Question 1

The quantity that is set by the dominant firm in an oligopolistic industry:

Accepted Answer

In an oligopolistic industry, the dominant firm sets its quantity at the level where its marginal revenue and marginal cost are equal, as this maximizes its profit. This is because the firm can influence the market price by its actions, but must still consider its own costs and revenue when making production decisions. Option A is incorrect because the dominant firm sets the price, not the other way around. Option C is incorrect because the dominant firm may set its quantity below or above the total industry output. Option D is incorrect because the dominant firm can earn positive economic profit in the short run, but may face competition in the long run. Option E is incorrect because the output produced in a perfectly competitive industry is determined by the intersection of the market demand and supply curves, which is not relevant to oligopolistic firms.

Question 2

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

Accepted Answer

In an oligopoly, the firms are mutually interdependent, meaning that the actions of one firm affect the profits and market share of other firms in the market. This leads to strategic behavior and decision-making by firms, such as collusion or price wars, to gain an advantage over their competitors. The other choices are not characteristic of an oligopoly - B is a characteristic of a monopsony market structure, C is a characteristic of a perfectly competitive market structure, D is not always true as oligopolistic firms may earn economic profit in the long run, and E is not true as there are usually significant barriers to entry in an oligopoly market.

Question 3

The model of the kinked demand curve in price competition implies that:

Accepted Answer

The kinked demand curve model suggests that competitors in a market will match any price cuts by a firm, but not price hikes. This creates a scenario where firms have little incentive to change prices and can lead to price stability in the market. However, this model does not address brand loyalty or the potential for free entry in the market to reduce profits to zero. Coordination of prices to maximize group profit is also not a feature of the kinked demand curve model. The market price is not set by a single dominant firm, as all firms in the market have some level of pricing power.

Question 4

The demand function in a duopoly is: P = 100 - 2(Q1 + Q2),where P = price,Q1 = output of the firm,and Q2 = output of the second firm.If the first firm decides to sell 10 units while the second firm sells 20 units,which of the following will be true?

Accepted Answer

The revenue of the first firm is R1 = P * Q1 = (100 - 2(Q1 + Q2)) * Q1 = (100 - 2(10 + 20)) * 10 = 500. The revenue of the second firm is R2 = P * Q2 = (100 - 2(Q1 + Q2)) * Q2 = (100 - 2(10 + 20)) * 20 = 1000. Therefore, the second firm will earn twice as much revenue as the first firm.

Question 5

Between 1950 and 1956,the three leading aluminum producers in the U.S.changed prices nine times by exactly the same amount each time and usually within one to three days of the initial price increase.This is an example of _____.

Accepted Answer

The answer of Between 1950 and 1956,the three leading aluminum...

Question 6

The following matrix shows the pricing strategies and resultant profits (in thousands of dollars)for two profit-maximizing firms.
Table 9-1
 
-Refer to Table 9-1.If Firm A sets a high price,Firm B will _____.

Accepted Answer

The answer of The following matrix shows the pricing strategies...

Question 7

Which of the following statements is true?

Accepted Answer

The theory of market concentration suggests that an increase in market concentration will lead to an increase in prices and profits due to the reduced competition in the market. This is because the fewer the number of firms, the higher the market power of each firm, which allows them to charge higher prices and increase their profits.

Question 8

During the 1990s,one of the dominant firms in the U.S.cigarette industry would raise prices once or twice a year by about 50 cents per carton.Other firms in the industry typically raised their prices by the same amount.This is an example of _____.

Accepted Answer

This is an example of price leadership, where the dominant firm sets the pricing standard for the industry and other firms follow suit. There is no evidence of predatory pricing (lowering prices to drive competitors out of the market) or price skimming (charging high prices for a new or unique product). Profit maximization and Sweezy oligopoly (where firms restrict output and collude on prices) may be applicable, but they are not the best choice given the given information.

Question 9

The kinked demand curve model explains _____ in an oligopoly.

Accepted Answer

The kinked demand curve model explains price rigidity among firms in an oligopoly. This is because firms in an oligopoly have interdependent behavior and react to changes in their competitor's prices. The kinked demand curve suggests that if a firm raises its price, its competitors will not follow suit, causing the firm to lose significant market share. However, if a firm lowers its price, its competitors will likely follow suit, resulting in a small gain in market share for the firm. As a result, firms often keep their prices stable, leading to price rigidity within the industry.

