Deck 6: Strategic Rivalry

Question 1

Unlike a perfectly competitive ?rm, _____.

A) a monopolistically competitive ?rm will have monopoly power in the long run
B) price is equal to marginal cost for a monopolistically competitive ?rm in the long run
C) a monopolistically competitive ?rm is a price taker
D) a monopolistically competitive ?rm produces homogeneous products

Answer 1

a monopolistically competitive ?rm will have monopoly power in the long run

Question 2

Which of the following could form a barrier to entry in a market?

A) Normal economic pro?ts.
B) Diseconomies of scale.
C) Relatively elastic demand for the good.
D) High sunk costs.

Answer 2

High sunk costs.

Question 3

Which of the following is an example of an endogenous cost to a ?rm?

A) The price of labour.
B) The level of advertising expenditure.
C) The cost of production technology.
D) The cost of raw materials.

Answer 3

The level of advertising expenditure.

Question 4

In a contestable market, _____.

A) potential entrants do not have access to the same technology as incumbent ?rms
B) sunk costs are likely to be zero
C) incumbent ?rms ?nd it di?cult to exit because of high sunk costs
D) there are high barriers to entry

Question 5

Unlike an oligopolistic market, a monopolistically competitive market has _____.

A) a homogeneous product
B) a differentiated product
C) a large number of ?rms
D) a horizontal demand curve

Question 6

Which of the following industries would be considered an oligopoly?

A) The hairdressing industry that has a large number of small ?rms.
B) The wheat industry that has a homogeneous product and a large number of suppliers.
C) The hotel industry that has a differentiated product and a large number of ?rms.
D) The supermarket industry that has a small number of large ?rms.

Question 7

Suppose the widget industry experiences signi?cant economies of scale. Which of the following is likely to be true?

A) The economies of scale will provide other ?rms an incentive to enter the industry.
B) Firms in the widget industry will make zero economic pro?ts in the short run.
C) The economies of scale will form a natural barrier to entry in the widget industry.
D) Large economies of scale will provide the ?rms in the market an incentive to co-operate.

Question 8

_____ refers to an implicit or explicit agreement among ?rms in an industry not to compete with each other.

A) Dominant ?rm hypothesis
B) Collusion
C) Vertical integration
D) Market consolidation

Question 9

The N-?rm concentration ratio measures the:

A) total market share attributed to the N largest ?rms in the market.
B) total market share of all the ?rms in the market, where N is the number of ?rms.
C) the number of new entrants in the market, where N is the number of new entrants.
D) the share of total revenues by all the ?rms in an oligopoly.

Question 10

Which of the following statements is true of monopolistic competition?

A) The goods produced in a monopolistically competitive market have a large number of substitutes.
B) Monopolistically competitive ?rms practice product differentiation.
C) There is only one ?rm in a monopolistically competitive market.
D) Firms are price takers in a monopolistically competitive market.

Question 11

Which of the following strategies can ?rms undertake to increase the minimum e?cient scale in an industry?

A) Reduce the quantity of raw material used to produce each additional unit.
B) Make large investments in intangible assets such as brand names.
C) Invest in cost-reducing technologies used in production.
D) Reduce the level of sunk costs by reducing the plant size.

Question 12

Which of the following is true of the long-run equilibrium in a monopolistically competitive market?

A) Monopolistically competitive ?rms make supernormal pro?ts in the long run.
B) Monopolistically competitive ?rms are productively e?cient in the long run.
C) Monopolistically competitive ?rms will produce where MC > MR in the long run.
D) Monopolistically competitive ?rms will not produce at the minimum average total cost in

Question 13

When a ?rm invests substantially in advertising and product development, it is trying to:

A) make its product similar to the other products in the market.
B) lower the market price.
C) lower its sunk costs.
D) raise entry barriers in the industry.

Question 14

Firms in a(n) _____ market are price-takers.

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

Question 15

Which of the following is a characteristic of monopolistic competition?

A) A small number of sellers.
B) Supernormal pro?ts in the long run.
C) Free entry and exit of ?rms.
D) A small number of buyers.

