Deck 25: Oligopoly

Question 1

Concentration ratios tend to overstate the power of some corporations to influence economic outcomes because they measure output

A)For single firms rather than markets.
B)For the whole United States,which is too large a geographic market for some firms or industries.
C)Only for domestic production when the true market boundaries are international for some markets.

Answer 1

Only for domestic production when the true market boundaries are international for some markets.

Question 2

The correct ranking of degree of market power (from highest to lowest)is

A)Monopoly,monopolistic competition,perfect competition,oligopoly.
B)Monopoly,monopolistic competition,oligopoly,perfect competition.
C)Monopoly,oligopoly,monopolistic competition,perfect competition.

Answer 2

Monopoly,oligopoly,monopolistic competition,perfect competition.

Question 3

The only market structure in which there is significant interdependence among firms with regard to their pricing and output decisions is

A)Monopolistic competition.
B)Monopoly.
C)Oligopoly.

Answer 3

Oligopoly.

Question 4

Market power is the ability of a firm to

A)Advertise.
B)Act as a price taker.
C)Control the price and quantity supplied.

Question 5

The concentration ratio measures the

A)Number of plants owned by an oligopoly.
B)Percentage of total profits made by a firm in a specific market.
C)Proportion of total output produced by the four largest producers in a specific market.

Question 6

The soft drink market is dominated by Coke,Pepsi,and very few other firms.The firms often start price wars.The market can best be classified as

A)Perfect competition.
B)Monopolistic competition.
C)Oligopoly.

Question 7

If an oligopoly market is contestable and new firms enter,the

A)Market power of the former oligopolists will be reduced.
B)Number of firms in the industry will decrease.
C)Former oligopolists will raise their prices.

Question 8

A nationwide concentration ratio is likely to understate market power when

A)Firms sell nationally.
B)The true markets are local and small.
C)There is extensive foreign competition.

Question 9

It is most difficult for new firms to enter

A)A perfectly competitive market.
B)An oligopolistic market.
C)A monopolistically competitive market.

Question 10

Which of the following may not characterize an oligopoly?

A)A few firms.
B)No market power.
C)High barriers to entry.

Question 11

A contestable market is

A)A perfectly competitive market.
B)An imperfectly competitive situation that is subject to entry.
C)An imperfectly competitive situation with high barriers to entry.

Question 12

Which of the following industries is likely to have the highest concentration ratio?

A)Corn production.
B)Clothing manufacturing.
C)Video game systems.

Question 13

Which of the following may characterize a monopoly?

A)Substantial market power.
B)Low barriers to entry.
C)Many firms.

Question 14

When firms are interdependent,

A)One firm can ignore other companies in the market when making decisions.
B)The profit of one firm depends on how its rivals respond to its strategic decisions.
C)They can act independently of one another.

Question 15

The goal of a company in an oligopoly industry is to

A)Increase market share and profits.
B)Obtain the highest price possible.
C)Always follow rivals if they raise price.

Question 16

It is easiest for new firms to enter a

A)Perfectly competitive market.
B)Duopoly market.
C)Oligopoly market.

Question 17

The number of firms in an oligopoly must be

A)Four.
B)Large enough so that firms cannot coordinate.
C)Small enough so that one firm's decisions have a significant impact on the decisions of the other firms in the industry.

Question 18

There are many corn farmers,each of whom produces the same product.The corn market can best be classified as

A)Monopolistic competition.
B)Perfect competition.
C)Oligopoly.

Question 19

An industry's market structure refers to

A)The number and size of the firms in the industry.
B)How much firms spend on advertising.
C)What types of products are produced in that industry.

Question 20

Which of the following is the critical determinant of market power?

A)The number of producers.
B)The size of each firm.
C)The extent of barriers to entry.

Question 21

Product differentiation

A)Involves charging different prices to different customers.
B)Is commonly practiced in perfect competition and monopoly markets.
C)Involves advertising unique product features.

Question 22

Suppose there are only three firms in a market.The largest firm has sales of $500 million,the second-largest has sales of $300 million,and the smallest has sales of $200 million.The market share of the largest firm is

A)50 percent.
B)100 percent.
C)60 percent.

Question 23

The kinked demand curve explains the observation that in oligopoly markets

A)Rivals match price increases.
B)Rivals do not match price reductions.
C)Prices may not change even in the face of cost increases.

Question 24

If a firm in an oligopoly expands its market share at prevailing prices,its competitors

A)Lose market share.
B)Increase their market share.
C)Ignore the expansion.

Question 25

The concentration ratio for an oligopoly is

A)Under 40 percent.
B)Over 60 percent.
C)90 percent.

Question 26

Market share can be computed by dividing

A)The amount that a buyer buys by the total amount that is produced in the market.
B)Profit by total cost.
C)The amount sold by a single firm by the total sold in the market.

Question 27

Which of the following is true about the kink in the demand curve?

A)It is the result of different rival responses to price increases and reductions.
B)It leads to an explanation of price flexibility.
C)It occurs because rivals do not respond to price reductions.

