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Microeconomics, 7e (Pindyck/Rubinfeld)
Chapter 12 Monopolistic Competition and Oligopoly
- For which of the following market structures is it assumed that there are barriers to entry?
A) Perfect competition
B) Monopolistic competition
C) Monopoly
D) all of the above
E) B and C only
Answer: C
Diff: 1
Section: 12.
- Use the following two statements about monopolistic competition to answer this question.
I. In the long run, the price of the good will equal the minimum of the average cost.
II. In the short run, firms may earn a profit.
A) I and II are true.
B) I is true, and II is false.
C) I is false, and II is true.
D) I and II are false.
Answer: C
Diff: 1
Section: 12.
- A market with few entry barriers and with many firms that sell differentiated products is
A) purely competitive.
B) a monopoly.
C) monopolistically competitive.
D) oligopolistic.
Answer: C
Diff: 1
Section: 12.
- The most important factor in determining the long-run profit potential in monopolistic
competition is
A) free entry and exit.
B) the elasticity of the market demand curve.
C) the elasticity of the firm's demand curve.
D) the reaction of rival firms to a change in price.
Answer: A
Diff: 1
Section: 12.
Page 1
- Which of the following is NOT regarded as a source of inefficiency in monopolistic
competition?
A) The fact that price exceeds marginal cost
B) Excess capacity
C) Product diversity
D) The fact that long-run average cost is not minimized
E) all of the above
Answer: C
Diff: 1
Section: 12.
- Monopolistically competitive firms have monopoly power because they
A) face downward sloping demand curves.
B) are great in number.
C) have freedom of entry.
D) are free to advertise.
Answer: A
Diff: 1
Section: 12.
- A monopolistically competitive firm in short-run equilibrium:
A) will make negative profit (lose money).
B) will make zero profit (break-even).
C) will make positive profit.
D) Any of the above are possible.
Answer: D
Diff: 1
Section: 12.
- A monopolistically competitive firm in long-run equilibrium:
A) will make negative profit.
B) will make zero profit.
C) will make positive profit.
D) Any of the above are possible.
Answer: B
Diff: 1
Section: 12.
- What happens to an incumbent firm's demand curve in monopolistic competition as new firms
enter?
A) It shifts right.
B) It shifts left.
C) It becomes horizontal.
D) New entrants will not affect an incumbent firm's demand curve.
Answer: B
Diff: 1
Section: 12.
Page 2
- Excess capacity in monopolistically competitive industries results because in equilibrium
A) each firm's output level is too great to minimize average cost.
B) each firm's output level is too small to minimize average cost.
C) firms make positive economic profit.
D) price equals marginal cost.
Answer: B
Diff: 2
Section: 12.
- Although firms earn zero profits in the long run, why is the outcome from monopolistic
competition considered to be inefficient?
A) Price exceeds marginal cost.
B) Quantity is lower than the perfectly competitive outcome.
C) Goods are not identical.
D) A and B are correct.
E) B and C are correct.
Answer: D
Diff: 2
Section: 12.
- The authors cited statistical evidence that the price elasticity of demand for Royal Crown
cola is -2.4, and the price elasticity of demand for Coke is roughly -5.5. Which firm likely has
stronger brand loyalty among customers that provides greater potential for monopoly power in
the cola market?
A) Coke
B) Royal Crown
C) Both firms should have identical monopoly power
D) We do not have enough information to answer this question.
Answer: B
Diff: 2
Section: 12.
- Why don't some firms in monopolistic competition earn losses in the long run?
A) The firms have enough monopoly power to ensure they always earn profits.
B) Free entry allows enough firms to remain in the market and maintain the critical mass of firms
required to attract customers.
C) Free exit implies that any unprofitable firms leave the market in the long run.
D) In the long run, firms will build enough brand loyalty among customers to ensure a profitable
level of sales.
Answer: C
Diff: 2
Section: 12.
Page 4
- The market structure in which strategic considerations are most important is
A) monopolistic competition.
B) oligopoly.
C) pure competition.
D) pure monopoly.
Answer: B
Diff: 1
Section: 12.
- In the Cournot duopoly model, each firm assumes that
A) rivals will match price cuts but will not match price increases.
B) rivals will match all reasonable price changes.
C) the price of its rival is fixed.
D) the output level of its rival is fixed.
Answer: D
Diff: 1
Section: 12.
- A situation in which each firm selects its best action, given what its rivals are doing, is called
a
A) Nash equilibrium.
B) Cooperative equilibrium.
C) Stackelberg equilibrium.
D) zero sum game.
Answer: A
Diff: 1
Section: 12.
- Which of the following can be thought of as a barrier to entry?
A) scale economies.
