ECN 104 Lecture 2: McConnellBrueFlynnBarbiero-12e_Ch9-1 - Copy
6 Jun 2018
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Chapter9MonopolisticCompetitionandOligopoly
Copyright©2010McGraw-HillRyersonLimited Page1
CHAPTER 9
Monopolistic Competition and Oligopoly
Topic Question numbers
_________________________________________________________________
9.1 Characteristics of monopolistic competition 1-25
Relatively large number of sellers 1-4
Differentiated products 5-9
Easy entry and exit 10-13
Advertising 14-16
Monopolistically competitive industries 17-25
9.2 Price and output in monopolistic competition 26-123
The firm's demand curve 26-38
The short run: Profit or loss 39-61
The long run: Only a normal profit 62-91
Monopolistic competition and efficiency 92-117
Benefits of product variety 118-121
Further complexity 122-123
9.3 Oligopoly 124-184
A few large producers 124-126
Homogeneous or differentiated products 127-140
Control over price, but mutual interdependence 141-150
Entry barriers 151-154
Mergers 155
Oligopolistic industries 156-184
9.4 Oligopoly pricing behaviour: A game theory overview 185-202
Basic concepts 185-187
Prisoner's dilemma 188-190
Strategies in a two-firm oligopoly 191-194
Mutual interdependence revisited 195-198
Collusion 199-201
Incentive to cheat 202
9.5 The incentives and obstacles to collusion: Two oligopoly
strategies 203-232
Cartels and other collusion: Cooperative strategies 203-226
Price leadership model: Another cooperative strategy 227-232
9.6 Oligopoly and advertising 233-258
Positive effects of advertising 233-243
Potential negative effects of advertising 244-251
Oligopoly and efficiency 252-258
The last word 259-260
True-False Questions 261-285
Appendix to Chapter 9: Additional game theory applications 286-314
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Chapter9MonopolisticCompetitionandOligopoly
Copyright©2010McGraw-HillRyersonLimited Page2
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.
Ans: C Level: Easy Main Topic: 9.1 Characteristics of monopolistic competition
Page: 219 Subtopic: Relatively large number of sellers Type: Definition
2. Monopolistic competition is characterized by a:
A) few dominant firms and low entry barriers.
B) large number of firms and low entry barriers.
C) large number of firms and substantial entry barriers.
D) few dominant firms and substantial entry barriers.
Ans: B Level: Easy Main Topic: 9.1 Characteristics of monopolistic competition
Page: 219-220 Subtopic: Relatively large number of sellers Type: Application
3. If the number of firms in a monopolistically competitive industry increases and the
degree of product differentiation diminishes:
A) the likelihood of realizing economic profits in the long run would be enhanced.
B) individual firms would now be operating at outputs where their average total costs
would be higher.
C) the likelihood of collusive pricing would increase
D) the industry would more closely approximate perfect competition.
Ans: D Level: Moderate Main Topic: 9.1 Characteristics of monopolistic
competition Page: 219-220 Subtopic: Relatively large number of sellers
Type: Application
4. A monopolistically competitive industry combines elements of both competition and
monopoly. It is correct to say that the competitive element results from:
A) a relatively large number of firms and the monopolistic element from product
differentiation.
B) product differentiation and the monopolistic element from high entry barriers.
C) a perfectly elastic demand curve and the monopolistic element from low entry
barriers.
D) a highly inelastic demand curve and the monopolistic element from advertising and
product promotion.
Ans: A Level: Moderate Main Topic: 9.1 Characteristics of monopolistic
competition Page: 220 Subtopic: Relatively large number of sellers
Type: Application
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Chapter9MonopolisticCompetitionandOligopoly
Copyright©2010McGraw-HillRyersonLimited Page3
5. Economic analysis of a monopolistically competitive industry is more complicated than
that of perfect competition because:
A) the number of firms in the industry is larger.
B) monopolistically competitive firms cannot realize an economic profit in the long
run.
C) of product differentiation and consequent product promotion activities.
D) monopolistically competitive producers are mutually interdependent in their pricing
strategies.
Ans: C Level: Moderate Main Topic: 9.1 Characteristics of monopolistic
competition Page: 220 Subtopic: Differentiated products Type: Application
6. A monopolistically competitive industry combines elements of both competition and
monopoly. The monopoly element results from:
A) the likelihood of collusion.
B) product differentiation.
C) high entry barriers.
D) mutual interdependence in decision making.
Ans: B Level: Easy Main Topic: 9.1 Characteristics of monopolistic competition
Page: 220 Subtopic: Differentiated products Type: Application
7. A significant difference between a monopolistically competitive firm and a perfectly
competitive firm is that the:
A) former sells similar, although not identical, products
B) latter recognizes that price must be reduced to sell more output.
C) former does not seek to maximize profits.
D) former's demand curve is perfectly inelastic.
Ans: A Level: Easy Main Topic: 9.1 Characteristics of monopolistic competition
Page: 220 Subtopic: Differentiated products Type: Application
8. The goal of product differentiation and advertising in monopolistic competition is to
make:
A) the firm allocatively efficient even if it is not productively efficient.
B) the firm productively efficient even if it is not allocatively efficient.
C) price more of a factor and product differences less of a factor in consumer
purchases.
D) price less of a factor and product differences more of a factor in consumer
purchases.
Ans: D Level: Moderate Main Topic: 9.1 Characteristics of monopolistic
competition Page: 220 Subtopic: Differentiated products Type: Application
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