Microeconomics: Theory and Applications with Calculus, 4e, Global Edition (Perloff)

Chapter 14 Oligopoly and Monopolistic Competition

14.1 Market Structures

1) Perfect competition and monopolistic competition are similar in that both market structures
include
A) price-taking behavior by firms.
B) a homogeneous product.
C) no barriers to entry.
D) very few firms.
Answer: C

2) Perfect competition and monopolistic competition are similar in that firms in both types of
market structure will
A) act as price takers.
B) produce a level of output where price equals marginal cost.
C) earn zero profit in the long run.
D) act as price setters.
Answer: C

3) A competitive market structure differs from the monopoly, oligopoly, and monopolistic
competition structures in the
A) producers' ability to set price.
B) profit maximization condition.
C) amount of long run profit.
D) entry conditions.
Answer: A

4) Oligopoly differs from monopolistic competition in that an oligopoly includes

A) product differentiation.
B) barriers to entry.
C) no barriers to entry.
D) downward-sloping demand curves facing the firm.
Answer: B

5) Monopolistic competition and monopoly have all of the following in common EXCEPT
A) P > MC.
B) Firms are price setters.
C) Barriers to entry.
D) MR = MC.
Answer: C

6) Monopolistic Competition and perfect competition differ because

A) only monopolistically competitive firms will set MR = MC.
B) only perfectly competitive firms will set MR = MC.
C) only monopolistic competition allows for entry of other firms in the long run.
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D) only competitive firms take the price as given.
Answer: D

7) Regardless of market structure, all firms

A) consider the actions of rivals.
B) maximize profit by setting marginal revenue equal to marginal cost.
C) produce a differentiated product.
D) have the ability to set price.
Answer: B

8) Market failure or inefficient consumption will take place in the market structures EXCEPT for
A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.
Answer: A

14.3 Cournot Oligopoly Model

1) If a Cournot duopolist announced that it will double its output,

A) it becomes the leader.
B) the other firm does not view the announcement as credible.
C) the other firm will shut down.
D) the other firm will double output also.
Answer: B

2) A group of firms are selling undifferentiated products if

A) consumers perceive the products identical between the firms.
B) production costs are the same for all firms.
C) the firms are selling goods that are identical, though consumers view them as different.
D) the firms are part of a single cartel.
Answer: A

3) The concept of Nash equilibrium states that

A) no firm can improve their outcome holding the other firm's actions constant.
B) all firms are earning the highest possible profit.
C) firms make alternating output decisions.
D) None of the above
Answer: A

4) If a Cournot duopolist announced that it will double its output, the other firm does not view
the announcement as credible because
A) the announcing firm's profits will fall if it carries out the threat.
B) the other firm's profits will fall if the announcing firm carries out the threat.
C) the other firm's profits will rise if the announcing firm carries out the threat.
D) the other firm will double output also.
Answer: A
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5) Two firms sell 100% orange juice in 10 ounce bottles. The juice is only good for one week.
The two firms have contracts for all the oranges produced in a large geographic area. Each firm
decides how many bottles of juice to produce at the same time. This market is best described
with a
A) Bertrand model.
B) Stackelberg model.
C) monopolistic competition model.
D) Cournot model.
Answer: D

6) The Cournot Model of Oligopoly assumes that

A) firms decide what quantity to produce.
B) firms make their decisions simultaneously.
C) firms do not cooperate.
D) All of the above.
Answer: D

7) Compared to a cartel, firms in a Cournot Oligopoly

A) make more joint profit.
B) sell less output.
C) make less joint profit.
D) act independently.
Answer: C

8) Suppose two Cournot duopolist firms operate at zero marginal cost. The market demand is p =
a - bQ. Firm 1's best-response function is
A) q1 = (a - bq2)/2b.
B) q1 = (a - 2bq2)/2b.
C) q1 = a/b.
D) q1 = a/2b.
Answer: A

9) Suppose two Cournot duopolist firms operate at zero marginal cost. The market demand is p =
a - bQ. Each firm will produce
A) a/b.
B) a/2b.
C) a/3b.
D) a/4b.
Answer: C

10) In the Cournot model, a firm maximizes profit by selecting

A) its output, assuming that other firms keep their output constant.
B) its price, assuming that other firms keep their price constant.
C) its output, assuming that other firms will retaliate.
D) its price, assuming that other firms will retaliate.
Answer: A
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11) In the Cournot model, the output that a firm chooses to produce increases as
A) the total output of other firms increases.
B) the number of firms in the market increases.
C) the number of firms in the market decreases.
D) its marginal cost increases.
Answer: C

12) Suppose a market with a Cournot structure has five firms and a market price elasticity of
demand equal to -2. What is a Cournot firm's Lerner Index?
A) .1
B) .2
C) .5
D) 1
Answer: A

