Deck 14: Oligopoly

Question 1

Entry to and exit from a ________ market are ________.

A) oligopolistic; easy
B) perfectly competitive; difficult
C) contestable; difficult
D) contestable; easy

Answer 1

D

Question 2

Of the following, ________ is the best example of an oligopolistic industry.

A) grocery stores
B) automobiles production
C) electric power
D) soybean farming

Answer 2

B

Question 3

A ________ industry has a relatively small number of firms that dominate a market.

A) Cournot
B) contestable
C) concentrated
D) monopolistically competitive

Answer 3

C

Question 4

According to the Five Forces Model, ________ are the five competitive forces that determine the level of competition and profitability in an industry.

A) rivals, buyers, suppliers, substitutes, and potential entrants
B) rivals, consumers, labor, weather, and government
C) buyers, suppliers, government, foreign competition, and weather
D) None of the above is correct.

Question 5

The four largest firms account for approximately 90% of U.S. beer sales. The U.S. beer industry would be best classified as a(n)

A) perfectly competitive industry.
B) monopolistically competitive industry.
C) oligopoly.
D) monopoly.

Question 6

The airline industry is an example of a(n) ________ industry.

A) perfectly competitive
B) monopolistic
C) monopolistically competitive
D) oligopolistic

Question 7

The ________ is the share of industry output in sales or employment accounted for by the top firms in an industry.

A) concentration ratio
B) contestability ratio
C) competitive index
D) collusive level

Question 8

The market structure in which the behavior of any given firm depends on the behavior of the other firms in the industry is

A) perfect competition.
B) monopoly.
C) monopolistic competition.
D) oligopoly.

Question 9

A(n) ________ industry has a single, unique product and blocked entry.

A) perfectly competitive
B) monopolistically competitive
C) monopolistic
D) oligopolistic

Question 10

Products may be homogeneous or differentiated in the ________ market structure.

A) perfectly competitive
B) monopolistic
C) monopolistically competitive
D) oligopolistic

Question 11

The Five Forces Model helps illustrate the five competitive forces that determine the ________ in an industry.

A) price and quality of output
B) level of R&D and price of output
C) level of competition and profitability
D) profitability and degree of product differentiation

Question 12

Oligopoly is difficult to analyze because

A) there is no price competition among oligopolistic firms.
B) of the complex interdependence that usually exists among oligopolistic firms.
C) price is NOT a decision variable for oligopolistic firms.
D) there is price competition among oligopolistic firms but no competition on product quality.

Question 13

In general, oligopolists compete

A) on price alone.
B) on many dimensions except for price.
C) on price, R&D, and marketing and advertising.
D) None of the above. There is no competition in oligopolistic industries.

Question 14

A(n) ________ industry is characterized by strategic behavior.

A) perfectly competitive
B) monopolistic
C) monopolistically competitive
D) oligopolistic

Question 15

In oligopoly, firms

A) are able to influence price only if the oligopolist's products are standardized.
B) are able to influence price only if the oligopolist's products are differentiated.
C) by virtue of their size, are able to influence price regardless of whether or not the product is differentiated or standardized.
D) have no influence over price regardless of whether or not the product is differentiated or standardized.

Question 16

In which of the four oligopolistic markets below is there considerable price competition?

A) music production industry
B) stent industry
C) airline industry
D) high-definition DVD industry

Question 17

The major distinguishing characteristic of oligopoly is that

A) firms produce differentiated products.
B) firms can influence the price of their product.
C) entry into the industry easy.
D) firms are interdependent.

Question 18

A market is defined as contestable if entry to it

A) is easy, but exit from it is difficult.
B) is difficult, but exit from it is easy.
C) and exit from it are both difficult.
D) and exit from it are both easy.

Question 19

A form of industry structure characterized by a few firms each large enough to influence market price is

A) perfect competition.
B) monopolistic competition.
C) oligopoly.
D) monopoly.

Question 20

Oligopolists must ________ to their strategy in order to determine their optimal strategy.

A) anticipate the reaction of their customers
B) anticipate the reaction of their rivals
C) both A and B are correct.
D) none of the above

Question 21

Markets in which entry and exit are difficult are known as contestable markets.

