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189. A market is contestable if
a.
the number of firms is larger than oligopoly.
b.
firms spend a lot on advertising.
c.
there is free entry and exit.
d.
firms have kinked demand curves.
190. If a market is contestable, then
a.
long-run economic profits are minimal due to inefficiency.
b.
long-run economic profits are zero.
c.
short-run and long-run economic profits are zero.
d.
positive economic profits are maximized due to the efficient production spurred by the threat of entry.
191. A market which firms can enter if they choose and exit without losing money invested is
a.
pure monopoly.
b.
duopoly.
c.
contestable.
d.
a market where there are kinked demand curves.
192. The contestable market theory best applies to
a.
pure monopoly.
b.
oligopoly.
c.
monopolistic competition.
d.
perfect competition.
193. Contestable markets improve the performance of imperfect markets with
a.
government regulations.
b.
the threat of entry.
c.
advertising.
d.
tacit collusion.
194. At any given airport, the airlines hold long-term leases for passenger loading gates. New gates cannot be added
without approval of the airlines. Frequent flier programs are also common in the industry. It is, therefore, more difficult
for a new airline to enter a given airport (market). Such factors:
(i)
are called barriers to entry.
(ii)
tend to decrease the contestability of the air travel market.
a.
i and ii
b.
i not ii
c.
ii not i
d.
neither i nor ii
195. In the past, the Department of Transportation allowed airline mergers that gave the merged airlines market shares of
79 and 82 percent, respectively, in their hub cities. The concept the DOT used to allow mergers where there was obvious
concentration was most likely
a.
the good trust principle.
b.
contestability.
c.
the efficient market principle.
d.
the monopolistic competition principle.
196. In a perfectly contestable market in the long run, each firm
a.
produces at the minimum point on its long-run average total cost curve.
b.
earns a profit below its opportunity cost of capital.
c.
avoids making capital expenditures.
d.
All of the above are correct.
197. An empirical study determines that price exceeds marginal cost at the levels of output of firms in long-run
equilibrium in the widget industry. The widget industry may therefore
a.
be monopolistically competitive.
b.
have firms whose goal is sales maximization.
c.
have firms that act as price leaders.
d.
All of the above are correct.
198. A perfectly competitive firm and a monopolistically competitive firm are similar in each of the following respects
except
a.
each has many buyers and sellers.
b.
firms sell homogeneous products in both markets.
c.
in having perfect information.
d.
for freedom of exit and entry.
199. Which of the following conditions distinguishes the monopolistic competitor from the monopolist?
a.
profit-maximizing rule
b.
downward slope of demand curve
c.
entry of rivals
d.
short-run economic profits
200. Deviations from the perfectly competitive market can lead to
a.
inefficiently high production costs.
b.
higher prices and smaller outputs.
c.
less efficient resource allocation.
d.
All of the above are correct.
201. All four market forms discussed in the text maximize profit where
a.
P = MC.
b.
AR = AC.
c.
MR = MC.
d.
MC = AR.
202. Markets in which the behavior of the firms theoretically leads to an efficient allocation of resources that maximizes
the benefits to consumers given the resources available to consumers are
a.
monopolistic competition and oligopoly.
b.
monopoly and oligopoly.
c.
monopolistic competition and monopoly.
d.
perfect competition and perfectly contestable.
203. The behavior of the perfectly competitive firm:
a.
theoretically leads to an inefficient allocation of resources.
b.
maximizes the benefits to consumers, given the resources available to the economy.
c.
reduces output in order to raise prices in the short-term.
d.
results in excess capacity and inefficiency.
204. The behavior of the monopolistic firm:
a.
maximizes the benefits to consumers, given the resources available to the economy.
b.
reduces output in order to raise prices in the short-term.
c.
results in excess capacity and inefficiency.
d.
both b and c
205. Define the following terms and explain their importance to the study of economics.
a.
monopolistic competition
b.
oligopoly
c.
cartel
d.
oligopolistic interdependence
206. Briefly and concisely define the following terms and explain their importance in the study of economics.
a.
excess capacity theorem
b.
price leadership
c.
kinked demand curve
d.
perfectly contestable market
207. In what way is monopolistic competition more like competition, and in what way is it more like monopoly?
208. Monopolistic competition tends to lead firms to have wasted capacity. Why?
209. Can positive economic profits persist under monopolistic competition in the long run. Why?
210. What are the advantages and disadvantages of resource allocation under monopolistic competition compared to
perfect competition?
