AP Economics

1
Oligopoly and Monopolistic CompetitionSample
Questions

• AP Economics
• Mr. Bordelon

2

• Oligopoly is a market structure characterized by
• independence in decision making.
• regulated natural monopolies.
• substantial diseconomies of scale.
• a large number of small firms.
• uncertainty about the behavior of rival firms.

3

• Oligopoly is a market structure characterized by
• independence in decision making.
• regulated natural monopolies.
• substantial diseconomies of scale.
• a large number of small firms.
• uncertainty about the behavior of rival firms.

4

• Collusive agreements are typically difficult for
  cartels to maintain because each firm can
  increase profits by
• secretly reporting the collusion to the federal
  government.
• producing less output than the quantity that
  maximizes joint cartel profits.
• increasing the price above the price that
  maximizes joint cartel profits.
• engaging in less advertising than the level of
  advertising that maximizes joint cartel profits.
• producing more output than the quantity that
  maximizes joint cartel profits.

5

• Collusive agreements are typically difficult for
  cartels to maintain because each firm can
  increase profits by
• secretly reporting the collusion to the federal
  government.
• producing less output than the quantity that
  maximizes joint cartel profits.
• increasing the price above the price that
  maximizes joint cartel profits.
• engaging in less advertising than the level of
  advertising that maximizes joint cartel profits.
• producing more output than the quantity that
  maximizes joint cartel profits.

6

• The market for gadgets is dominated by two
  producers, Margaret and Ray. Each firm can
  produce gadgets at marginal costs of
  approximately zero dollars. The table shows the
  market demand schedule for gadgets and the total
  revenue of the industry at each point on the
  market demand curve. If these two producers
  acted independently to maximize profit, total
  industry output would be _____. If these two
  producers formed a cartel and acted to maximize
  total industry profits, total industry output
  would be _____.
• 5 gadgets 10 gadgets
• 0 gadgets 5 gadgets
• 100 gadgets 50 gadgets
• 1,000 gadgets 500 gadgets
• 1,000 gadgets 100 gadgets

Gadget Demand Schedule Gadget Demand Schedule
Price Quantity Demanded
10 0
9 100
8 200
7 300
6 400
5 500
4 600
3 700
2 800
1 900
0 1000
7

• The market for gadgets is dominated by two
  producers, Margaret and Ray. Each firm can
  produce gadgets at marginal costs of
  approximately zero dollars. The table shows the
  market demand schedule for gadgets and the total
  revenue of the industry at each point on the
  market demand curve. If these two producers
  acted independently to maximize profit, total
  industry output would be _____. If these two
  producers formed a cartel and acted to maximize
  total industry profits, total industry output
  would be _____.
• 5 gadgets 10 gadgets
• 0 gadgets 5 gadgets
• 100 gadgets 50 gadgets
• 1,000 gadgets 500 gadgets
• 1,000 gadgets 100 gadgets

Gadget Demand Schedule Gadget Demand Schedule
Price Quantity Demanded
10 0
9 100
8 200
7 300
6 400
5 500
4 600
3 700
2 800
1 900
0 1000
8

• In an oligopolistic market structure, collusion
  between firms usually leads to higher profits
  than noncooperative behavior. Which of the
  following statements accurately describes why
  formal, overt collusion doesnt usually occur in
  the United States?
• Formal collusion is illegal.
• There is an incentive for each firm to cheat on a
  collusive agreement.
• Oligopolistic industries have low barriers to
  entry.
• I only
• II only
• III only
• I and II only
• I, II and III

9

• In an oligopolistic market structure, collusion
  between firms usually leads to higher profits
  than noncooperative behavior. Which of the
  following statements accurately describes why
  formal, overt collusion doesnt usually occur in
  the United States?
• Formal collusion is illegal.
• There is an incentive for each firm to cheat on a
  collusive agreement.
• Oligopolistic industries have low barriers to
  entry.
• I only
• II only
• III only
• I and II only
• I, II and III

10

• Overt collusion exists if
• the government regulates an industry such that
  firms must charge a price equal to marginal cost.
• smaller firms in an industry learn to charge the
  same price as the largest firm.
• competition among a large number of small firms
  generates a stable market price.
• competition among a large number of small firms
  generates similar, but slightly different,
  prices.
• firms agree openly on price, output, and other
  decisions aimed at achieving monopoly profits.

