14) Which of the following is a true statement about industry regulation in the United States?
A) It is intended to create more competition in the regulated industry.
B) It has been applied only to natural monopolies.
C) It has largely replaced antitrust as a method of controlling market power.
D) It is playing a smaller role because much questionable regulation has been undone.
15) Firms that are monopolists
A) always earn economic profits in the short run.
B) always earn economic profits in the long run.
C) can see their monopoly status eroded by technological progress.
D) All of the above.
16) When a monopolistically competitive firm is in long-run equilibriums,
A) price equals marginal cost.
B) the demand curve is tangent to the marginal cost curve.
C) price equals average total cost.
D) the firm earns an economic profit.
17) If the firms in a monopolistically competitive industry are earning economic profits,
A) additional firms will enter the industry, shifting each firm’s demand curve to the right.
B) firms will tend to leave the industry until a normal profit is earned.
C) firms will enter the industry, reducing the demand for each firm’s product.
D) firms will enter the industry until each firm’s demand curve is tangent to its marginal cost
curve.
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Use the following payoffs matrix in answering the following question(s).
18) Based on the table above, which of the following is true?
A) A’s dominant strategy is to advertise.
B) B’s dominant strategy is not to advertise.
C) A does not have a dominant strategy.
D) B’s dominant strategy is to advertise.
19) Based on the table above, if A decides not to advertise, B’s best strategy is
A) not to advertise, in which case it will earn $40,000.
B) to advertise, in which case it will earn $40,000.
C) not to advertise, in which case it will earn $80,000.
D) to advertise, in which case it will earn $80,000.
20) Based on the table above, because B knows that A’s dominant strategy is
A) to advertise, B’s best strategy is to advertise also.
B) not to advertise, B will also opt not to advertise.
C) to advertise, B’s best strategy is not to advertise.
D) not to advertise, B’s best strategy is to advertise.
1) An industry made up of a large number of relatively small firms selling differentiated products
would be described as
A) purely competitive.
B) monopolistically competitive.
C) oligopolistic.
D) a pure monopoly.
2) Which of the following is a true statement?
A) Monopolistically competitive firms are protected by entry barriers, while purely competitive
firms are not.
B) Monopolistically competitive firms can earn economic profits in the long run, while purely
competitive firms cannot.
C) Monopolistically competitive firms can differentiate their products, while purely competitive
firms cannot.
D) Monopolistically competitive firms face competition from a large number of other sellers,
while purely competitive firms do not.
3) Which of the following is probably not a monopolistically competitive firm?
A) a barber shop
B) a wheat farm
C) a hardware store
D) a furniture store
4) Monopolistically competitive firms possess
A) no market power.
B) a modest amount of market power which is gained through product differentiation.
C) a substantial amount of market power which is gained by producing a significant share of the
total industry output.
D) a substantial amount of market power which is gained by producing a significant share of the
total industry output and by selling a differentiated product.
Use the following diagram of a monopolistically competitive firm in answering the following
question(s).
5) Based on the figure above, this monopolistically competitive firm is
A) earning an economic profit.
B) earning a normal profit.
C) incurring a loss.
D) earning a profit or incurring a loss; there is not sufficient information to decide.
6) Based on the figure above, long-run equilibrium will be achieved in this monopolistically
competitive industry when
A) additional firms enter the industry, shifting the demand curve to the left and eliminating all
economic profit.
B) additional firms enter the industry, shifting the average total cost curve upward and
eliminating all economic profit.
C) some firms leave the industry, shifting the demand curve to the right and restoring a normal
profit.
D) some firms leave the industry, shifting the average total cost curve downward and restoring a
normal profit.
7) In graphing the long-run adjustment process under monopolistic competition, the entrance of
additional firms is shown by
A) shifting the industry supply curve to the right, just as it is represented in the purely
competitive model.
B) shifting the firm’s ATC curve downward; if there are more firms in the industry, they will
each have lower average costs.
C) shifting the firm’s demand curve to the left; if there are more firms in the industry, they will
each have a smaller share of total demand.
D) shifting the firm’s ATC curve upward; if there are more firms in the industry, they will each
have higher average costs.
8) Which of the following is not a characteristic of an oligopolistic industry?
A) mutual interdependence
B) substantial entry barriers
C) a large number of sellers
D) identical or differentiated products
9) Which of the following is clearly an example of collusion?
A) Firm A cuts its price, and firm B matches the price cut.
B) The manager of firm A meets with the manager of firm B to discuss tactics for avoiding
competition.
C) Big Bank raises its prime interest rate, and the remaining banks in the city follow its lead.
D) The chief executive of ZWA Airlines makes a speech in which he criticizes his competitors
for “destructive price competition.”
10) Collusive agreements to fix prices are more likely to be successful when
A) the prices charged by each competitor can be kept secret.
B) the agreements involve a small number of firms.
C) the overall economy is weak.
D) the firms have substantial excess productive capacity.
11) Which of the following is not true?
A) Collusion is illegal in the United States.