Question 28

If oligopolists start cutting prices to capture a larger market share,the result will be a

A)Movement up the market demand curve.
B)Movement down the market demand curve.
C)Leftward shift of the market demand curve.

Question 29

Suppose the larger firm of a duopoly has sales of $400 million and the smaller firm has sales of $100 million.The market share of the larger firm is

A)80 percent.
B)40 percent.
C)20 percent.

Question 30

Suppose the larger firm of a duopoly has sales of $900 million and the smaller firm has sales of $100 million.The market share of the larger firm is

A)90 percent.
B)80 percent.
C)10 percent.

Question 31

What is the most likely response by rivals when an oligopolist cuts its price to increase its sales?

A)Raise their prices.
B)Ignore the change.
C)Cut their prices.

Question 32

RC Cola lost market share in the 1980s due to

A)Its decision not to advertise.
B)Consumers not liking the taste of its colas.
C)Wasting precious resources on advertising.

Question 33

When a business advertises that its product has unique features that make it superior to other similar products,it is engaging in

A)Price competition.
B)Predatory pricing.
C)Product differentiation.

Question 34

If a firm is producing at the kink in its demand curve and it decides to decrease its price,according to the kinked demand model

A)It will gain market share.
B)It will lose market share to the firms that do not follow the price decrease.
C)Its market share will not be affected.

Question 35

The demand curve will be kinked if rival oligopolists

A)Match price increases but not price reductions.
B)Match price reductions but not price increases.
C)Match both price increase and price reductions.

Question 36

If a firm is producing at the kink in its demand curve and it decides to increase its price,according to the kinked demand model

A)It will gain market share.
B)It will lose market share to the firms that do not follow the price increase.
C)Its market share will not be affected.

Question 37

Which of the following industries has the highest concentration ratio?

A)Satellite radio.
B)Cameras.
C)Detergents.

Question 38

The kinked demand curve explains

A)The consequences of the interdependent behavior of oligopolists.
B)Why oligopolists are more sensitive to cost changes than are competitive markets.
C)Price-fixing along the elastic part of the demand curve and predatory pricing on the inelastic portion.

Question 39

If an oligopolist is going to change its price or output,its initial concern is

A)The response of its competitors.
B)A change in its cost structure.
C)The concentration ratio.

Question 40

Market share is the percentage of total

A)Market output produced by the largest firm in an industry.
B)Market output produced by a single firm.
C)Market output produced by the four largest firms in an industry.

Question 41

Oligopolists have a mutual interest in coordinating production decisions in order to maximize joint

A)Costs.
B)Profits.
C)Revenues.

Question 42

If rival oligopolists completely ignore Mitchell's Tool Company's price changes,then Mitchell's Tool Company's

A)Demand curve will not have a kink.
B)Most profitable strategy will be to raise its price.
C)Demand curve will be less elastic than if rivals matched price changes.

Question 43

The goal of an oligopoly is to maximize

A)Market share to achieve long-run economic profit.
B)Short-run profit to achieve long-run maximum revenue.
C)Short-run profit to achieve long-run market share.

Question 44

General Electric and Westinghouse were convicted of

A)Price-fixing.
B)Marginal cost pricing.
C)Price leadership.

Question 45

The pricing strategy in which one firm is allowed by its rivals to establish the market price for all firms in the market is called

A)Overt collusion.
B)Price leadership.
C)Pattern pricing.

Question 46

Given the payoff matrix in Table 25.1,if the probability of rivals reducing their price even though you don't is 10 percent,what is the expected payoff for Company ABC not cutting prices?

A)$0.
B)$5.
C)-$500.

Question 47

The potential for maximizing total industry profits is greater in oligopolies than in perfect competition because

A)There are fewer firms and each is dependent on the actions of rivals.
B)Firms in an oligopoly are more profitable.
C)There are independent firms in an oligopoly.

Question 48

A payoff matrix shows

A)The profits or losses that result from strategic decisions of one firm and another firm.
B)The payoffs of one firm always choosing to price low.
C)What companies will do no matter what the other firm does.

Question 49

Game theory is

A)The study of price-fixing and collusion.
B)The study of how decisions are made when interdependence exists between firms.
C)An explanation of how oligopolists become monopolists.

Question 50

Sky-High Skywriters raises its price,and the other four firms in the industry raise their prices in response.Coordination in this industry is accomplished by

A)Predatory pricing.
B)Retaliation.
C)Price-fixing.

Question 51

Price leadership is a method by which oligopolies can

A)Increase prices without explicit price-fixing.
B)Illegally raise prices.
C)Maintain the "kink" in their demand curves.

Question 52

Open and explicit agreements concerning pricing and output shares transform an oligopoly into a

A)Monopoly.
B)Cartel.
C)Differentiated oligopoly.

Question 53

The pricing strategy in which one firm is allowed to establish the market price for all firms in the market is called

A)Price discrimination.
B)Price leadership.
C)The profit-maximizing rule.

Question 54

The study of how decisions are made when strategic interaction between firms exists is known as

A)Game theory.
B)Contestable market theory.
C)Market power theory.