13) In the Cournot model, if a firm's marginal cost increases, its best-response function will
A) shift inward.
B) not change.
C) shift outward.
D) The shift is ambiguous.
Answer: A

14) Which of the following is NOT an assumption of the initial Cournot Oligopoly Model?
A) Market lasts for only one period.
B) Firms act simultaneously.
C) Firms have same cost functions.
D) Firms produce differentiated products.
Answer: D

15) In a Duopoly Nash-Cournot equilibrium,

A) neither firm has an incentive to change its output level given the other firm's output decision.
B) firms will choose the pair of quantities above the intersection of the two best response
functions.
C) firms will choose the pair of quantities below the intersection of the two best response
functions.
D) firms will choose its quantity regardless of the other firm's output decision.
Answer: A

16) Suppose in the ice-cream market with 10 firms, the elasticity of market demand is -1, and
each firm has a constant marginal cost at $2. The Nash-Cournot equilibrium price is
A) $2.
B) $2.2.
C) $2.4.
D) $2.5.
Answer: A

17) The market power for a firm in the Cournot model will be greater
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A) if the market demand is more elastic.
B) if there are fewer firms in the industry.
C) if market demand is higher.
D) the more output this firm produces.
Answer: B

18) In a Nash-Cournot equilibrium where firms produce identical products with unequal costs,
A) the firm with lower costs charges a higher price.
B) the firm with higher costs charges a higher price.
C) the firm with lower costs produces more.
D) the firm with higher costs produces more.
Answer: C

14.4 Stackelberg Oligopoly Model

1) The Stackelberg model is more appropriate than the Cournot model in situations where
A) there are more than two firms.
B) all firms enter the market simultaneously.
C) one firm makes its output decision before the other.
D) firms will be likely to collude.
Answer: C

2) The outcome of the Stackelberg model is

A) a Nash equilibrium.
B) the same as the Cournot outcome.
C) that the follower earns zero profit.
D) that the follower cannot be on its best-response curve.
Answer: A

3) In the Stackelberg model, the leader has a first-mover advantage because it

A) has lower costs than the follower.
B) commits to producing a larger quantity.
C) reacts to the follower's decision.
D) differentiates its output.
Answer: B

4) If an incumbent cannot commit and faces an identical potential entrant with relatively high
fixed costs that are below the level where entry is blockaded, the incumbent will
A) produce the Cournot duopolist level of output.
B) produce the Stackelberg leader level of output.
C) set price equal to marginal cost.
D) produce a level of output that is greater than the Stackelberg leader level of output.
Answer: D

5) One firm previously operated as a monopoly. Now, one potential entrant exists. Consumers
would prefer
A) entry, and the firms to split the output equally.
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B) no entry, and for the incumbent to produce the Stackelberg leader level of output.
C) entry, and for the incumbent to produce the Stackelberg leader level of output.
D) no entry, and the monopoly to continue.
Answer: C

6) Incumbents are unaffected by fixed costs of entry while potential entrants are affected by them
because
A) for potential entrants the cost is avoidable, while for the incumbent, it is not.
B) fixed costs will be greater for the potential entrant than for the incumbent.
C) fixed costs are zero for the incumbent.
D) incumbents will act to prevent entry at all costs.
Answer: A

7) Which of the following is a necessary condition for government subsidies to influence a firm
to choose an output level as if it were a Stackelberg leader?
A) The subsidy must be announced before the firms choose output levels.
B) The subsidy must be equal to the firm's marginal cost.
C) The subsidy must be equal to the firm's rival's marginal cost.
D) The firm does not have any fixed costs.
Answer: A

8) The above figure shows the reaction functions for two pizza shops in a small isolated town.
The Stackelberg leader will produce
A) 25 pizzas.
B) 50 pizzas.
C) 66.7 pizzas.
D) 100 pizzas.
Answer: D

9) Suppose two duopolists operate at zero marginal cost. The market demand is p = a - bQ. If
firm 1 is the Stackelberg leader, what level of output will it choose?
A) q1 = (a - bq2)/2b
B) q1 = (a - 2bq2)/2b

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C) q1 = a/b
D) q1 = a/2b
Answer: D

10) In which of the following market structures with two identical firms do both firms produce
more than the Cournot outcome?
A) Stackelberg Oligopoly
B) Cartel
C) Perfect Competition
D) None of the above
Answer: C

11) What strategic advantage compared to a Cournot Oligopoly results in the Stackelberg
outcome?
A) the ability to move first
B) the ability to set price
C) the ability to set quantity
D) the ability to make independent decisions by the Stackelberg leader
Answer: A