11

• Overt collusion exists if
• the government regulates an industry such that
  firms must charge a price equal to marginal cost.
• smaller firms in an industry learn to charge the
  same price as the largest firm.
• competition among a large number of small firms
  generates a stable market price.
• competition among a large number of small firms
  generates similar, but slightly different,
  prices.
• firms agree openly on price, output, and other
  decisions aimed at achieving monopoly profits.

12

• Engaging in price competition or Bertrand
  behavior will most likely mean oligopolists
• cannot increase their level of output quickly due
  to limits on their productive capacity.
• will likely increase price to monopoly levels.
• will likely collude effectively in order to
  produce the joint profit-maximizing quantity.
• will end up behaving like a monopolist.
• will likely end up behaving like a perfectly
  competitive industry.

13

• Engaging in price competition or Bertrand
  behavior will most likely mean oligopolists
• cannot increase their level of output quickly due
  to limits on their productive capacity.
• will likely increase price to monopoly levels.
• will likely collude effectively in order to
  produce the joint profit-maximizing quantity.
• will end up behaving like a monopolist.
• will likely end up behaving like a perfectly
  competitive industry.

14

• Jake and Zoe are the only producers of slushes in
  Vacatown. Each week, each firm decides whether
  to price high or price low for the following
  week. The figure shows the profit per week
  earned by the two firms. What is the Nash
  equilibrium for Jake and Zoe?
• Jake prices high Zoe prices high
• Jake prices high Zoe prices low
• Jake prices low Zoe prices high
• Jake prices low Zoe prices low
• This game does not have a Nash equilibrium.

15

• Jake and Zoe are the only producers of slushes in
  Vacatown. Each week, each firm decides whether
  to price high or price low for the following
  week. The figure shows the profit per week
  earned by the two firms. What is the Nash
  equilibrium for Jake and Zoe?
• Jake prices high Zoe prices high
• Jake prices high Zoe prices low
• Jake prices low Zoe prices high
• Jake prices low Zoe prices low
• This game does not have a Nash equilibrium.

16

• Every week, each firm decides whether to price
  high or price low for the following week. The
  figure shows the profit per week earned by the
  two firms. Suppose the firms each decide to
  price high initially, and adopt a tit-for-tat
  strategy for the following weeks. After a few
  weeks, how much profit would each firm make per
  week?
• Jakes profit 800 Zoes profit 800.
• Jakes profit 1,000 Zoes profit 1,000
• Jakes profit 1,500 Zoes profit 200
• Jakes profit 200 Zoes profit 1,500
• Jakes profit 900 Zoes profit 900

17

• Every week, each firm decides whether to price
  high or price low for the following week. The
  figure shows the profit per week earned by the
  two firms. Suppose the firms each decide to
  price high initially, and adopt a tit-for-tat
  strategy for the following weeks. After a few
  weeks, how much profit would each firm make per
  week?
• Jakes profit 800 Zoes profit 800.
• Jakes profit 1,000 Zoes profit 1,000
• Jakes profit 1,500 Zoes profit 200
• Jakes profit 200 Zoes profit 1,500
• Jakes profit 900 Zoes profit 900

18

• In the classic prisoners dilemma with two
  accomplices in crime, the dominant strategy for
  each individual is to
• never confess.
• always confess.
• confess only if the other confesses.
• This game does not have a dominant strategy.
• confesss only if the other does not confess.

19

• In the classic prisoners dilemma with two
  accomplices in crime, the dominant strategy for
  each individual is to
• never confess.
• always confess.
• confess only if the other confesses.
• This game does not have a dominant strategy.
• confesss only if the other does not confess.

20

• In the classic prisoners dilemma with two
  accomplices in crime, the Nash equilibrium is
  for
• both individuals to not ocnfess.
• both individuals to confess.
• the first player to confess and the second player
  to not confess.
• This game does not have a Nash equilibrium.
• the first player to not confess and the second
  player to confess.

21

• In the classic prisoners dilemma with two
  accomplices in crime, the Nash equilibrium is
  for
• both individuals to not confess.
• both individuals to confess.
• the first player to confess and the second player
  to not confess.
• This game does not have a Nash equilibrium.
• the first player to not confess and the second
  player to confess.