Question 22

The colluding oligopoly will face market demand and produce up until the point at which

A) price and marginal cost are equal and price will be set equal to marginal cost.
B) marginal revenue and marginal cost are equal and price will be set above marginal cost.
C) price and marginal revenue are equal and price will be set below marginal cost.
D) marginal revenue and marginal cost are equal and price will be set below marginal cost.

Question 23

________ is a group of firms colluding to make price and output decisions.

A) A concentrated industry
B) An oligopoly
C) A cartel
D) Price leadership

Question 24

Oligopolists have market power.

Question 25

The size of the firm is what differentiates oligopoly markets from the other three market structure types (perfect competition, monopoly, and monopolistic competition).

Question 26

Traditionally, the airline industry has competed vigorously on price.

Question 27

Refer to the information provided in Figure 14.7 below to answer the questions that follow. Figure 14.7
Refer to Figure 14.7. Six chewing gum producing firms form a cartel. The firms have identical cost structures. If the cartel produces the profit maximizing output level, each firm should produce

A) 2,000 packs of chewing gum.
B) 6,000 packs of chewing gum.
C) 12,000 packs of chewing gum.
D) indeterminate output levels from this information.

Question 28

The fact that the behavior of one firm depends on the behavior of other firms is what differentiates oligopoly markets from the other three market structure types (perfect competition, monopoly, and monopolistic competition).

Question 29

In contestable markets, large oligopolistic firms end up behaving like

A) monopolistically competitive firms.
B) a monopoly.
C) perfectly competitive firms.
D) a cartel.

Question 30

The product differentiation of firms in an industry is an indicator of the size distribution of firms.

Question 31

Assume that firms in an oligopoly are currently colluding to set price and output to maximize total industry profit. If the government forces the oligopolists to stop colluding, the price charged by the oligopolies will ________ and the total output produced will ________.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 32

Refer to the information provided in Figure 14.7 below to answer the questions that follow. Figure 14.7
Refer to Figure 14.7. Firms form a cartel that maximizes profits. The profits are

A) $0.
B) $1,080.
C) $1,800.
D) indeterminate from this information.

Question 33

Refer to the information provided in Figure 14.7 below to answer the questions that follow. Figure 14.7
Refer to Figure 14.7. Six firms that produce chewing gum form a cartel. The cartel faces the market demand curve given by D. To maximize profits, the cartel should produce ________ packs of chewing gum and the price should be ________.

A) 12,000; $.25
B) 12,000; $.40
C) 14,000; $.30
D) 16,000; $.35

Question 34

The conclusion that firms in oligopoly always produce where price exceeds marginal cost is true for all models of oligopoly EXCEPT the

A) collusive oligopoly model.
B) price-leadership model.
C) Cournot model.
D) contestable market model.

Question 35

In an oligopolistic industry, the price firms charge and the quantity they produce would be the same as if the industry were a monopoly if

A) the market is contestable.
B) the oligopolists behave as Cournot assumed.
C) one of the oligopolists acts as a dominant firm price leader.
D) the oligopolists collude.

Question 36

Related to the Economics in Practice on page 295: The smart phone industry is best characterized as

A) purely competitive.
B) monopolistically competitive.
C) an oligopoly.
D) a monopoly.

Question 37

The oligopolistic model in which firms produce exactly the same results as would exist if a monopolist controlled the entire industry is called the ________ model.

A) Cournot
B) price leadership
C) maximin strategy
D) collusion

Question 38

The more differentiated the products produced by oligopolists, the more their behavior will resemble that of the monopolist.

Question 39

The Five Forces Model illustrates the forces that determine the level of product differentiation and price competition in an industry.

Question 40

Oligopolists compete on price but not quality.

Question 41

The Cournot model assumes that the firms take their competitors output as fixed.

Question 42

In the Cournot model the final level of output falls between the output that would prevail if the market were ________ and the output that would be set by a ________.

A) competitive; monopoly
B) oligopolistic; monopoly
C) monopolistic; cartel
D) monopolistically competitive; cartel

Question 43

An oligopoly with a dominant price leader will produce a level of output between that which would prevail under competition and that which a monopolist would choose in the same industry.

