Chapter 20 — Quiz

Multiple choice

Q1. Monopolistic competition is characterized by: a) One firm, no substitutes b) Many firms, differentiated products, free entry c) A few firms with strategic interaction d) Many firms, identical products

Q2. In long-run monopolistic competition: a) Firms earn positive economic profit b) Firms earn zero economic profit (P = ATC) but P > MC c) Firms earn zero accounting profit d) All firms exit

Q3. "Excess capacity" in monopolistic competition means: a) Firms produce too much b) Firms produce at a level below the minimum of ATC c) Firms have no capacity d) Firms are at full capacity

Q4. An oligopoly is characterized by: a) Many firms, identical products b) One firm, high barriers c) A few firms with significant market power and strategic interaction d) Free entry and exit

Q5. The prisoner's dilemma shows that: a) Cooperation always works b) Individual rational choices can lead to a collectively worse outcome c) Firms never compete d) Game theory is irrelevant

Q6. A Nash equilibrium is: a) The best outcome for both players b) A set of strategies where no player can improve by changing unilaterally c) Always the cooperative outcome d) The same as the dominant strategy

Q7. A cartel is: a) A single large firm b) An agreement among firms to cooperate (restrict output, fix prices) c) A government agency d) A type of monopolistic competition

Q8. OPEC's chronic problem is: a) Too few members b) Members have individual incentives to cheat on their quotas (the prisoner's dilemma) c) Oil prices are too low d) The cartel has too many members

Q9. The main difference between monopolistic competition and perfect competition is: a) Number of firms b) Product differentiation (gives each firm some market power) c) Barriers to entry d) Government regulation

Q10. Which market structure is most common in real economies? a) Perfect competition b) Monopolistic competition and oligopoly (the "messy middle") c) Pure monopoly d) None — all markets are identical

Short answer

SA1. Why does free entry in monopolistic competition drive economic profit to zero in the long run?

SA2. What is the prisoner's dilemma and how does it apply to oligopoly?

SA3. Why are cartels unstable?

SA4. Distinguish monopolistic competition from oligopoly in two sentences.

SA5. What is Nash equilibrium?

True / False

TF1. In monopolistic competition, products are identical. (True / False)

TF2. In long-run monopolistic competition, P = MC. (True / False)

TF3. A dominant strategy is the best choice regardless of what the other player does. (True / False)

TF4. OPEC has been perfectly successful at maintaining high oil prices. (True / False)

TF5. Game theory is most useful for analyzing oligopolies. (True / False)

Selected answers in appendices/answers-to-selected.md.