Question 1

Which of the following best describes a key characteristic of monopolistic competition?

Accepted Answer

Firms produce differentiated products and there is free entry and exit.

Question 2

In the long-run equilibrium of a monopolistically competitive market, what is true about price ($$P) $$and average cost ($$AC$$)?

Accepted Answer

$$P = AC$$

Question 3

Suppose two firms in a Cournot duopoly face the market demand $$P = 30 - Q$$ and both have marginal cost $$MC = 0. $$What is the Cournot equilibrium output for each firm?

Accepted Answer

Question 4

Which of the following is a necessary condition for a cartel to be successful in raising prices above competitive levels?

Accepted Answer

The demand for the good must be relatively inelastic.

Question 5

In the Bertrand model of oligopoly with homogeneous products and identical marginal costs, what is the Nash equilibrium price?

Accepted Answer

Equal to marginal cost.

Question 6

Why is collusion among firms in an oligopoly often unstable?

Accepted Answer

Each firm can increase its profit by secretly undercutting the agreed price.

Question 7

In the context of the prisoners’ dilemma, what outcome is most likely if both firms act in their own self-interest?

Accepted Answer

Both firms compete aggressively, leading to lower profits for each.

Question 8

Suppose the market for college textbooks is highly concentrated among a few publishers. According to the study materials, why might prices remain high even if competition is expected?

Accepted Answer

Publishers avoid price wars by not discounting and instead increase prices in lockstep.

Question 9

In the Stackelberg model of duopoly, what advantage does the first mover have?

Accepted Answer

The first mover can commit to an output level, forcing the rival to react, and thus earns higher profit.

Question 10

Which of the following best explains price rigidity in oligopolistic markets?

Accepted Answer

Firms are reluctant to change prices even if costs or demand change, often due to the kinked demand curve.

Question 11

If a monopolistically competitive firm is earning positive economic profit in the short run, what will happen in the long run?

Accepted Answer

New firms will enter, shifting the demand curve left until profits are zero.

Question 12

Given the demand function $$Q = 240 - 2P$$ and marginal costs $$MC_a = 4Q_a$$ and $$MC_b = 5Q_b$$, what is the first step to find the Cournot equilibrium outputs for firms $$a$$ and $$b$$?

Accepted Answer

Find the total revenue function for each firm and set marginal revenue equal to marginal cost.

Question 13

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

Accepted Answer

A few firms dominate the market.

Question 14

In the kinked demand curve model of oligopoly, what happens to a firm's demand elasticity if it raises its price above the prevailing market price?

Accepted Answer

Demand becomes more elastic.

Question 15

If two firms in a duopoly collude and maximize joint profit, what is the total output if the market demand is $$P = 30 - Q$$ and $$MC = 0$$?

Accepted Answer

$$Q = 15$$

Question 16

Which of the following real-world examples best illustrates the concept of a cartel?

Accepted Answer

OPEC, where oil-producing countries coordinate output and prices.

Question 17

Why might product diversity in monopolistic competition offset the inefficiency from downward-sloping demand curves?

Accepted Answer

Consumers value having a variety of choices, which can increase overall welfare.

Question 18

In a payoff matrix for a pricing game between two firms, what does the Nash equilibrium represent?

Accepted Answer

Each firm chooses the best strategy given the other firm's choice.

Question 19

Which of the following is a plausible reason why most commodity cartels have failed?

Accepted Answer

The cartel cannot control a large enough share of world supply.

Monopolistic Competition and Oligopoly: Structured Study Notes

Study Guide - Practice Questions

Study Guide - Flashcards