Western University - ECON 2150 Chapter 13: Market Structure and Competition Multiple Choice 1)All of the following statements are true except: a) Perfect competition can only exist in industries with a large number of firms

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Western University - ECON 2150

Chapter 13: Market Structure and Competition

Multiple Choice

1)All of the following statements are true except:

1. a) Perfect competition can only exist in industries with a large number of firms.
2. b) A monopoly market structure cannot exist in an industry with an undifferentiated product.
3. c) Monopolistic competition implies that each firm has some ability to differentiate its product.
4. d) Oligopoly can exist in industries with differentiated and undifferentiated products.

1. 2. Perfect competition
2. a) in its purest form is probably difficult to observe in the real world because even such factors as location can lead to some market power.
3. b) is only observed where there are some barriers to entry in the industry.
4. c) requires each of the few firms in the industry to behave in the same profit-maximizing fashion.
5. d) only exists in differentiated product markets

1. 3. A differentiated products oligopoly market consists of
2. a) only a few firms producing similar, but differentiated products.
3. b) only a few firms producing the same products.
4. c) many firms producing differentiated products.
5. d) a single, large firm producing differentiated products.

1. 4. If the modeling agents industry were characterized by only a few firms that represented models and handled their bookings, the industry could be characterized as
2. a) an oligopoly with homogeneous products.
3. b) an oligopoly with differentiated products.
4. c) a dominant firm industry.
5. d) monopolistic competition.

1. 5. Market structures differ on two important dimensions:
2. a) price discrimination and product differentiation.
3. b) number of sellers and product differentiation.
4. c) surplus maximization and number of sellers
5. d) price discrimination and surplus maximization

1. 6. When one firm possesses a large share of the market but competes against numerous small firms each offering identical products, such markets are called
2. a) Oligopoly markets
3. b) Dominant firm markets
4. c) Differentiated markets
5. d) Homogenous product markets

1. 7. A monopolistically competitive market consists of __________ firms selling _________ to many buyers.
2. a) a small number; differentiated products
3. b) many; differentiated products
4. c) many; identical products
5. d) a small number; identical products

1. 8. A differentiated-products oligopoly market consists of _________ selling differentiated product that are __________ for each other.
2. a) two firms; complements
3. b) fewer than five firms; substitutes
4. c) a small number of firms; complements
5. d) a small number of firms; substitutes

1. 9. The Cournot reaction function
2. a) maps out the best response a firm could take for each possible action of the rival firm.
3. b) maps out how firms work together to maximize profits.
4. c) is most applicable to monopoly markets.
5. d) shows how each firm makes its profit-maximizing decision while considering the entire market demand, the same as a monopolist.

1. 10. In the Cournot model, the curve that traces out the relationship between the market price and a firm’s quantity when rival firms hold their outputs fixed is called ______________
2. a) Reaction function
3. b) Best response
4. c) Residual demand curve
5. d) Cournot equilibrium

1. 11. In the Cournot model, the firm chooses
2. a) its optimal price, holding the price of its competitors constant.
3. b) its best response to the price changes of the competitor firm.
4. c) its optimal level of output, holding the output of the other firm constant.
5. d) the level of output that would optimize profits for all firms.

1. 12. In the Cournot model of oligopoly,
2. a) each firm chooses simultaneously and non-cooperatively how much to produce to maximize its own profit.
3. b) each firm chooses simultaneously and non-cooperatively its own product’s price to maximize its own profit.
4. c) one firm acts as a quantity leader, choosing its quantity first, while all other firms act as followers, choosing their quantities second and in reaction to the first.
5. d) each firm makes its profit-maximizing decision while considering the entire market demand, the same as a monopolist.

1. 13. In a Cournot duopoly, a residual demand curve
2. a) is the same as a market demand curve.
3. b) represents the demand curve that one firm faces given the output choice of the other firm.
4. c) is the same as a marginal revenue curve when determining output in the Cournot model.
5. d) is steeper than the market demand curve.

1. 14. Suppose that firms A and B are Cournot duopolists in the computer industry. Firm A’s best response function
2. a) lists firm B’s profit-maximizing choice of output given any level of output by firm A.
3. b) lists firm A’s profit-maximizing choice of output given any level of output by firm B.
4. c) lists firm B’s profit-maximizing choice of price given any level of price by firm A.
5. d) lists firm B’s profit-maximizing choice of price given any level of price by firm B.

1. 15. Suppose that firms A and B are Cournot duopolists in the salt industry. The market demand curve can be specified as . The marginal cost to each firm is $40. What is firm B’s profit-maximizing quantity when firm A produces an arbitrary output ?
2. a) .
3. b) _.
4. c) _.
5. d) _.

