Foundations of Microeconomics, 5e (Bade/Parkin)
Chapter 16 Monopolistic Competition
16.1 What Is Monopolistic Competition?
1) An industry with a large number of firms, differentiated products, and free entry and exit is
called
A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
E) monopolistic oligopoly.
2) One characteristic of monopolistic competition is that it has
A) many firms producing a slightly differentiated product.
B) many firms producing identical goods.
C) one firm producing a unique good.
D) a few firms producing a slightly differentiated product.
E) large barriers to entry.
3) Which market structure is characterized by the following characteristics?
i. a large number of firms compete
ii. each firm produces a differentiated product
iii. firms are free to enter and exit
A) perfect competition
B) duopoly
C) oligopoly
D) monopolistic competition
E) monopoly
4) In monopolistic competition, each firm supplies a small part of the market. This occurs
because
A) there are barriers to entry.
B) there are no barriers to exit.
C) there are a large number of firms.
D) firms produce differentiated products.
E) there are a large number of buyers.
5) Monopolistic competition is a market structure in which
A) firms face barriers to entry.
B) a large number of firms compete.
C) firms produce and sell an identical product.
D) firms face perfectly elastic demand for their product.
E) the firms have no ability to influence the price of their product.
6) Monopolistic competition is defined as a type of market structure in which
A) many firms produce the good.
B) firms produce a homogeneous good.
C) there are barriers to entry.
D) firms can make an economic profit in the long run.
E) firms can easily enter the market but cannot easily exit from it.
7) What does monopolistic competition have in common with perfect competition?
A) a large number of firms and freedom of entry and exit
B) a standardized product
C) product differentiation
D) the ability to earn an economic profit in the long run
E) barriers to exit but no barriers to entry
8) What does monopolistic competition have in common with monopoly?
A) a large number of firms
B) a downward-sloping demand curve
C) the ability to collude with respect to price
D) mutual interdependence
E) barriers to entry
9) If a large number of firms are competing, the market could be
A) perfect competition or monopolistic competition.
B) perfect competition or monopoly.
C) monopolistic competition or oligopoly.
D) monopolistic competition or monopoly.
E) oligopoly or monopoly.
10) In both monopolistic competition and perfect competition,
A) firms sell identical products.
B) there is easy entry and exit.
C) firms are price takers.
D) firms face horizontal demand curves.
E) the marginal revenue curve and the demand curve are the same.
11) Which of the following is NOT a characteristic of monopolistic competition?
A) few firms compete
B) easy entry and exit
C) small market share
D) differentiated product
E) no barriers to entry or exit
12) A firm in monopolistic competition ________ influence its price and ________ influence the
market average price.
A) can; can
B) can; cannot
C) cannot; can
D) cannot; cannot
E) can; only in the short run can
13) The women’s dress industry is monopolistically competitive because each firm has
A) a large market share.
B) a very small market share.
C) no market share.
D) no competition for their market share.
E) struck a deal with the many other firms about what price will be charged.
14) It would be impossible for members of the fast-food industry to collude to fix prices because
A) there are too many fast-food firms in the market.
B) collusion is illegal.
C) there are not enough fast-food firms in the market.
D) the price of fast-food is too low.
E) demanders would not buy from firms that collude.
15) Because of the number of firms in monopolistic competition
A) each firm has a large market share.
B) it is possible for the firms to collude.
C) no one firm can dominate the market.
D) one firm has the ability to dictate market conditions.
E) each firm must carefully monitor what its competitors do.
16) In an industry with a large number of firms,
A) each firm will produce a large quantity, relative to market demand.
B) one firm will dominate the market.
C) collusion is impossible.
D) competition is eliminated.
E) barriers to exit must exist.
17) The freedom of entry and exit in monopolistic competition means that firms
A) enter the market when economic losses are being suffered.
B) exit the market when economic profits are being earned.
C) enter the market when normal profits are being earned.
D) can enter a market to compete for economic profits and leave when economic losses are being
incurred.
E) find it easy to permanently earn an economic profit.
18) In monopolistic competition, the products of different sellers are
A) identical.
B) similar but slightly different.
C) unique without any close or perfect substitutes.
D) perfect substitutes.
E) either identical or differentiated.
19) A differentiated product has
A) many perfect substitutes.
B) no close substitutes.
C) no substitutes of any kind.
D) close but not perfect substitutes.
E) many different complements.