Question 55

Price leadership

A)Results in inflexible prices.
B)Accounts for kinked oligopoly behavior.
C)Helps achieve monopoly profit for the market.

Question 56

Temporary price reductions intended to drive out competition are referred to as

A)Predatory pricing.
B)Price-fixing.
C)Price leadership.

Question 57

Given the payoff matrix in Table 25.1,if the probability of rivals matching a price reduction is 99 percent,what is the expected payoff for a price cut by Company ABC?

A)$0.
B)$5.
C)-$500.

Question 58

Borden,Inc. ,which sold milk to Texas Tech University,public schools,and hospitals,paid $8 million in fines for

A)Price-fixing.
B)Marginal cost pricing.
C)Price leadership.

Question 59

If a market changes from oligopoly to perfect competition,then as a result

A)Output should increase in the long run.
B)Fewer resources will be allocated to the market.
C)Profitability should rise in the long run.

Question 60

The pricing strategy in which there is an explicit agreement among producers regarding price is called

A)Price discrimination.
B)Price-fixing.
C)Price leadership.

Question 61

When oligopoly firms collude to raise prices,

A)Each firm benefits,but society loses.
B)Both the colluding firms and society benefit.
C)Everyone is eventually a loser.

Question 62

For an oligopoly,a few firms cannot dominate in the long run unless

A)A cartel is formed.
B)A firm has a high concentration ratio.
C)Barriers to entry exist.

Question 63

When U.S.government regulations that prevent goods from being imported are relaxed,this

A)Causes oligopoly profits to increase.
B)Causes U.S.cartels to become even stronger.
C)Reduces the barriers to entry into U.S.markets.

Question 64

The Herfindahl-Hirshman Index is

A)Used to identify cases worthy of antitrust concern.
B)A barrier to entry.
C)An example of government failure.

Question 65

An imperfection in the market mechanism that prevents optimal outcomes is called

A)Antitrust behavior.
B)Collusion.
C)Market failure.

Question 66

Often antitrust enforcers

A)Lack the resources to prosecute anticompetitive behavior.
B)Prefer to break up companies that violate antitrust laws.
C)Lack a legal structure to prosecute companies for monopoly behavior.

Question 67

How might an oligopolist increase total revenue without changing price?

A)Reduce output.
B)Reduce marketing efforts.
C)Through nonprice competition.

Question 68

A firm cannot maintain above-normal profits over the long run

A)Without the existence of a cartel.
B)Unless barriers to entry exist.
C)Unless predatory pricing occurs.

Question 69

Refer to Table 25.2.Assume there are only four firms in the pool sweeper industry.If Clean Sweep manages to increase its sales to $3,000 per week at the current price and the size of the market does not change,the combined weekly sales of the three other firms will

A)Fall by $3,000 per week.
B)Also rise.
C)Not change.

Question 70

The most common form of nonprice competition is

A)Collusion.
B)Advertising.
C)Patents.

Question 71

Which of the following is not an argument to have less antitrust enforcement?

A)Global competitors put pressure on U.S.oligopoly industries.
B)There is always a chance that new innovators will replace oligopoly firms.
C)Oligopolies can lead to less output and higher prices.

Question 72

Oligopolistic behavior includes

A)Tacit collusion.
B)High concentration ratios.
C)High barriers to entry.

Question 73

Refer to Figure 25.1 for an oligopoly firm.Assume that the existing price and quantity are $10 and 2,000 units.Which of the following statements is most likely correct?

A)Demand curves D₁ and D₂ both assume that rivals will not match any price changes.
B)Demand curves D₁ and D₂ both assume that rivals match any price changes.
C)Demand curve D₁ assumes that rivals match any price changes.

Question 74

The Herfindahl-Hirshman Index is the sum of the

A)Squared market shares of the firms in the market.
B)Market shares of all the firms in the market.
C)Market shares of the top four firms in the market.

Question 75

Market power leads to market failure when it results in

A)Decreased market output.
B)Lower market prices.
C)Normal economic profits.

Question 76

Refer to Table 25.2.Assume there are only four firms in the pool sweeper industry.What is the market share for North Star?

A)20 percent.
B)50 percent.
C)10 percent.

Question 77

In the long run,an oligopolist is most likely to

A)Experience economic profits because of barriers to entry.
B)Experience zero economic profits because barriers to entry do not exist in the long run.
C)Produce at the most technically efficient output level due to long-run competition.

Question 78

If all of your friends use the same instant messaging service provider,you are likely to use it too.This behavior may create

A)Cartels.
B)Nonprice competition.
C)A network economy.

Question 79

The demand curve facing an oligopoly firm is kinked because

A)Its competitors will match only price hikes.
B)It is most likely that rivals will match price cuts but not price increases.
C)The demand curve that is most inelastic is the most probable situation facing the company.

Question 80

Sky-High Skywriters temporarily reduces its price when a new firm called The Sky's the Limit Skywriting enters the industry.Sky-High Skywriters is practicing

A)Retaliation.
B)Price leadership.
C)Predatory pricing.