1. The basic idea of the theory of contestable markets is that when the cost of
ID: 1108484 • Letter: 1
Question
1. The basic idea of the theory of contestable markets is that when the cost of entry and exit is very low, the threat of entry can be sufficient to produce an allocation similar to the one we see under
A. Monopoly
B. Monopolistic competition
C. Perfect competition
D. Oligopoly
2.The model of monopolistic competition differs from the model of perfect competition in which of the following assumptions?
A. Free entry and exit
B. Product homogeneity
C. Large number of firms
D. Perfect information
3. Which of the following is not true for a profit-maximizing single-price monopolist in the long run?
A. It will make profit or break even
B. Price is greater than marginal revenue
C. Marginal revenue equals marginal cost
D. Demand is inelastic
4. The profit-maximizing markup (over MC) can be expressed as:
A. 1/|price elasticity of demand|
B. price elasticity of elasticity
C. (price elasticity of demand)2
D. price elasticity of demand + 1
Explanation / Answer
Ans)
1. The basic idea of the theory of contestable markets is that when the cost of entry and exit is very low, the threat of entry can be sufficient to produce an allocation similar to the one we see under
C. Perfect competition
Because perfect competition has zero entry-exit costs.
2.
B. Product homogeneity
Monopolistically competitive firms have differentiated products.
3. Which of the following is not true for a profit-maximizing single-price monopolist in the long run?
D. Demand is inelastic
4.
A. 1/|price elasticity of demand|
Markup can be defined as one over the absolute value of price elasticity of demand.
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