Introduction to Economic Reasoning, 8e (Rohlf)
Chapter 8: Industry Structure and Public Policy
1) Which of the following is not an element of industry structure?
A) the number of sellers in the industry
B) the extent of barriers to entry
C) the existence of economic profits
D) the nature of the product; the degree of product differentiation, for example
E) the size distribution of the firms in the industry
2) The market structure which is characterized by a large number of firms selling slightly
differentiated products is known as
A) pure competition.
B) pure monopoly.
C) monopolistic competition.
D) oligopoly.
E) duopoly
3) The market structure which is characterized by a high degree of interdependence between
sellers is known as
A) pure competition.
B) pure monopoly.
C) monopolistic competition.
D) oligopoly.
E) duopoly.
4) Which of the following is an example of a monopolistic competitor?
A) a soybean farmer
B) General Motors
C) the local utility company
D) a barbershop
E) the only bank in a small town
5) Monopolistic competition is different from pure competition in that
A) monopolistic competitors produce where MR = MC, but pure competitors do not.
B) monopolistic competition is characterized by a small number of firms while pure competition
is not.
C) monopolistic competitors are protected by barriers to entry, while pure competitors are not.
D) monopolistic competitors sell differentiated products, while pure competitors sell identical
products.
E) monopolistic competitors sell identical products while pure competitors sell differentiated
products.
6) Monopolistically competitive firms have some pricing discretion because
A) they are protected by substantial barriers to entry.
B) there are very few firms in monopolistically competitive industries.
C) they control a significant fraction of total industry output.
D) these firms tend to be quite large in relation to the total industry.
E) they sell somewhat unique products.
7) One reason that monopolistically competitive firms probably charge higher prices than
comparable purely competitive firms is because
A) monopolistically competitive industries tend to be overcrowded, preventing firms from
operating efficiently.
B) monopolistically competitive firms are protected by barriers to entry, while competitive firms
are not.
C) monopolistically competitive firms tend to hire less efficient personnel than competitive
firms.
D) monopolistically competitive firms operate where MR = MC, while competitive firms do not.
E) monopolistically competitive firms always charge the highest possible price, while
competitive firms do not.
8) Which of the following is not true of both pure competitors and monopolistically competitive
firms?
A) Both produce at the output where MR = MC.
B) Neither tend to earn economic profits in long-run equilibrium.
C) Both firms are price takers.
D) Both tend to be small in relation to the total industry.
E) Both firms attempt to earn economic profits.
9) In a monopolistically competitive industry, if the typical firm is earning economic profits in
the short run,
A) the profits may continue to exist in the long run, since there are substantial entry barriers.
B) the profits will tend to be eliminated, as additional firms enter the industry selling identical
products.
C) the profits continue to exist in the long run, since each firm sells a slightly different product.
D) the profits will tend to be eliminated in the long run, as additional firms enter the industry
selling somewhat differentiated products.
E) the profits will tend to be eliminated in the long run, as the industry evolves into an oligopoly.
10) When the typical monopolistically competitive firm is in long-run equilibrium,
A) its average total cost curve will be tangent to the demand curve at the output where MR =
MC.
B) its demand curve will lie above its average total cost curve at all output levels.
C) its demand curve will lie below its average total cost curve at the output where MR = MC.
D) its average total cost curve will intersect the demand curve at the profit-maximizing output.
E) its average total cost curve will be tangent to the marginal revenue curve at the output where
MR = MC.
11) Monopolistically competitive firms fail to achieve allocative efficiency because
A) they do not operate at the minimum point on their average total cost curve.
B) they produce more output than is socially desirable.
C) they produce at an output level where price exceeds marginal cost.
D) they do not operate at the minimum point on their marginal cost curve.
E) they are able to earn economic profits in the long run.
12) Which of the following is not a characteristic of oligopoly?
A) low barriers to entry
B) few firms
C) mutual interdependence
D) firms which are large in relation to the market
E) the possibility of product differentiation
13) Which of the following is an example of an oligopolist?
A) a retail clothing store in a major city
B) the local phone company
C) a catfish producer
D) a Kansas wheat farmer
E) a major cigarette manufacturer
14) Game theory is the study of the behavior of
A) monopolists.
B) price takers.
C) interdependent firms.
D) monopolistically competitive firms.
E) all firms with market power.
Use the following payoffs matrix in answering the following question(s).
15) Based on the table above, which of the following is true?
A) X’s dominant strategy is to charge $15; Y doesn’t have a dominant strategy.
B) Y’s dominant strategy is to charge $15; X doesn’t have a dominant strategy.
C) X’s dominant strategy is to charge $10; Y’s dominant strategy is to charge $15.
