Question 1

There are 30 firms in an industry. What happens to that industry's four-firm concentration when the third- and fourth-largest firms merge?

Accepted Answer

The third- and fourth-largest firms merging would decrease the number of firms in the industry from 30 to 29. However, since the concentration ratio calculation only considers the market shares of the top four firms, the market share of the merged firm would be added to the market shares of the other top three firms, increasing the concentration ratio.

Question 2

Straight Cut beauty salon merges with Clean-Cut beauty salon. This is an example of

Accepted Answer

A horizontal merger is the merger of two companies that operate in the same industry and produce similar products or services. In this case, Straight Cut and Clean-Cut are both beauty salons, meaning they operate in the same industry, and by merging together, they are combining their similar services to potentially increase their market share and be more competitive.

Question 3

The existence of economies of scale is one reason oligopolies exist because

Accepted Answer

Economies of scale occur when the average total cost of production decreases as output increases. This means that larger firms are able to produce goods and services at a lower cost than smaller firms, giving them a competitive advantage. In an oligopoly, where there are only a few large firms dominating the market, these economies of scale make it difficult for new firms to enter the market and compete with the existing firms. Therefore, oligopolies exist due to the advantages of large-scale production that come from economies of scale.

Question 4

Horizontal merger occurs when

Accepted Answer

A horizontal merger occurs when two firms producing a similar product merge. This can result in a larger combined entity with increased market power and economies of scale, potentially leading to higher profits.

Question 5

Which of the following is true of an oligopoly?

Accepted Answer

Oligopolies typically engage in nonprice competition, such as marketing and advertising, in order to differentiate themselves from their competitors. They also react to actions of their competitors, as their actions can have a significant impact on the market. While each firm in an oligopoly may not produce the majority of the total output, they still have a significant market share. Firms in oligopolies often closely monitor their competitors and are highly aware of their actions.

Question 6

Vertical merger occurs when

Accepted Answer

A vertical merger occurs when two firms merge where one had sold its output to the other as an input. In other words, the two firms are at different stages of the production process and the merger allows for vertical integration. For example, a car manufacturer merging with a tire manufacturer would be a vertical merger.

Question 7

The joining of a firm with another to which it sells an output or from which it buys an input is known as

Accepted Answer

A vertical merger is when two firms from different levels of the supply chain merge, such as a supplier and a manufacturer or a manufacturer and a distributor. This is different from a horizontal merger, which is when two firms in the same industry and level of the supply chain merge, and a conglomerate merger, which is when two unrelated firms merge. Economies of scale refer to the cost advantages that come with increased production, but it is not the same as a merger.

Question 8

The joining of firms that are producing or selling a similar product is known as

Accepted Answer

A horizontal merger is when two firms producing or selling a similar product join together. A conglomerate merger involves firms in completely unrelated industries, and a vertical merger involves firms within the same industry but at different stages of the production process. Economies of scale refer to the cost advantages a company gains by producing on a larger scale.

Question 9

Oligopoly is a situation when there

Accepted Answer

Oligopoly is a market structure where a few large firms dominate the industry, often leading to collusive behavior and barriers to entry for smaller competitors. Therefore, option B - "are a few large firms in the industry" is the best choice. The other options do not accurately describe an oligopoly market structure.

Question 10

When managers in oligopolistic firms make decisions that affect output or price, they must

Accepted Answer

In an oligopoly, a small number of firms dominate the market and the decisions of one firm can have a significant impact on the others. Therefore, managers in oligopolistic firms must anticipate the reactions of their rivals when making decisions that affect output or price. This is because the actions of one firm can trigger a reaction from others, which can lead to a price war or other consequences. Choices A, C, and D are not accurate as they do not directly address the need to anticipate the reactions of rivals.

Question 11

The Herfindahl-Hirschman index is measured by

Accepted Answer

The Herfindahl-Hirschman index is measured by adding the squares of the market shares of all firms in an industry. This index is often used as a measure of market concentration and is calculated by summing the squares of the market share percentages of all firms in a given market. A higher index value indicates higher concentration and less competition in the market.

Question 12

Joe's hotdog stand merges with a company that supplies the condiments to Joe's. This is an example of

Accepted Answer

This is a vertical merger because it involves two companies at different stages of the production process (hotdog stand and condiment supplier) merging together.

Question 13

Which of the following is a characteristic of oligopoly?

Accepted Answer

Oligopoly is characterized by the presence of only a few firms in the industry, often leading to high levels of market concentration. These firms have a significant degree of market power, which allow mutual firm interdependence, strategic decision-making and collusion. However, they may not necessarily have zero economic profits in the short-run and marginal cost pricing is generally not a characteristic associated with oligopoly.

Question 14

All of the following are reasons for an oligopoly to occur EXCEPT

Accepted Answer

Independence among firms would not lead to an oligopoly, as oligopoly is characterized by a few dominant firms in the industry. The presence of interdependence among firms, on the other hand, can contribute to oligopoly. Economies of scale, barriers to entry, and mergers are all factors that can create conditions for oligopoly to occur.

Question 15

A situation in which one firm's actions with respect to price, quality, advertising and related changes may be strategically countered by the reactions of one or more other firms in the industry is known as

Accepted Answer

This situation is known as strategic interdependence where the actions of one firm have an impact on the actions and reactions of other firms in the industry. It is important for firms to consider the possible reactions of their competitors when making strategic decisions.

Question 16

Which of the following is NOT a reason why some industries are oligopolies?

Accepted Answer

Strategic independence is actually a reason why some industries are oligopolies. The remaining options (A, B, D) are all reasons why an industry may become an oligopoly.

Question 17

Which of the following is an example of a horizontal merger?

Accepted Answer

Northeastern Illinois University merging with Roosevelt University is an example of a horizontal merger because both institutions are in the same line of business, which is higher education.

Question 18

Which of the following is not true of an oligopoly?

Accepted Answer

In an oligopoly, firms are not price takers but rather have the ability to influence market prices. This is due to the limited number of firms in the industry and the importance of each firm's actions on the overall market.

Question 19

Which of the following is an example of a vertical merger?

Accepted Answer

The answer of Which of the following is an example...

Question 20

Over the past several decades, U.S. firms have faced more competition from overseas firms. Does this have any impact on the market power of U.S. oligopoly firms?

Accepted Answer

Competition from overseas firms can increase market competition and limit the market power of U.S. oligopoly firms. These firms may face pressure to lower prices or improve product quality to remain competitive, which can benefit consumers. However, the impact of overseas competition will depend on the specific industry and the level of competition that exists domestically.

Quiz 26: Oligopoly and Strategic Behavior