Deck 13: Oligopoly and Monopolistic Competition

Question 1

Regardless of market structure, all firms

A)consider the actions of rivals.
B)maximize profit by setting marginal revenue equal to marginal cost.
C)produce a differentiated product.
D)have the ability to set price.

Answer 1

maximize profit by setting marginal revenue equal to marginal cost.

Question 2

Suppose that government used to requires airline companies to have at least 30 airplanes and serve at least 20 different airports. Now, this requirement changed to a minimum of 10 airplanes and 4 different airports. Such change in regulation will lead to

A)lower profits due to increased competition.
B)higher profits due to decreased competition.
C)higher profits due to weaker labor unions.
D)lower profits due to larger regulatory burden.

Answer 2

lower profits due to increased competition.

Question 3

Explain how long-run economic profits are linked to entry in monopolistic competition and perfect competition.

Answer 3

In the short run, all market structures allow for positive economic profits. However, those profits can only be maintained in the long run if other firms cannot enter the industry. If they can they will enter and competition will force the price of the good down until economic profits are zero.

Question 4

Which of the following market structures have market power?

A)oligopoly
B)monopolistic competition
C)perfect competition
D)Both A and B.

Question 5

Perfect competition and monopolistic competition are similar in that firms in both types of market structure will

A)act as price takers.
B)produce a level of output where price equals marginal cost.
C)earn zero profit in the long run.
D)act as price setters.

Question 6

In a sense, a cartel is self-destructive because

A)it reduces consumer surplus.
B)it sets price above marginal cost.
C)each cartel member has the incentive to cheat on the cartel.
D)each cartel member earns economic profit.

Question 7

Suppose that government requires airline companies to have at least 30 airplanes and serve at least 20 different airports. This is an example of

A)safety concerns.
B)perfect information.
C)barriers to entry.
D)labor union power.

Question 8

A cartel is a group of firms that attempts to

A)maximize joint revenue.
B)maximize joint profit.
C)behave independently.
D)increase consumer surplus.

Question 9

What is the aspect of imperfect competition that is most distinct from perfect competition?

A)free entry/exit
B)perfect information
C)differentiated products
D)zero profits

Question 10

Which of the following market structures is (are)capable of earning positive economic profits in the long run?

A)monopoly
B)oligopoly
C)monopolistic competition
D)Both A and B.

Question 11

Monopolistic competition and monopoly have all of the following in common EXCEPT

A)P > MC.
B)firms are price setters.
C)barriers to entry.
D)MR = MC.

Question 12

A competitive market structure differs from the monopoly, oligopoly, and monopolistic competition structures in the

A)producers' ability to set price.
B)profit maximization condition.
C)amount of long-run profit.
D)entry conditions.

Question 13

If a cartel is unable to monitor its members and punish those firms that violate the agreement, then

A)the member firms will each act as price setters.
B)the cartel will prosper in the long run.
C)the market will become a monopoly.
D)the cartel will fail.

Question 14

In comparing monopolistic competition to perfect competition, one can conclude that the lack of free entry is the key to having the ability to set price.

Question 15

Perfect competition and monopolistic competition are similar in that both market structures include

A)price-taking behavior by firms.
B)a homogeneous product.
C)no barriers to entry.
D)very few firms.

Question 16

The Organization of Petroleum Exporting Countries (OPEC)is an example of a(n)

A)oil monopoly.
B)cartel.
C)competitive arrangement.
D)monopolistically competitive arrangement.

Question 17

Explain why a monopoly or a perfectly competitive firm does not consider a rival firm's behavior, but an oligopoly and a monopolistically competitive firm do.

Question 18

Monopolistic competition and perfect competition differ because

A)only monopolistically competitive firms will set MR = MC.
B)only perfectly competitive firms will set MR = MC.
C)only monopolistic competition allows for entry of other firms in the long run.
D)only competitive firms take the price as given.

Question 19

Firms in all types of market structures pay attention to current rival firms' behavior.

Question 20

Oligopoly differs from monopolistic competition in that an oligopoly includes

A)product differentiation.
B)barriers to entry.
C)no barriers to entry.
D)downward-sloping demand curves facing the firm.