Question 16

Which of the following statements about oligopolistic markets is correct?

A) Firms in an oligopoly face an upward-sloping demand curve for their products.
B) There are a large number of small ?rms in an oligopoly.
C) An oligopolist is a price-setter in the output market.
D) The degree of market power enjoyed by ?rms in an oligopoly is very low.

Question 17

Suppose the market share of the ?ve largest ?rms in an industry is equal to 31%, 17%, 8%, 5% and 1% respectively. What is the ?ve-?rm concentration ratio for the industry?

A) 62%
B) 93%
C) 31%
D) 5%

Question 18

In the long run, tangency equilibrium occurs when a monopolistically competitive ?rm's average revenue curve is tangent to:

A) its average cost curve.
B) its marginal revenue curve.
C) its marginal cost curve.
D) its demand curve.

Question 19

What is meant by the strategic interdependence of ?rms?

A) Firms in perfectly competitive markets affect the pricing and output decisions of other ?rms.
B) A monopolistic ?rm decides the price and output level in the market.
C) The actions of one ?rm in a market have pricing and output implications for the rival ?rms.
D) A group of ?rms collude to set the output and price level in the market.

Question 20

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

A) All the ?rms in an industry make equal pro?ts.
B) The ?rms in the market make zero economic pro?ts.
C) Firms can freely enter and exit the market.
D) The total number of ?rms in the market is small.

Question 21

A drawback of the kinked demand curve model is that:

A) it is not applicable to oligopolistic ?rms.
B) it does not explain the process that determines the stable price.
C) it does not include strategic independence between ?rms.
D) it assumes that the marginal revenue curve is vertical, which is not a realistic assumption.

Question 22

The following graph shows the marginal revenue (MR), marginal cost (MC), demand and average revenue (D = AR) curves for a pro?t-maximizing ?rm. Refer to the graph to answer the question. Which of the following statements is true?

A) The ?rm is a price leader in this market.
B) Firms in this market produce highly differentiated products.
C) A small change in the marginal cost will lead to a large change in the equilibrium price.
D) Below the market price, the demand curve is price inelastic.

Question 23

Suppose that ?ve ?rms in an oligopoly formally sign a contract to establish the price of the product in the market. In other words, they have _____.

A) increased the elasticity of demand for the good
B) increased the variety of the goods available to the consumer
C) formed a cartel
D) increased competition in the market

Question 24

Suppose that all the ?rms in an oligopoly face the same horizontal marginal and average cost curves. If all these ?rms agree to co-operate, their joint pro?ts will be maximized by producing at the level where:

A) average revenue equals average cost.
B) marginal revenue equals average revenue.
C) marginal cost equals average variable cost.
D) marginal revenue equals marginal cost.

Question 25

Suppose that it is relatively easy for new ?rms to enter an industry. Some of the ?rms in this industry want to form a cartel. Which of the following is likely to be true?

A) It would be relatively easy for the ?rms to form a cartel.
B) The market power of the cartel is likely to be low.
C) The industry exhibits substantial economies of scale.
D) The marginal cost of production in this industry is likely to be low.

Question 26

To move from a non-co-operative Nash equilibrium to a co-operative Nash equilibrium, _____.

A) a single-period game must be played
B) a repeated game must be played
C) a threat made by one of the players need not be credible
D) the players should not have any information about their rivals' strategy

Question 27

In the kinked demand curve model, the kink in the demand curve arises because:

A) the elasticity of the demand curve changes at the equilibrium output.
B) there are no barriers to entry or exit in the industry.
C) the demand for the good is unstable and keeps changing.
D) the products sold by each ?rm in the market are different.

Question 28

The following table shows the pay-off matrix for West Ltd. and East Ltd. in an oligopolistic market. Each ?rm has two options: co-operate or start a price war. Refer to the table to answer the question. East Ltd. earns its maximum pay-off when _____.

A) West Ltd. co-operates but East Ltd. begins a price war
B) it co-operates but West Ltd. begins a price war
C) both the ?rms co-operate
D) both the ?rms begin a price war

Question 29

Cartels are more likely to fail when _____.