22

• Tacit collusion in practice is made more
  difficult to achieve
• the larger the number of firms in the industry.
• the fewer the number of products being sold.
• the more similar the marginal costs of each firm.
• if customers have little or no bargaining power.
• the less differentiated the products being sold.

23

• Tacit collusion in practice is made more
  difficult to achieve
• the larger the number of firms in the industry.
• the fewer the number of products being sold.
• the more similar the marginal costs of each firm.
• if customers have little or no bargaining power.
• the less differentiated the products being sold.

24

• Suppose that each of two firms has the
  independent choice of advertising its product or
  not advertising. If neither advertises, each
  gets 10 million in profit if both advertise,
  their profits will be 5 million each and if
  one advertises while the other does not, the
  advertiser gets profit of 15 million while the
  other gets profit of 2 million. According to
  game theory, if the firms could collude to
  maximize profit
• both may or may not advertise.
• firm 1 will advertise and firm 2 will not
  advertise.
• both will advertise.
• neither will advertise.
• firm 1 will not advertise and firm 2 will
  advertise.

25

• Suppose that each of two firms has the
  independent choice of advertising its product or
  not advertising. If neither advertises, each
  gets 10 million in profit if both advertise,
  their profits will be 5 million each and if
  one advertises while the other does not, the
  advertiser gets profit of 15 million while the
  other gets profit of 2 million. According to
  game theory, if the firms could collude to
  maximize profit
• both may or may not advertise.
• firm 1 will advertise and firm 2 will not
  advertise.
• both will advertise.
• neither will advertise.
• firm 1 will not advertise and firm 2 will
  advertise.

26

• The Orlando theme-park industry tends to follow a
  price leadership model. This means that
• each theme park sets its own price and operating
  hours independent of what other parks do.
• Disney, the largest firm, often sets a price and
  rival theme parks then following with similar, if
  not identical, prices.
• Disney, the largest firm, often sets prices only
  to be undercut by rival firms who prefer to
  engage in price wars.
• in written agreements each firm explicitly agrees
  to charge identical prices.
• the government dictates specific prices and all
  firms are obligated to follow.

27

• The Orlando theme-park industry tends to follow a
  price leadership model. This means that
• each theme park sets its own price and operating
  hours independent of what other parks do.
• Disney, the largest firm, often sets a price and
  rival theme parks then following with similar, if
  not identical, prices.
• Disney, the largest firm, often sets prices only
  to be undercut by rival firms who prefer to
  engage in price wars.
• in written agreements each firm explicitly agrees
  to charge identical prices.
• the government dictates specific prices and all
  firms are obligated to follow.

28

• Two firms have tacitly colluded on price-setting
  for several years. If this tacit agreement
  breaks down, it is likely to trigger a(n)
• Justice Department investigation.
• antitrust prosecution.
• price war.
• elimination of advertising expenditures.
• increase in combined profits.

29

• Two firms have tacitly colluded on price-setting
  for several years. If this tacit agreement
  breaks down, it is likely to trigger a(n)
• Justice Department investigation.
• antitrust prosecution.
• price war.
• elimination of advertising expenditures.
• increase in combined profits.

30

• Which of the following would make it difficult
  for oligopolists to collude?
• There are few firms in the market.
• There are few buyers in the market.
• The oligopolists have similar costs of
  production.
• Oligopolists usually produce a homogeneous
  product.
• There are substantial barriers to entry in the
  market.

31

• Which of the following would make it difficult
  for oligopolists to collude?
• There are few firms in the market.
• There are few buyers in the market.
• The oligopolists have similar costs of
  production.
• Oligopolists usually produce a homogeneous
  product.
• There are substantial barriers to entry in the
  market.

32

• Non-price competition is more prevalent in an
  oligopoly in which there is (are)
• a Nash equilibrium.
• complex products
• tacit price collusion.
• no product differentiations.
• a very inelastic demand curve.

33

• Non-price competition is more prevalent in an
  oligopoly in which there is (are)
• a Nash equilibrium.
• complex products
• tacit price collusion.
• no product differentiations.
• a very inelastic demand curve.

34

• Antitrust policy refers to government
• attempts to prevent the acquisition of monopoly
  power.
• attempts to encourage the exercise of monopoly
  power.
• encouragement of collusion in the marketplace.
• attempts to limit private enterprise.
• attempts to promote research and development.

