ECO 204 Quiz 07

1.Why are firms in an oligopolistic market considered interdependent?

• A) Each firm ignores the actions of others.

• B) Firms set prices independently of competitors.

• C) A firm's actions (price or output decisions) affect, and are affected by, the actions of rival firms.

• D) There is no competition among firms.

2.What is collusion in the context of an oligopoly?

• A) Firms aggressively competing on price.

• B) Firms cooperating - formally or informally - to set prices or output to maximize joint profits.

• C) Firms differentiating their products.

• D) Government intervention in the market.

3.Which of the following best describes monopolistic competition?

• A) Many firms selling identical products

• B) A single seller dominating the market

• C) A few large firms controlling the market

• D) Many firms selling differentiated products with some market power

4.Why can firms in monopolistic competition earn positive economic profits in the short run?

• A) Due to effective product differentiation and some degree of market power.

• B) Because there is no competition.

• C) Because they are price takers.

• D) Because entry barriers are high.

5.What happens to economic profits in monopolistic competition in the long run?

• A) They remain positive indefinitely.

• B) They become negative.

• C) They tend to zero as free entry erodes profits.

• D) They fluctuate without a trend.

6.How does advertising function in monopolistic competition?

• A) It standardizes products across firms.

• B) It is used to inform consumers and emphasize product differentiation.

• C) It has no effect on consumer choices.

• D) It leads to collusion among firms.

7.Which of the following best defines a Nash equilibrium?

• A) An outcome where all players choose strategies that maximize their own payoff, and no one can benefit by changing their strategy unilaterally.

• B) An outcome where players cooperate to maximize total welfare.

• C) An outcome where one player dominates the game and sets the rules.

• D) An outcome where all players have the same payoff.

8.Game theory is a valuable tool for analyzing oligopolies because it:

• A) Assumes firms have no knowledge of their competitors' actions.

• B) Eliminates the need for strategic planning.

• C) Suggests that firms will always collude in practice.

• D) Predicts outcomes when each firm's optimal decision depends on the strategies of others.

9.In monopolistic competition, product differentiation causes each firm’s demand curve to be:

• A) Perfectly elastic

• B) Perfectly inelastic

• C) Downward sloping, reflecting some pricing power

• D) Vertical, indicating fixed quantity demanded

10.In a monopolistically competitive market, the entry of new firms typically causes the demand curve facing an individual firm to:

• A) Shift to the right, increasing market share.

• B) Become perfectly inelastic.

• C) Shift to the left and become more elastic, reducing individual market power.

• D) Remain unchanged, as each firm’s product is unique.