Question 44

An oligopoly with a dominant price leader will produce an output level that is ________ than the output level that would prevail if the industry were a monopoly and sells it at a price that is ________ than the price that would prevail if the industry were a monopoly.

A) higher; higher
B) higher; lower
C) lower; lower
D) lower; higher

Question 45

Tacit collusion

A) is legal under the U.S. antitrust laws.
B) occurs when firms engage in formal agreements to reduce output and increase prices in their industry.
C) is more likely to be successful in increasing industry profits when there are a few, similar firms in the industry.
D) is more likely to effectively raise prices in the industry when demand is elastic.

Question 46

Predatory pricing is

A) often effective and a relatively inexpensive means of eliminating competition.
B) legal under the U.S. antitrust laws.
C) the practice by which a large, powerful firm attempts to drive its competitors out of the market by temporarily setting an artificially low price.
D) generally more effective when barriers to entry exist.

Question 47

________ occurs when a large, powerful firm drives smaller firms out of the market by temporarily selling at an artificially low price.

A) A dominant strategy
B) A prisoner's dilemma
C) A maximin strategy
D) Predatory pricing

Question 48

In the Cournot model, when a new firm begins production it assumes its demand curve is

A) the market demand less the amount the other firm is selling.
B) the market demand plus the amount the other firm is selling.
C) the same as the competing firm's demand curve.
D) one-half of the competing firm's demand curve.

Question 49

Which of the following is NOT an assumption of the Cournot model presented in the text?

A) There are two firms in an industry.
B) Each firm takes the output of the other firm as given.
C) Both firms maximize profits.
D) If the first firm cuts price, the second firm will follow and if the first raises price, the second will not follow.

Question 50

An oligopoly with a dominant price leader will produce a level of output

A) equal to what a monopolist would choose in the same industry.
B) between that which would prevail under competition and that which a monopolist would choose in the same industry.
C) between that which would prevail under competition and that which a monopolistic competitor would choose in the same industry.
D) that would prevail under competition.

Question 51

A form of oligopoly in which a dominant firm sets the price and all smaller firms in the industry follow the dominant firm's pricing policy is called

A) the Cournot model.
B) the contestable markets model.
C) a cartel.
D) the price-leadership model.

Question 52

________ occurs when price- and quantity-fixing agreements among producers are implicit.

A) Tacit collusion
B) A Cournot model
C) A price-leadership model
D) A monopoly

Question 53

In the Cournot model, each firm's ________ shows the firm's optimal, profit-maximizing output given its rival's output.

A) price leadership decision
B) reaction function
C) collusive response
D) dominant strategy

Question 54

Cartels, tacit collusion, and predatory pricing are all illegal under U.S. antitrust laws.

Question 55

Related to the Economics in Practice on page 298: The Department of Justice's case against the Taiwanese firm AU Optronics was centered around

A) breaking its monopoly.
B) product dumping.
C) illegal mergers.
D) price fixing.

Question 56

The price-leadership model does NOT assume the

A) demand elasticity in response to an increase in price is different from the demand elasticity in response to a price cut.
B) industry is made up of one large firm and a number of smaller, competitive firms.
C) dominant firm maximizes profit.
D) dominant firm allows the smaller firms to sell all they want at the price the leader has set.

Question 57

The demand curve facing a dominant firm in the price leadership model is derived by subtracting the

A) amount supplied by the smaller firms from market demand.
B) amount supplied by the smaller firms from market supply.
C) amount demanded by customers from the smaller firms from market supply.
D) dominant firm's marginal cost curve from the industry's supply curve.

Question 58

Output in a Cournot duopoly is at a level between that in perfect competition and monopolistic competition.

Question 59

A two firm oligopoly is known as a ________.

A) duopoly
B) cartel
C) monopoly
D) contestable market

Question 60

You read that 25 firms that grow and export peanuts to the United States decide to form a cartel. The cartel aims to raise the price of peanuts and reduce output to increase profits for the peanut growers. You predict that this cartel will probably

A) not be successful because the number of firms is unmanageable and there are a number of good substitutes for peanuts.
B) not be successful because there are too few firms that are trying to organize the cartel.
C) be successful because the demand for peanuts is very elastic.
D) be successful because it will be very easy to enforce the rules among only 25 firms.