35

• Antitrust policy refers to government
• attempts to prevent the acquisition of monopoly
  power.
• attempts to encourage the exercise of monopoly
  power.
• encouragement of collusion in the marketplace.
• attempts to limit private enterprise.
• attempts to promote research and development.

36

• A major application of the Sherman Antitrust Act
  was in _____ against _____.
• 1880 the Ford Motor Company
• 1984 ATT
• 1911 Standard Oil
• 1948 Paramount Pictures
• 1990 Microsoft

37

• A major application of the Sherman Antitrust Act
  was in _____ against _____.
• 1880 the Ford Motor Company
• 1984 ATT
• 1911 Standard Oil
• 1948 Paramount Pictures
• 1990 Microsoft

38

• Suppose a monopolistically competitive firm can
  increase its profits by decreasing its output.
  Then it must be the case that at the current
  output
• marginal revenue is less than zero.
• price is less than marginal revenue.
• price is less than marginal cost.
• price is less than average total cost.
• marginal revenue is less than marginal cost.

39

• Suppose a monopolistically competitive firm can
  increase its profits by decreasing its output.
  Then it must be the case that at the current
  output
• marginal revenue is less than zero.
• price is less than marginal revenue.
• price is less than marginal cost.
• price is less than average total cost.
• marginal revenue is less than marginal cost.

40

• Suppose a monopolistically competitive firm can
  increase its profits by increasing output. Then
  it must be the case that at the current output
• marginal revenue is greater than marginal cost.
• price is less than marginal cost.
• price is less than average total cost.
• marginal revenue is less than marginal cost.
• price is equal to marginal revenue and marginal
  cost.

41

• Suppose a monopolistically competitive firm can
  increase its profits by increasing output. Then
  it must be the case that at the current output
• marginal revenue is greater than marginal cost.
• price is less than marginal cost.
• price is less than average total cost.
• marginal revenue is less than marginal cost.
• price is equal to marginal revenue and marginal
  cost.

42

• The monopolistic competitor in the figure is
  producing at the output level that maximizes
  profits (minimizes losses). The shaded rectangle
  depicts the level of
• profit.
• loss.
• fixed cost.
• variable cost.
• total cost.

43

• The monopolistic competitor in the figure is
  producing at the output level that maximizes
  profits (minimizes losses). The shaded rectangle
  depicts the level of
• profit.
• loss.
• fixed cost.
• variable cost.
• total cost.

44

• If monopolistically competitive firms are earning
  positive economic profits in the short run, then
  in the long run
• firms will leave the industry.
• the demand curves faced by existing firms will
  move to the right.
• economic profits will increase.
• economic profits will be reduced to zero.
• the average total cost curve will shift upward.

45

• If monopolistically competitive firms are earning
  positive economic profits in the short run, then
  in the long run
• firms will leave the industry.
• the demand curves faced by existing firms will
  move to the right.
• economic profits will increase.
• economic profits will be reduced to zero.
• the average total cost curve will shift upward.

46

• Assume that the market for gas stations is
  characterized by many firms, differentiated
  products, easy entry, and easy exit. The typical
  gas station shown in the figure will maximize
  profits at a quantity of
• Q1
• Q2
• Q3
• P1
• 0.

47

• Assume that the market for gas stations is
  characterized by many firms, differentiated
  products, easy entry, and easy exit. The typical
  gas station shown in the figure will maximize
  profits at a quantity of
• Q1
• Q2
• Q3
• P1
• 0.

48

• The figure shows curves facing a typical gas
  station in a large town. Assume that the market
  is characterized by many firms, diffentiated
  products, easy entry, and easy exit. If the gas
  station here is typical of others in the
  community, then in the long run, we would expect
  to observe
• a few gas stations exiting the market.
• new gas stations entering the market.
• neither entry nor exit.
• the government regulating gas stations so that
  prices are lower for consumers.
• many gas stations choosing to shut down.

49

• The figure shows curves facing a typical gas
  station in a large town. Assume that the market
  is characterized by many firms, diffentiated
  products, easy entry, and easy exit. If the gas
  station here is typical of others in the
  community, then in the long run, we would expect
  to observe
• a few gas stations exiting the market.
• new gas stations entering the market.
• neither entry nor exit.
• the government regulating gas stations so that
  prices are lower for consumers.
• many gas stations choosing to shut down.

