Question 1

The price and quantity generated by a Nash equilibrium is closer to the competitive solution than the price and quantity generated by a cartel.

Accepted Answer

In a Nash equilibrium, each player is pursuing their own self-interest and there is no incentive for any player to deviate from their chosen strategy. This creates a situation where the market outcome is closer to the competitive solution than the outcome generated by a cartel, where players collude to restrict output and raise prices. The cartel may be able to generate higher prices and profits in the short run, but in the long run, the incentive to cheat and increase output will erode the cartel's market power, leading to a less efficient outcome compared to a Nash equilibrium.

Question 2

When firms cooperate with one another, it is generally good for the cooperating firms.

Accepted Answer

When firms cooperate with one another, they can benefit from shared resources, reduced costs, increased efficiency, and access to new markets or technologies. Overall, such collaboration can lead to better business outcomes and strategic advantages for the involved firms.

Question 3

As the number of firms in an oligopoly increases, the

Accepted Answer

As the number of firms in an oligopoly increases, competition intensifies, leading to a decrease in market power for individual firms. This makes it harder for firms to charge high prices above their marginal costs, eventually leading to prices approaching marginal cost and the quantity approaching the socially efficient level. This is because the firms can no longer collude and act like a monopolist. Therefore, the correct choice is A.

Question 4

A market structure in which many firms sell products that are similar but not identical is known as

Accepted Answer

Monopolistic competition is a market structure in which there are many firms that sell products that are similar but not identical. This means that each firm has some degree of market power, but they also face competition from other firms in the market. This can lead to price competition as firms try to differentiate their products and attract customers, but it may also allow for some level of price discrimination. Monopolistic competition is characterized by low barriers to entry and exit, meaning that new firms can easily enter the market if they believe they can make a profit, and existing firms can exit if they are no longer profitable.

Question 5

If oligopolists engage in collusion and successfully form a cartel, the market outcome is

Accepted Answer

If oligopolists form a cartel, they can act like a monopoly, setting prices high and limiting output. This results in a market outcome that is similar to that of a monopoly. However, unlike a single monopolist, a cartel is vulnerable to cheating from its members. If one member decreases output or lowers prices, it can increase its own profits at the expense of the other members. Therefore, maintaining a cartel over time can be difficult, and it may not be as efficient as a competitive market.

Question 6

The dominant strategy for an oligopolist is to cooperate with the group and maintain low production regardless of what the other oligopolists do.

Accepted Answer

The dominant strategy for an oligopolist is to compete with the group and potentially increase production if it will lead to higher profits. Maintaining low production may not be the most profitable strategy in some situations.

Question 7

When an oligopolist individually chooses its level of production to maximise its profits, it produces

Accepted Answer

An oligopolist produces more than a monopoly, which restricts output to raise prices, but less than a competitive market, where firms produce at a level where price equals marginal cost.

Question 8

There is a constant tension in an oligopoly between cooperation and self-interest, because after an agreement to reduce production is reached, it is profitable for each individual firm to cheat and produce more.

Accepted Answer

In an oligopoly, there is a constant tension between cooperation and self-interest because after an agreement to reduce production is reached, each individual firm may be tempted to cheat and produce more in order to gain a competitive advantage and generate more profit. This is known as the "prisoner's dilemma" and is a common challenge faced by firms in oligopolistic markets.

Question 9

An oligopoly is a market structure in which many firms sell products that are similar but not identical.

Accepted Answer

The answer of An oligopoly is a market structure in...

Question 10

The prisoners' dilemma demonstrates why it is difficult to maintain cooperation even when cooperation is mutually beneficial.

Accepted Answer

The prisoners' dilemma shows that individual rationality can prevent people from cooperating, even when it would be beneficial for both parties to do so.

Question 11

As the number of sellers in an oligopoly increases,

Accepted Answer

In an oligopoly, as the number of sellers increases, competition among them also increases which puts downward pressure on prices. This tends to push the market price closer towards marginal cost in the long run. Hence, the correct answer is D- the price in the market moves closer to marginal cost.

Question 12

As the concentration ratio decreases, an oligopolistic market looks more like

Accepted Answer

As the concentration ratio decreases, the market becomes less dominated by a few large firms and more competitive. In a monopolistically competitive market, there are many small firms that compete based on product differentiation and advertising rather than price. This is different from a monopoly or duopoly where there are few firms that dominate the market and can control prices. A collusion solution is not a market type, but rather a strategy where firms cooperate to act like a monopoly and coordinate their pricing and output decisions.

Question 13

When firms cooperate with one another, it is generally good for society as a whole.

Accepted Answer

The answer of When firms cooperate with one another, it...

Question 14

When an oligopolist individually chooses its level of production to maximise its profits, it charges

Accepted Answer

When an oligopolist individually chooses its level of production to maximize its profits, it tends to produce less than a competitive market but more than a monopoly. Therefore, it charges a price that is less than a monopoly but more than a competitive market. So, the correct option is D.

Question 15

The unique feature of an oligopoly market is that the actions of one seller have a significant impact on the profits of all of the other sellers in the market.

Accepted Answer

This is a defining characteristic of an oligopoly market structure. Because there are only a few dominant firms in the market, their decisions and actions can have a ripple effect on the entire industry. For example, if one firm lowers its prices, other firms may need to follow suit in order to remain competitive, leading to a decrease in overall profits for all firms involved.

Question 16

Predatory pricing occurs when a firm cuts prices with the intention of driving competitors out of the market so that the firm can become a monopolist and later raise prices.

Accepted Answer

Predatory pricing is a pricing strategy used by a firm to gain a larger market share by significantly reducing prices below the cost of production or below the prices of its competitors in the short term. This strategy is used with the intent of driving competitors out of business, allowing the predator to become a monopolist in the long term and raising prices.

Question 17

The greater the number of firms in the oligopoly, the more the outcome of the market looks like that generated by a monopoly.

Accepted Answer

The greater the number of firms in an oligopoly, the more competitive the market becomes and the outcome looks more like that of a perfectly competitive market, not a monopoly.

Question 18

The simplest type of oligopoly is

Accepted Answer

Duopoly is the simplest type of oligopoly because it involves only two firms dominating a market. Monopoly involves one firm dominating a market, monopolistic competition involves many firms with differentiated products, and oligopolistic competition involves a small number of firms dominating a market.

Question 19

The market for hand tools in South Africa (such as hammers and screwdrivers) is dominated by three major tool manufacturers. This market is best described as

Accepted Answer

An oligopoly is a market dominated by a few large firms who have the power to influence prices and output. In this case, three major tool manufacturers dominate the market, indicating an oligopoly.

Question 20

Suppose an oligopolist individually maximises its profits. When calculating profits, if the output effect exceeds the price effect on the marginal unit of production, then the oligopolist

Accepted Answer

If the output effect exceeds the price effect on the marginal unit of production, this means that producing one more unit will increase total revenue more than it will decrease the price of all units sold. Thus, the oligopolist should produce more units to increase profits.

Quiz 16: Market Structures Iii: Oligopoly