Question 21

Mergers are closely scrutinized by the government because

A)they might allow the firms involved to dominate the market and act as a legalized cartel (monopoly).
B)they always result in a more efficient market.
C)they always result in lower joint profits of the firms involved.
D)all mergers are undesirable.

Question 22

The Cournot Model of Oligopoly assumes that

A)firms decide what quantity to produce.
B)firms make their decisions simultaneously.
C)firms do not cooperate.
D)All of the above.

Question 23

The above figure shows the reaction functions for two pizza shops in a small isolated town. The Cournot equilibrium is at point

A)a.
B)b.
C)c.
D)d.

Question 24

Explain why gasoline stations across the street from each other with large signs displaying their prices may "legally" jointly set monopoly prices.

Question 25

There are only two firms in an industry with demand curves q₁ = 30 - P and q₂ = 30 - P. Both have no fixed costs and each has a marginal cost of 10 per unit produced. If they behave as profit-maximizing price takers, each produces 20 units and sells them at a price of 10 so that each firm makes zero economic profits. Suppose the two firms form a cartel. While firm 1 produces one-half of the profit-maximizing cartel output, firm 2 cheats and produces 5 units more. What would happen to the two firms' economic profits?

A)Firm 1's profits remain the same, but firm 2's profits increase by 10.5
B)Firm 1's profits decrease by 5.5, but firm 2's profits increase by 11.
C)Firm 1's profits decrease by 25, but firm 2's profits increase by 12.5.
D)Firm 1's profits decrease by 12.5, but firm 2's profits increase by 25.

Question 26

Cartels are inherently self-destructive because each member firm has the incentive to cheat on the cartel agreement.

Question 27

Which of the following conditions can help prolong the life of a cartel?

A)There are only a few firms in the market and they all belong to the cartel.
B)There are many firms in the market that are not members of the cartel.
C)It is difficult to know what price any cartel member is actually charging.
D)The cartel has no ability to punish members who cheat on the cartel.

Question 28

Two firms sell 100% orange juice in 10 ounce bottles. The juice is only good for one week. The two firms have contracts for all the oranges produced in a large geographic area. Each firm decides how many bottles of juice to produce at the same time. This market is best described with a

A)Bertrand model.
B)Stackelberg model.
C)monopolistic competition model.
D)Cournot model.

Question 29

Compared to a cartel, firms in a Cournot Oligopoly

A)make more joint profit.
B)sell less output.
C)make less joint profit.
D)act independently.

Question 30

There are only two firms in an industry with demand curves q₁ = 30 - P and q₂ = 30 - P. Both have no fixed costs and each has a marginal cost of 10 per unit produced. If they behave as profit-maximizing price takers, each produces 10 units and sells them at a price of 10 so that each firm makes zero economic profits. If they form a cartel, their inverse demand curve is

A)Q = 30 - P.
B)Q = 60 - 2P.
C)P = 60 - 2Q.
D)P = 30 - Q/2.

Question 31

There are only two firms in an industry with demand curves q₁ = 30 - P and q₂ = 30 - P. Both have no fixed costs and each has a marginal cost of 10 per unit produced. If they behave as profit-maximizing price takers, each produces 20 units and sells them at a price of 10 so that each firm makes zero economic profits. If they formed a cartel and split the production of the output evenly, the economic profit of each firm would be

A)0.
B)50.
C)100.
D)200.

Question 32

The evidence on mergers occurring within the hospital industry suggests that

A)efficiency gains that resulted have been passed on to customers through lower prices.
B)the mergers have tended to not have any significant effect on hospital prices.
C)prices have risen slightly as some efficiency gains are passed on to customers after mergers.
D)prices have risen after mergers.

Question 33

There are only two firms in an industry with demand curves q₁ = 30 - P and q₂ = 30 - P. Both have no fixed costs and each has a marginal cost of 10 per unit produced. If they behave as profit-maximizing price takers, each produces 20 units and sells them at a price of 10 so that each firm makes zero economic profits. If they formed a cartel and split the production of the output evenly, the profit-maximizing quantity produced by each firm is

A)5.
B)10.
C)15.
D)20.