B) patents.
C) strategic actions by incumbent firms.
D) all of the above
Answer: D
Diff: 1
Section: 12.
- In the __________, each firm treats the output of its competitor as fixed and then decides
how much to produce.
A) Cournot model
B) model of monopolistic competition
C) Stackelberg model
D) kinked-demand model
E) none of the above
Answer: A
Diff: 1
Section: 12.
Page 5
Scenario 12.1:
Suppose mountain spring water can be produced at no cost and that the demand and marginal
revenue curves for mountain spring water are given as follows:
Q = 6000 - 5P MR = 1200 - 0.4Q
- Refer to Scenario 12.1. What is the profit maximizing price of a monopolist?
A) $
B) $
C) $
D) $
E) none of the above
Answer: B
Diff: 2
Section: 12.
- Refer to Scenario 12.1. What will be the price in the long run if the industry is a Cournot
duopoly?
A) $
B) $
C) $
D) $
E) Competition will drive the price to zero.
Answer: A
Diff: 2
Section: 12.
- The Cournot equilibrium can be found by treating __________ as a pair of simultaneous
equations and by finding the combination of Q1 and Q2 that satisfy both equations.
A) the reaction curves for firms 1 and 2
B) the market supply curve and the market demand curve
C) the contract curve and the market demand curve
D) the contract curve and the market supply curve
E) the firm's supply curve and the firm's demand curve
Answer: A
Diff: 3
Section: 12.
- The oligopoly model that is most appropriate when one large firm usually takes the lead in
setting price is the __________ model.
A) Cournot
B) Stackelberg
C) game theory
D) prisoner's dilemma
Answer: B
Diff: 1
Section: 12.
Page 7
- Under a Cournot duopoly, the collusion curve represents:
A) all possible allocations of the pure monopoly quantity among the two firms in the duopoly.
B) all possible allocations of the pure monopoly quantity that would be possible if the two firms
in the duopoly did not cooperate.
C) all optimal price-quantity outcomes for a cartel rather than a Cournot duopoly.
D) the potential profits to be earned by firms in a collusive cartel.
Answer: A
Diff: 2
Section: 12.
- For a market with a linear demand curve and constant marginal cost of production, why are
the reaction functions for the Cournot duopoly sellers also straight lines?
A) The reaction functions do not have to be straight lines, and they are only drawn this way in
the book to keep the figures simple.
B) Cournot thought the lines would be straight, but this was proven wrong by other economists.
C) Marginal revenue is always linear when marginal costs are constant.
D) We know that the marginal revenue curves for linear demand curves are also straight lines.
Answer: D
Diff: 2
Section: 12.
- In the Stackelberg model, suppose the first-mover has MR = 15 - Q 1
, the second firm has
reaction function Q2 = 15 - Q 1
/2, and production occurs at zero marginal cost. Why doesn't the
first-mover announce that its production is Q 1
= 30 in order to exclude the second firm from the
market (i.e., Q 2
= 0 in this case)?
A) In this case, MR is negative and is less than MC, so the first-mover would be producing less
than the optimal quantity.
B) In this case, MR is negative and is less than MC, so the first-mover would be producing too
much output.
C) This is a possible outcome from the Stackelberg duopoly under these conditions.
D) We do not have enough information to determine if this is an optimal outcome for this case.
Answer: B
Diff: 3
Section: 12.
- What is one difference between the Cournot and Stackelberg models?
A) In Cournot, both firms make output decisions simultaneously, and in Stackelberg, one firm
sets its output level first.
B) In Stackelberg, both firms make output decisions simultaneously, and in Cournot, one firm
sets its output level first.
C) In Cournot, a firm has the opportunity to react to its rival.
D) Profits are zero in Cournot and positive in Stackelberg.
Answer: A
Diff: 1
Section: 12.
Page 8
- Collusion can earn higher prices and higher profits under the Bertrand model, but why is this
an unlikely outcome in practice?
A) Firms prefer to remain independent of other firms so that their pricing plans can be more
flexible over time.
B) The collusive firms have an incentive to gain market share at the expense of the other firms
by cutting prices.
C) The federal antitrust authorities have an easier time catching firms that collude on price rather
than quantity.
D) none of the above
Answer: B
Diff: 2
Section: 12.
- Which oligopoly model(s) have the same results as the competitive model?
A) Cournot
B) Bertrand
C) Stackelberg
D) Both Cournot and Stackelberg
Answer: B
Diff: 1
Section: 12.
- In which oligopoly model(s) do firms earn zero profit?
A) Cournot
B) Bertrand
C) Stackelberg
D) Oligopoly firms always earn positive economic profits.
Answer: B
Diff: 1
Section: 12.