1. 16. Suppose the market demand curve is given by . If one Cournot duopolist produces , the residual demand curve faced by the other Cournot duopolist is
2. a) P = 90 – 2Q₂.
3. b) P = 80 – 2Q₂.
4. c) Q₂ = 80 – P.
5. d) Q₂ = 80 – 2P.

1. 17. Suppose in a Cournot duopoly that two firms, Firm 1 and Firm 2, face market demand and both have marginal cost, . Firm 1’s reaction function can be written as
2. a)
3. b)
4. c)
5. d)

1. 18. Suppose in a Cournot duopoly that two firms, Firm 1 and Firm 2, face market demand and both have marginal cost, . The equilibrium output for each firm will be
2. a)
3. b)
4. c)
5. d)

1. 19. Suppose in a Cournot duopoly that two firms, Firm 1 and Firm 2, face market demand and both have marginal cost, . The equilibrium price in this market will be
2. a)
3. b)
4. c)
5. d)

1. 20. Identify the truthfulness of the following statements.

1. I. Cournot firms do not attain the monopoly or collusive equilibrium.
2. II. The equilibrium output in a Cournot oligopoly market does not maximize industry profit.

1. a) Both I and II are true.
2. b) Both I and II are false.
3. c) I is true; II is false.
4. d) I is false; II is true.

1. 21. Identify the truthfulness of the following statements.

1. I. As the number of firms in an industry exhibiting Cournot competition increases, the greater the Cournot equilibrium diverges from the collusive outcome.
2. II. As the number of firms in an industry exhibiting Cournot competition increases, the market price increases.

1. a) Both I and II are true.
2. b) Both I and II are false.
3. c) I is true; II is false.
4. d) I is false; II is true.

1. 22. A Cournot oligopoly has 19 firms, and inverse market demand P = 60 - Q. All firms have marginal cost, . The equilibrium output for each firm will be
2. a) 1 unit
3. b) 2 units
4. c) 3 units
5. d) 4 units

1. 23. A Cournot oligopoly has 19 firms, and inverse market demand P = 60 - Q. All firms have marginal cost, . The equilibrium price in this market will be
2. a) $20.50
3. b) $22
4. c) $33.33
5. d) $40.15

1. 24. A Cournot oligopoly has 2 firms, and inverse market demand P = 60 - Q. All firms have marginal cost, . The equilibrium price in this market will be
2. a) $20.50
3. b) $22
4. c) $33.33
5. d) $40.15

1. 25. The percentage contribution margin (PCM) for each firm in a Cournot equilibrium can be calculated using the following formula:
2. a)
3. b)
4. c)
5. d)

1. 26. Suppose that firms A and B are Cournot duopolists in the salt industry. The market demand curve can be specified as . The marginal cost to each firm is $40. Suppose that firm A is producing 100 units. What is firm B’s profit-maximizing quantity?
2. a) 100.
3. b) 60.
4. c) 30.
5. d) 20.

1. 27. Suppose in a Cournot duopoly that two firms, Firm 1 and Firm 2, face market demand and both have marginal cost, . The equilibrium industry profits in this market will be
2. a) 150
3. b) 200
4. c) 250
5. d) 300

1. 28. In a Bertrand oligopoly,
2. a) each firm chooses simultaneously and non-cooperatively how much to produce to maximize its own profit.
3. b) each firm chooses simultaneously and non-cooperatively its own product’s price to maximize its own profit.
4. c) one firm acts as a quantity leader, choosing its quantity first, while all other firms act as followers, choosing their quantities second and in reaction to the leader.
5. d) each firm makes its profit-maximizing decision while considering the entire market demand, the same as a monopolist.

1. 29. Bertrand duopolists, Firm 1 and Firm 2, face inverse market demand and both have marginal cost, . The equilibrium output this market will be
2. a) 15
3. b) 20
4. c) 30
5. d) 40

1. 30. Bertrand duopolists, Firm 1 and Firm 2, face inverse market demand and both have marginal cost, . The equilibrium industry profits this market will be
2. a) 0
3. b) 10
4. c) 50
5. d) 90

1. 31. Identify the truthfulness of the following statements.

1. I. Cournot competitors behave less aggressively than Bertrand competitors because a Cournot firm cannot expect to “steal” customers from a rival whereas a Bertrand firm can.
2. II. Two firms are enough to replicate perfectly competitive outcomes in a Bertrand market, whereas a Cournot market only approaches perfectly competitive outcomes when the number of competitors becomes large.

1. a) Both I and II are true.
2. b) Both I and II are false.
3. c) I is true; II is false.
4. d) I is false; II is true.

