Frequent Exam Questions with Answers
Perfect and Imperfect Competition
Chapter 13 ― Question 1
The demand curve for a perfect competitor is identical
- with its marginal revenue curve
- with its marginal cost curve
- with its supply curve
*A. A perfect competitor receives the same price for every unit. Its demand curve is therefore a horizontal line. About B: It is the supply curve that is identical with the marginal cost curve.
Chapter 13 ― Question 2
How competitive is perfect competition?
* Perfect competitors do not compete. They do not differentiate their products; they do not advertise their products (what do you want to say about identical eggs?); they are not interested in increasing their market share, as they have already maximised output and cannot increase it any further.
Chapter 14 ― Question 1
For a monopolistic firm marginal revenue is
- equal to price
- below price
- above price
- unrelated to price
*B. Remember that for imperfect competitors the marginal revenue curve is below the demand curve, which indicates price and average revenues. This is because an imperfect competitor has a downward sloping demand curve.
Chapter 14 ― Question 2
Explain the prisoners' dilemma by using an example of a duopoly.
* The prisoners' dilemma assumes that there is either no collusion or that an agreement can be violated. Each of the firms must anticipate its competitor's responses to its own decisions. If it lowers price, its competitors is likely to follow suit. As a result, profits for both firms decline. If it raises price and its competitor does not follow suit, it will lose market share. The prisoners' dilemma helps to explain why single-handed price increases or cuts can backfire.
Chapter 14 ― Question 16
There are 10 firms in an industry. 5 have a market share of 15 percent each, the other five 5 a market share of 5 each.
1) What is the concentration ratio in the industry?
2) And what is its Herfindahl index?
*1) The five-firm concentration ratio is 75 (5 x 15).
*2) The Herfindahl index is 1250 (225 x 5) + (25 x 5).
Remember that the concentration ratio is the sum of the market shares of the leading firms. The Herfindahl Index is the sum of the squares of all firms' market shares.
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