AP Micro Microeconomics: Market Structures 2 — Questions and Answers
Question 1: In an oligopoly, the kinked demand curve model predicts that if one firm raises its price above the kink, rivals will:
- Match the price increase to maintain market share
- Not follow, leaving the firm with fewer customers (Correct answer)
- Lower their prices to gain market share
- Exit the market due to reduced profitability
Correct answer: Not follow, leaving the firm with fewer customers
Rivals do not match price increases in the kinked demand curve model, making demand elastic above the kink and causing the firm to lose customers.
Question 2: Which condition is true for a monopolistically competitive firm in long-run equilibrium?
- Price equals marginal cost
- Economic profit is positive
- Price equals average total cost (Correct answer)
- The firm produces at minimum average total cost
Correct answer: Price equals average total cost
In long-run monopolistic competition, free entry drives economic profit to zero, so price equals average total cost.
Question 3: A natural monopoly arises when:
- A single firm owns all inputs needed for production
- Government grants an exclusive operating license
- Long-run average costs continuously decline over the relevant range of market demand (Correct answer)
- A firm achieves economies of scale in the short run
Correct answer: Long-run average costs continuously decline over the relevant range of market demand
A natural monopoly exists when one firm can serve the entire market at lower average cost than multiple competing firms due to continuously declining LRAC.
Question 4: Game theory is most useful for analyzing which market structure?
- Perfect competition
- Monopoly
- Oligopoly (Correct answer)
- Monopolistic competition
Correct answer: Oligopoly
Oligopoly involves strategic interdependence among a few firms, making game theory the appropriate tool for analyzing their decisions.
Question 5: Compared to a perfectly competitive market, a monopoly produces:
- More output at a lower price
- The same output at a higher price
- Less output at a higher price (Correct answer)
- More output at a higher price
Correct answer: Less output at a higher price
A monopolist restricts output below the competitive level and charges a higher price to maximize profit.
Question 6: Which of the following is a characteristic of monopolistic competition but NOT perfect competition?
- Many buyers and sellers
- Free entry and exit in the long run
- Product differentiation (Correct answer)
- Price-taking behavior by firms
Correct answer: Product differentiation
Monopolistic competition features differentiated products, giving each firm some market power, unlike perfectly competitive firms that sell identical products.
Question 7: The Herfindahl-Hirschman Index (HHI) is used to measure:
- A firm's price elasticity of demand
- The degree of market concentration (Correct answer)
- The deadweight loss from monopoly
- The efficiency of price discrimination
Correct answer: The degree of market concentration
The HHI sums the squares of market share percentages of all firms and is used by regulators to assess market concentration.
AP Micro Microeconomics: Market Structures 2
In an oligopoly, the kinked demand curve model predicts that if one firm raises its price above the kink, rivals will: