ECON 251 FINAL EXAM QUESTIONS AND ANSWERS
Monopolistic competition - answers -market structure in which a large number of firms
compete, each firm produces a differentiated product, firms compete on product quality,
price, and marketing, firms are free to enter and exit the industry
In monopolistic competition, each firm supplies - answers -a small part of the total
industry output
In monopolistic competition, firms do not - answers -pay attention to other firms, no one
firm's actions directly affect the actions of the other firms
Collusion - answers -firms in monopolistic competition would like to conspire to fix a
higher price
Product differentiation - answers -firm makes a product that is slightly different from
products of competing firms
A differentiated product is - answers -one that is a close substitute but not a perfect
substitute for the products of other firms
Product differentiation enables a firm to - answers -compare with other firms in three
areas: quality, price, and marketing
Quality of a product - answers -physical attributes that make it different from the
products of other firms, includes design, reliability, the service provided to the buyer,
and ease of access to the product
Firm in monopolistic competition has a - answers -downward sloping demand curve
Firm in monopolistic competition can set - answers -its price and output
A firm that makes a high quality product can - answers -charge a higher price than a
firm that makes a low quality product
Marketing takes two main forms - answers -advertising and packaging
Monopolistic competition has no - answers -barriers to prevent new firms from entering
the industry in the long
A firm in monopolistic competition cannot make - answers -an economic profit in the
long run
, In long run equilibrium, firms neither - answers -enter nor leave the industry and the
firms in the industry make zero economic profit
Excess capacity - answers -if a firm produces less than its efficient scale
Efficient scale - answers -quantity at which average total cost is at a minimum
Average total cost is the - answers -lowest possible only in perfect competition
Markup - answers -amount by which price exceeds marginal cost
In long run equilibrium in monopolistic competition, - answers -price does exceed
marginal cost
The markup that drives a gap between price and marginal cost in monopolistic
competition arises from - answers -product differentiation
Product variety is both - answers -valued and costly
The efficient degree of product variety is - answers -the one for which marginal social
benefit of a product equals its marginal social cost.
Oligopoly - answers -market structure in which natural or legal barriers prevent the
entry of new firms, small number of firms compete
Natural oligopoly - answers -economies of scale and demand form a natural barrier to
entry
Duopoly - answers -an oligopoly market with two firms
Legal oligopoly arises when - answers -a legal barrier to entry protects the small
number of firms in a market
Oligopoly firms are - answers -interdependent, and they face a temptation to cooperate
to increase their joint economic profit
When there is a small number of firms in a market, each firm's actions - answers -
influence the profits of all the other firms
When a small number of firms share the market, they can increase - answers -their
profits by forming a cartel and acting like a monopoly
Cartel - answers -group of firms acting together to limit output, raise price, and increase
economic profit, illegal but operate in some markets
Game theory - answers -set of tools for studying strategic behavior
Monopolistic competition - answers -market structure in which a large number of firms
compete, each firm produces a differentiated product, firms compete on product quality,
price, and marketing, firms are free to enter and exit the industry
In monopolistic competition, each firm supplies - answers -a small part of the total
industry output
In monopolistic competition, firms do not - answers -pay attention to other firms, no one
firm's actions directly affect the actions of the other firms
Collusion - answers -firms in monopolistic competition would like to conspire to fix a
higher price
Product differentiation - answers -firm makes a product that is slightly different from
products of competing firms
A differentiated product is - answers -one that is a close substitute but not a perfect
substitute for the products of other firms
Product differentiation enables a firm to - answers -compare with other firms in three
areas: quality, price, and marketing
Quality of a product - answers -physical attributes that make it different from the
products of other firms, includes design, reliability, the service provided to the buyer,
and ease of access to the product
Firm in monopolistic competition has a - answers -downward sloping demand curve
Firm in monopolistic competition can set - answers -its price and output
A firm that makes a high quality product can - answers -charge a higher price than a
firm that makes a low quality product
Marketing takes two main forms - answers -advertising and packaging
Monopolistic competition has no - answers -barriers to prevent new firms from entering
the industry in the long
A firm in monopolistic competition cannot make - answers -an economic profit in the
long run
, In long run equilibrium, firms neither - answers -enter nor leave the industry and the
firms in the industry make zero economic profit
Excess capacity - answers -if a firm produces less than its efficient scale
Efficient scale - answers -quantity at which average total cost is at a minimum
Average total cost is the - answers -lowest possible only in perfect competition
Markup - answers -amount by which price exceeds marginal cost
In long run equilibrium in monopolistic competition, - answers -price does exceed
marginal cost
The markup that drives a gap between price and marginal cost in monopolistic
competition arises from - answers -product differentiation
Product variety is both - answers -valued and costly
The efficient degree of product variety is - answers -the one for which marginal social
benefit of a product equals its marginal social cost.
Oligopoly - answers -market structure in which natural or legal barriers prevent the
entry of new firms, small number of firms compete
Natural oligopoly - answers -economies of scale and demand form a natural barrier to
entry
Duopoly - answers -an oligopoly market with two firms
Legal oligopoly arises when - answers -a legal barrier to entry protects the small
number of firms in a market
Oligopoly firms are - answers -interdependent, and they face a temptation to cooperate
to increase their joint economic profit
When there is a small number of firms in a market, each firm's actions - answers -
influence the profits of all the other firms
When a small number of firms share the market, they can increase - answers -their
profits by forming a cartel and acting like a monopoly
Cartel - answers -group of firms acting together to limit output, raise price, and increase
economic profit, illegal but operate in some markets
Game theory - answers -set of tools for studying strategic behavior
