- Punishment mechanism. If the cartel can restrict output and increase the price above
the current competitive level, cartel members have an incentive to cheat by producing
more than their allotment. There must be some kind of deterrent to cheating. - Entry of new firms. If the cartel members are successful in creating monopoly profits,
they are faced with new firms eager to enter. If entry occurs, the cartel loses monopoly
power and profit.
› Review Questions
Market Structures, Perfect Competition, Monopoly, and Things Between ‹ 137- For a competitive firm, what is the most impor-
tant thing to consider in deciding whether to
shut down in the short run?
(A) Compare AVC to MR.
(B) Compare TR to TC.
(C) Do not produce if the TFC is not covered by
revenue.
(D) Produce the highest quantity demanded
regardless of price.
(E) Compare Pto ATC. - Which characteristic is likely a part of a mono poly
market but not of monopolistic competition?
(A) Differentiated products
(B) Patents and copyrights
(C) Possibility of profit in the short run
(D) Deadweight loss exists
(E) None of the above - If the perfectly competitive price is currently
above minimum ATC, we can expect which of
the following events in the long run?
(A) Price rises as firms enter the industry.
(B) Market equilibrium quantity rises as firms
exit the industry.
(C) Nothing. The industry is currently in long-
run equilibrium.
(D) Profits fall as the market price rises.
(E) Price falls as firms enter the industry. - Which of these situations is not an example of
price discrimination?
(A) Brent works nights, so he chooses to buy
bread at 7 a.m. rather than at 7 p.m.
(B) Bob and Nancy each receive a “$1 off ”
coupon in the mail, but Bob redeems it while
Nancy does not.
(C) Katie buys 12 Cokes for $3, and Josh buys
one Coke at a time for $1.
(D) Velma likes to go to the movies at the lower
afternoon matinee price, and Rosemary
would rather pay more for the evening show.
(E) Jason and Jen go to a popular nightclub.
Because it is “Ladies’ Night,” Jen pays no
cover charge, but Jason must pay to enter
the club.
Two competing firms are deciding whether to launch
a huge costly advertising campaign or maintain the
status quo. Use the following matrix showing the
profits of this duopoly to respond to question 5.FIRM X
Advertise Status Quo
X: $4.5 X: $l
Advertise million million
Y: $4.5 Y: $6
FIRM Y million million
X: $6 X: $5
Status million million
Quo Y: $1 Y: $5
million million- If these firms do not collude, the outcome will
be that
(A) both firms maintain the status quo.
(B) both firms advertise.
(C) Firm X advertises and Firm Y maintains the
status quo.
(D) Firm Y advertises and Firm X maintains the
status quo.
(E) Firm X advertises and Firm Y alternates
between the status quo and advertising.- Deadweight loss occurs in
(A) monopolistic competition as P>MC.
(B) monopoly markets because P>MC.
(C) oligopoly markets because P>MC.
(D) All of the above.
(E) None of the above.