Deck 12: Oligopoly and Strategic Behavior

Question 1

A cartel is:

A)a group of firms that coordinate their pricing and quantity decisions.
B)a type of oligopoly in which the demand curve is "kinked."
C)a duopoly market where firms have the exact product.
D)a group of firms that all produce the same level of output.

Answer 1

A

Question 2

An arrangement in which firms conspire to fix prices is called:

A)a cartel.
B)price-ceiling.
C)price-fixing.
D)a duopoly.

Answer 2

C

Question 3

Which of the following is the best example of an oligopolistic industry?

A)cleaning services
B)airline services
C)local water utility
D)designer shoes

Answer 3

B

Question 4

Refer to Figure 12.1.Assume the firms have formed a cartel.If the cartel is maximizing profits,the cartel's profits are:

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

Question 5

Suppose four firms in the airline industry have gotten together and formed a cartel.Which of the following is true?

A)The firms will set a price that is equal to minimum average total cost.
B)The firms will produce where the marginal cost curve intersects the average total cost curve.
C)The firms will produce where marginal cost is equal to marginal revenue.
D)The firms will set a price equal to marginal revenue.

Question 6

Figure 12.2 shows the decision tree for setting price for the only two firms in a market.How many dominant strategies are there for firm A?

A)0
B)1
C)2
D)It cannot be determined without knowing what firm B does.

Question 7

In game theory,a strategy that represents the best choice for a firm no matter what the other firm does is termed:

A)a dominant strategy.
B)a Nash equilibrium.
C)a prisoners' dilemma.
D)a duopolists' dilemma.

Question 8

Refer to Figure 12.1.Six firms that produce chewing gum have formed 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 9

Table 12.1
Refer to Table 12.1.If Firms L and M were to merge,the four-firm concentration ratio would:

A)rise to 71%.
B)fall to 82%.
C)fall to 40%.
D)rise to 82%.

Question 10

Assume six firms comprising an industry have market shares of 30,30,10,10,10,and 10 percent.The Herfindahl-Hirschman Index for this industry is ________.

A)80
B)2,200
C)1,600
D)2000

Question 11

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 12

Figure 12.2 shows the decision tree for setting price for the only two firms in a market.If both firms follow their dominant strategies:

A)both firms will set price high.
B)both firms will set price low.
C)only one firm will set price low.
D)The firms' dominant strategies cannot be determined without more information.

Question 13

An oligopoly could occur for the following reasons:

A)advertising campaigns.
B)economics of scale in production.
C)government barriers to entry.
D)all of the above

Question 14

Table 12.1
Refer to Table 12.1.The four-firm concentration ratio of the cigarette industry is equal to:

A)48%.
B)54%.
C)71%.
D)81%.

Question 15

Oligopoly is a market:

A)with one firm and many different products.
B)with many firms and a homogeneous product.
C)with a few firms and the actions of one firm have a large impact on the others.
D)with a few firms and the actions of one firm have a small impact on the others.

Question 16

If the five-firm concentration ratio in an oligopolistic industry is 100 percent and each firm has an equal share of the market,the Herfindahl-Hirschman Index is:

A)10,000.
B)2,000.
C)2,500.
D)400.

Question 17

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

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

Question 18

Which of the following is a characteristic of an oligopoly market?

A)control over price
B)diseconomies of scale in production
C)firms act independently without regard to each other
D)all of the above

Question 19

Consider four types of markets: monopoly,perfect competition,oligopoly,and monopolistic competition.If they were ranked from the lowest number of firms to the largest number of firms the ranking would be:

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

Question 20

Firms in an oligopoly can increase profit by:

A)jointly acting to reduce output and increase prices.
B)independently acting to increase price.
C)acting alone and refusing to join the group.
D)none of the above.

Question 21

Refer to Figure 12.2.If A adopts a strategy of price fixing then the best choice for A is to choose the ________ price and the best choice for B is to choose the ________ price.

A)high;high
B)high;low
C)low;high
D)low;low

Question 22

Refer to Figure 12.3.The decision tree shows the payoffs for two firms based on the strategies they choose.If they agree to collude and hold prices at $10,and both stand by the agreement,each will earn profits of $5 million.If one firm cheats and the other does not,the firm that cheats will earn profits of $8 million and the other firm will have losses of $2 million.If they both cheat and cut prices,they will each earn profits of only $2 million.If both firms follow their dominant strategies,Firm B's profits will be:

A)-$2 million.
B)$ 2 million.
C)$5 million.
D)$ 8 million.

Question 23

Game tree is a graphical representation of the consequences of different actions in a strategic setting.

Question 24

An oligopolistic industry has barriers to entry.

Question 25

Many cartels exist in the U.S.because cartels and price-fixing are legal under United States law.

Question 26

According to one rule of thumb,a four-firm concentration ratio of greater than 40 percent for the industry is considered to be an oligopoly.

Question 27

The cigarette industry is not an example of an oligopolistic industry.

Question 28

The beer industry is an example of a oligopolistic industry.