D) The dominant strategy for both X and Y is to charge $15.
E) The dominant strategy for both X and Y is to charge $10.
16) Based on the table above, if both firms charge $10,
A) each firm will earn a profit of $35,000.
B) there will be incentive to collude and raise price to $15.
C) firm X will earn $50,000.
D) firm Y will earn $50,000.
E) each firm will earn a profit of $10,000.
17) Which of the following methods for avoiding price competition is illegal?
A) product differentiation
B) price leadership
C) new product development
D) collusion
E) advertising product superiority as a method of competition
18) Which of the following may be able to earn economic profits in the long run?
A) purely competitive firms, monopolistically competitive firms, and pure monopolists
B) monopolistically competitive firms, oligopolists, and pure monopolists
C) monopolistically competitive firms and pure monopolists
D) oligopolists and pure monopolists
E) only pure monopolists
19) The distinguishing feature of oligopoly is the fact that
A) the firm maximizes its profit by producing at the output where MR = MC.
B) the firm must reduce price to sell more.
C) the firm considers the reactions of its rivals before choosing a course of action.
D) firms sell differentiated products.
E) the firm attempts to earn economic profits.
20) Oligopolists are more likely to cheat on collusive agreements when
A) the prices charged by each firm are readily known.
B) the economy is strong and firms have little excess capacity.
C) rivals quickly retaliate against cheaters.
D) price cutting may go undetected for some time.
E) there are very few firms in the industry.
21) Conscious parallelism describes
A) a situation in which oligopolists pursue policies which are in the public interest.
B) collusive agreements to fix prices or share the market.
C) written agreements to adopt similar policies.
D) a situation in which oligopolists adopt similar policies without any communication.
E) secret agreements to avoid practices that can lead to price warfare.
22) The concept of mutual interdependence means that
A) each firm requires the inputs produced by some other firm.
B) all firms in the economy are linked to one another through a buying or selling relationship.
C) the actions of any given firm directly affect the other firms in the industry.
D) consumers need the products supplied by businesses, and businesses need consumers’ dollars.
E) the future of the firm is dependent on the market for its product.
23) In an oligopolistic industry, mutual interdependence results from
A) the product differentiation efforts of sellers.
B) the fact that a few firms produce most of the industry output.
C) the high degree of specialization that exists among the firms in the U.S. economy.
D) the fact that oligopolists have unlimited pricing discretion.
E) the strength of foreign competition.
24) Oligopolists may resort to “collusion”
A) as a way of differentiating their products.
B) in order to avoid price competition.
C) because it is legal, while price leadership is not.
D) because of their desire to achieve allocative efficiency.
E) because of their desire to achieve production efficiency.
25) In an oligopolistic industry, undercutting the prices of rival firms
A) is the primary method by which firms compete.
B) is always a wise strategy, because it enlarges the profits of the firm doing the price cutting.
C) is less common than it is in pure competition.
D) can be a poor strategy, since it can lead to price warfare between firms.
E) is less common than it is in pure monopoly.
26) When applied to oligopoly, price leadership refers to
A) the practice of undercutting rival firm’s prices.
B) the practice of attracting customers by offering low prices on certain products.
C) singling out particular rivals and attempting to drive them out of business.
D) a method of avoiding price competition.
E) an illegal method of cooperating with other firms.
27) Collusive agreements
A) are most successful when a large number of firms are involved.
B) are most likely to be successful when one firm is unable to discover the prices charged by
other firms.
C) often break down because of the strong temptation to cheat in order to steal customers.
D) almost never break down.
E) are most common in purely competitive industries.
28) Which of the following best summarizes the way(s) to become a monopolist?
A) acquire exclusive control of the critical ingredient in some product
B) obtain an exclusive franchise to sell a product or provide a service
C) obtain a patent which prevents other firms from duplicating your product
D) acquire a patent, exclusive franchise, or control of a critical ingredient
E) make a conscious decision to produce at the output level where MR = MC
29) A monopolist
A) enjoys unlimited pricing discretion.
B) faces a vertical demand curve.
C) faces competition from firms in other industries.
D) can increase its price without losing any customers.
E) faces a horizontal demand curve.
30) In the long run, a monopolist
A) always earns economic profits.
B) may have its monopoly status eroded by technological change or the introduction of new
products.
C) produces at the output where P = MC.
D) faces a horizontal demand curve.
E) may earn less than a normal profit.
31) A monopolist will maximize its profit by producing at the output where
A) marginal revenue equals marginal cost.
B) price equals marginal cost.
C) marginal revenue equals price.