A) the ?rms in the cartel produce identical products
B) the marginal cost of production is high
C) the number of ?rms forming the cartel is high
D) the demand for the good is perfectly inelastic

Question 30

A ?rm that faces a kinked demand curve will:

A) establish its optimal output at the level where marginal cost is greater than marginal revenue.
B) frequently engage in price wars with its competitors.
C) face a horizontal marginal revenue curve.
D) lose customers if it raises its prices.

Question 31

Which of the following is true of Nash equilibrium?

A) There is no strategic interdependence between ?rms that are in Nash equilibrium.
B) It occurs when each player does what is best for themselves, given their rivals' possible
C) It tends to be more unstable than a market equilibrium.
D) A Nash equilibrium is the same as a tangency equilibrium.

Question 32

Suppose a cartel operates in the widget industry. It would be weakened if:

A) all the ?rms produced the same type of widget.
B) there were no substitutes for a widget.
C) all the ?rms produced the same quantity of widgets.
D) one of the cartel members sells widgets at a lower price.

Question 33

A cartel is more likely to be successful when:

A) ?rms produce highly differentiated products.
B) there are no barriers to entry or exit of ?rms.
C) there are many ?rms in the industry.
D) demand and costs in the industry are stable.

Question 34

A problem often encountered when oligopolists try to cooperate and set output and prices in the market is that:

A) the number of ?rms in the industry is too small to form a successful cartel.
B) most oligopolists produce highly differentiated products.
C) some ?rms might cheat on the agreed-upon market price.
D) market demand and costs are in?exible and do not change.

Question 35

The following table shows the pay-off matrix for West Ltd. and East Ltd. in an oligopolistic market. Each ?rm has two options: co-operate or start a price war. Refer to the table to answer the question. Which of the following is the Nash equilibrium outcome in this oligopoly?

A) East Ltd. co-operates but West Ltd. begins a price war.
B) West Ltd. co-operates but East Ltd. begins a price war.
C) Both ?rms co-operate.
D) Both ?rms begin a price war.

Question 36

The following graph shows the marginal revenue (MR), average revenue (AR), marginal cost (MC) and average cost (AC) curves for an oligopoly ?rm. Refer to the graph to answer the question.
Assume that all the ?rms in the oligopoly market face the same set of cost and revenue curves. If they formed a cartel, they would maximize pro?t at the output level _____.

A) Q
B) Q1
C) Q2
D) Q3

Question 37

Oligopolists collude in order to_____.

A) minimize the social cost of production
B) earn monopoly pro?ts
C) maximize the quantity of output produced
D) increase production costs

Question 38

The following graph shows the marginal revenue (MR), marginal cost (MC), demand and average revenue (D = AR) curves for a pro?t-maximizing ?rm. Refer to the graph to answer the question. Which of the following statements is true?

A) The demand curve above the market price is relatively inelastic.
B) The demand curve below the market price is relatively elastic.
C) The marginal revenue curve is a vertical line at the pro?t-maximizing level of output.
D) Marginal cost is greater than marginal revenue at the pro?t-maximizing level of output.

Question 39

The following table shows the pay-off matrix for West Ltd. and East Ltd. in an oligopolistic market. Each ?rm has two options: co-operate or start a price war. Refer to the table to answer the question. West Ltd. earns its maximum pay-off when _____.

A) it co-operates but East Ltd. begins a price war
B) East Ltd. co-operates but West Ltd. begins a price war
C) both the ?rms co-operate
D) both the ?rms begin a price war

Question 40

The kinked demand curve pricing model is based on the assumption that:

A) a ?rm's competitors will match both its price increases and price decreases.
B) one ?rm in the industry sets price for all other ?rms.
C) a ?rm's competitors will match a price fall but not a price increase.
D) price in the market is in?exible and unlikely to change.

Question 41

Which of the following auction formats offers a solution to the problem of the winner's curse?

A) The English auction
B) The Dutch auction
C) The ?rst-price sealed-bid auction
D) The second-price sealed-bid auction

Question 42

Game theory suggests collusion is more likely to occur in:

A) a single-period game.
B) a zero-sum game.
C) a repeated game.
D) a dictator game.

