Deck 8: Oligopoly and Firm Architecture

Question 1

Two firms that comprise an industry have decided to engage in collusion. They intend to maximize their total collective profit; i.e., to behave as a single monopolist. How should they behave?

A) Both firms should increase their levels of output.
B) The firm with the higher marginal cost should reduce output and the firm with the lower marginal cost should increase output.
C) The firm with the lower marginal cost should reduce output and the firm with the higher marginal cost should increase output.
D) Both firms should reduce their levels of output.

Answer 1

The firm with the higher marginal cost should reduce output and the firm with the lower marginal cost should increase output.

Question 2

Oligopolist A is considering a price reduction. The payoff from this strategy depends on the behavior of Oligopolist B. If Oligopolist B also reduces price, then Oligopolist A will earn a profit of $50,000. If Oligopolist B does not reduce price, then Oligopolist A will earn a profit of $100,000. The situation is symmetrical; i.e., if Oligopolist B reduces price and Oligopolist A doesn't, then Oligopolist B will earn a profit of $100,000 and, if both oligopolists reduce their prices, then Oligopolist B will earn a profit of $50,000. If neither oligopolist reduces price, then both will continue to earn profits of $75,000. What can Oligopolist A and Oligopolist B be expected to do in the absence of collusion?

A) Both will refrain from reducing price.
B) Both will reduce price.
C) Oligopolist A will reduce price, but Oligopolist B won't.
D) Oligopolist B will reduce price, but Oligopolist A won't.

Answer 2

Both will reduce price.

Question 3

A differentiated oligopoly is a firm of market organization where several different large firms produce a homogeneous commodity.

Answer 3

False

Question 4

A market may be organized as an oligopoly if there are many producers of a product, but transportation costs limit the number that compete directly on a local market.

Question 5

The theory of contestable markets holds that an industry without barriers to entry or exit will operate as if it is perfectly competitive.

Question 6

The Cournot model is defined as a non-oligopolistic model.

Question 7

Firms described by the Cournot model assume that their rivals will keep their rates of production constant.

Question 8

Reference to the "Cournot" model is derived by merging "Course" and "not" into a single word and is a response to the question, "Is this firm a monopolist?"

Question 9

An industry that can be described by the Cournot model will produce total output that is the same as that produced by a perfectly competitive industry, however they will charge a higher price.

Question 10

The kinked demand curve model describes a demand curve that is very elastic for price cuts and less elastic for price increases.

Question 11

The marginal revenue curve associated with the kinked demand curve is vertical at the current market price.

Question 12

Collusion is illegal in the U.S., but is legal in many other parts of the world.

Question 13

The dominant-firm price leadership model describes a market structure in which a dominant firm is the price maker and all other firms are price takers.

Question 14

There is no general theory of oligopoly.

Question 15

The sales maximization model assumes that firms will always continue to increase output until marginal revenue is equal to zero.

Question 16

Firms in the entertainment and communications industry have grown and globalized by means of mergers.

Question 17

A firm's architecture is defined by the buildings and furnishings that it owns.

Question 18

The steel industry is comprised of virtual corporations.

Question 19

A virtual corporation is a temporary network of independent companies.

Question 20

Relationship enterprises are more limited and temporary than virtual corporations.

Question 21

Firms A and B operate as a centralized cartel. Their marginal cost functions are defined below:
MC_A = 2000 + 25Q_A MC_B = 2000 + 6.25Q_B
The firms face the following market demand curve:
Q = 1000 - 0.05P
Determine the market price that the firms should charge and the quantity of output that should be produced by each firm.