D) marginal revenue exceeds marginal cost by the greatest amount.
E) average total cost is at a minimum.
32) In the long run, a monopolist
A) must earn just a normal profit.
B) must earn an economic profit.
C) may earn an economic profit.
D) will always be forced out of business by competition.
E) may earn less than a normal profit.
33) Monopolists generally distort the allocation of scarce resources by
A) failing to produce where MR = MC.
B) producing less output than is socially desirable.
C) producing more output than is socially desirable.
D) failing to produce up to the point where MR = P.
E) using price leadership.
34) Which of the following does not describe the behavior of a pure monopolist?
A) It charges a price that exceeds marginal cost.
B) It produces less output than is socially optimal.
C) It produces at the output level where the MC curve intersects the demand curve.
D) It attempts to earn an economic profit.
E) It must reduce price if it desires to sell more output.
35) In general, consumers would be better off if
A) monopolists produced less output.
B) more resources were devoted to the production of the goods produced by monopolists.
C) monopolists continued to produce up to the point where MR = MC.
D) monopolists charged higher prices.
E) oligopolists resorted to collusion instead of price competition.
36) Which of the following is not true of pure monopoly?
A) It may lead to a redistribution of income from consumers to monopolists.
B) It results in an inefficient allocation of resources.
C) It may lead to higher prices than would occur in a more competitive industry.
D) It may be able to produce output at a lower average total cost than a purely competitive firm.
E) It always earns economic profits because it is protected by a barrier to entry.
37) Consumers might benefit from monopoly if
A) a monopolist’s greater size means lower average costs (ATC) than a competitive firm could
achieve.
B) the monopolist produced at the output where MR = MC instead of where P = MC.
C) the monopolist would agree to cut back output and move closer to the point of allocative
efficiency.
D) the monopolist employed price leadership.
E) the monopolist chose to compete on the basis of product differentiation instead of price.
38) In the long run, society might be better served by monopoly or oligopoly than by competitive
firms
A) if monopolists and oligopolists spend more than competitive firms on research and new
product development.
B) because monopolists and oligopolists always achieve allocative efficiency, while purely
competitive firms do not.
C) because in the long run monopolists and oligopolists earn just a normal profit, while purely
competitive firms may earn economic profits.
D) because monopolists and oligopolists are motivated by different objectives than purely
competitive firms.
E) if monopolists and oligopolists have higher costs than competitive firms.
39) It is possible that more research and new product development may occur in an oligopolistic
industry than in a purely competitive industry or a monopolistically competitive industry because
A) oligopolists are under more intense competitive pressure.
B) oligopolists sometimes earn economic profits which can be used to finance these activities.
C) oligopolists are motivated less by profits and more by a desire to develop better products.
D) there is no reason for purely competitive firms or monopolistically competitive firms to be
concerned about research or product development.
E) oligopolists are more concerned with service to society, while monopolistically competitive
firms and competitive firms are more concerned with maximizing profit.
40) Research seems to suggest that
A) firms in highly competitive industries are very innovative.
B) firms in tightly oligopolistic industries tend to be more innovative than firms in loosely
oligopolistic industries.
C) firms in loosely oligopolistic industries tend to be more innovative than firms in tightly
oligopolistic industries.
D) firms tend to be highly innovative when there is a complete absence of competitive pressure.
E) oligopolists are much more innovative when there are only 2 or 3 firms in the industry.
41) The objective of the antitrust laws is to
A) regulate the prices that firms are permitted to charge.
B) promote competition.
C) make it possible for large firms to cooperate with one another.
D) control natural monopolies.
E) protect firms from harmful competition.
42) The Sherman Antitrust Act was passed in
A) 1914.
B) 1950.
C) 1890.
D) 1967.
E) 1922.
43) The Clayton Act was passed in
A) 1914.
B) 1950.
C) 1890.
D) 1967.
E) 1922.
44) If a merger is likely to result in a substantial lessening of competition, it is illegal according
to the
A) Sherman Act.
B) Clayton Act.
C) Federal Trade Commission Act.
D) Northern Securities Act.
E) Carter Act.
45) “Attempts to monopolize” were declared illegal by the
A) Sherman Act.
B) Clayton Act.
C) Federal Trade Commission Act.
D) Northern Securities Act.
E) Carter Act.
46) If General Motors wished to merge with Ford Motor company, it would probably be
prohibited from doing so by which of the following laws?
A) Sherman Act
B) Clayton Act
C) Federal Trade Commission Act
D) Northern Securities Act
E) Carter Act
47) A major loophole in the Clayton Act was closed by the
A) Northern Securities Act.
B) Standard Oil Act.