50

• In the long run, perfect competitors and
  monopolistic competitors are similar in that
  they
• set price where MR lt MC.
• produce an output level at which P ATC.
• produce a product that is standardized and hard
  to differentiate.
• earn a positive economic profit.
• set price where MR MC ATC.

51

• In the long run, perfect competitors and
  monopolistic competitors are similar in that
  they
• set price where MR lt MC.
• produce an output level at which P ATC.
• produce a product that is standardized and hard
  to differentiate.
• earn a positive economic profit.
• set price where MR MC ATC.

52

• Two firms, Firm A and Firm B, have identical cost
  curves, yet Firm A operates in perfect
  competition and Firm B operates in monopolistic
  competition. In the long run, what can we say
  about the price and output that each firm
  charges?
• Firm As price will be lower than Firm Bs price,
  and Firm As output will be lower than Firm Bs
  output.
• Firm As price will be greater than Firm Bs
  price, and Firm As output will be greater than
  Firm Bs output.
• Firm As price will be greater than Firm Bs
  price, and Firm As output will be lower than
  Firm Bs output.
• Firm As price will be lower than Firm Bs price,
  and Firm As output will be greater than Firm Bs
  output.
• Firm As price will be lower than Firm Bs price,
  and Firm As output will be equal to Firm Bs
  output.

53

• Two firms, Firm A and Firm B, have identical cost
  curves, yet Firm A operates in perfect
  competition and Firm B operates in monopolistic
  competition. In the long run, what can we say
  about the price and output that each firm
  charges?
• Firm As price will be lower than Firm Bs price,
  and Firm As output will be lower than Firm Bs
  output.
• Firm As price will be greater than Firm Bs
  price, and Firm As output will be greater than
  Firm Bs output.
• Firm As price will be greater than Firm Bs
  price, and Firm As output will be lower than
  Firm Bs output.
• Firm As price will be lower than Firm Bs price,
  and Firm As output will be greater than Firm Bs
  output.
• Firm As price will be lower than Firm Bs price,
  and Firm As output will be equal to Firm Bs
  output.

54

• In the long run, monopolistically competitive
  firms produce less than the output at which
  average total cost is minimized. This is
  referred to as
• irrational capacity.
• excess capacity.
• product differentiation.
• zero economic profit.
• price leadership.

55

• In the long run, monopolistically competitive
  firms produce less than the output at which
  average total cost is minimized. This is
  referred to as
• irrational capacity.
• excess capacity.
• product differentiation.
• zero economic profit.
• price leadership.

56

• Because monopolistically competitive firms charge
  a P gt MC
• monopolistic competition is efficient.
• monopolistic competition is inefficient.
• the marginal benefit to society of an additional
  unit of output is below its cost.
• monopolistic competition is inefficient and the
  marginal benefit to society of an additional unit
  of output is below its cost.
• deadweight loss does not exist in monopolistic
  competition.

57

• Because monopolistically competitive firms charge
  a P gt MC
• monopolistic competition is efficient.
• monopolistic competition is inefficient.
• the marginal benefit to society of an additional
  unit of output is below its cost.
• monopolistic competition is inefficient and the
  marginal benefit to society of an additional unit
  of output is below its cost.
• deadweight loss does not exist in monopolistic
  competition.

58

• A large shopping mall has a food court with many
  different restaurants serving many different
  cuisines to hungry shoppers. By offering so many
  different choices to customers, the food court is
  practicing product differentiation by
• brand name.
• price.
• quality.
• style and type.
• location.

59

• A large shopping mall has a food court with many
  different restaurants serving many different
  cuisines to hungry shoppers. By offering so many
  different choices to customers, the food court is
  practicing product differentiation by
• brand name.
• price.
• quality.
• style and type.
• location.

60

• Which of the following advertising slogans
  provides information to potential buyers?
• Coffee PalaceStop and smell the coffee!
• Karaoke Maker wants you to just sing it!
• Bees Beachside Restaurant is the only restaurant
  on the beach for 50 miles.
• The Happy Hotel has a happy bed for you.
• Pattys Pies mmmmmmm pie!

61

• Which of the following advertising slogans
  provides information to potential buyers?
• Coffee PalaceStop and smell the coffee!
• Karaoke Maker wants you to just sing it!
• Bees Beachside Restaurant is the only restaurant
  on the beach for 50 miles.
• The Happy Hotel has a happy bed for you.
• Pattys Pies mmmmmmm pie!