Question 34

Mergers may result in

A)anticompetitive behavior.
B)more efficient production.
C)fewer firms in a market.
D)All of the above.

Question 35

Collusion is more successful in a game that will continue forever or in a game with an uncertain ending time than in a game with a known ending time.

Question 36

Requiring government agencies to report which company had the lowest bid for a government contract and the level of the bid,

A)can help a cartel enforce its agreement.
B)can speed up the end of a cartel.
C)may foster competition.
D)may help a cartel to lower its price.

Question 37

Suppose that market demand can be represented as p = 100 - 2Q. There are 10 identical firms producing an undifferentiated product, each with the total cost function TC = 50 + q². Compare the competitive outcome with the cartel outcome. What is the individual firm's incentive to cheat on the cartel?

Question 38

There are only two firms in an industry with demand curves q₁ = 30 - P and q₂ = 30 - P. Both have no fixed costs and each has a marginal cost of 10 per unit produced. If they behave as profit-maximizing price takers, each produces 20 units and sells them at a price of 10 so that each firm makes zero economic profits. If they formed a cartel, the profit-maximizing price is

A)10.
B)15.
C)20.
D)25.

Question 39

Television stations have seemingly synchronized their commercial breaks. This is likely an example of

A)tacit collusion.
B)explicit collusion.
C)mixed strategies.
D)pure strategies.

Question 40

A typical firm in a cartel will hold which of the following attitudes?

A)If everyone cheats, I'm better off, and so is everyone in the cartel.
B)If I alone cheat, I'm better off; if everyone cheats, I'm worse off.
C)I can never do better for myself than following agreed-upon cartel rules.
D)If I suspect others are planning to cheat, I'll do best for myself by deciding not to cheat.

Question 41

The above figure shows the reaction functions for two pizza shops in a small isolated town. Collusion would result in

A)each firm producing 25 pizzas.
B)each firm producing 40 pizzas.
C)the firms splitting the production of 100 making 50 pizzas each.
D)firm A monopolizing the market by selling 50 pizzas.

Question 42

Suppose a market with a Cournot structure has five firms and a market price elasticity of demand equal to -2. What is a Cournot firm's Lerner Index?

A).1
B).2
C).5
D)1

Question 43

Explain why the intersection of the best-response functions is the Cournot equilibrium.

Question 44

In the Cournot model, if the products are differentiated,

A)this reduces the pressure of one firm's decisions on the other.
B)this increases the pressure of one firm's decisions on the other.
C)there is no difference between this model and one with homogeneous goods.
D)marginal costs are necessarily different.

Question 45

In the Cournot model, the output that a firm chooses to produce increases as

A)the total output of other firms increases.
B)the number of firms in the market increases.
C)the number of firms in the market decreases.
D)its marginal cost increases.

Question 46

Suppose Cournot duopolist firms operate with each having a cost of 30q_i (i = 1,2)so that each firm's marginal cost is 30. The inverse market demand curve is P = 120 - Q where Q = q₁ + q₂. Suppose there were no barriers to entry and firms continued to enter so long as there were positive economic profits. At the Nash-Cournot equilibrium, the total output, Q, is

A)30.
B)45.
C)60.
D)90.

Question 47

The above figure shows the reaction functions for two pizza shops in a small isolated town. The perfect competitive outcome is that

A)each firm produces 40 pizzas.
B)each firm produces 50 pizzas.
C)the firms split the production of 200 pizzas.
D)each firm produces 200 pizzas.

Question 48

Suppose Cournot duopolist firms operate with each having a cost of 30q_i (i = 1,2)so that each firm's marginal cost is 30. The inverse market demand curve is P = 120 - Q where Q = q₁ + q₂. At the Nash-Cournot equilibrium, the total quantity, Q, is

A)30.
B)45.
C)60.
D)90.