Question 61

Refer to the information provided in Table 14.1 below to answer the question that follows.
Table 14.1
B's Strategy
$$\begin{array} { r r r r } \hline & & \text { Raise Price } & \text { Don't Raise Price } \\\hline & \text { Raise } & \text { A's profit } \$ 3,000 & \text { A's profit } \$ 10,000 \\& \text { Price } & \text { B's profit } \$ 3,000 & \text { B's profit } \$ 15,000 \\{ \text { A's Strategy } } & & & \\& \text { Don't } & \text { A's profit } \$ 15,000 & \text { A's profit } \$ 5,000 \\& \text { Raise } & \text { B's profit } \$ 10,000 & \text { B's profit } \$ 5,000 \\\hline\end{array}$$

-Refer to Table 14.1. The Nash equilibrium in the game is ________.

A) (Raise Price, Don't Raise Price)
B) (Don't Raise Price, Raise Price)
C) (Don't Raise Price, Don't Raise Price)
D) Both A and B are correct.

Question 62

A maximin strategy will maximize the maximum payoff that can be earned.

Question 63

Refer to the information provided in Table 14.3 below to answer the question that follows.
Table 14.3
B's Strategy
$$\begin{array} { l l l l } & & { \text { Advertise } } & { \text { Don't Advertise } } \\\hline & & & \text { A's profit \$ 200 million}\\& & \text { A's profit } \$ 75 \text { million } \\\text { A's Strategy } & \text { Advertise } & \text { B's profit \$ 75 million }& \text {B's profit } \$ 50 \text { million } \\& & & \\& \text { Don't } & \text { A's profit } \$ 50 \text { million } & \text { A's profit } \$ 100 \text { million } \\& & \text { B's profit } \$ 200 & \text { B's profit } \$ 100 \\& \text { Advertise } & \text { million } & \text { million } \\\hline\end{array}$$

-Refer to Table 14.3. What is the Nash equilibrium in the game?

A) (Advertise, Advertise)
B) (Don't Advertise, Don't Advertise)
C) (Don't Advertise, Advertise)
D) (Advertise, Don't Advertise)

Question 64

Refer to the information provided in Table 14.3 below to answer the question that follows.
Table 14.3
B's Strategy
$$\begin{array} { l l l l } & & { \text { Advertise } } & { \text { Don't Advertise } } \\\hline & & & \text { A's profit \$ 200 million}\\& & \text { A's profit } \$ 75 \text { million } \\\text { A's Strategy } & \text { Advertise } & \text { B's profit \$ 75 million }& \text {B's profit } \$ 50 \text { million } \\& & & \\& \text { Don't } & \text { A's profit } \$ 50 \text { million } & \text { A's profit } \$ 100 \text { million } \\& & \text { B's profit } \$ 200 & \text { B's profit } \$ 100 \\& \text { Advertise } & \text { million } & \text { million } \\\hline\end{array}$$

-Refer to Table 14.3. Firm A?s dominant strategy is

A) to advertise.
B) to not advertise.
C) dependent on what Firm B does.
D) indeterminate from this information, as no information is provided on Firm A?s risk preference.

Question 65

Refer to the information provided in Table 14.3 below to answer the question that follows.
Table 14.3
B's Strategy
$$\begin{array} { l l l l } & & { \text { Advertise } } & { \text { Don't Advertise } } \\\hline & & & \text { A's profit \$ 200 million}\\& & \text { A's profit } \$ 75 \text { million } \\\text { A's Strategy } & \text { Advertise } & \text { B's profit \$ 75 million }& \text {B's profit } \$ 50 \text { million } \\& & & \\& \text { Don't } & \text { A's profit } \$ 50 \text { million } & \text { A's profit } \$ 100 \text { million } \\& & \text { B's profit } \$ 200 & \text { B's profit } \$ 100 \\& \text { Advertise } & \text { million } & \text { million } \\\hline\end{array}$$

-Refer to Table 14.3. The result of this game is known as a ________.