B) Price leaders generally signal their intent to change prices.
C) Oligopolists generally prefer price competition to nonprice competition.
D) Conscious parallelism occurs when oligopolists adopt similar policies without any
communication.
Use the following payoff matrix in answering the following question(s).
12) Based on the table above, which of the following is true?
A) Super Cola’s dominant strategy is not to cut prices; Royal Bob’s does not have a dominant
strategy.
B) Royal Bob’s dominant strategy is to cut prices, Super Cola does not have a dominant strategy.
C) The dominant strategy for both firms is to cut prices.
D) The dominant strategy for both firms is not to cut prices.
13) Based on the table above, if both firms decide to cut prices,
A) each firm will earn a profit of $12 million.
B) Royal Bob’s will earn $15 million
C) Super Cola will earn $7 million.
D) the firms will have incentive to collude in order to avoid price cutting.
14) Which of the following is not a source of monopoly?
A) exclusive control of a critical input
B) a government franchise
C) diseconomies of scale
D) patents
15) Monopolists
A) always earn economic profits in the long run.
B) face some competition from firms in other industries.
C) maximize their profit or minimize their loss by producing at the output where ATC is
minimized.
D) must earn a normal profit in long-run equilibrium.
Use the following payoff matrix in answering the following question(s).
16) Based on the table above, if Elite decides to serve in-flight meals, Discount Air’s best
strategy is
A) to serve meals, in which case it will earn $10 million.
B) to serve meals, in which case it will earn $12 million.
C) not to serve meals, in which case it will earn $11 million.
D) not to serve meals, in which case it will earn $15 million.
17) Based on the table above, according to the payoff matrix
A) Elite’s dominant strategy is to serve meals, Discount Air does not have a dominant strategy.
B) Discount Air’s dominant strategy is not to serve meals, Elite Air does not have a dominant
strategy.
C) The dominant strategy for both firms is to serve meals.
D) Elite Air’s dominant strategy is to serve meals; Discount Air’s dominant strategy is not to
serve meals.
18) which of the following statutes outlawed mergers that would substantially lessen
competition?
A) the Sherman Act
B) the Clayton Act
C) the Merger Act
D) the Federal Trade Commission Act
19) According to the “Rule of Reason,”
A) price fixing is only illegal if prices are fixed at unreasonable levels.
B) collusion is only illegal if it results in substantial harm to consumers.
C) possessing a monopoly is only illegal if the firm deliberately sought to become a monopoly.
D) All of the above are true.
20) The primary purpose of the Clayton Act was to
A) outlaw mergers that reduce competition.
B) declare price fixing illegal.
C) establish the Federal Trade Commission.
D) outlaw attempts to monopolize markets.
21) The intended purpose of industry regulation is to
A) enforce competition.
B) prevent the formation of monopolies.
C) prevent price fixing.
D) constrain the behavior of natural monopolies.
22) Which of the following statutes outlawed price fixing an “attempts to monopolize” markets?
A) The Sherman Act
B) The Federal Trade Commission Act
C) The Cellar Act
D) The Clayton Act
23) In recent years,
A) industry regulation has lost favor in the United States.
B) merger activity has been on the decline due to stricter antitrust enforcement.
C) antitrust enforcement has gained almost universal support from economists.
D) None of the above are true.
1) The number of sellers is one element of an industry’s “structure.”
2) The industry structure closest to pure competition is oligopoly.
3) Monopolistic competition is characterized by a large number of relatively small sellers,
product differentiation, and substantial barriers to entry.
4) The only distinction between monopolistic competition and pure competition is the fact that
monopolistically competitive firms are able to differentiate their products.
5) Monopolistically competitive firms face downward sloping demand curves.
6) The demand curves facing monopolistically competitive firms are perfectly elastic because
each firm’s product is a perfect substitute for the products offered by the other firms in the
industry.
7) In long-run equilibrium, monopolistically competitive firms are able to earn only a normal
profit.
8) When monopolistically competitive firms are in long-run equilibrium, their demand curves are
tangent to their average variable cost curves.
9) If monopolistically competitive firms are earning short-run profits, additional firms will enter
the industry, shifting the representative firm’s demand curve to the left.
10) When monopolistically competitive firms are incurring short-run losses, some firms will
leave the industry shifting the demand curves of the remaining firms to the left and permitting
those firms to earn an economic profit.
11) Monopolistically competitive firms fail to achieve either production efficiency or allocative
efficiency.
12) Monopolistically competitive firms fail to achieve production efficiency because the large
number of firms prevents individual firms from operating at minimum average total cost.
13) When monopolistically competitive firms are in long-run equilibrium, P = MC, so the firms
have achieved allocative efficiency.
14) The distinguishing feature of all oligopolistic industries is the presence of strong product
differentiation.
15) When firms are large in relation to the total market, each firm must consider the reactions of
its rivals before taking any action.
16) Oligopolistic industries are dominated by a few relatively large sellers that are able to ignore
the actions of the other firms in their industries.
17) Game theory is used to illustrate how monopolists make decisions.
