Dominick Salvatore Schaums Outline of Microeconomics, 4th edition Schaums Outline Series 2006

246 PRICE AND OUTPUT UNDER MONOPOLISTIC COMPETITION AND OLIGOPOLY [CHAP. 10
7. With reference to the Edgeworth model, determine which of the following statements is correct.
(a)
(b)
(c)
The duopolists recognize their interdependence.
It explains price rigidity.
Each duopolist assumes the other keeps its price constant.
(d ) Each duopolist assumes the other keeps its quantity constant.
Ans. (c) See Section 10.6.
8. In both the Chamberlin and the kinked demand curve models, the oligopolists (a) recognize their interdependence,
(b) do not collude, (c) tend to keep prices constant, or (d) all of the above.
Ans. (d) See Sections l0.7 and 10.8.
9. The centralized cartel (a) leads to the monopoly solution, (b) behaves as the multiplant monopolist if it wants to
minimize the total costs of production, (c) is illegal in the U.S., or (d) all of the above.
Ans. (d) For choice (a), see Fig. 10-6; for choice (b), see Problem 9.12.
10. A market-sharing cartel will reach the monopoly solution (a) sometimes, (b) always when the product is homogeneous,
(c) always when the product is differentiated, or (d) never.
Ans. (a) This statement is true only when the duopolists agree to share equally the market for a homogeneous commodity
and have identical SMC curves (see Fig. 10.7). It is not true when the product is differentiated, the markets
are not shared equally, or the duopolists do not have identical SMC curves.
11. In the case of price leadership by the dominant firm, all the firms in the purely oligopolistic industry will produce
their best level of output. (a) Always, (b) never, (c) sometimes, or (d) often.
Ans. (a) This is so because the dominant firm will set the industry price at which it maximizes its total profits and
all the other firms in the industry will behave as perfect competitors and produce where P ¼ SMC, and the SMC
curve is rising.
12. If an oligopolist incurs losses in the short run, then in the long run, (a) the oligopolist will go out of business, (b) the
oligopolist will stay in business, (c) the oligopolist will break even, or (d) any of the above is possible.
Ans. (d) See Section 10.12.
Solved Problems
MONOPOLISTIC COMPETITION DEFINED
10.1 (a) Define monopolistic competition and give a few examples of it. (b) Identify the competitive and
monopolistic elements in monopolistic competiton. (c) Why is it difficult or impossible to define the
market demand curve, the market supply curve, and the equilibrium price under monopolistic
competition?
(a)
(b)
Monopolistic competition refers to the market organization in which there are many sellers of a differentiated
product. Monopolistic competition is very common in the retail and service sectors of our economy. Examples
of monopolistic competition are the numerous barber shops, gasoline stations, grocery stores, liquor stores,
and drug stores located close to one another.
The competitive element results from the presence in a monopolistically competitive market (as in a perfectly
competitive market) of so many firms that the activities of each have no perceptible effect on the other firms in
the market. Furthermore, firms can enter or leave the market without much difficulty in the long run. The