Question 29

Refer to Figure 12.3.The decision tree shows the payoffs for two firms based on the strategies they choose.If they agree to collude and hold prices at $10,and both stand by the agreement,each will earn profits of $5 million.If one firm cheats and the other does not,the firm that cheats will earn profits of $8 million and the other firm will have losses of $2 million.If they both cheat and cut prices,they will each earn profits of only $2 million.In this game the dominant strategy for A is to:

A)cheat.
B)stand by the agreement.
C)cheat only if B cheats.
D)maximize the maximum losses.

Question 30

The Nash equilibrium is an outcome of a game:

A)when each player is doing the best he or she can,given the actions of the other players.
B)each player has a competitive advantage over the other players.
C)in which there are no winners only losers.
D)when all the possibilities are revealed to the players.

Question 31

If firms in an oligopoly form a cartel,the outcome is the same as it would be under monopolistic competition.

Question 32

A dominant strategy exists when a firm's choice is the best regardless of other firms' decisions.

Question 33

Oligopoly is a market structure where many firms are competing by selling an identical product.

Question 34

A duopolists' dilemma occurs when two firms in a market would be better off if:

A)both choose the high price but instead each chooses the low price.
B)both firms act jointly as a cartel and chooses the best price.
C)one firm refuses to participate in the cartel.
D)both firms adopt price matching.

Question 35

Recall the application about the failure of the salt cartel,why did the salt cartels around the 19th century fail to get established,even though they paid new firms not to produce salt for a year?

A)Individual firms cheated on the cartel by selling outside the cartel.
B)Artificially high price also caused new firms to enter the market.
C)Salt consumers found substitutes and brought the price of salt down.
D)A and B are correct.

Question 36

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

Question 37

Figure 12.2 shows the decision tree for setting price for the only two firms in a market.The dominant strategy for firm A:

A)is to set price low.
B)is to set price high.
C)depends on what B does.
D)is to do the opposite of whatever B does.

Question 38

Figure 12.2 shows the decision tree for setting price for the only two firms in a market.One way for both firms to charge a high price is for both firms to:

A)play their dominant strategies.
B)collude.
C)expand output.
D)any of the above

Question 39

If one duopolist chooses the highest price it will maximize its profit.

Question 40

Refer to Figure 12.3.The decision tree shows the payoffs for two firms based on the strategies they choose.If they agree to collude and hold prices at $10,and both stand by the agreement,each will earn profits of $5 million.If one firm cheats and the other does not,the firm that cheats will earn profits of $8 million and the other firm will have losses of $2 million.If they both cheat and cut prices,they will each earn profits of only $2 million.In this game the dominant strategy for B is to:

A)cheat.
B)stand by the agreement.
C)cheat only if A cheats.
D)maximize the maximum losses.

Question 41

Explicit price fixing was outlawed by the ________ Act.

A)Fair Labor Standards
B)Alien and Sedition
C)Sherman Antitrust
D)Freedom of Information

Question 42

An oligopolistic industry has no barriers to entry.

Question 43

Under what conditions does an oligopoly market result in the same outcome as monopoly? What does this imply for the oligopoly's long-run profits?

Question 44

A duopoly pricing strategy results in a(n)________ profitable outcome than cartel pricing.

A)less
B)more
C)equally
D)indeterminate

Question 45

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

Question 46

What is a cartel?

Question 47

In an oligopoly,the behavior of any one firm depends on the reaction it expects of all the others in the industry.

Question 48

In an oligopolistic market,the government may limit the number of firms in a market by issuing patents.

Question 49

The cereal industry is an example of a oligopolistic industry.

Question 50

What is one way that firms can overcome the duopolists' dilemma and promote cartel pricing?

A)One firm can guarantee it will match a lower price of a competitor.
B)Firms can come to an agreement to be at Nash equilibrium.
C)Firms create a cartel to control prices.
D)none of the above

Question 51

Recall the application about low-price guarantee with tire prices in Florida,what happen to the prices of the tires after the low-price guarantee advertising was included in the newspaper ad?

A)The prices soar.
B)The prices decrease
C)The prices stayed the same.
D)Some tire companies exit the market.

Question 52

A dominant strategy is one that is the best choice regardless of other firms' decisions.

Question 53

The house slipper industry is an example of an oligopolistic industry.

Question 54

In a two-person,repeated game,a grim-trigger strategy results in:

A)each firm following its own self-interest choice.
B)each firm earning economic profits.
C)one firm choosing a price so low that no firm earns an economic profit.
D)one firm earning economic profits while the other does not.

Question 55

What does it mean when a firm has a dominant strategy?

Question 56

Which of the following industries was NOT charged with price fixing?

A)industrial diamonds
B)electric generators
C)music distribution
D)none of the above

Question 57

Consider the decision tree depicted in Figure 12.4 concerning a collusive agreement between firms owned by Bob and Donna.Each participant has the option of following the terms of the agreement or cheating on the terms of the agreement,but neither knows what the other will do.What is the dominant strategy for Bob? For Donna? Which strategy should player,Bob and Donna,choose to maximize the potential gain? What do you think the outcome of this game will be? Carefully explain your answers.