Question 10

The laundry machine industry has a four-firm concentration ratio of 98%.Based on this information,we can conclude that:

Accepted Answer

A four-firm concentration ratio of 98% indicates a highly concentrated market and a tight oligopoly, where the top four firms dominate the market. This means that these firms have significant pricing power and can potentially limit competition. Therefore, the best choice is B. The other options are not applicable since they do not reflect the characteristics of a highly concentrated market.

Question 11

When the four-firm concentration ratio is less than 40 percent,we can conclude that:

Accepted Answer

A four-firm concentration ratio of less than 40 percent indicates a low degree of market concentration and suggests that the industry is characterized by a large number of firms, each of which has a relatively small market share. This suggests that the industry is competitive.

Question 12

An oligopoly firm's effective demand curve will be kinked at the current market price if:

Accepted Answer

In an oligopoly market, firms assume that if they increase their price, other firms will not follow, leading to a decrease in sales and revenue. Conversely, if they decrease their price, other firms will follow, leading to a price war and a decrease in profits. Therefore, the firm's effective demand curve will be kinked at the current market price, as the demand for price increases will be elastic, while the demand for price decreases will be inelastic.

Question 13

During the 1990s,the U.S.cigarette industry was dominated by four major firms that charged similar prices for the cigarettes they sold under a variety of brand names.When one firm raised its prices,the other firms generally followed.The cigarette industry is best characterized as _____.

Accepted Answer

The given scenario describes a market structure known as an oligopoly, where a few dominant firms control the market and influence prices. The fact that the firms charged similar prices and followed each other's price changes suggests that they were interdependent and engaged in mutually beneficial collusion.

Question 14

The Herfindahl-Hirschman Index _____.

Accepted Answer

The Herfindahl-Hirschman Index (HHI) takes into account the market share of all the firms in the market, giving a measure of the concentration in the market. It is calculated as the sum of the squared percentage market shares of all firms in the market. HHI values range from 0 to 10,000, where 10,000 represents a monopoly and smaller values indicate a more competitive market. Therefore, choices B, C, D, and E are incorrect.

Question 15

The following matrix shows the pricing strategies and resultant profits (in thousands of dollars)for two profit-maximizing firms.
Table 9-1
 
-Refer to Table 9-1.If both the firms act noncooperatively,which of the following is most likely?

Accepted Answer

In a noncooperative setting, each firm aims to maximize its own profit without collaborating with the other. Given the matrix, if either firm believes the other will set a high price, it has an incentive to set a low price to increase its profit (37 for A if B sets high, 41 for B if A sets high). Conversely, if one expects the other to set a low price, setting a low price still yields a better or equal outcome (30 for both if both set low) than the alternative (21 for A if it sets high, B sets low; 21 for B if it sets high, A sets low). Thus, rational choice leads both to set low prices, resulting in a profit of $30,000 each, aligning with the Nash Equilibrium concept.

Question 16

Which of the following correctly explains the dominant firm model of an oligopoly?

Accepted Answer

In the dominant firm model of an oligopoly, there is a single firm that sets the price in the market, which is taken as given by the other smaller firms. This firm is known as the dominant firm and it has the ability to influence the market price because of its large size or strategic advantages. The other firms in the market adjust their prices based on the price set by the dominant firm. This model differs from perfect competition, where no single firm has the power to influence the market price, and from a monopoly, where a single firm sets the price and has no competition.

Question 17

The following matrix shows the pricing strategies and resultant profits (in thousands of dollars)for two profit-maximizing firms.
Table 9-1
 
-Refer to Table 9-1.If Firm B sets a high price,Firm A will _____.

Accepted Answer

The answer of The following matrix shows the pricing strategies...

Question 18

The concentration ratio for an industry with four firms shows the:

Accepted Answer

The concentration ratio measures the percentage of total industry sales accounted for by the largest firms in the industry. Therefore, choice A is the correct answer. The other choices are not related to the concentration ratio.

Question 19

Which of the following is true of the Cournot model of a duopoly?

Accepted Answer

In the Cournot model of a duopoly, firms independently choose their level of output based on their competitor's output. The products sold by the firms are usually imperfect substitutes. The demand curve facing each firm is downward sloping, but not necessarily horizontal. The market price is determined by both firms' output decisions. Therefore, the duopoly equilibrium lies between the pure-monopoly and purely competitive outcomes.

Question 20

In the Cournot model of quantity competition,as the number of firms increases:

Accepted Answer

In the Cournot model, as the number of firms increases, competition among them also increases, leading to a decrease in the price of the product. This process continues until the price approaches the average cost, making the market more competitive and efficient.

Quiz 9: Oligopoly