A) prisoner's dilemma
B) collusive outcome
C) repeated strategy
D) tit-for-tat outcome

Question 66

Firms are more likely to avoid a prisoner's dilemma when they interact repeatedly than when they rarely interact.

Question 67

The prisoner's dilemma game presented in the text involves ________ players each with ________ strategies.

A) two; two
B) two; three
C) three; two
D) three; three

Question 68

Refer to the information provided in Table 14.3 below to answer the question that follows.
Table 14.3
B's Strategy
$$\begin{array} { l l l l } & & { \text { Advertise } } & { \text { Don't Advertise } } \\\hline & & & \text { A's profit \$ 200 million}\\& & \text { A's profit } \$ 75 \text { million } \\\text { A's Strategy } & \text { Advertise } & \text { B's profit \$ 75 million }& \text {B's profit } \$ 50 \text { million } \\& & & \\& \text { Don't } & \text { A's profit } \$ 50 \text { million } & \text { A's profit } \$ 100 \text { million } \\& & \text { B's profit } \$ 200 & \text { B's profit } \$ 100 \\& \text { Advertise } & \text { million } & \text { million } \\\hline\end{array}$$

-Refer to Table 14.3. The result of this game is a prisoner's dilemma. In which of the following cases is it most likely that the firms will be able to overcome the prisoner's dilemma?

A) repeated play
B) a single interaction
C) when both firms follow a maximin strategy
D) government intervention

Question 69

Refer to the information provided in Table 14.2 below to answer the question that follows.
Table 14.2
B's Strategy
$$\begin{array}{l}\begin{array} {| ll | l l| } \hline &&\text {Advertise }&\text { Don't Advertise}\\\hline &&\text {A's profit \$ 100 }&\text {A's profit \$ 200 }\\&&\text {million }&\text { million}\\&\text {Advertise}&\text {B's profit \$ 100 }&\text {B's profit \$ 50 }\\&&\text {million }&\text { million}\\\text {A`s strategy}\\&DON`T&\text {A's profit \$ 50million}&\text {A's profit \$ 75million}\\&advertise&\text {B's profit \$ 200million}&\text {B's profit \$ 75million}\\\hline \end{array}\end{array}$$

-Refer to Table 14.2. Firm A?s dominant strategy is

A) to advertise.
B) to not advertise.
C) dependent on what Firm B does.
D) indeterminate from this information, as no information is provided on Firm A?s risk preference.

Question 70

A ________ occurs if all players in a game play their best strategies given what their competitors do.

A) dominant strategy
B) Nash equilibrium
C) prisoner's dilemma
D) tit-for-tat strategy

Question 71

Refer to the information provided in Table 14.2 below to answer the question that follows.
Table 14.2
B's Strategy
$$\begin{array}{l}\begin{array} {| ll | l l| } \hline &&\text {Advertise }&\text { Don't Advertise}\\\hline &&\text {A's profit \$ 100 }&\text {A's profit \$ 200 }\\&&\text {million }&\text { million}\\&\text {Advertise}&\text {B's profit \$ 100 }&\text {B's profit \$ 50 }\\&&\text {million }&\text { million}\\\text {A`s strategy}\\&DON`T&\text {A's profit \$ 50million}&\text {A's profit \$ 75million}\\&advertise&\text {B's profit \$ 200million}&\text {B's profit \$ 75million}\\\hline \end{array}\end{array}$$

-Refer to Table 14.2. What is the Nash equilibrium in the game?

A) (Advertise, Advertise)
B) (Don't Advertise, Don't Advertise)
C) (Don't Advertise, Advertise)
D) (Advertise, Don't Advertise)

Question 72

Refer to the information provided in Table 14.1 below to answer the question that follows.
Table 14.1
B's Strategy
$$\begin{array} { r r r r } \hline & & \text { Raise Price } & \text { Don't Raise Price } \\\hline & \text { Raise } & \text { A's profit } \$ 3,000 & \text { A's profit } \$ 10,000 \\& \text { Price } & \text { B's profit } \$ 3,000 & \text { B's profit } \$ 15,000 \\{ \text { A's Strategy } } & & & \\& \text { Don't } & \text { A's profit } \$ 15,000 & \text { A's profit } \$ 5,000 \\& \text { Raise } & \text { B's profit } \$ 10,000 & \text { B's profit } \$ 5,000 \\\hline\end{array}$$

-Refer to Table 14.1. If both firms follow a maximin strategy, the equilibrium in the game is ________.

