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1 Homework Chapter 11: Name: Due Date: Wednesday, December 4 at the beginning of class. Please mark your answers on a Scantron. It is late if your Scantron is not complete when I ask for it at 9:35. Get it done before class please. 1. Which of the following is not a characteristic of firms in a monopolistically competitive market? A) Existence of large economies of scale B) Advertising C) Nonprice competition D) Ease of entry and exit E) Differentiated products 2. Any time firms in monopolistic competition are earning above-normal profit, A) new firms enter the market, and entry continues until firms are earning normal profit. B) new firms have no incentive to enter the market. C) new firms have incentive to enter the market but are legally barred from doing so. D) they can maintain those levels indefinitely. E) their cost structure automatically shifts up, eliminating the additional profit. 3. Which of the following statements about a monopolistically competitive firm in the short run is not true? A) Profits will be maximized when price equals marginal cost. B) The firm may be able to earn a normal profit or an economic profit or incur an economic loss. C) Advertising may enable a firm to charge a higher price than that charged by rival firms. D) Entry into the market is fairly easy. E) It faces a negatively sloped demand curve. Page 1

2 Price Use the following to answer question 4: MC ATC P 5 P 4 P 3 P 2 P 1 D 0 Q 1 Q 2 Q 3 Q 4 MR Quantity 4. In the preceding figure, at the profit-maximizing output level, this firm is producing units, charging, and making. A) Q2; P2; a normal profit B) Q2; P2; C) Q2; P5; zero economic profit D) Q3; P3; E) Q2; P5; Page 2

3 Price per Unit Use the following to answer question 5: MC ATC P 2 D 1 D 2 MR 2 Q 2 Quantity 5. If demand is D 1 for the firm in the preceding figure, that firm is earning A) a normal profit. B) an above-normal profit. C) a negative economic profit. D) a break-even level of profit. E) a zero economic profit. 6. Because consumers often possess incomplete information in markets, A) gaining information about products itself may be costly. B) brand names provide valuable information to consumers about the quality of products. C) firms often provide information through marketing. D) guarantees can help to increase consumer confidence in a product. E) All of the above 7. Consumers are willing to pay a higher price for a brand-name product as opposed to a generic product because A) a brand name provides a signal about a product's quality and reliability. B) they are willing to pay more for the privilege of watching the firm's commercials. C) a brand-name product itself is always of higher quality. D) consumers maximize utility by purchasing the most expensive products. E) consumers are irrational. Page 3

4 8. What characteristic is unique to oligopolistic firms? A) Barriers to entry in the market B) Interdependence of firms C) Homogeneous products D) Economic profits can exist in the long run. E) Economic profits can exist in the short run. 9. Strategic behavior occurs in a market when A) there are many firms with differentiated products. B) what is best for A depends on what B does and vice versa. C) the market is a monopoly. D) the market is perfectly competitive. E) All of the above Use the following to answer question 10: 10. According to the payoffs in the preceding table, A) Firm A will advertise, no matter what, if Firm B does not advertise. B) Firm A will advertise only if Firm B advertises. C) Firm A has a dominant strategy but Firm B does not. D) Firm B has a dominant strategy but Firm A does not. E) both firms have a dominant strategy of not advertising. 11. A price-leadership oligopoly is one in which A) a dominant firm in the market sets the price and other firms follow. B) small-market participants have a strong influence over price. C) there is a large kink in the demand curve. D) a prisoner's dilemma exists. E) all firms face downward-sloping demand curves. 12. When a cartel is successful, A) it offers consumers the lowest possible prices. B) it minimizes profits for its members. C) it behaves as a monopolist in the market. D) it has no effective mechanism for enforcing agreements. E) it will always be stable. Page 4

5 13. In which market structure model(s) does price exceed marginal cost in long-run equilibrium? A) In perfect competition only B) In both perfect competition and monopolistic competition C) In every market structure model but perfect competition D) In all market structure models E) In no market structure models 14. The shape of the demand curve for an oligopolist depends on A) the market marginal-revenue curve. B) how rival firms react to price changes. C) the amount of monopolistic competition in the market. D) whether price is more or less than marginal revenue. E) the prevalence of adverse selection. 15. Which of the following occurs only in an oligopoly? A) A downward-sloping market demand curve B) A downward-sloping demand curve for the individual firm C) Interdependence and strategic behavior D) A differentiated product E) A standardized product Page 5

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