %20

• Only UA have an incentive to reduce production by %20

• Only UB have an incentive to reduce production by %20

Game theory is used to explain

• why firms price discriminate

• how monopolies evolve into oligopolies

• strategic behavior of firms in oligopoly

• profit maximization in monopoly

• price leadership of monopolistic competition

Based on the payoff matrix, which of the following is correct?

• Firm A always gets a smaller share of the industry profits.

• Firm A’s dominant strategy is to advertise.

• Firm B’s dominant strategy is not to advertise.

• The dominant strategy for both firms is not to advertise.

• Neither firm has a dominant strategy.

The combination where Firm A advertises and Firm B does not advertise is Nash equilibrium because

• it is best for each firm given what the other firm has chosen

• the total industry profits are maximized

• Firm A has an incentive to change its strategy and chooses not to advertise

• it is the best outcome for Firm B regardless of what firm A does

• advertising is always the best strategy for Firm A

Monopolistically competitive product markets are inefficient because

• price equals the marginal value to the buyer of the last item produced

• price is greater than marginal cost

• excessive competition prevents other firms from entering the market

• homogeneous goods are usually overpriced

• short-run economic profit-making opportunities exist

A monopolistically competitive firm is currently producing the profit-maximizing level of output. If the price of a variable input increases, which of the following will occur?

• The firm will increase its output to increase its revenue.

• The firm will increase the price of its output by the same amount.

• The firm’s average total cost and marginal cost curves will shift upward.

• The firm’s average fixed cost will decrease as it decreases production.

• The firm’s fixed cost will increase, but its output level will be unaffected.

One difference between oligopolies and monopolistically competitive markets is that

• there is no deadweight loss in monopolistically competitive markets, but there is in oligopolies

• the products sold in monopolistically competitive markets are identical

• oligopolies have fewer barriers to entry

• firms maximize profits in monopolistically competitive markets but not in oligopolies

• there are fewer firms in oligopolistic markets than in monopolistically competitive ones

Which of the following must be true if a profit-maximizing monopolistically competitive firm continues to operate in the short run while incurring a loss?

• Marginal revenue equals marginal cost and price is greater than average total cost.

• Marginal revenue equals marginal cost and price is greater than average variable cost.

• Marginal revenue equals marginal cost and price is less than average variable cost.

• Price equals both marginal cost and marginal revenue.

• Price is less than marginal revenue, but greater than average variable cost.

What is the profit-maximizing price and quantity?

• P₁, Q₁

• P₂, Q₄

• P₃, Q₃

• P₄, Q₂

• P₅, Q₁