A) (Raise Price, Don't Raise Price)
B) (Raise Price, Raise Price)
C) (Don't Raise Price, Raise Price)
D) (Don't Raise Price, Don't Raise Price)

Question 73

Refer to the information provided in Table 14.3 below to answer the question that follows.
Table 14.3
B's Strategy
$$\begin{array} { l l l l } & & { \text { Advertise } } & { \text { Don't Advertise } } \\\hline & & & \text { A's profit \$ 200 million}\\& & \text { A's profit } \$ 75 \text { million } \\\text { A's Strategy } & \text { Advertise } & \text { B's profit \$ 75 million }& \text {B's profit } \$ 50 \text { million } \\& & & \\& \text { Don't } & \text { A's profit } \$ 50 \text { million } & \text { A's profit } \$ 100 \text { million } \\& & \text { B's profit } \$ 200 & \text { B's profit } \$ 100 \\& \text { Advertise } & \text { million } & \text { million } \\\hline\end{array}$$

-Refer to Table 14.3. If both firms follow a maximin strategy, the equilibrium in the game is ________.

A) (Advertise, Advertise)
B) (Don't Advertise, Don't Advertise)
C) (Don't Advertise, Advertise)
D) (Advertise, Don't Advertise)

Question 74

Under the collusion model, the outcome in an oligopoly is the same as a monopoly.

Question 75

Cartels are more successful when members play by the rules and the industry faces an inelastic demand.

Question 76

A player chooses a maximin strategy to ________ gain the player can earn.

A) minimize the minimum
B) maximize the maximum
C) maximize the minimum
D) minimize the maximum

Question 77

Game theory enables economists to fully understand and predict the behavior of oligopolistic industries with more than two firms.

Question 78

Refer to the information provided in Table 14.2 below to answer the question that follows.
Table 14.2
B's Strategy
$$\begin{array}{l}\begin{array} {| ll | l l| } \hline &&\text {Advertise }&\text { Don't Advertise}\\\hline &&\text {A's profit \$ 100 }&\text {A's profit \$ 200 }\\&&\text {million }&\text { million}\\&\text {Advertise}&\text {B's profit \$ 100 }&\text {B's profit \$ 50 }\\&&\text {million }&\text { million}\\\text {A`s strategy}\\&DON`T&\text {A's profit \$ 50million}&\text {A's profit \$ 75million}\\&advertise&\text {B's profit \$ 200million}&\text {B's profit \$ 75million}\\\hline \end{array}\end{array}$$

-Refer to Table 14.2. If both firms follow a maximin strategy, the equilibrium in the game is ________.

A) (Advertise, Advertise)
B) (Don't Advertise, Don't Advertise)
C) (Don't Advertise, Advertise)
D) (Advertise, Don't Advertise)

Question 79

________ is a repeated game strategy in which a player responds in kind to an opponent's play.

A) Maximin
B) Tit-for-tat
C) Prisoner's dilemma
D) Price leadership

Question 80

Refer to the information provided in Table 14.1 below to answer the question that follows.
Table 14.1
B's Strategy
$$\begin{array} { r r r r } \hline & & \text { Raise Price } & \text { Don't Raise Price } \\\hline & \text { Raise } & \text { A's profit } \$ 3,000 & \text { A's profit } \$ 10,000 \\& \text { Price } & \text { B's profit } \$ 3,000 & \text { B's profit } \$ 15,000 \\{ \text { A's Strategy } } & & & \\& \text { Don't } & \text { A's profit } \$ 15,000 & \text { A's profit } \$ 5,000 \\& \text { Raise } & \text { B's profit } \$ 10,000 & \text { B's profit } \$ 5,000 \\\hline\end{array}$$

-Refer to Table 14.1. Firm A?s optimal strategy is

A) to not raise the price of its product.
B) to raise the price of its product.
C) dependent on what Firm B does.
D) indeterminate from this information, as no information is provided on Firm A?s risk preference.