1.
Monopolistic competition means:
A) a market situation where competition is based
entirely on product differentiation and
advertising.
B) a large number of firms producing a
standardized or homogeneous product.
C) many firms producing differentiated products.
D) a few firms producing a standardized or
homogeneous product.
Answer: C
2. Monopolistic competition resembles pure
competition because:
A) both industries emphasize non-price
competition.
B) in both instances firms will operate at the
minimum point on their long-run average total
cost curves.
C) both industries entail the production of
differentiated products.
D) barriers to entry are either weak or
nonexistent.
Answer: D
3. Which of the following is not characteristic
of monopolistic competition?
A) relatively large numbers of sellers
B) product differentiation
C) production at minimum ATC in the long-run
D) relatively easy entry to the industry
Answer: C
4. A monopolistically competitive industry
combines elements of both competition and
monopoly. The monopoly element results
from:
A) the likelihood of collusion.
B) high entry barriers.
C) product differentiation.
D) mutual interdependence in decision making.
Answer: C
5. The monopolistically competitive seller's
demand curve will become more elastic the:
A) more significant the barriers to entering the
industry.
B) greater the degree of product differentiation.
C) larger the number of competitors.
D) smaller the number of competitors.
Answer: C
6. A monopolistically competitive firm's
marginal revenue curve:
A) is downsloping and coincides with the
demand curve.
B) coincides with the demand curve and is
parallel to the horizontal axis.
C) is downsloping and lies below the demand
curve.
D) does not exist because the firm is a "price
maker."
Answer: C
7. In long-run equilibrium, a monopolistically
competitive firm sets it price:
A) above marginal cost.
B) below marginal cost.
C) equal to marginal revenue.
D) equal to marginal cost.
Answer: A
8. In short-run equilibrium, the price charged
by the monopolistically competitive firm:
A) must be less than ATC.
B) must be more than ATC.
C) may be either equal to ATC, less than ATC,
or more than ATC.
D) must be equal to ATC.
Answer: C
9. The monopolistically competitive seller
maximizes profit by producing at the point
where:
A) total revenue is at a maximum.
B) average costs are at a minimum
C) marginal revenue equals marginal cost.
D) price equals marginal revenue.
Answer: C
10. In long-run equilibrium a monopolistically
competitive firm's price will:
A) be less than both MC and ATC.
B) exceed ATC, but equal MC.
C) exceed MC, but equal ATC.
D) exceed both MC and ATC.
Answer: C
11. Which of the following is not
characteristic of long-run equilibrium under
monopolistic competition?
A) price equals minimum average total cost
B) marginal cost equals marginal revenue
C) price is equal to average total cost
D) price exceeds marginal cost
Answer: A
12. Long-run equilibrium for a
monopolistically competitive firm where
economic profits are zero results from:
A) rising marginal costs.
B) a perfectly elastic product demand curve.
C) relatively easy entry.
D) product differentiation and development.
Answer: C
Use the following to answer questions 13-15 17. In long-run equilibrium a monopolistically
competitive producer achieves:
A) neither productive efficiency nor allocative
efficiency.
B) both productive efficiency and allocative
efficiency.
C) productive efficiency, but not allocative
efficiency.
D) allocative efficiency, but not productive
efficiency.
Answer: A

18. The less elastic a monopolistic

competitor's long-run demand curve, the:
A) greater its excess capacity.
B) lower its price relative to that of a pure
competitor having the same cost curves.
C) higher its long-run economic profit.
D) lower its average total cost at its equilibrium
level of output.
13. Refer to the above diagrams, which
Answer: A
pertain to monopolistically competitive firms.
Short-run equilibrium entailing economic Use the following to answer questions 19-21:
loss is shown by:
A) diagram a only.
B) diagram b only.
C) diagram c only.
D) both diagrams a and c.
Answer: C