211. Explain how short-run and long-run equilibrium in monopolistic competition differ. Use graphs to illustrate your
answer. Be sure that your graphs are completely and correctly labeled.
212. Here is an excerpt form an editorial praising capitalism in The Economist: "It is competition that delivers choice,
holds prices down, encourages invention and service, and (through all these things) delivers economic growth." To what
type of competition does the writer refer? Is it the sort of competition that economists study? Explain.
213. Baumol and Blinder argue that oligopolies are interdependent firms. What do they mean by this? Give three
examples of the types of interdependence which might occur.
214. What quantity of output and price do they try to set, when a group of oligopoly firms form a cartel? Will there be any
changes in the price and quantity supplied if the cartel gets broken down?
215. Demand for a firm has been reliably measured as P = 100 − 5Q where Q is output and P is price in dollars. Total cost
is in the table below. Complete the table and indicate the level of output and price which a profit-maximizing firm would
select and indicate the same for a sales-maximizing firm.
Quantity
Price
Revenue
Cost
Profit
1
_____
_____
200
_____
2
_____
_____
210
_____
3
_____
_____
220
_____
4
_____
_____
231
_____
5
_____
_____
243
_____
6
_____
_____
256
_____
7
_____
_____
270
_____
8
_____
_____
285
_____
9
_____
_____
301
_____
10
_____
_____
320
_____
11
_____
_____
345
_____
12
_____
_____
375
_____
216. What are the assumptions of the kinked demand curve model? What is its main conclusion about oligopoly behavior?
217. Is it likely that oligopolistic firms will be in both a kinked demand curve situation and also engage in price
leadership? Why or why not?
218. Economists tend to be concerned about entry barriers. Why are entry barriers so important?
219. Define the following terms and explain their importance to the study of economics.
a.
maximin criterion
b.
Nash equilibrium
c.
Dominant Strategy
d.
Zero-sum game
e.
Credible threat
220. What is a repeated game? Hoe does this helps the players in a game?
Figure 12-4
221. The above matrix (Figure 12-4) displays the possible profit results of two firms, A and B, from following two
different possible strategies: charging a high price and charging a low price. In each cell, the first number is the profit of
firm A, and the second number is the profit of firm B.
a.
Assume that collusion is not possible. Determine the optimal strategy for each firm. Explain
why it is the best strategy to follow.
b.
Based on your answer to a., explain why firms collude. What are the pitfalls of collusion?
222. Explain the prisoner's dilemma case in game theory and its relevance to the maximin criterion.
223. Why is oligopoly more difficult to model than competition or monopoly?
224. When an airline reduces its fares, other airlines typically match the action. But when an airline increases its fare,
other airlines do not follow suit. Which oligopoly model cartel, price leadership, or kinked demand best fits the airline
industry as described? Justify your choice and explain why the other models are less appropriate.
225. Explain how a large number of firms in the industry and product heterogeneity affect the likelihood of cartel success.
226. How will price, output, and profit compare if firms maximize sales rather than profit?
227. Which oligopoly model leads to price rigidity? Graphically show why.
228. The airline dominating Charlotte, North Carolina, once contended that it could not overcharge for fear of potential
competition, if not at Charlotte, then at Raleigh, a two-hour drive away. Do you find this argument compelling, given the
theory of contestable markets?
229. Firms in a perfectly contestable market will be forced to operate as efficiently as possible and to charge prices as low
as long-run financial survival permits. Why?
230. What are the four types of industry structures? Compare and contrast them with the number of firms in the industry,
whether firms produce homogeneous or heterogeneous products, whether there are economic profits in long-run
equilibrium, and how frequently the model appears in the real world.
