6_Firm Competition and Market Structure

Question 1

LO: Describe how most real-world markets differ from the model of perfect competition.

Answer 1

In the real world, many firms aren’t perfectly competitive

Question 2

A ___ is a firm that is the sole seller of a product without close substitutes and maintains market power.; arise when there are no close substitutes and barriers to entry.

Answer 2

Monopoly

Question 3

___ is a state of limited competition, in which a market is shared by a small number of producers or sellers with natural or legal barriers to prevent the entry of new firms.

Answer 3

Oligopoly

Question 4

A ___ is a market structure in which a single buyer substantially controls the market as the major purchaser of goods and services offered by many would-be sellers.

Answer 4

Monopsony

Question 5

___ is the ability to influence the market price of the products it sells.

Answer 5

Market power

Question 6

What are the barriers of entry into a market?

1. ___
2. ___
3. ___
4. ___

Answer 6

1. Natural monopoly
2. Control over a key resource
3. Network externalities
4. Government restrictions

Question 7

A ___ is a firm that must sell each unit of its output for the same price to all its customers.

Answer 7

Single-price monopoly

Question 8

A ___ is a firm that is able to sell different units of a good or service for different prices.

Answer 8

Price-discriminating monopoly

Question 9

Since a single monopolist faces the entire demand of the market, the demand curve is ___.

Answer 9

Downward sloping

Question 10

The supply curve for monopolists ___.

Answer 10

Does not exist

Question 11

Why is a monopoly unfair?

Answer 11

It redistributes welfare from buyer to seller AND it creates a deadweight loss.

Question 12

___ is the act of obtaining special treatment by the government to create economic profit or to divert consumer surplus or producer surplus away from others; it does not always create a monopoly, but it always restricts competition and often creates a monopoly.

Answer 12

Rent seeking

Question 13

For industries in which a firm’s long-run average total cost falls continuously as output increases, the government will regulate price rather than attempting to dismantle a monopoly or encourage new participants called a ___.

Answer 13

Natural monopoly

Question 14

___ laws are designed to promote competitive markets by restricting behaviors that limit competition

Answer 14

Anti-trust laws

Question 15

Economists refer to __ as a situation in which the usefulness of a product increases with the number of consumers who use it.
I.e., HD television, Facebook, etc.

Answer 15

Network externalities

Question 16

A ___ is a market in which competition and entry are restricted by granting of a public franchise, government license, patent, or copyright.

Answer 16

Legal monopoly

Question 17

A government designation that a firm is the only legal provider of a good or service is known as a ___.
I.e., Entergy and SandWB.

Answer 17

Public franchise

Question 18

Monopolists charge a ___ price and produces a ___ quantity compared to firms who utilize perfect competition.

Answer 18

Higher

Lower

Question 19

___ is when a small number of firms share a market; they can increase their profit by forming a cartel and acting like a monopoly.

Answer 19

Collusion

Question 20

A ___ is a group of firms acting together to limit output, raise price, and increase economic profit; illegal, but do operate in some markets and eventually tend to collapse.

Answer 20

Cartel

Question 21

A ___ is a market in which there are only two producers.

Answer 21

Duopoly

Question 22

Collusion or formation of a cartel are possible when: ___.

Answer 22

Firms make identical products, industries agree to coordinate their quantity and pricing decision, and no firm deviates from the agreement, even if breaking is in it’s best interest.

Question 23

The ___ model describes an oligopoly in which each firm chooses the price of it’s product, as opposed to their output decisions in collusion; assumed that firms make identical products, compete by choosing the price, and set their prices simultaneously.

Answer 23

Betrand competition model

Question 24

A ___ is an oligopoly model in which each firm chooses it’s production quantity rather than price; assumed that firms make identical products, compete by choosing the quantity, and set their prices with market price, and firms choose quantities simultaneously.

Answer 24

Cournot competition

Question 25

The ___ model states that firms make production decisions sequentially; assumed that firms make identical products, compete by choosing quantity, all goods sell at market price, and firm do not choose quantities simultaneously.

Answer 25

Stackelberg model

Question 26

The ___ is the ability of a first mover to manipulate it’s competitor’s output in the Stackleberg competition.

Answer 26

First-mover advantage

Question 27

A ___ is a firm’s method of pricing its product based on market characteristics.

Answer 27

Pricing strategy

Question 28

___ refers to the practice of charging different prices to different customers for the same product.

Answer 28

Price discrimination

Question 29

___ occurs when two firms mutually rely on one another

Answer 29

Interdependence

Question 30

___ are the result of sorting all sellers on the basis of market share, selecting a specified number of the firms with the highest market shares, and adding the market shares for those firms; used to assess the extent to which a given market is oligopolistic; can be 3-, 4- or 5-firm.

