Week 12 — Quiz · Monopolistic Competition & Oligopoly

Course: Principles of Microeconomics (ECON 1) · Silver Oak University (fictional sample) · Prof. Kessler
Objective 7 · 10 questions · 10 points · closed to AI · one attempt
Auto-graded (Classic QTI): see F-quiz-week-12-qti.xml for the Canvas import. Every numeric answer is pre-computed; every payoff-matrix claim is verified.

The questions (human-readable; answer key below)

Q1. Which of the following best describes a monopolistically competitive market?
A) A single seller with high barriers to entry
B) Many sellers with differentiated products and free entry
C) A few large sellers that are strategically interdependent
D) Many sellers with identical products and no market power

Q2. In the long run, free entry in a monopolistically competitive market drives economic profit to zero because —
A) firms collude to set the monopoly price
B) government regulators cap the price at average total cost
C) rivals enter, each existing firm's demand curve shifts left, until price equals average total cost
D) firms produce at minimum average total cost, just like perfectly competitive firms

Q3. "Excess capacity" in monopolistic competition means that in the long-run equilibrium each firm —
A) operates where price equals minimum average total cost
B) earns a positive economic profit
C) produces a quantity below the output at minimum average total cost
D) faces a horizontal demand curve

Q4. An oligopoly is best defined as a market with —
A) many sellers producing a differentiated good
B) a small number of sellers and significant barriers to entry
C) a single seller with no close substitutes
D) price-taking firms earning zero long-run profit

Q5. Use the payoff matrix below (Firm 1 profit, Firm 2 profit). What is Firm 1's dominant strategy?

A) High price, because (10, 10) is better for both firms than (5, 5)
B) High price, because it is better than Low when Firm 2 plays Low
C) Low price, because it yields a higher payoff regardless of what Firm 2 does
D) There is no dominant strategy for Firm 1 in this matrix

Q6. Using the same payoff matrix, what is the Nash equilibrium?
A) (High, High) = (10, 10) — the jointly preferred outcome
B) (High, Low) = (3, 12)
C) (Low, High) = (12, 3)
D) (Low, Low) = (5, 5) — neither firm wants to deviate unilaterally

Q7. (Select all that apply.) The payoff matrix above illustrates a prisoner's dilemma because —
☑ A) each firm has a dominant strategy (Low price)
☑ B) the Nash equilibrium (Low, Low) = (5, 5) is worse for both firms than the cooperative outcome (High, High) = (10, 10)
☑ C) neither firm can commit to cooperation without a binding enforcement mechanism
☐ D) (High, High) is a Nash equilibrium — both firms prefer it and neither wants to deviate
☐ E) Firm 1 earns more than Firm 2 at the Nash equilibrium

Q8. (True/False) A cartel is stable in the long run because every member earns higher profit from cooperation than from cheating. → False

Q9. (Matching) Match each market structure to its defining trait.

(Distractor: "Many sellers; identical products; significant barriers to entry.")

Q10. Why is (High, High) = (10, 10) in the payoff matrix above not a Nash equilibrium, even though it is better for both firms?
A) Because it is not achievable — firms can never both choose High
B) Because if Firm 2 plays High, Firm 1 earns 12 by switching to Low (12 > 10), so Firm 1 has an incentive to deviate
C) Because the government always blocks cooperative pricing agreements
D) Because (5, 5) is higher than (10, 10) for both firms

Answer key & feedback (instructor)

Quality gate (self-checked): Q5 and Q6 verified against the payoff matrix — Low is dominant for both (12>10, 5>3); Nash = (Low,Low) = (5,5); (High,High) is not Nash because unilateral deviation to Low earns 12>10 ✓. Q7 answer set verified: (High,High) is NOT a Nash (distractor D correctly excluded); payoffs are symmetric so E is false ✓. Q8: cartel instability verified against the dominant-strategy logic ✓. No free numeric entry; matching item uses market structure → trait as required.