1. 32. Bertrand duopolists, Firm 1 and Firm 2, face inverse market demand . Both have marginal cost, . The equilibrium price in the market will be
2. a) $10
3. b) $20
4. c) $30
5. d) $40

1. 33. In a Stackelberg oligopoly,
2. a) each firm chooses simultaneously and non-cooperatively how much to produce to maximize its own profit.
3. b) each firm chooses simultaneously and non-cooperatively its own product’s price to maximize its own profit.
4. c) one firm acts as a quantity leader, choosing its quantity first, while all other firms act as followers, choosing their quantities second and in reaction to the leader.
5. d) each firm makes its profit-maximizing decision while considering the entire market demand, the same as a monopolist.

1. 34. Stackelberg duopolists, Firm 1 and Firm 2, face inverse market demand . Both have marginal cost, . If the follower takes the leader’s output as fixed at Q₁, what is the equation of its reaction function?
2. a)
3. b)
4. c)
5. d)

1. 35. Stackelberg duopolists, Firm 1 and Firm 2, face inverse market demand . Both have marginal cost, . Let firm 2, the follower, set its output according to the formula . Which of the following outputs maximizes the leader’s profit?
2. a) Q₁ = 7.5
3. b) Q₁ = 10
4. c) Q₁ = 15
5. d) Q₁ = 20

1. 36. Stackelberg duopolists, Firm 1 and Firm 2, face inverse market demand . Both have marginal cost, . Firm 1 produces output Q₁ = 15 and Firm 2 produces output Q₂ = 7.5. What is the price level in this market and what is the level of industry profits (i.e., the sum of Firm 1 and Firm 2’s profits)?
2. a) P = 27.5; industry profits = 168.75
3. b) P = 30; industry profits = 172.6
4. c) P=32.5; industry profits = 180
5. d) P=34; industry profits = 184.2

1. 37. In a dominant firm market,
2. a) one firm possesses a large share of the market but competes against numerous small firms, each offering identical products.
3. b) one firm possesses a large share of the market but competes against a small number of other firms, each offering differentiated products.
4. c) a small number of firms possess a large share of the market but compete against numerous small firms, each offering a differentiated product.
5. d) a small number of firms possess a large share of the market but compete against numerous small firms, each offering an identical product.

1. 38. In a dominant firm market, the dominant firm chooses its output level by
2. a) setting price equal to marginal cost.
3. b) setting marginal revenue from the market demand curve equal to marginal cost.
4. c) setting marginal revenue from its residual demand curve equal to marginal cost.
5. d) identifying first a profit-maximizing price for its product subject to the price being charged by the competitive fringe.

1. 39. *In equilibrium, how many units will the fringe producers supply?
2. a) 45 units
3. b) 60 units
4. c) 90 units
5. d) 135 units

1. 40. *In equilibrium, how many units will the dominant firm supply?
2. a) 45 units
3. b) 60 units
4. c) 90 units
5. d) 135 units

1. 41. *In equilibrium, what will the market price be?
2. a) $20
3. b) $65
4. c) $80
5. d) $110

1. 42. *In equilibrium, what will the dominant firm’s profit be?
2. a) $8,100
3. b) $2,025
4. c) $4,050
5. d) $3,600

1. 43. *In equilibrium, what will consumer surplus be?
2. a) $8,100
3. b) $9112.5
4. c) $9,600
5. d) $1,250

1. 44. If a dominant firm follows a strategy of limit pricing, this firm charges a price _________ the current profit-maximizing level in order to _____________.
2. a) equal to; maximize profits.
3. b) below; reduce the rate of expansion by the fringe.
4. c) above; drive out the fringe.
5. d) below; limit dominant firm’s marginal cost.

1. 45. Which of the following is false regarding the practice of limit pricing by a dominant firm?
2. a) Limit pricing is a strategy to keep price below the level that maximizes profit to reduce the number of firms entering the fringe.
3. b) Limit pricing is a strategy that sacrifices current profits to maintain higher future profits.
4. c) Limit pricing is most appealing when the dominant firm has a cost advantage over the fringe firms.
5. d) Limit pricing is most attractive to a dominant firm that is more interested in current profits than future profits.

1. 46. Horizontal differentiation occurs when
2. a) one product is always considered superior to the other across a broad spectrum of consumers.
3. b) some consumers consider a company’s product or group of products to be superior to another company’s product or group of products, but not all consumers have the same viewpoint.
4. c) an inventor in the telecom industry comes up with a completely new and innovative product.
5. d) the demand curve is horizontal in an oligopolistic industry.