12) If only two identical firms operate in a market, consumers prefer

A) a Cournot equilibrium.
B) a Stackelberg equilibrium.
C) a collusive equilibrium.
D) any equilibrium, since they all result in the same consumer surplus.
Answer: B

13) Which of the following models results in the highest level of output assuming a fixed number
of firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Cartel
Answer: B

14) Which of the following market models results in the highest price assuming a fixed number
of firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Price is the same in all three markets.
Answer: C

15) Which of the following market models results in the highest level of consumer surplus,
assuming a fixed number of firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
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C) Monopoly
D) Cartel
Answer: B

16) Which of the following models results in the greatest deadweight loss, assuming a fixed
number of firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Perfect competition
Answer: C

17) Which of the following models results in the greatest total profit, assuming a fixed number of
firms with identical costs and a given demand curve?
A) Cournot
B) Stackelberg
C) Monopoly
D) Perfect competition
Answer: C

18) As the number of firms increases in a market, the differences between the Cournot,
Stackelberg, and price-taking market structures
A) decrease.
B) increase.
C) remain the same.
D) cannot be determined.
Answer: A

19) Firms A and B are identical, produce identical products, and are the only firms in a market.
Firm A's output is higher than Firm B's. This means that Firm B is the
A) Cartel leader.
B) Stackelberg leader.
C) Stackelberg follower.
D) Cournot leader.
Answer: C

14.5 Bertrand Oligopoly Model

1) The Bertrand model is a more plausible model of firm behavior than the Cournot model
A) when firms set the quantity to be sold.
B) when firms sell a differentiated product.
C) because firms that sell a non-differentiated product typically act as price takers.
D) because the Bertrand model predicts that firms will price at marginal cost.
Answer: B

2) The Bertrand model of price setting assumes that a firm chooses its price
A) independently of what price other firms charge.
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B) subject to what price rival firms are charging.
C) so that joint profits are maximized.
D) without considering the shape of the demand curve.
Answer: B

3) Assuming a homogeneous product, the Bertrand duopoly equilibrium price is

A) the same as the Cournot equilibrium price.
B) less than the Cournot equilibrium price.
C) greater than the Cournot equilibrium price.
D) equal to the monopoly price.
Answer: B

4) Assuming a homogeneous product, the Bertrand equilibrium price is

A) independent of the number of firms.
B) independent of the firm's marginal costs.
C) equal to the Cournot equilibrium price.
D) equal to the monopoly price.
Answer: A

5) One criticism of the Bertrand pricing model is that

A) the model is implausible when there is product differentiation.
B) when there is an oligopoly with no product differentiation, the model's prediction is
inconsistent with reality.
C) the model's predicted price is solely a function of demand conditions.
D) the model's predicted price is dependent on the number of firms.
Answer: B

6) In a Bertrand model, graphically, the intersection of all firms' best-response curves determines
A) the Nash equilibrium prices.
B) the dominant strategy for each firm.
C) the degree of product differentiation.
D) the price of the market leader.
Answer: A

7) In a Bertrand model, if one firm has a dominant strategy, its best-response function
A) does not exist.
B) is identical to its rival.
C) is a constant.
D) is to respond to its rival's price increase with a price decrease.
Answer: C

8) In a Bertrand model, market power is a function of

A) marginal cost.
B) the number of firms.
C) price elasticity of supply.
D) product differentiation.
Answer: D
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9) In a Bertrand model with identical firms and a non-differentiated product, price will increase
in response to
A) an increase in the number of firms.
B) a decrease in the number of firms.
C) an increase in marginal cost.
D) a decrease in marginal cost.
Answer: C

10) In a Bertrand model with differentiated products,

A) firms can set price above marginal cost.
B) firms set price at marginal cost.
C) price is independent of marginal cost.
D) firms set price independently of one another.
Answer: A

11) Product differentiation allows a firm to charge a higher price because the residual demand
curve facing the firm
A) is more elastic than the residual demand curve without product differentiation.
B) is less elastic than the residual demand curve without product differentiation.
C) is horizontal.
D) shifts to the left.
Answer: B

12) Product differentiation

A) may allow firms to price above a competitive level.
B) generates value as consumers value more choices.
C) depends on perceived differences between products.
D) All of the above.
Answer: D

13) Two identical firms that share a market and produce a homogeneous good will find which of
the following market outcomes LEAST desirable?
A) Bertrand Oligopoly
B) Cournot Oligopoly
C) Cartel
D) All are equally preferable.
Answer: A

14) Two identical firms that share a market and produce a homogeneous good will find the
Bertrand Oligopoly LEAST attractive because
A) Cartels generate the highest joint profit.
B) a Cournot Oligopoly will generate more profit than a Bertrand Oligopoly.
C) they want to avoid a price war that leads to profit erosion and P = MC.
D) All of the above.
Answer: D

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