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Managerial Economics, 7e (Keat)
Chapter 9 Pricing and Output Decisions: Monopolistic Competition and Oligopoly
(Appendix 9A)
Multiple-Choice Questions
1) Which of the following industries is most likely to represent the monopolistic competition
market structure?
A) automobiles
B) tobacco products
C) restaurants
D) farm equipment
2) The main difference between perfect competition and monopolistic competition is
A) the number of sellers in the market.
B) the ease of exit from the market.
C) the difference in the firm's profits in the long run.
D) the degree of product differentiation.
3) If firms are earning economic profit in a monopolistically competitive market, which of the
following is most likely to happen in the long run?
A) Some firms will leave the market.
B) Firms will join together to keep others from entering.
C) New firms will enter the market, thereby eliminating the economic profit.
D) Firms will continue to earn economic profit.
4) Firms in monopolistic competition would
A) persistently realize economic profits in both the short and long run.
B) may realize economic profits in the long run and normal profits in the short run.
C) tend to incur persistent losses in both the short and long run.
D) tend to realize economic profits in the short run and normal profits in the long run.
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5) In the long run, the most helpful action that a monopolistically competitive firm can take to
maintain its economic profit is to
A) continue its efforts to differentiate its product.
B) raise its price.
C) lower its price.
D) do nothing, because it will inevitably experience a decline in profits.
6) Which of the following represents a good example of an oligopoly?
A) the agriculture industry
B) a public utility
C) the automobile industry
D) the restaurant industry
7) In general, there is a(n) ________ relationship between the height/strength of the barriers and
the number of firms in an industry.
A) direct
B) inverse
C) constant
D) random
8) Mutual interdependence occurs when
A) all firms in an industry are affected by the same macro economic conditions, such as a
recession, inflation, interest rates, exchange rates, etc.
B) the actions of firms are independent of each other.
C) the actions of one firm in an industry are easily recognized and perhaps copied by others.
D) monopolists recognize that they must face eventual competition in the long run.
9) Mutual interdependence means that
A) all firms are price takers.
B) each firm sets its own price based on its anticipated reaction by its competitors.
C) all firms collaborate to establish one price.
D) all firms are free to enter or leave the market.
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10) The Herfindahl-Hirschman (HH) Index is used to
A) measure the degree of nonprice competition.
B) measure the degree of market concentration in an industry.
C) measure the extent of price leadership.
D) None of the above
11) The demand curve, which assumes that competitors will follow price decreases but not price
increases, is called
A) an industry demand curve.
B) an inelastic demand curve.
C) a kinked demand curve.
D) a competitive demand curve.
12) The kinked demand curve model best reflects
A) mutual interdependence among sellers.
B) a game theory approach to price-output decisions.
C) price rigidities in oligopolistic markets.
D) All of the above
13) In the kinked demand curve model, the demand curve is ________ for price increases and
________ for price decreases.
A) unit elastic; relatively elastic
B) relatively inelastic; relatively elastic
C) relatively elastic; relatively inelastic
D) perfectly elastic; perfectly inelastic
14) The existence of a kinked demand curve under oligopoly conditions may result in
A) price flexibility.
B) price rigidity.
C) competitive pricing.
D) None of the above
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15) When a company is faced by a kinked demand curve, the marginal revenue curve
A) will be upward sloping.
B) will be horizontal.
C) will always be zero at the quantity produced.
D) will be discontinuous.
16) In which of these markets would the firms be facing the least elastic demand curve?
A) perfect competition
B) pure monopoly
C) monopolistic competition
D) oligopoly
17) Porter's "Five Forces Model" is based on
A) the laws of supply and demand.
B) the law of diminishing returns.
C) the Structure-Conduct-Performance model.
D) the key factors affecting demand.
18) The four-firm concentration ratio
A) indicates the total profitability among the top four firms in an industry.
B) is an indicator of the degree of monopolistic competition.
C) indicates the presence and intensity of an oligopoly market.
D) is used by the government as a basis for anti-trust cases.
Analytical Questions
1) Convenience stores with gas stations tend to sell an essentially identical variety of products
and services. Yet this is generally considered to be a monopolistically competitive industry
selling differentiated products. How can this be considered a differentiated product?
2) Describe the transition from short-run to long-run equilibrium in a monopolistically
competitive industry.
3) How is a monopolistically competitive industry like perfect competition? How is it like
monopoly?
4) Why might a concentration ratio be a poor measure of actual industry competition?
5) When one automaker begins offering low cost financing or rebates, others tend to do the same.
What two oligopoly models might offer an explanation of this behavior?
6) Restaurants cluster together. That is, on one corner, there may be four similar fast-food
restaurants. How can this be explained using a location game theory model?
7) Microsoft has integrated many components into its Windows operating systems, such as a web
browser, media player, etc. How might this be an example of nonprice competition?
8) Describe the factors in Michael Porter's "Five Forces Model" that affect the ability of any firm
in an industry to earn a profit.
9) Describe the structure-conduct-performance (S-C-P) paradigm.
10) Explain why the "kinked demand curve" model of oligopoly represents a game theory
approach to oligopolistic behavior.
