Study Questions #7 - Monopolistic Competition and Oligopoly 22
UNIVERSITY OF WATERLOO
Department of Economics
Econ 101 - Study Questions #7
PART A - Short Answers
1. If monopolistic competitive firms have some control over their prices, why don’t they set their
prices above average cost so they will realize an economic profit in the long run?
2. Explain the “Excess Capacity Theory” of monopolistic competition.
3. What is meant by “concentration ratio” within a given market?
4. What are the reasons for firms entering collusive agreement under oligopolistic competition?
5. Explain the pricing and output policy in oligopolistic markets when price leadership exists.
6. Explain the conditions where collusive agreement is most likely to be successful.
7. Explain the kinked demand curve.
8. Why is it that firms acting in an oligopolistic market structure tend to compete through
advertising and produce differentiation than through price adjustment?
9. Explain why prices tend to be fairly rigid in some industries where the market structure is
10. Explain the Nash Equilibrium; the dominant strategy equilibrium.
PART B - Multiple Choice
1. Firms in monopolistically competitive industries may earn only normal economic profit in the
long run because
a) their costs rise as the capital stock grows older.
b) the demand they face will be decreased as rival firms offer slightly differentiated
products for sale in the same market.
c) their marginal cost curve slopes upward.
d) the market eventually becomes perfectly competitive.
e) costs always rise over time.
2. For a monopolistically competitive firm to be earning positive economic profit, Study Questions #7 - Monopolistic Competition and Oligopoly 23
a) the production period must be the short run.
b) the production period must be the long run.
c) rival firms must not exist.
d) their rivals must also be earning positive economic profit.
e) barriers to entry must exist.
3. When the economic profit is negative in an industry that is monopolistically competitive, then
a) firms will enter the industry and produce better products.
b) firms will exit the industry, and the demand will increase for the products of the firms
c) firms will exit the industry, and the demand will decrease for the firms that remain in the
d) firms will enter the industry, and the demand will increase for the firms t