A monopolistically competitive firm has some power to set its price because its product is differentiated.
Correct Answer
True
True. Because buyers see the firm's product as somewhat distinct, the firm faces a downward-sloping demand curve and can raise its price without losing all of its customers.
Category: Monopolistic Competition
Question 2
In monopolistic competition, barriers to entry are so high that new firms cannot enter.
Correct Answer
False
False. Monopolistic competition has low barriers to entry, which is why economic profits attract new firms and are competed away in the long run.
Category: Monopolistic Competition
Question 3
Economists disagree about whether monopolistic competition produces the socially best amount of product variety.
Correct Answer
True
True. Some argue that the variety benefits consumers, while critics say firms create more differentiation than buyers truly value; there is no settled answer.
Category: Variety and Advertising
Question 4
In the long run, losses in a monopolistically competitive market lead more firms to enter.
Correct Answer
False
False. Losses cause some firms to exit, which shifts the demand curves of the remaining firms to the right until losses disappear.
Category: Monopolistic Competition
Question 5
Monopolistic competition offers consumers more product variety than perfect competition does.
Correct Answer
True
True. Perfectly competitive firms sell identical products, while monopolistically competitive firms offer differentiated versions, giving buyers more choices.
Category: Variety and Advertising
Question 6
The demand curve facing a monopolistically competitive firm is horizontal at the market price.
Correct Answer
False
False. The firm's demand curve slopes downward because its product is differentiated; a horizontal demand curve describes a perfectly competitive firm.
Category: Monopolistic Competition
Question 7
When rival firms all advertise heavily, their ads may largely cancel each other out.
Correct Answer
True
True. If each firm's ads mainly pull customers away from rivals that are advertising just as hard, the campaigns can offset one another and leave market shares roughly unchanged.
Category: Variety and Advertising
Question 8
Critics argue that some product differentiation and advertising is socially wasteful.
Correct Answer
True
True. Critics contend that resources spent creating small or merely perceived differences between products could be used more productively elsewhere.
Category: Variety and Advertising
Question 9
In an oligopoly, it is easy for new firms to enter because barriers to entry are low.
Correct Answer
False
False. Oligopolies persist because of barriers to entry, such as large economies of scale, patents or the high cost of building a brand name.
Category: Oligopoly Basics
Question 10
Patents shared among a few firms can be a barrier that keeps an industry limited to a small number of sellers.
Correct Answer
True
True. If only a handful of firms hold the patents needed to make a product, others cannot legally produce it, which keeps the number of sellers small.
Category: Oligopoly Basics
Question 11
When oligopoly firms collude successfully, they produce more output and charge lower prices than they would if they competed.
Correct Answer
False
False. Successful collusion lets the firms act like a monopoly, producing less output and charging higher prices than if they competed.
Category: Collusion and Cartels
Question 12
Members of a cartel may watch each other's output and prices to catch members who break the agreement.
Correct Answer
True
True. Because cartel agreements cannot be enforced in court, members rely on monitoring one another and on pressure to keep each firm within its quota.
Category: Collusion and Cartels
Question 13
In the classic prisoner's dilemma, both prisoners would be better off if both confessed than if both stayed silent.
Correct Answer
False
False. Both prisoners would receive shorter sentences if both stayed silent, but because each one does better by confessing whatever the other does, both end up confessing.
Category: Game Theory
Question 14
Game theory studies situations in which each player's payoff depends on the choices made by the other players.
Correct Answer
True
True. Game theory is a branch of mathematics that analyzes strategic decisions, where the reward from a choice depends on what others choose.
Category: Game Theory
Question 15
In the United States, most collusion among firms takes place through formal, written agreements.
Correct Answer
False
False. Because explicit agreements to fix prices or restrict output are illegal in the United States, most collusion is tacit: firms reach an unspoken understanding to avoid competing hard, with no formal contract.
Category: Collusion and Cartels
Question 16
Oligopoly firms that compete fiercely on price may drive their economic profits close to zero.
Correct Answer
True
True. If oligopolists choose hard competition instead of cooperation, price cuts can push prices toward cost and erode their profits.
Category: Oligopoly Basics
Question 17
The kinked demand curve model predicts that oligopoly prices will change frequently.
Correct Answer
False
False. Because a price increase loses many customers and a price cut gains few, the model predicts that oligopoly prices tend to stay stable.
Category: Kinked Demand
Question 18
The heavy advertising needed to build a brand name, as in the soft drink industry, can act as a barrier to entry.
Correct Answer
True
True. A new entrant would have to spend enormous sums to compete with well-known brands, which discourages entry and helps keep the market concentrated among a few firms.
Category: Oligopoly Basics
Question 19
Imperfect competition refers only to markets that have a single seller.
Correct Answer
False
False. Imperfect competition refers to market structures other than perfect competition, most commonly monopolistic competition and oligopoly, which have many or a few sellers rather than a single one.
Category: Oligopoly Basics
Question 20
A monopolistically competitive firm charges a price equal to its marginal revenue.
Correct Answer
False
False. Because the firm must lower its price on all units to sell more, its marginal revenue is below its price; it charges the higher price shown on its demand curve.
Category: Monopolistic Competition