1. 47. _____________ differentiation is concerned with product quality (inferiority or superiority), whereas ______________ differentiation is concerned with product substitutability.
2. a) Horizontal; vertical
3. b) Vertical; horizontal
4. c) Generic; vertical
5. d) Vertical; oligopoly

1. 48. Which of the following is an example of horizontally differentiated products?
2. a) Product A, which everyone agrees is superior to Product B.
3. b) Product C, which everyone agrees is worse than Product D.
4. c) Product E, which some believe is better than Product F (while others believe Product F is better than Product E).
5. d) Product G, which everyone agrees is the same quality as product H.

1. 49. Which of the following is true in markets with horizontally differentiated products?
2. a) Bertrand competitors will generally earn zero profits in equilibrium.
3. b) Firms always act as monopolists when products are horizontally differentiated.
4. c) IEPR does not apply to markets with horizontal product differentiation.
5. d) Bertrand competitors will generally earn positive profits in equilibrium.

1. 50. Let firm A face demand curve Q_A = 100 – P_A + .5P_Band firm B face demand curve Q_B = 100 – P_B + .5P_A. Products A and B both have constant marginal cost of production of 10 per unit (and no fixed cost). Each firm acts as a Bertrand competitor. What is firm B’s profit-maximizing price when firm A sets a price of $70 for its good?
2. a) $70
3. b) $72.5
4. c) $74
5. d) $76.5

1. 51. Let firm A face demand curve Q_A = 100 – P_A + .5P_Band firm B face demand curve Q_B = 100 – P_B + .5P_A. Products A and B both have constant marginal cost of production of 10 per unit (and no fixed cost). Each firm acts as a Bertrand competitor. What is the equation of firm B’s (price) reaction function?
2. a)
3. b)
4. c)
5. d)

1. 52. Let firm A face demand curve Q_A = 100 – P_A + .5P_Band firm B face demand curve Q_B = 100 – P_B + .5P_A. Products A and B both have constant marginal cost of production of 10 per unit (and no fixed cost). Each firm acts as a Bertrand competitor. What are the Bertrand Equilibrium prices in this market?
2. a) P_B = 72.5; P_A = 70
3. b) P_B = P_A = 73.33
4. c) P_B = 74; P_A = 87
5. d) P_B = P_A = 74

1. 53. In the long run under monopolistic competition, profits will always be
2. a) zero.
3. b) the industry average rate of return.
4. c) positive.
5. d) positive or zero, but never negative.

1. 54. Under monopolistic competition, the firm optimizes
2. a) by setting MC = MR = P.
3. b) by setting MC = MR, but P > MC.
4. c) by setting MC greater than MR.
5. d) by setting MC = MR, but P < MC.

1. 55. What of the following is completely true in long run, monopolistically competitive equilibrium?
2. a) the slope of the demand and average cost curves are the same, P = MC, and MC = MR.
3. b) the slope of the demand and average cost curves are negative, P > MC, and MC > MR
4. c) the slope of the demand and average cost curves are positive, P > MC, and MC = MR
5. d) the slope of the demand and average cost curves are the same, P > MC, and MC = MR.

1. 56. Which of the following is a real-world example of a monopolistically competitive industry?
2. a) The soft-drink industry.
3. b) The breakfast cereal industry.
4. c) The semiconductor industry.
5. d) The Chicago restaurant industry.

1. 57. Which of the following is not a characteristic of monopolistic competition?
2. a) The market is fragmented.
3. b) There is free entry and exit.
4. c) In the long-run equilibrium, firms earn positive profits.
5. d) Firms produce horizontally differentiated products.

1. 58. For an individual firm operating in a monopolistically competitive industry, the firm ______ earn short-run economic profits and ________ earn long-run economic profits.
2. a) can; can.
3. b) cannot; cannot
4. c) can; cannot
5. d) cannot; can

1. 59. In the long-run equilibrium in a monopolistically competitive industry, economic profits are _________ due to __________.
2. a) positive; free entry into the industry.
3. b) zero; monopoly power.
4. c) positive; barriers to entry into the industry.
5. d) zero; free entry into the industry.

1. 60. In the short-run equilibrium in a monopolistically competitive industry, a firm’s marginal cost is equal to its _________ but in the long run equilibrium, a firm’s average cost is equal to its __________.
2. a) price; demand.
3. b) average cost; price.
4. c) marginal revenue; marginal cost.
5. d) marginal revenue; price.

1. 61. Which of the following is a distinguishing feature of a monopolistically competitive market?
2. a) A small number of buyers and sellers.
3. b) Barriers to entry and exit.
4. c) Firms produce differentiated products.
5. d) Firms set prices cooperatively.