18) Game theory illustrates that an oligopolist’s profits depend on its own decisions and on the
strategies selected by rival firms.
19) Mutual interdependence refers to the necessity of oligopolists to consider the reactions of
rivals before taking any action.
20) Collusion refers to agreements among oligopolists to fix prices or otherwise limit
competition.
21) Collusion is legal in the United States but illegal in some other countries.
22) A dominant strategy is a strategy that should be pursued regardless of the strategy selected
by a rival firm.
23) In game theory, if one firm has a dominant strategy, the other must also.
24) Game theory illustrates that firms can never benefit from collusion.
25) “Conscious parallelism” occurs when firms use collusion to adopt similar prices or otherwise
avoid competition.
26) Price leadership is illegal in the United States.
27) Collusive agreements are more likely to break down the larger the number of firms involved.
28) Firms are less likely to cheat on collusive agreements during periods of weak demand.
29) Oligopolists are more likely to undercut their rivals when the prices charged tend remain
confidential.
30) Monopolists face perfectly inelastic demand curves.
31) Monopolists enjoy unlimited pricing discretion; they can charge whatever price they choose
without losing any sales.
32) When a monopolist raises its price, it can expect to lose some customers to firms in other
industries.
33) Monopolists must reduce price to sell a higher quantity, ceteris paribus.
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34) Monopolists always earn economic profits in the short run.
35) Monopolists may be able to earn economic profits in the long run.
36) If a monopolist is protected by substantial barriers to entry it is certain to earn economic
profits in the long run.
37) Monopolists produce less output than is socially desirable; that is, they produce less output
than is consistent with allocative efficiency.
38) Monopoly may be preferable to pure competition if the monopolist’s greater size allows it to
produce at lower average total costs than competitive firms.
39) Evidence indicates that firms in highly competitive industries tend to be more innovative
than firms in loosely oligopolistic industries.
40) The Sherman, Clayton, and Federal Trade Commission Acts were all passed in 1914.
41) The Sherman Act declared illegal all monopolies or attempts to create a monopoly.
42) The Clayton Act outlaws all mergers.
43) Unfair methods of competition are outlawed by the Clayton Act.
44) The Justice Department and the Federal Trade Commission are the two government agencies
charged with the enforcement of the antitrust statutes.
45) Anytime there is only one producer of a product a “natural” monopoly exists.
46) A natural monopoly exists whenever technical or cost conditions make it advisable to have
only one firm in a particular industry.
47) The only regulated industries in the United States are those judged to be natural monopolies.
48) In the last two decades, much questionable industry regulation has been undone.
49) Conscious parallelism is illegal under U.S. antitrust laws.
50) The development of cell phones has undermined the “natural monopoly” status of the local
phone company.
1) Last year, Judy Walton, a Ph.D. chemist by training, quit her job as a professor at MIT and
started her own business, SWEET STUFF, INC. Judy’s business manufactures and sells her own
discovery an artificial, low calorie sweetener that all experts agree is vastly superior to any
product presently on the market.
In its first year of operation, Judy’s company made substantial profits even though her initial
$100,000 investment is generally regarded as quite modest. Firm’s that have attempted to copy
SWEET STUFF have been threatened by Judy’s attorneys and have thus far decided against
producing a sweetener with the same chemical composition.
There is some question about whether or not Judy will be able to patent her discovery. Some
legal experts argue that this chemical compound has been well known for a number of years and
is therefore not subject to patent. The decision of the patent office will be known in about 6
months.
Use a graph to depict Judy’s present profit situation. Then use economic theory to discuss the
long-run future of Judy’s company. More than one outcome may be possible. If so, discuss each
possible outcome and illustrate with graphs.
2) Discuss the methods that oligopolists use to limit their rivalry and coexist with one another.
3) Recently, George Babbit invested $10,000 and started a hot dog stand on the south side of
Blimpton, Illinois, a rapidly growing community of 300,000 people. George decided to start his
business because he saw that a hot dog stand on the north side seemed to be doing a great deal of
business. George’s stand, the BIG DOGGIE has been doing very well, with profits in the first six
months exceeding even George’s wildest dreams. George and his wife Gertrude are thinking
about buying a larger home and taking a trip to Europe. In George’s words, “We’re ready to begin
living the American dream.”
Use a graph to depict George’s present profit situation. Then use economic theory to discuss
George Babbit’s future what can he expect as a hot dog entrepreneur? Be explicit about what
model you have selected and why you selected that model.
4) Imagine a community served by four banks. These banks will be tempted to compete on the
rates they charge loan customers and the rates they pay depositors.
(a) What other forms of competition might the banks employ and why might they find these
other forms of competition more appealing?
(b) What can the banks do to prevent competition based on interest rates?
5) Many economists support the regulation of prices in situations involving natural monopoly,
but oppose such regulation in other cases.
(a) What is a natural monopoly and why do economists support its regulation?
(b) Why do economists often oppose the regulation of industries that do not qualify as natural
monopolies?