C) Humphrey-Kennedy Act.
D) Cellar-Kefauver Act.
E) Gramm-Rudman-Hollings Act.
48) “Tying contracts”
A) require a purchaser to pay for a product well in advance of its delivery.
B) bind a purchaser to an agreement signed by his or her business partner.
C) require a customer, as a condition for sale of a given product, to also buy some other product.
D) require a firm to provide service for any product it sells.
E) is a custom that dates back to a time before staples and paperclips were available to hold
contracts together.
49) A “natural monopoly” exists if
A) technical or cost conditions make it undesirable to have more than one firm in an industry.
B) a firm has acquired monopoly status by gaining exclusive control of some critical raw
material.
C) a firm acquires a monopoly by obtaining an exclusive government franchise to produce a
good or offer a service.
D) a firm has unlimited pricing discretion.
E) a person was “born” to be a monopolist.
50) Industry regulation
A) attempts to promote competition.
B) is intended to help regulated firms to maximize their profits.
C) has only been applied to natural monopolies.
D) is intended to restrict the actions of firms with market power.
E) has never been attempted in the United States.
51) A common criticism of industry regulation is that
A) it often protects the regulated firms from competition.
B) it leads to lower prices than would prevail in a competitive environment.
C) it has been applied to too few industries.
D) it leads to wasteful and destructive competition.
E) it often forces firms to be too innovative, forcing perfectly good products from the market.
52) If firms rely on price leadership to increase prices
A) they can be prosecuted under the Sherman Act.
B) they can be prosecuted under the Clayton Act.
C) they can be prosecuted under the Humphrey-Kennedy Act.
D) they have not violated the antitrust laws.
E) they can be prosecuted under the Carter Act.
1) Which of the following is not an element of industry structure?
A) the number of sellers in the industry
B) the extent of barriers to entry
C) the existence of economic profits
D) the size distribution of sellers
2) Which of the following statements about unregulated monopolists is false?
A) They may incur an economic loss in the short run.
B) They maximize their profit (or minimize their loss) by producing the output at which MR =
MC.
C) They sell their product at a price equal to marginal cost.
D) They face competition from rivals in other industries.
3) Which of the following is not a characteristic of monopolistic competition?
A) substantial barriers to entry
B) differentiated products
C) a large number of sellers
D) small firms
4) In a large city, a doughnut shop is probably an example of
A) a purely competitive firm.
B) a monopolistically competitive firm.
C) an oligopolist.
D) a monopolist.
5) American Airlines will not raise prices without first considering how United will behave. This
is probably evidence of their
A) cutthroat competition.
B) collusion.
C) interdependence.
D) price fixing.
6) Which of the following is not a characteristic of oligopolistic industries?
A) mutual interdependence
B) substantial barriers to entry
C) relatively large sellers
D) fierce price competition
7) Which of the following do monopolistically competitive firms, oligopolists, and monopolists
have in common?
A) All are relatively large.
B) All have some market power.
C) All are protected by substantial barriers to entry.
D) All are concerned about the reactions of rivals to any actions they take.
8) Which of the following statutes outlawed “attempts to monopolize?”
A) the Sherman Act
B) the Clayton Act
C) the Cellar-Kefauver Act
D) the Federal Trade Commission Act
9) What is the primary difference between antitrust enforcement and industry regulation?
A) Antitrust enforcement attempts to promote competition; industry regulation does not.
B) Antitrust enforcement has some critics; industry regulation does not.
C) Antitrust enforcement is concerned about the public interest; industry regulation attempts to
protect the regulated firms.
D) Industry regulation deals only with natural monopolies; antitrust does not.
10) The concept of conscious parallelism suggests that oligopolists
A) will always collude.
B) can adopt similar policies without any communication.
C) use price leadership to coordinate their pricing policies.
D) prefer price competition to nonprice competition.
Use the payoffs matrix below in answering the following question(s).
11) Based on the table above, which of the following is true?
A) X’s dominant strategy is to charge $15; Y doesn’t have a dominant strategy.
B) The dominant strategy for both X and Y is to charge $15.
C) Y’s dominant strategy is to charge $20; X doesn’t have a dominant strategy.
D) The dominant strategy for both X and Y is to charge $20.
12) Based on the table above, if both firms charge $15,
A) each firm will earn a profit of $30,000.
B) there will be incentive to collude and raise the price to $20.
C) firm X will earn $40,000.
D) firm Y will earn $40,000.
13) Cheating on collusive agreements is more likely when
A) there are very few firms in the industry.
B) the economy is weak and firms have excess capacity.
C) each firm’s prices are readily known.
D) cheaters can expect swift retaliation.