20) Product differentiation involves making a product that is
A) slightly different from the products of competing firms.
B) no different than the products of competing firms.
C) very different from the products of competing firms.
D) completely different from the products of competing firms.
E) cheaper than the products of competing firms.
21) Product differentiation means
A) firms sell products that are very dissimilar.
B) products sold by different firms are slightly different.
C) charging a higher price to consumers with high willingness to pay.
D) charging a lower price to consumers with low willingness to pay.
E) that a single firm sells many different types of products.
22) Which of the following is the best example of a differentiated product?
A) beets in the local supermarket
B) diamonds
C) airlines
D) running shoes
E) electricity
23) Because of product differentiation, firms
A) do not have to compete because their products are unique.
B) cannot compete on price.
C) can compete on the basis of quality.
D) are unable to compete by using advertising.
E) must compete on only price.
24) Which of the following is true about monopolistic competition but false about perfect
competition?
A) There are a large number of independently acting sellers.
B) There are no barriers to entry.
C) Firms can earn an economic profit in the short run.
D) Firms compete on their product’s price as well as its quality and marketing.
E) Firms cannot earn an economic profit in the long run.
25) Product differentiation allows a firm to compete with another firm on the basis of
A) efficiency.
B) elasticity.
C) quality, price, and marketing.
D) the level of output and the price.
E) demand.
26) In monopolistic competition, the presence of a large number of firms making a differentiated
product means that
A) each firm can set the price of its particular product.
B) each firm must charge the same price.
C) the price is established by collusive behavior.
D) each firm must produce the same quantity.
E) firms cannot compete with each other on the basis of price.
27) In monopolistic competition, a firm can set the price for its product because of
A) easy entry and exit.
B) economic profits.
C) product differentiation.
D) many competitors.
E) the firm’s upward sloping demand curve.
28) Firms in monopolistic competition have demand curves that are
A) horizontal.
B) vertical.
C) downward sloping.
D) upward sloping.
E) U-shaped.
29) As a firm in monopolistic competition sets the price for its product, the firm faces a tradeoff
between
A) supply and demand.
B) efficiency and equity.
C) internal and external economies of scale.
D) price and the quantity it can sell.
E) its marginal revenue and its price.
30) An example of a firm in monopolistic competition is
A) your local water company.
B) the sole cable television company.
C) the many Chinese restaurants in San Francisco .
D) Kansas Power and Light, the sole provider of electricity in Kansas City.
E) Shaniq, a wheat farmer.
31) Which of the following is the best example of a monopolistically competitive industry?
A) land-based long distance telephone service
B) wheat farming
C) the local electricity producer
D) manufacturing of shirts
E) cable television
32) The United Company competes with many other firms each producing slightly different
products. Firms freely enter and exit this industry. The type of industry United Company
operates in is ________.
A) a monopoly
B) monopolistic competition
C) oligopoly
D) perfect competition
E) oligopolistic monopoly
33) Concentration ratios
A) refer to the concentration of customers in a certain area.
B) measure whether the market is dominated by a small number of firms.
C) measure the concentration of a large number of firms in a certain area.
D) have high values for perfect competition.
E) measure how concentrated a firm’s sales are among certain types of goods.
34) The four-firm concentration ratio is the percentage of ________ accounted for by the four
largest firms in an industry.
A) profit
B) supply
C) total revenue
D) total cost
E) marginal cost
35) If you have found the percentage of the value of total revenue accounted for by the four
largest firms in an industry, you have found the
A) elasticity of demand value.
B) elasticity of supply value.
C) Herfindahl-Hirschman Index.
D) four-firm concentration ratio.
E) monopolistic concentration index.
36) If the four-firm concentration ratio of an industry is
A) near 100, the industry is considered very competitive.
B) less than 40, the industry is considered an oligopoly.
C) over 40, the industry is considered monopolistic competition.
D) less than 40, the industry is considered monopolistic competition.
E) close to 0, the industry is considered a monopoly.
37) Which of the following four-firm concentration ratios would be the best indication of a
perfectly competitive industry?
A) 2 percent
B) 31 percent
C) 78 percent
D) 100 percent
E) 50 percent
38) Which of the following is correct?
A) Monopoly has a four-firm concentration ratio of 100.
B) Perfect competition has a four-firm concentration ratio near zero.
C) Monopolistic competition has a four-firm concentration ratio of more than 40.