Answer 30

Concentration ratios

Question 31

If CR4 is less than 40 or the HHI is less than 1000, the market is ___.
If CR4 is between 40 and 60 or the HHI is between 1000 and 2000, the market is ___.
If CR4 is above 60 or the HHI is above 2000, the market is ___.
If CR4 is above 90 or the HHI is above 8000, the market is ___.

Answer 31

Fairly low
Loose oligopoly
Tight oligopoly
Effective monopoly

Question 32

Which of the following is a characteristic shared by a perfectly competitive firm and a monopoly?

a. Each must lower its price to sell more output.
b. Each maximizes profits by producing a quantity for which price equals marginal cost.
c. Each sets a price for its product that will maximize its revenue.
d. Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost.

Answer 32

d. Each maximizes profits by producing a quantity for which marginal revenue equals marginal cost.

Question 33

Consider the following characteristics:

a. a market structure with barriers to entry
b. demand curves that are easily identified
c. firm cannot make zero profits in the long run
d. firm can reap long run profits.

Which of the characteristics in the list above is shared by an oligopolist and a monopolist?

a. a, c, and d
b. a, b, c, and d
c. a and d
d. a, b, and d

Answer 33

c. a and d

a. a market structure with barriers to entry
d. firm can reap long run profits.

Question 34

When discussing the demand and cost curves facing a monopolist, to maximize profit, the firm will produce where ___.

Answer 34

MR = MC

Question 35

Explain why the monopolist has no supply curve?

Answer 35

Monopolies are price makers, not price takers, therefore, it is not necessary to have a supply curve.

Question 36

Interdependence of firms is most common in

a. monopolistic industries.
b. oligopolistic industries.
c. monopolistically competitive industries.
d. monopolistically competitive and oligopolistic industries.

Answer 36

b. oligopolistic industries.

Question 37

There are five firms in an industry with sales at $5 million, $10 million, $8 million, $12 million, and $10 million, respectively. The HHI is

a. 2,138.
b. 925
c. 2,014.
d. 1,805

Answer 37

a. 2,138.

5 + 10 + 8 + 12 + 10 = 45

5/45 + 10/45 + 8/45 + 12/45 + 10/45 (all squared) = 2138

Question 38

Collusion makes firms better off because if they act as a single entity (a cartel) they can reduce output and increase their prices and profits. But some cartels have failed and others are unstable. Which of the following is a reason why cartels often break down?

a. Members of a cartel may resent having to share their profits equally.
b. Each member of a cartel has an incentive to “cheat” on the collusive agreement by producing more than its share when everyone else sticks with the collusive agreement.
c. Most cartels do not have a dominant strategy.
d. When a cartel is profitable the amount of competition it faces increases.

Answer 38

b. Each member of a cartel has an incentive to “cheat” on the collusive agreement by producing more than its share when everyone else sticks with the collusive agreement.

Question 39

According to the Bertrand model, a firm will assume that rival firms will

a. match price cuts but not price increases
b. match price increases but not price cuts
c. keep their prices constant
d. keep their rates of production constant

Answer 39

c. keep their prices constant

Question 40

In the quantity leadership model:

Select one:

a. prices are higher and quantities are slightly less than we would see if the firms colluded to achieve the monopoly outcome
b. each firm takes the quantities produced by its competitors as given
c. each firm takes the prices charged by its competitors as given
d. one firm plays a leadership role and its competitor’s simply react to the leader’s quantity

Answer 40

d. one firm plays a leadership role and its competitor’s simply react to the leader’s quantity

Question 41

The Bertrand model is a more plausible model of firm behavior than the Cournot model

a. because the Bertrand model predicts that firms will price at marginal cost.
b. because firms that sell a non-differentiated product typically act as price takers.
c. when firms sell a differentiated product.
d. when firms set the quantity to be sold

Answer 41

c. when firms sell a differentiated product.

Question 42

If identical firms sell an undifferentiated product, advertising is likely to be

a. collectively undertaken by the industry group.
b. strategically aimed at deterring entry.
c. used to attack the rivals’ products.
d. focused on secret ingredients.

Answer 42

a. collectively undertaken by the industry group.

Question 43

Oligopolists that have restrictions on productive capacity divide the market between themselves and charge prices greater than marginal costs. In this case they engage in:

a. Betrand competition.
b. quality competition.
c. Cournot competition.
d. price competition.

Answer 43

c. Cournot competition.

