1 . In both competitive and monopolistically competitive markets, firms earn nor
ID: 1120320 • Letter: 1
Question
1. In both competitive and monopolistically competitive markets, firms earn normal profits in the long run. What enables oligopoly firms to have the opportunity to earn economic profits in the long run?
a Oligopolies have a large portion of the market share.
b The oligopolies use barriers to entry.
c Oligopolies are price takers.
d Oligopolies have the ability to follow price increases and price decreases of other firms.
2. At a price of $8, the marginal revenue of a monopolistically competitive firm is $5. If the marginal cost is $7 and average total cost is $4, what should the firm do to maximize profits?
a The firm should increase both output and price.
b The firm reduce both output and price.
c The first should reduce output and increase price.
d The firm should increase output and decrease price.
3. All of these are characteristic of monopolistic competition, EXCEPT:
a product differentiation.
b free entry and exit.
c barriers to entry.
d price maker.
5. Which of these is a downside of monopolistic competition and oligopolies?
a higher transportation costs
b higher trade barriers
c market power
d higher input prices
6. Why is it difficult for cartels to effectively maintain high prices over the long term?
a It is difficult for cartels to effectively maintain high prices over the long term because the products that most cartels produce have very unstable demand.
b The statement is incorrect; cartels are effective at maintaining high prices over the long term.
c Cartels jointly maximize profit, which means that there are still potential sales at prices above marginal cost; thus, a participant willing to cheat could capture those profits.
d Cartels jointly maximize profit, which means that there are still potential sales when the marginal revenue is above marginal cost; thus, a participant willing to cheat could capture additional profits.
Explanation / Answer
Ans)
1.
b.The oligopolies use barriers to entry.
Oligopolies prevent new entrants from entering the industry when there is profits by using the barriers to entry.
2.
c. The first should reduce output and increase the price.
At this point MC exceeds MR and the price is less(since the Mr is downward sloping) the output should be reduced until Mc equals MR at this point the price will rise.
3
c. barriers to entry
A monopolistic competition has no barriers to entry hence cannot earn profits in the long run.
4.
a.higher transportation costs
All the other three factors help either monopolistic competition or oligopolies.
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