Question

1. A profit-maximizing firm in monopolistic competition should shut down in the short run if:

   	a.	price is more than average total cost.
   	b.	price is less than average variable cost.
   	c.	marginal revenue is equal to marginal cost.
   	d.	marginal revenue is less than price.
   	e.	price is less than average fixed cost.

1. The term “strategy” in terms of game theory refers to:

   	a.	the tendency for collusive firms to generate normal profits.
   	b.	each firm’s decision to charge a higher price than the price charged by the rival firm in an industry.
   	c.	the tendency of firms in an oligopoly to exit the market in the long run.
   	d.	each firm's game plan for making decisions.
   	e.	the tendency of firms to earn zero economic profit in the long run.

1. An oligopoly firm that _____ will earn long-run economic profit.

   	a.	incurs a high cost to achieve the minimum efficient scale
   	b.	charges a low price for its product
   	c.	enjoys huge brand loyalty
   	d.	charges a higher price for its product
   	e.	spends less on advertisement

Monopolistically competitive industries consist of:

	a.	many firms, all selling identical products.
	b.	one firm selling several products.
	c.	one firm selling one product.
	d.	many firms, each selling a slightly different product.
	e.	many firms, each selling a completely different product.

Answer 1

1) optionB

• A profit maximizing firm is a firm that maximizes its profits by producing at a point where marginal revenue equal to marginal cost.
• If the price is set below the Average variable cost, the firms incur losses and hence they are forced to shut down in the short run.
• 2) optionA
• In a game theory, the term strategy refers to any choice that is chosen by the participants whose outcome depends on their own actions and also on the actions of other participants.
• When we talk about the strategy used by the collusive firms, we can say that it is a tendency for the collusive firms to generate normal profits when each firm's action or outcomes depend on the other firms in the collusion.

3) option C

• An oligopoly firm that enjoys huge brand loyalty will earn long run Economic profit.
• Brand loyalty refers to the behaviour exhibited by the customer when they are positively attracted to a particular brand.
• If the oligopoly firm is able to produce branded goods, then it will enjoy brand loyalty and thus earn long run Economic profits.

4) option D

• A monopolistically competitive is a market structure characterised by many firms selling differentiated products from each other.
• These markets allows free entry or exit into the market due to the absence of government imposed barriers.