14. Refer to the above diagrams, which

pertain to monopolistically competitive firms.
A short-run equilibrium entailing economic
profits is shown by:
A) diagram a only.
B) diagram b only.
C) diagram c only. 19. Refer to the above diagram for a
D) both diagrams b and c. monopolistically competitive producer. The
Answer: B firm is:
A) minimizing losses in the long run.
15. Refer to the above diagrams, which B) minimizing losses in the short run.
pertain to monopolistically competitive firms. C) realizing a normal profit in the long run.
Long-run equilibrium is shown by: D) about to leave the industry.
A) diagram a only. Answer: C
B) diagram b only.
C) diagram c only. 20. Refer to the above diagram for a
D) both diagrams b and c. monopolistically competitive producer. This
Answer: A firm is experiencing:
A) a shortage of production capacity.
16. In long-run equilibrium monopolistic B) excess capacity of CD.
competition entails: C) excess capacity of DE.
A) an efficient allocation of resources. D) diseconomies of scale.
B) an overallocation of resources. Answer: C
C) an underallocation of resources.
D) production at the minimum attainable
average total cost.
Answer: C
21. Refer to the above diagram for a
monopolistically competitive producer. If this
firm were to realize productive efficiency, it
would:
A) also realize an economic profit.
B) incur a loss.
C) also achieve allocative efficiency.
D) have to produce a smaller output.
Answer: B
22. In an oligopolistic market:
A) one firm is always dominant.
B) products may be standardized or
differentiated.
C) the four largest firms account for 20 percent
or less of total sales.
D) the industry is monopolistically competitive.
Answer: B
23. Barriers to entry in oligopolistic
industries may consist of:
A) diseconomies of scale.
B) diminishing returns.
C) ownership of essential resources.
D) patent expirations.
Answer: C
24. In which of the following market models
do demand and marginal revenue diverge?
A) pure monopoly, oligopoly, and monopolistic
competition
B) pure monopoly, oligopoly, and pure
competition
C) pure monopoly only
D) oligopoly only
Answer: A
25. Oligopoly is difficult to analyze primarily
because:
A) the number of firms is too large to make
collusion understandable.
B) the price and output decisions of any one firm
depend on the reactions of its rivals.
C) output may be either homogenous or
differentiated.
D) neither allocative nor productive efficiency is
achieved.
Answer: B
26. Oligopolistic industries:
A) are characterized by a relatively large number
of small sellers.
B) may produce either standardized or
differentiated products.
C) always produce differentiated products.
D) always produce standardized products.
Answer: B
27. If the four-firm concentration ratio for
industry X is 80:
A) the four largest firms account for 80 percent
of total sales.
B) each of the four largest firms accounts for 20
percent of total sales.
C) the four largest firms account for 20 percent
of total sales.
D) the industry is monopolistically competitive.
Answer: A
28. Aluminum competes with copper in the
market for power transmission lines. This
illustrates:
A) mutual interdependence.
B) differentiated oligopoly.
C) interindustry competition.
D) homogeneous oligopoly.
Answer: C
29. Suppose that total sales in an industry in
a particular year are $600 million and sales
by the top four sellers are $200 million, $150
million, $100 million, and $50 million,
respectively. We can conclude that:
A) price leadership exists in this industry.
B) the concentration ratio is more than 80
percent.
C) this industry is a differentiated oligopoly.
D) the firms in this industry face a kinked
demand curve.
Answer: B
30. Suppose the Herfindahl Indexes for
industries A, B, and C are 1,200, 5,000, and
7,500 respectively. These data imply that:
A) market power is greatest in industry A.
B) market power is greatest in industry B.
C) market power is greatest in industry C.
D) industry A is more monopolistic than industry
C.
Answer: C
Use the following to answer questions 31-34:
31. The industry characterized by the above
information is:
A) an oligopoly. C) percentage of the industry's capital facilities
B) a monopolistically competitive industry. owned by the four largest firms.
C) a purely competitive industry. D) degree of X-inefficiency in the industry.
D) a pure monopoly. Answer: B
Answer: A
38. Industries X and Y both have four-firm
32. The four-firm concentration ratio for the concentration ratios of 65 percent, but the
above industry is: Herfindahl index for X is 1,500 while that for
A) 100 percent. Y is 2,000. These data suggest:
B) indeterminate, since we don't know which A) greater market power in X than in Y.
four firms are included. B) greater market power in Y than in X.
C) 80 percent. C) that X is more technologically progressive
D) 20 percent. than Y.
Answer: C D) that price competition is stronger in Y than in
X.
33. The Herfindahl Index for the above Answer: B
industry is:
39. Mutual interdependence means that each
A) 1,600. B) 1,800. C) 18,000. D) 80.
oligopolistic firm:
Answer: B
A) faces a perfectly elastic demand for its
product.
34. Suppose that firms in this industry
B) must consider the reactions of its rivals when
miraculously split up such that there were
it determines its price policy.
100 firms, each with a one percent market
C) produces a product identical to those of its
share. The four-firm concentration ratio and
rivals.
the Herfindahl Index respectively would be:
D) produces a product similar but not identical to
A) 100 percent and 10,000.
the products of its rivals.
B) 4 percent and 4.
Answer: B
C) 100 percent and 16.
D) 4 percent and 16. 40. The copper, aluminum, cement, and
Answer: D industrial alcohol industries are examples of:
A) interproduct competition.
35. If an industry evolves from monopolistic
B) homogeneous oligopoly.
competition to oligopoly, we would expect:
C) monopolistic competition.
A) the four-firm concentration ratio to decrease.
D) differentiated oligopoly.
B) the four-firm concentration ratio to increase.
Answer: B
C) the four-firm concentration ratio to remain the
same.
D) barriers to entry to weaken.
Answer: B

36. The Herfindahl Index:

A) measures the prices charged by oligopolistic
manufacturers.
B) is another name for the four-firm
concentration ratio.
C) tells us whether oligopolistic firms are
engaging in collusion.
D) gives much greater weight to larger firms
than to smaller firms in an industry.
Answer: D

37. The four-firm sales concentration ratio

for an industry measures the:
A) geographic concentration of firms.
B) extent to which the four largest firms
dominate the production of a good.