Question 49

Suppose Cournot duopolist firms operate with each having a cost of 30q_i (i = 1,2)so that each firm's marginal cost is 30. The inverse market demand curve is P = 120 - Q where Q = q₁ + q₂. Suppose there were no barriers to entry and firms continued to enter so long as there were positive economic profits. At the Nash-Cournot equilibrium, the price, P, is

A)30.
B)45.
C)60.
D)90.

Question 50

The Cournot model assumes that firm A maximizes its profit, holding firm B's output constant.

Question 51

Suppose Cournot duopolists firms face the same market demand curve, but have differing costs. At the Nash-Cournot equilibrium, the firm with the lower cost will

A)have a lower price for its product than its competitor.
B)produce a smaller output than its competitor.
C)have a higher price for its product than its competitor.
D)produce a larger output than its competitor.

Question 52

In the Cournot model, a firm maximizes profit by selecting

A)its output, assuming that other firms keep their output constant.
B)its price, assuming that other firms keep their price constant.
C)its output, assuming that other firms will retaliate.
D)its price, assuming that other firms will retaliate.

Question 53

Suppose two Cournot duopolist firms operate at zero marginal cost. The market demand is p = a - bQ. Each firm will produce

A)a/b.
B)a/2b.
C)a/3b.
D)a/4b.

Question 54

Suppose two Cournot duopolist firms operate at zero marginal cost. The market demand is p = a - bQ. Firm 1's best-response function is

A)q₁ = (a - bq₂)/2b.
B)q₁ = (a - 2bq₂)/2b.
C)q₁ = a/b.
D)q₁ = a/2b.

Question 55

Suppose Cournot duopolist firms operate with each having a cost of 30q_i (i = 1,2)so that each firm's marginal cost is 30. The inverse market demand curve is P = 120 - Q where Q = q₁ + q₂. At the Nash-Cournot equilibrium, the market price, P, is

A)30.
B)45.
C)60.
D)90.

Question 56

Suppose Cournot duopolists firms (A and B) face the same market demand curve, and initially have identical costs. Firm A figures out a way of reducing its marginal cost. At the new Nash-Cournot equilibrium,

A) firm A's price falls.
B) firm A's output expands and firm B's output contracts.
C) firm B's profits expand.
D) the price charged by both firms increases.

Question 57

Suppose the demand for pizza in a small isolated town is p = 10 - Q. There are only two firms, A and B, and each has a cost function TC = 2 + q. Determine the Cournot equilibrium.

Question 58

The above figure shows the reaction functions for two pizza shops in a small isolated town. Firm B producing 100 pizzas and firm A producing 50 pizzas is not a Cournot equilibrium because

A)Cournot duopolists agree to share the market equally.
B)firm B is not on its best-response function.
C)firm A is not on its best-response function.
D)neither firm is on its best-response function.

Question 59

As compared to the basic Nash-Cournot equilibrium for duopolists where the firms face the same market demand curve and have identical costs, in the situation where the firms produce products which are viewed by consumers as not being identical,

A)there will generally be different prices charged by the two firms.
B)there will generally be different quantities produced by the two firms.
C)one or both of the firms may practice spurious differentiation.
D)All of the above.

Question 60

Suppose Cournot duopolists firms face the same market demand curve, but have differing costs. At the Nash-Cournot equilibrium, the firm with the higher cost will

A)have a lower price for its product than its competitor.
B)have a smaller profit than its competitor.
C)have a higher price for its product than its competitor.
D)have a higher profit than its competitor.

Question 61

Suppose duopolists face the market inverse demand curve P = 100 - Q, Q = q₁ + q₂, and both firms have a constant marginal cost of 10. If firm 1 is a Stackelberg leader and firm 2's best response function is q₂ = (100 - q₁)/2, at the Nash-Stackelberg equilibrium firm 1's output is

A)30.
B)40.
C)60.
D)70.

Question 62

Which of the following market models results in the highest price assuming a fixed number of firms with identical costs and a given demand curve?

A)Cournot
B)Stackelberg
C)Monopoly
D)Price is the same in all three markets.

Question 63

Which of the following models results in the greatest deadweight loss assuming a fixed number of firms with identical costs and a given demand curve?