Question 58

In a two-person,repeated game,a tit-for-tat strategy starts with:

A)non-cooperation and then each player follows his or her own self-interest.
B)non-cooperation and then each player cooperates only if the other player cooperates.
C)cooperation and then each player follows his or her own self-interest.
D)cooperation and then each player repeats the other player's previous move.

Question 59

Assuming that firms do not collude,compare the market outcome under oligopoly with the outcome under monopoly.

Question 60

Low-price guarantees in a duopoly:

A)lead to higher prices.
B)lead to lower prices.
C)make cartel pricing possible.
D)A and C are correct.

Question 61

Explain the underlying assumptions of the price leadership model.What conclusions can be made about the price charged and the output produced in an industry that has an implicit price leader?

Question 62

In this article on airlines,when the firms experienced an increase in cost of production,their price ________.

A)increased
B)decreased
C)did not change
D)change was ambiguous

Question 63

Firms participating in implicit price leadership openly discuss their pricing strategies with one another.

Question 64

In this article on airlines,when the firms experienced an increase in demand,their price ________.

A)increased
B)decreased
C)did not change
D)change was ambiguous

Question 65

Refer to Figure 12.7.The numerical data show daily profits for each of the two firms when they choose a specific pricing strategy.If both firms choose a high-price strategy:

A)Omega will earn $300 daily profit and Zeta will earn $100 daily profit.
B)Omega will earn $100 daily profit and Zeta will earn $300 daily profit.
C)Both will earn $200 daily profit.
D)Both will earn $150 daily profit.

Question 66

Under price leadership,when firm A suddenly drops its price what could its competitors interpret by the drop in price?

A)Firm A is breaking an explicit pricing agreement.
B)Firm A is forming a cartel.
C)Firm A is not cooperating with the price fixing.
D)Firm A observed a change in demand or production.

Question 67

Refer to Figure 12.6.Assume the firm represented is selling its product at $12.It could increase its revenue by:

A)raising its price.
B)by lowering its price.
C)by producing more.
D)None of these are correct.

Question 68

Low-price guarantees worsen the duopolists' dilemma.

Question 69

AACSB: Reflective Thinking Skills
Learning Outcome: Micro-16
Low-price guarantees mean lower prices for consumers.

Question 70

If a firm uses a grim trigger retaliation strategy,all firms could end up with zero economic profit.

Question 71

In the U.S. ,price leadership,as in the article above,is ________.

A)illegal
B)unprofitable
C)seldom used
D)legal

Question 72

Refer to Figure 12.5.Section of the demand curve assumes that competing firms will:

A)lower their price in response to this firm's price reduction.
B)increase their price in response to this firm's price reduction.
C)not change their price in response to this firm's price reduction.
D)raise their price in response to this firm's price increase.

Question 73

Refer to Figure 12.6.The segment of the demand curve from $9 to $12 is:

A)relatively inelastic.
B)positively sloped.
C)relatively elastic.
D)not realistic.

Question 74

The low-price guarantee results in an outcome equivalent to perfect competition.

Question 75

Additional Application
Late in the day on August 7,2006 numerous U.S.airlines cut their fares on leisure travelers.These included American Airlines,Delta,Continental,and Southwest.This fare cut,which was approximately 4 to 8 percent,occurred during a period of rising fuel costs and a record number of seats being filled.If costs are up and demand is strong,why did these airlines reduce their prices on this class of passengers? The explanation is that they were following the lead of United.United Airlines is the implicit price leader in this industry and many other carriers watch closely what the leader does and base their decisions on the leader's actions.Such behavior is not uncommon in an industry dominated by a few large firms.
"United Airlines sparks fare war," August 9,2006,retrieved November 3,2006 from http://money.cnn.com/2006/08/09/news/companies/airfares/index.htm.
What market structure does the airline industry most likely resemble?

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

Question 76

Refer to Figure 12.5.Section of the demand curve assumes that competing firms will:

A)raise their price in response to this firm's price increase.
B)decrease their price in response to this firm's price increase.
C)not change their price in response to this firm's price increase.
D)raise their price in response to this firm's price decrease.

Question 77

Suppose that Sun beach only has three movie theaters.One movie theater decreases its movie ticket price and later that same day,the other two do the same.Which of the following is true?

A)This is illegal because the movie theater are colluding.
B)This is an example of explicit price fixing.
C)The first movie theater to lower price is probably the implicit price leader.
D)All of the above are true.

Question 78

Low-price guarantees is a way to insure that other firms will choose a high price.

Question 79

Refer to Figure 12.5.The model of oligopoly in this diagram is the:

A)price leadership model.
B)kinked demand curve model.
C)cartel model.
D)competitive oligopoly.

Question 80

Under tit-for-tat retaliation,a firm will mimic the other firm's choice from the preceding period.