- In the __________, one firm sets its output first, and then a second firm, after observing the
first firm's output, makes its output decision.
A) Cournot model
B) model of monopolistic competition
C) Bertrand model
D) kinked-demand model
E) none of the above
Answer: E
Diff: 2
Section: 12.
Page 10
- In the __________, two duopolists compete by simultaneously selecting price.
A) Cournot model
B) Nash model
C) Bertrand model
D) kinked-demand model
E) none of the above
Answer: C
Diff: 1
Section: 12.
- In the Bertrand model with homogeneous products,
A) the firm that sets the lower price will capture all of the market.
B) the Nash equilibrium is the competitive outcome.
C) both firms set price equal to marginal cost.
D) all of the above
E) the outcome is inconclusive.
Answer: D
Diff: 1
Section: 12.
- Relative to the Nash equilibrium in the Cournot model, the Nash equilibrium in the Bertrand
model with homogeneous products
A) results in the same output but a higher price.
B) results in the same output but a lower price.
C) results in a larger output at a lower price.
D) results in a smaller output at a higher price.
E) any of the above may result.
Answer: C
Diff: 2
Section: 12.
- Which statement most nearly describes a Nash equilibrium applied to price competition?
A) Two firms cooperate and set the price that maximizes joint profits.
B) Each firm automatically moves to the purely competitive equilibrium because it knows the
other firm will eventually move to that price anyway.
C) Given the prices chosen by its competitors, no firm has an incentive to change their prices
from the equilibrium level.
D) One dominant firm sets the price, and the other firms take that price as if it were given by the
market.
Answer: C
Diff: 2
Section: 12.
Page 11
the Bertrand model:
Firm B cuts
Firm B
colludes
Firm A cuts 6,6 24,
Firm A
colludes
Here, the possible options are to retain the collusive price (collude) or to lower the price in
attempt to increase the firm's market share (cut). The payoffs are stated in terms of millions of
dollars of profits earned per year. What is the Nash equilibrium for this game?
A) Both firms cut prices.
B) Both firms collude.
C) There are two Nash equilibria: A cuts and B colludes, and A colludes and B cuts.
D) There are no Nash equilibria in this game.
Answer: C
Diff: 3
Section: 12.
- The oligopoly model that predicts that oligopoly prices will tend to be very rigid is the
__________ model.
A) Cournot
B) Stackelberg
C) dominant firm
D) kinked demand
Answer: D
Diff: 1
Section: 12.
- In the kinked demand curve model, if one firm reduces its price
A) other firms will also reduce their price.
B) other firms will compete on a non-price basis.
C) other firms will raise their price.
D) Both A and B are correct.
E) Both B and C are correct.
Answer: A
Diff: 1
Section: 12.
Page 13
- Suppose that three oligopolistic firms are currently charging $12 for their product. The three
firms are about the same size. Firm A decides to raise its price to $18, and announces to the
press that it is doing so because higher prices are needed to restore economic vitality to the
industry. Firms B and C go along with Firm A and raise their prices as well. This is an example
of
A) price leadership.
B) collusion.
C) the dominant firm model.
D) the Stackelberg model.
E) none of the above
Answer: A
Diff: 1
Section: 12.
- A market structure in which there is one large firm that has a major share of the market and
many smaller firms supplying the remainder of the market is called:
A) the Stackelberg Model.
B) the kinked demand curve model.
C) the dominant firm model.
D) the Cournot model.
E) the Bertrand model.
Answer: C
Diff: 1
Section: 12.
- In the dominant firm model, the smaller fringe firms behave like:
A) competitive firms.
B) Cournot firms.
C) Stackelberg firms.
D) Bertrand firms.
E) monopolists.
Answer: A
Diff: 1
Section: 12.
- Under the kinked demand curve model, an increase in marginal cost will lead to
A) an increase in output level and a decrease in price.
B) a decrease in output level and an increase in price.
C) a decrease in output level and no change in price.
D) neither a change in output level nor a change in price.
Answer: D
Diff: 1
Section: 12.
Page 14
- Refer to Scenario 12.2. What is the profit maximizing price?
A) 205.
B) 240
C) 210
D) all of the above
E) none of the above
Answer: C
Diff: 3
Section: 12.
- Refer to Scenario 12.2. Suppose that the marginal cost increases such that:
MC = Q + 10
What is the profit maximizing level of output?
A) 171.
B) 120
C) 150
D) all of the above
E) none of the above
Answer: C
Diff: 3
Section: 12.
- Refer to Scenario 12.2. Suppose that the marginal cost increases such that:
MC = Q + 10
What is the profit maximizing price?
A) 205.
