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1、1 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)restaura
2、nts D)farm equipment Answer:C Diff:1 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 firms profits in the long run.D)the degree of product differentiation.Answer:D Diff:
3、2 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 econo
4、mic profit.D)Firms will continue to earn economic profit.Answer:C Diff:2 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 loss
5、es in both the short and long run.D)tend to realize economic profits in the short run and normal profits in the long run.Answer:D Diff:2 2 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 diffe
6、rentiate its product.B)raise its price.C)lower its price.D)do nothing,because it will inevitably experience a decline in profits.Answer:A Diff:3 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
7、 industry Answer:C Diff:1 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 Answer:B Diff:1 8)Mutual interdependence occurs when A)all firms in an industry are affected by the same macro
8、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
9、 long run.Answer:C Diff:2 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.Answer:B Diff:2 3 10)The Her
10、findahl-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 Answer:B Diff:1 11)The demand curve,which assumes that competitors will follow price decreases b
11、ut 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.Answer:C Diff:1 12)The kinked demand curve model best reflects A)mutual interdependence among sellers.B)a game theory approach to price-output decisions.C)pric
12、e rigidities in oligopolistic markets.D)All of the above Answer:D Diff:3 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)per
13、fectly elastic;perfectly inelastic Answer:C Diff:3 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 Answer:B Diff:1 4 15)When a company is faced by a kinked demand curve,the marginal reve
14、nue curve A)will be upward sloping.B)will be horizontal.C)will always be zero at the quantity produced.D)will be discontinuous.Answer:D Diff:2 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)olig
15、opoly Answer:B Diff:2 17)Porters 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.Answer:C Diff:1 18)The four-firm concentration ratio A)indicates the total profitability among
16、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.Answer:C Diff:2 Analytical Questions 1)Convenience stores with gas stations tend to
17、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?Answer:These stores are differentiated by location.2)Describe the transiti
18、on from short-run to long-run equilibrium in a monopolistically competitive industry.Answer:In the short run,firms in a monopolistically competitive industry may make a positive profit.However,since there are assumed to be no significant barriers to entry,positive profits attract entry.As more firms
19、(or varieties)enter,the demand for each firm(or variety)decreases,and thus prices and profits fall until there is no further incentive for entry.5 3)How is a monopolistically competitive industry like perfect competition?How is it like monopoly?Answer:Monopolistic competition is like perfect competi
20、tion in that there are many firms and no barriers to entry(and thus long-run economic profits will be zero).It is like monopoly in that firms sell products that are not perfect substitutes for each other,and thus firms have some market power,and prices will be above marginal cost.4)Why might a conce
21、ntration ratio be a poor measure of actual industry competition?Answer:Concentration ratios measure national competition within a line of products that are substitutes in production.Where there is much international competition,where competition is regional rather than national,where there is compet
22、ition from products that are substitutes in consumption but not production,and for other reasons listed in the text,competition ratios may be poor measures of competition.5)When one automaker begins offering low cost financing or rebates,others tend to do the same.What two oligopoly models might off
23、er an explanation of this behavior?Answer:(1)Kinked demand curve:the assumption behind the kinked demand curve model is that rivals follow price decreases but not price increases.One automaker offering rebates,etc.,is essentially a price cut,and so others will follow.(2)Price leadership:This could a
24、lso be viewed as a price leader setting a new price and others following.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?Answer:Similar to the beach kiosk model,restaurants cluster becau
25、se they attract the most customers that way.One explanation might be:assume that customers have identical transportation costs,are distributed uniformly,and have no preference for one restaurant over another.Then they will always go to the closest restaurant.If one is located far away from the other
26、,it would attract customers on the other side of it,but only half of the ones between it and its rival.If it locates next to its rival,it gets all the customers on that side,and thus maximizes profit.7)Microsoft has integrated many components into its Windows operating systems,such as a web browser,
27、media player,etc.How might this be an example of nonprice competition?Answer:There are a number of possible answers,including enhancing the attributes of the product(increasing demand),increasing switching costs to increase customer loyalty(reduce elasticity),etc.8)Describe the factors in Michael Po
28、rters Five Forces Model that affect the ability of any firm in an industry to earn a profit.Answer:Threats of new entrants into the industry,bargaining power of a firms customers,bargaining power of a firms suppliers,threats of substitute products from other industries,and intramarket rivalry from o
29、ther firms in the industry.6 9)Describe the structure-conduct-performance(S-C-P)paradigm.Answer:An analytical approach to examining the structure of an industry and how it affects firm profitability.It holds that the types of products being sold,their price elasticities of demand,the methods used to
30、 produce them(especially the role of technology and the existence of scale economies),and the degree to which there are related products(complements and substitutes)will determine the number of firms in the industry,conditions of firm entry and exit,and the extent of product differentiation.The resu
31、ltant industry structure determines firm price-output and non-pricing strategies which,in turn,determine the degree of firm profitability.10)Explain why the kinked demand curve model of oligopoly represents a game theory approach to oligopolistic behavior.Answer:Game theory usually is defined as stu
32、dying how individuals form strategies when they are aware that their decisions affect the decisions of other which,in turn,will affect the outcome of their decisions.The kinked demand curve model is based on how firms perceive their competitors will react to any changes they make in their product pr
33、ices,and how the expected reactions by competitive firms will affect firm profitability.The typical assumption is that if the firm raises its product price,competitors will not raise their prices so that the firm will experience such a decrease in quantity sold that their total revenue and profit wi
34、ll decline.However,if the firm lowers its product price,competitors will match the price decrease so that the firm gains little or no increase in quantity sold,resulting in a decline in total revenue and profit.Under this expected behavior by competitors,firms should not alter their product prices in response to small changes in product costs.