Question 44

There are five firms in an industry with sales at $5 million, $10 million, $8 million, $12 million, and $10 million, respectively. What is the proper conclusion that we can draw from the calculated four-firm concentration ratio and HHI?

a. The four-firm measure suggests the industry is relatively uncompetitive, while the HHI suggests the industry is highly competitive
b. The four-firm measure suggests the industry is highly competitive, while the HHI suggests the industry is relatively uncompetitive.
c. Both measures indicate that the industry is not perfectly competitive.
d. Both measures indicate the industry is served by a monopoly

Answer 44

c. Both measures indicate that the industry is not perfectly competitive.

Question 45

Excess capacity and high advertising expenditures are encountered in

a. monopoly
b. perfect competition
c. non-profit competition
d. monopolistic competition

Answer 45

d. monopolistic competition

Question 46

In which markets are network effects likely?

a. Markets subject to increasing returns
b. Hi-tech product markets
c. Market for trendy products.
d. All of the above

Answer 46

d. All of the above

Question 47

The reason that the Fisherman’s Friend restaurant in Stonington, Maine had a monopoly on selling seafood dinners in that town is most likely due to

a. occupational licensing.
b. the restaurant owned all the fresh seafood in the state.
c. a government-imposed barrier.
d. no competitors apparently found the profit level attractive enough to enter the market.

Answer 47

d. no competitors apparently found the profit level attractive enough to enter the market.

Question 48

Relative to a perfectly competitive market, a monopoly results in

a. a gain in producer surplus equal to the loss in consumer surplus.
b. greater economic efficiency.
c. a gain in producer surplus less than the loss in consumer surplus.
d. a gain in producer surplus equal to the gain in consumer surplus.

Answer 48

c. a gain in producer surplus less than the loss in consumer surplus.

Question 49

An oligopolistic industry is characterized by all of the following except

a. production of standardized products.
b. firms pursuing aggressive business strategies, independent of rivals’ strategies.
c. existence of entry barriers.
d. the possibility of reaping long run economic profits.

Answer 49

b. firms pursuing aggressive business strategies, independent of rivals’ strategies.

Question 50

A member of a cartel like OPEC has an incentive to

a. argue for larger production quotas for each member of the cartel.
b. abide by its individual production quota.
c. support equal production quotas for each member.
d. agree to a low cartel production level and then produce more than its quota.

Answer 50

d. agree to a low cartel production level and then produce more than its quota.

Question 51

“Tom and Jack are two local petrol stations. Although they have different constant marginal costs, they both survive continued competition.” Tom and Jack do not constitute:

a. a Bertrand oligopoly.
b. a Stackelberg oligopoly.
c. a Cournot oligopoly.
d. a monopolistically competitive industry.

Answer 51

a. a Bertrand oligopoly.

Question 52

Suppose that the duopolists competing in Cournot fashion agree to produce the collusive output. Given that firm two commits to this collusive output, it pays firm one to

a. cheat by producing a lower level of output.
b. cheat by raising prices.
c. none of the above.
d. cheat by producing a higher level of output.

Answer 52

d. cheat by producing a higher level of output.

Question 53

An industry has a 4-firm concentration ratio of 85. We would call this industry a:

a. purely competitive industry
b. very competitive one
c. monopoly
d. oligopoly

Answer 53

d. oligopoly

Question 54

A firm that is threatened by the potential entry of competitors into a market builds excess production capacity. This is an example of

a. Bertrand competition
b. Entry Barriers to prevent potential entrants
c. collusion or cartel
d. Cournot competition

Answer 54

b. Entry Barriers to prevent potential entrants

Question 55

Suppose two firms in a duopoly implicitly collude and charge a high price. How might each firm benefit from advertising that it will match the lowest price offered by its competitor?

a. The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same.
b. The offer to match prices is a way of signaling to antitrust authorities that the firms are not engaged in illegal collusion
c. The advertisement is meant to suggest to consumers that the offered price is actually the lowest price available
d. The offer to match prices is a way of deterring entry by other large firms, thereby keeping the market share of the existing firms intact

Answer 55

a. The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same.

Question 56

Which of the following is an example of bundling?

a. HP includes a toner cartridge with the purchase of a new laser printer
b. A shoe store doesn’t sell shoes for just one foot; it sells shoes for the left foot and right foot packaged together
c. An automobile manufacturer includes Michelin tires on its new cars
d. A $95 ticket to the Magic Kingdom gives you entrance to the park and free access to all the rides

Answer 56

d. A $95 ticket to the Magic Kingdom gives you entrance to the park and free access to all the rides