D) Both answers A and B are correct.
E) Both answers A and C are correct.
39) If the four-firm concentration ratio equals 0.1 percent for the Mexican tomato industry, then
this industry is best characterized as
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) either a monopoly or monopolistic competition.
40) Which of the following four-firm concentration ratios is consistent with monopolistic
competition?
A) 100 percent
B) 75 percent
C) 25 percent
D) 0 percent
E) 91 percent
41) Which of the following four-firm concentration ratios would be the best indicator of an
oligopoly?
A) 0.25 percent
B) 31 percent
C) 78 percent
D) 100 percent
E) 11 percent
42) If the four-firm concentration ratio for the market for diapers is 73 percent, then this industry
is best characterized as
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) either a monopoly or monopolistic competition.
43) Which of the following four-firm concentration ratios would be the best indicator of a
monopoly?
A) 0.25 percent
B) 31 percent
C) 78 percent
D) 100 percent
E) 89 percent
44) The table above shows the revenue figures for the top four firms along with a total for the
remaining firms in the fast-food industry. What is the four-firm concentration ratio for the
industry?
A) 200
B) 20 percent
C) 25 percent
D) 80 percent
E) 100 percent
45) What is the four-firm concentration ratio if the four largest firms in an industry account for 5
percent, 6 percent, 7 percent, and 8 percent of total revenue?
A) 26 percent
B) 174 percent
C) 1,680
D) There is enough information given to answer the question, but none of the answers above are
correct.
E) There is not enough information given to answer the question.
46) The square of the percentage market share of each firm summed over the 50 largest firms in
a market is the
A) elasticity of demand value.
B) elasticity of supply value.
C) Herfindahl-Hirschman Index.
D) four-firm concentration ratio.
E) fifty-firm concentration ratio.
47) The Herfindahl-Hirschman Index measures market concentration in an industry by summing
the square of the percentage market shares for
A) the 4 largest firms.
B) the 50 smallest firms.
C) the 4 smallest firms.
D) the 50 largest firms.
E) all firms in the market.
48) The Herfindahl-Hirschman Index is the ________ of the percentage market share of each
firm summed over the largest 50 firms in a market.
A) sum
B) square
C) square root
D) cube
E) negative
49) If the Herfindahl-Hirschman Index in the market for single-use cameras equals 10,000 , then
the single-use camera industry is best characterized as
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) either a monopoly or monopolistic competition.
50) If the HHI for the widget industry is 1,200, then the market structure is
A) a monopoly.
B) monopolistic competition.
C) an oligopoly.
D) perfect competition.
E) impossible to determine
51) A market in which the Herfindahl-Hirschman Index exceeds 1,800 is considered to be
A) competitive.
B) not competitive.
C) moderately competitive.
D) purely competitive.
E) either a monopoly or monopolistic competition.
52) When the Herfindahl-Hirschman Index for an industry is
A) very small, the industry can be perfectly competitive.
B) very large, the industry can be perfectly competitive.
C) 10,000, the industry is perfectly competitive.
D) very small, the industry can be a monopoly.
E) above 5,000 the industry is considered not very competitive and when it is below 5,000 the
industry is considered very competitive.
53) If there are four firms in an industry with market shares of 50 percent, 40 percent, 5 percent,
and 5 percent, the Herfindahl-Hirschman Index is
A) 100.
B) 4150.
C) 25.
D) 3450.
E) undefined because there are not 50 firms in the industry.
54) What is the Herfindahl-Hirschman Index if the four firms in an industry account have market
shares of 62 percent, 15 percent, 15 percent, and 8 percent?
A) 100
B) 4,358
C) 111,600
D) 2,822
E) 6,200
55) The three largest firms in an industry have market shares of 40 percent, 30 percent, and 2
percent. The remaining 47 firms in the industry each have a market share of 1 percent. The
Herfindahl-Hirschman Index (HHI) for this industry is ________.
A) 2,551
B) 5,184
C) 24,061
D) 10,000
E) 3,013
56) Suppose there are 7 firms in the candy industry with the market shares shown below. What is
the HHI for the industry?
A) 1850
B) 2000
C) 6400
D) 100
E) 20
57) A market is considered competitive if the Herfindahl-Hirschman Index (HHI) is ________
and its four-firm concentration ratio is ________.
A) high; high
B) high; low
C) low; high
D) low; low
E) between 30 percent and 70 percent; greater than 5,000