A)Cournot
B)Stackelberg
C)Monopoly
D)Perfect competition

Question 64

Suppose two duopolists operate at zero marginal cost. The market demand is p = a - bQ. If firm 1 is the Stackelberg leader, what level of output will it choose?

A)q₁ = (a - bq₂)/2b
B)q₁ = (a - 2bq₂)/2b
C)q₁ = a/b
D)q₁ = a/2b

Question 65

If two firms playing Cournot are identical with decreasing average costs, how should the firms divide production to maximize joint profits?

Question 66

Assuming Cournot behavior, what happens to the market output, the price of the output, and each firm's output as the number of firms in a market increases?

Question 67

What strategic advantage compared to a Cournot Oligopoly results in the Stackelberg outcome?

A)the ability to move first
B)the ability to set price
C)the ability to set quantity
D)the ability to make independent decisions by the Stackelberg leader

Question 68

Which of the following market models results in the highest level of consumer surplus assuming a fixed number of firms with identical costs and a given demand curve?

A)Cournot
B)Stackelberg
C)Monopoly
D)Cartel

Question 69

Strategic trade policy might work if

A)trade decisions are made simultaneously by two countries.
B)trade decisions are made sequentially by two countries.
C)trade decisions entail response by a trading partner.
D)trade decisions are made in a random fashion.

Question 70

Which of the following models results in the highest level of output assuming a fixed number of firms with identical costs and a given demand curve?

A)Cournot
B)Stackelberg
C)Monopoly
D)Cartel

Question 71

Which of the following is a necessary condition for government subsidies to influence a firm to choose an output level as if it were a Stackelberg leader?

A)The subsidy must be announced before the firms choose output levels.
B)The subsidy must be equal to the firm's marginal cost.
C)The subsidy must be equal to the firm's rival's marginal cost.
D)The firm does not have any fixed costs.

Question 72

Draw a graph that shows the effect on the equilibrium quantities if the government subsidizes one firm in a Cournot duopoly with a per-unit subsidy. Assume that the best-response functions are linear. Explain the new equilibrium quantities.

Question 73

The outcome of the Stackelberg model is

A)a Nash equilibrium.
B)the same as the Cournot outcome.
C)that the follower earns zero profit.
D)that the follower cannot be on its best-response curve.

Question 74

Suppose duopolists face the market inverse demand curve P = 100 - Q, Q = q₁ + q₂, and both firms have a constant marginal cost of 10. If firm 1 is a Stackelberg leader and firm 2's best response function is q₂ = (100 - q₁)/2, at the Nash-Stackelberg equilibrium the prices the two firms charge are

A)P₁ = 40, P₂ = 40.
B)P₁ = 30, P₂ = 30.
C)P₁ = 30, P₂ = 40.
D)P₁ = 40, P₂ = 30.

Question 75

In which of the following market structures with 2 identical firms do both firms produce more than the Cournot outcome?

A)Stackelberg Oligopoly
B)Cartel
C)Perfect Competition
D)None of the above.

Question 76

The Stackelberg model is more appropriate than the Cournot model in situations where

A)there are more than two firms.
B)all firms enter the market simultaneously.
C)one firm makes its output decision before the other.
D)firms will be likely to collude.

Question 77

Strategic trade policy requires ALL of the following EXCEPT

A)subsidies set before output levels.
B)non-retaliation of the trading partner.
C)credible actions on the part of the subsidizing government.
D)incomplete information on the part of the government.

Question 78

If only two identical firms operate in a market, consumers prefer

A)a Cournot equilibrium.
B)a Stackelberg equilibrium.
C)a collusive equilibrium.
D)any equilibrium since they all result in the same consumer surplus.

Question 79

The profitability of the second mover in a Stackelberg model is

A)guaranteed to be negative.
B)smaller than that of the first mover.
C)greater than that of the first mover.
D)greater than the Cournot profits.

Question 80

The above figure shows the reaction functions for two pizza shops in a small isolated down. The Stackelberg leader will produce

A)25 pizzas.
B)50 pizzas.
C)66.7 pizzas.
D)100 pizzas.