B) 240
C) 210
D) all of the above
E) none of the above
Answer: C
Diff: 3
Section: 12.
- Refer to Scenario 12.2. Suppose that the marginal cost falls such that:
MC = Q - 10
What is the profit maximizing level of output?
A) 171.
B) 120
C) 150
D) all of the above
E) none of the above
Answer: C
Diff: 3
Section: 12.
Page 16
- Refer to Scenario 12.2. Suppose that the marginal cost falls such that:
MC = Q - 10
What is the profit maximizing price?
A) 205.
B) 240
C) 210
D) all of the above
E) none of the above
Answer: C
Diff: 3
Section: 12.
- The key disadvantage of the kinked-demand model is that it:
A) explains why firms may collude, but it does not explain how they interact.
B) does not explain why prices may be rigid in an oligopoly.
C) requires the assumptions of perfect competition.
D) only holds under price leadership.
Answer: B
Diff: 1
Section: 12.
- Use the following statements to answer this question:
I. Under the dominant firm model, the dominant firm effectively acts like a monopolist who is
facing the excess market demand that cannot be supplied by the fringe firms.
II. If the fringe supply curve shifts leftward in the dominant firm model, then the resulting
market equilibrium price is __________ and the dominant firm's quantity __________.
A) lower, decreases
B) lower, increases
C) higher, decreases
D) higher, increases
Answer: D
Diff: 2
Section: 12.
- Under the kinked demand model, suppose the firm's demand curve shifts rightward but the
price at which the kink occurs remains the same. In this case, the firm:
A) does not change its output.
B) increases output.
C) decreases output.
D) We do not have enough information to answer this question.
Answer: B
Diff: 3
Section: 12.
Page 17
- The authors explain that the international copper cartel (CIPEC) has been largely ineffective
in raising the price of copper in world markets, and the reason is mainly due to the relatively
elastic demand for copper. Suppose the cartel recognized that there are multiple uses for copper,
and some of the uses have few substitute products (e.g., copper electrical wire) while others have
several close substitutes (e.g., copper water pipes). If cartel attempted to raise the price of
copper in one of these sub-markets, which market should the cartel choose?
A) Market with several close substitutes because demand is more elastic.
B) Market with several close substitutes because demand is more inelastic.
C) Market with few close substitutes because demand is more elastic.
D) Market with few close substitutes because demand is more inelastic.
Answer: D
Diff: 2
Section: 12.
- The authors explain that the international copper cartel (CIPEC) has been largely ineffective
in raising the price of copper in world markets, and the reason is mainly due to the relatively
elastic demand for copper. Suppose the cartel recognized that there are multiple uses for copper,
and some of the uses have few substitute products (e.g., copper electrical wire) while others have
several close substitutes (e.g., copper water pipes). To increase profits, the cartel could raise the
price of copper in the sub-markets with relatively inelastic demand. What else would the cartel
have to do in order to make the cartel's action effective?
A) The cartel would have to seek permission from the U.S. Department of Justice.
B) The cartel would have to get the cooperation of all other copper producers in order to raise the
price by some positive amount.
C) The cartel would have to find a way to keep the buyers in the low-price market from reselling
the copper to buyers in the high-price market.
D) none of the above
Answer: C
Diff: 2
Section: 12.
- Suppose the supply of non-OPEC oil increases due to new petroleum discoveries in other
countries. What happens to the price of oil on the world market?
A) Increases
B) Decreases
C) Remains the same
D) We do not have enough information to answer this question.
Answer: B
Diff: 2
Section: 12.
Page 19
- Suppose the supply of non-OPEC oil increases due to new petroleum discoveries in other
countries. What happens OPEC's share of the world oil market?
A) Increases
B) Decreases
C) Remains the same
D) We do not have enough information to answer this question.
Answer: B
Diff: 2
Section: 12.
- Cartels can more easily detect cheating by cartel members if the products sold by each
member are largely homogeneous. As product quality varies, the observed prices charged by
cartel members may be due to differences in the products, or they may be due to cheating.
Which of the following goods would more difficult to monitor for potential cheating?
A) Aluminum ingots
B) Industrial concrete
C) Steel beams
D) Luxury yachts
Answer: D
Diff: 1
Section: 12.
Scenario 12.3:
Suppose a stream is discovered whose water has remarkable healing powers. You decide to
bottle the liquid and sell it. The market demand curve is linear and is given as follows:
P = 30 - Q
The marginal cost to produce this new drink is $3.
- Refer to Scenario 12.3. What price would this new drink sell for if it sold in a competitive
market?
A) 0
B) $
C) $13.
D) $16.
E) $
Answer: B
Diff: 3
Section: 12.
Page 20