Question 43

The following graph shows the bid value and probability of winning an auction for an oil painting under a ?rst-price sealed bid auction with private values. The bidder is willing to pay a maximum of £2000 for the oil painting. Refer to the graph to answer the question. The line S has a positive slope which shows that the _____.

A) probability of winning the auction rises as the bidder increases the bid.
B) the potential gains from winning the auction increases as the bid value increases.
C) the private value of the bidder is in?uenced by the changes in the bid values.
D) the optimal bid is equal to the bidder's maximum willingness to pay.

Question 44

Which of the following is true in a Stackelberg model of duopoly?

A) Both ?rms in the market will take price and output decisions simultaneously.
B) The level of strategic interdependence between ?rms in the market is very low.
C) One ?rm has a ?rst-mover advantage and other ?rms follow this ?rm.
D) Both ?rms will collude and set output in the market.

Question 45

Which of the following is true of a Cournot model?

A) A ?rm's pro?t-maximizing output does not vary with the decision of its rival.
B) A ?rm will always treat its rival's output as a given.
C) The ?rm will produce where MC > MR.
D) It is a price-based approach to duopoly.

Question 46

A reaction function shows that:

A) a ?rm's pro?t-maximizing output varies with its rival's output decision.
B) prices in the market are assumed to be constant.
C) ?rms do not make strategic decisions simultaneously.
D) one ?rm in the market has ?rst-mover advantage.

Question 47

In Nash equilibrium in a Dutch auction with private values, the optimal bid is calculated by _____, where N is the number of bidders.

A) N/(N - 1) × the probability of winning the auction
B) (N - 1)/N × the bidder's maximum willingness to pay
C) N/(N - 1) × the expected value from winning the auction
D) (N - 1)/N × the reserve price in the auction

Question 48

Which of the following is true of an English auction?

A) Bids begin low and are increased incrementally until no other bidder is willing to raise the bid.
B) Prices start high and are gradually reduced until a bidder accepts the price and wins the
C) Bidders submit a single bid in writing, without knowing how others have bid, and the highest bid wins.
D) Bidders submit a single bid in writing, without knowing how others have bid, and the

Question 49

The following graph shows the bid value and probability of winning an auction for an oil painting under a ?rst-price sealed bid auction with private values. The bidder is willing to pay a maximum of £2000 for the oil painting. Refer to the graph to answer the question. The expected value from winning the auction at the price of £2000 is equal to the area _____.

A) A + B + C + D + E + F
B) F + E
C) C + D + E
D) A + B + F

Question 50

Suppose that a supermarket auctions contracts for manufacturers to provide it with its own-labelled products. Which of the following strategies would prevent co-operation among rival ?rms that bid for the contracts?

A) Running an English auction
B) Reducing the number of ?rms that bid for the contracts
C) Making the auction a repeated game
D) Organizing blind auctions

Question 51

In the market for local bus services in the UK, the ?ve-?rm concentration ratio was found to be 69 per cent. Only another ?ve companies had a share of the market which exceeded 1 per cent. Given this information, which of the following statements is most likely to be true?

A) The total number of ?rms serving the market is likely to be very high.
B) It is likely that the ?rms in the market engage in head-to-head competition rather than
C) The quality of the local bus services offered is likely to be high.
D) There are likely to be high sunk costs in the market, which form a natural entry barrier.

Question 52

Which of the following is the Nash equilibrium outcome of an English auction?

A) The highest bidder pays exactly the same price as the second-highest bidder.
B) The highest bidder pays a fraction more than the second-highest bidder.
C) The highest bidder pays the expected value of the second-highest bidder's willingness to pay.
D) The highest bidder pays half the bid of the second-highest bidder.

Question 53

The following graph shows the bid value and probability of winning an auction for an oil painting under a ?rst-price sealed bid auction with private values. The bidder is willing to pay a maximum of £2000 for the oil painting. Refer to the graph to answer the question. The expected value from winning the auction at £1500 is equal to the area _____.

