Microeconomics: Market Structures Flashcards

In an oligopoly, the kinked demand curve model predicts that if one firm raises its price above the kink, rivals will:

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.

Which condition is true for a monopolistically competitive firm in long-run equilibrium?

Answer: Price equals average total cost

In long-run monopolistic competition, free entry drives economic profit to zero, so price equals average total cost.

A natural monopoly arises when:

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.

Game theory is most useful for analyzing which market structure?

Answer: Oligopoly

Oligopoly involves strategic interdependence among a few firms, making game theory the appropriate tool for analyzing their decisions.

Compared to a perfectly competitive market, a monopoly produces:

Answer: Less output at a higher price

A monopolist restricts output below the competitive level and charges a higher price to maximize profit.

Which of the following is a characteristic of monopolistic competition but NOT perfect competition?

Answer: Product differentiation

Monopolistic competition features differentiated products, giving each firm some market power, unlike perfectly competitive firms that sell identical products.

The Herfindahl-Hirschman Index (HHI) is used to measure:

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.