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Tutorial- Managerial Economics -Oligopoly and oligopolistic competition

Analytical Questions
Hint: Tutorial questions are comprehensive. However, the respective lecturers should utilize
the questions based on the depth of the knowledge acquisition by students.

1) Describe the characteristics of an oligopoly.

2) What is a natural oligopoly? How does it arise? Give an example.

3) What market structures other than oligopoly have the characteristic of one firm's actions
affecting the actions of its competitors? Explain your answer.

4) List four characteristics of monopolistic competition.

5) How do the characteristics of perfect competition and monopolistic competition differ?

6) What do demand and marginal revenue curves look like in monopolistic competition? How do
they compare to the demand and marginal revenue curves in perfect competition and monopoly?

7) "A firm in monopolistic competition maximizes its profit by producing where its price is equal
to its marginal cost." Is the previous statement correct or incorrect?

8) How does a firm in monopolistic competition determine its price and quantity? What type of
profit can it make in the short run and the long run?

9) What type of profit can a firm in monopolistic competition make in the long run? Explain your

10) Why are firms in monopolistic competition unable to make an economic profit in the long
run?

11) What is excess capacity? What industry has excess capacity in the long run: perfect
competition or monopolistic competition?

12) Define the efficient scale of production. For the situation of a firm in monopolistic
competition, discuss its excess capacity.

13) Explain why firms in monopolistic competition have excess capacity in the long run.

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14) In monopolistic competition, firms sell a differentiated product. In perfect competition, firms
sell an identical product. How do these markets differ as a result?

15) A monopoly firm can make economic profit in the long run. A firm in monopolistic
competition cannot. What creates this difference?

16) How do product development and marketing affect a firm in monopolistic competition?

17) Why would a firm in a monopolistically competitive industry ever advertise?

18) Explain the role of advertising in monopolistic competition. Describe how advertising by all
firms in a monopolistically competitive industry impacts a firm's ATC curve, its MC curve, its
demand curve, and its MR curve.

19) Why are selling costs high in monopolistic competition?

20) Explain how selling costs in monopolistic competition affect the efficiency of monopolistic
competition.

Multiple Choice Questions

1) ACME, Inc. operates in a market structure in which there are many other firms that find it
easy to enter or exit. ACME is operating in ________ market.
A) definitely a perfectly competitive
B) either a perfectly competitive or a monopolistically competitive
C) definitely a monopolistically competitive
D) neither a perfectly competitive nor a monopolistically competitive

2) Which of the following is NOT true of monopolistic competition?


A) Firms produce a good that is a perfect substitute for their competitors' goods.
B) There is free entry and exit.
C) There are a large number of firms.
D) Firms can compete on price and quality.

3) In monopolistic competition, each firm supplies a ________ part of the total market output
and its actions ________ the actions of the other firms.
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A) small; do not directly affect
B) small; directly affect
C) large; do not directly affect
D) large; directly affect

4) Brand name drugs are chemically identical to their generic counterparts. Yet, consumers often
prefer the brand name product to the generic product. Making consumers think that a brand name
drug differs from its generic counterpart is an example of
A) product differentiation.
B) perfect competition.
C) oligopolistic behavior.
D) price taking behavior.

5) The firm in the figure above is in monopolistic competition. It will set a price equal to
A) $1.
B) $2.
C) $3.
D) more than $3.

6) The firm in the figure above is in monopolistic competition. It will produce


A) 10 units.
B) 20 units.
C) 30 units.
D) 40 units.

7) The firm in the figure above is in monopolistic competition. The firm has
A) no excess capacity.
B) excess capacity of 10 units.

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C) excess capacity of 20 units.
D) excess capacity of 30 units.
8) Which of the following is characteristic of oligopoly, but NOT of monopolistic competition?
A) The choices made by one firm have a significant effect on other firms.
B) Each firm faces a downward-sloping demand curve.
C) Firms are profit-maximizers.
D) There is more than one firm in the industry.

In the figure, D is the demand curve for taxi rides in a town, and ATC is the average total cost
curve of a taxi company.

9) In the scenario above, the market is


A) a natural duopoly.
B) a natural oligopoly with three firms.
C) a natural monopoly.
D) monopolistically competitive.
Answer: A
Topic: Duopoly
Skill: Analytical
AACSB: Analytical thinking

10) In an oligopoly market, the Herfindahl-Hirschman Index is usually


A) greater than 2,500.
B) below 1,000.
C) between 100 and 1,000.
D) between 200 and 2,000.
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11) A market in which the Herfindahl-Hirschman Index (HHI) is 2,500 is considered to be
A) an oligopoly.
B) monopolistically competitive.
C) a monopoly.
D) perfectly competitive.

12) In the market for batteries, the three largest firms earn 90% of the total revenue and there are
35 firms in the industry. This industry is best described as
A) oligopoly.
B) monopoly.
C) monopolistic competition.
D) perfect competition.

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