A) A + B + C + D + E + F
B) E + F+ D
C) B + C + D
D) C + D + E + F

Question 54

In Nash equilibrium, the price received by a seller in a ?rst-price sealed bid auction with private values would be equal to _____.

A) the bidder's maximum willingness to pay
B) the expected value of second-highest willingness to pay
C) the bidder's probability of winning
D) half of the bidder's minimum reserve price

Question 55

In a _____ auction, prices start high and are gradually reduced until a bidder accepts the price and wins the auction.

A) Dutch
B) English
C) ?rst-price sealed-bid
D) second-price sealed bid

Question 56

Under a Bertrand model of an oligopoly:

A) ?rms treat the price set by rival ?rms as given.
B) both ?rms collude to ?x the total level of output in the market.
C) both ?rms will choose a price lower than marginal cost.
D) ?rms will produce the level of output produced under a monopoly.

Question 57

Sony and Toshiba, are competitors in the high de?nition DVD market. The products that they launched used different recording formats and were incompatible with each other. Given that Blu- ray, Sony's product, is now the dominant format for high de?nition ?lms, which of the following is likely to be true?

A) Sony and Toshiba are likely to have colluded and set prices in the high de?nition DVD market.
B) The race to win market share between Sony and Toshiba is an example of a single-period
C) Sony is likely to have had a ?rst-mover advantage in the market for high de?nition DVDs.
D) Sony and Toshiba must have agreed to split the market for high de?nition DVDs.

Question 58

In a _____ auction, the highest bidder pays the price of the second-highest bid.

A) second-bid
B) ?rst-bid
C) ?rst-price sealed-bid
D) second-price sealed bid

Question 59

For a threat to be credible it has to be:

A) made jointly by all the incumbent ?rms.
B) made by the incumbent with the smallest market share.
C) an optimal course of action for the ?rm making the threat.
D) made in a single-period game.

Question 60

Which of the following is a key difference between the Cournot model and the Stackelberg model of an oligopoly?

A) The leader ?rm in the Stackelberg model makes lower pro?ts than it would under the Cournot model.
B) Unlike in the Cournot model, ?rms in the Stackelberg model do not make decisions
C) Firms in the Cournot model have a ?rst-mover advantage unlike ?rms in the Stackelberg model.
D) Unlike in the Stackelberg model, ?rms in the Cournot model treat the prices of rivals as

Question 61

Demand below the equilibrium price is inelastic in a kinked demand curve model of an oligopoly.

Question 62

A Nash equilibrium occurs when each player in a game does what is best for themselves, irrespective of what their opponent may do.

Question 63

One of the features of a monopolistically competitive market is that the number of sellers in the market is very low.

Question 64

Collusion is likely to fail when there are a large number of firms in the market.

Question 65

One of the primary characteristics of oligopolistic industries are barriers to entry.

Question 66

A cartel faces a horizontal demand curve.

Question 67

If all the firms in an oligopoly agree to co-operate, their joint profits will be maximized if they act as one monopolist.

Question 68

An individual firm in a cartel is likely to earn more profits by cheating on the cartel and reducing prices.

Question 69

The soft drinks industry, which is a market with a small number of large players, is likely to be an oligopoly.

Question 70

An example of a natural barrier to entry in an industry is a very high minimum efficient scale.

Question 71

Tangency equilibrium in a monopolistically competitive market occurs when the firm's average profit line just touches the firm's average total cost line.

Question 72

A contestable market is one where firms can enter and exit a market freely.

Question 73

A successful brand name owned by an incumbent firm can form barrier to entry in the industry.

Question 74

An industry where the minimum efficient scale is large when compared to the overall market is likely to be an oligopoly.

Question 75

An endogenous cost is one which cannot be influenced by a firm.

Question 76

The kinked demand curve model of oligopoly suggests that if one firm increases its price then the other firms will do the same.

Question 77

The kinked demand curve model predicts that prices in the market will be relatively stable.

Question 78

Monopolistic competition is the same as perfect competition except for the existence of product differentiation.

Question 79

In the long run, monopolistically competitive firms are not productively efficient.

Question 80

A dominant strategy is a player's best response when the rival's decision is known.