Question 1

A market is composed of five firms, and their market shares are 30 percent, 25 percent, 20 percent, 15 percent, and 10 percent. What is the Herfindahl index for the industry?
A) 100
B) 2,250
C) 6,116
D) 10,000

Accepted Answer

The Herfindahl index is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For this market: (30^2) + (25^2) + (20^2) + (15^2) + (10^2) = 900 + 625 + 400 + 225 + 100 = 2,250.

Question 2

Which of the following is an oligopoly model where firms assume that their rivals will hold their rates of production constant?
A) The kinked demand curve model
B) The Cournot model
C) The Bertrand model
D) The price leadership model

Accepted Answer

A

Question 3

Which of the following is an oligopoly model where firms assume that their rivals will hold their rate prices constant?
A) The kinked demand curve model
B) The Cournot model
C) The Bertrand model
D) The price leadership model

Accepted Answer

C

Question 4

Which of the following is an oligopoly model where firms assume that their rivals will match price cuts but not price increases?
A) The kinked demand curve model
B) The Cournot model
C) The Bertrand model
D) The price leadership model

Accepted Answer

The kinked demand curve model is characterized by firms assuming that their rivals will match price cuts to avoid losing market share but will not match price increases, leading to a kinked demand curve for the firm. This assumption results in price rigidity within the market.

Question 5

Which of the following is an oligopoly model where firms respond to the behavior of a dominant firm?
A) The kinked demand curve model
B) The Cournot model
C) The Bertrand model
D) The price leadership model

Accepted Answer

The price leadership model is an oligopoly model where firms respond to the pricing changes of a dominant firm, often following its lead in setting their own prices.

Question 6

Use the following to answer questions below : 
-Refer to the kinked demand graph. If an oligopolistic firm with constant unit cost equal to $60 faces this demand curve, then the firm will
A) produce 2 units of output.
B) produce 3 units of output.
C) produce 4 units of output.
D) None of the above is correct.

Accepted Answer

The firm will produce 2 units of output because at that quantity, marginal cost equals marginal revenue.

Question 7

Use the following to answer questions below : 
-Refer to the kinked demand graph. If an oligopolistic firm with constant unit cost equal to $60 faces this demand curve, then the firm will
A) charge $60.00 per unit.
B) charge $62.50 per unit.
C) charge $65.00 per unit.
D) None of the above is correct.

Accepted Answer

In a kinked demand curve model, firms in an oligopoly face a demand curve that is more elastic for price increases and less elastic for price decreases. The firm will set a price where marginal cost equals marginal revenue, which typically occurs at the kink. Given the constant unit cost of $60, the firm will likely charge a price above this cost, such as $65.00, to maximize profit while considering the kinked demand curve.

Question 8

Use the following to answer questions below : 
-Refer to the kinked demand graph. If an oligopolistic firm with constant unit cost equal to $40 faces this demand curve, then the firm will
A) produce 2 units of output.
B) produce 4 units of output.
C) produce 6 units of output.
D) None of the above is correct.

Accepted Answer

The firm will produce 4 units of output because at that quantity, marginal cost equals marginal revenue.

Question 9

Use the following to answer questions below : 
-Refer to the kinked demand graph. If an oligopolistic firm with constant unit cost equal to $40 faces this demand curve, then the firm will
A) charge $40.00 per unit.
B) charge $50.00 per unit.
C) charge $60.00 per unit.
D) None of the above is correct.

Accepted Answer

In a kinked demand curve model, firms in an oligopoly are likely to charge a price above marginal cost. Given the constant unit cost of $40, the firm will charge a price higher than this, typically at the kink, which is often represented as $60 in such models.

Question 10

Use the following to answer questions below : -Refer to the graph of market demand and marginal revenue. Two firms have formed a centralized cartel in order to maximize profit on the market. Their marginal cost curves are given below: MC₁ = 5Q₁ and MC₂ = 10Q₂ In order to maximize profit, the firms should produce A) Q₁ = 4, Q₂ = 2, and charge P = 50. B) Q₁ = 8, Q₂ = 0, and charge P = 40. C) Q₁ = 3, Q₂ = 1, and charge P = 60. D) None of the above is correct.

Accepted Answer

The correct answer is A because it is the only option that satisfies the profit-maximizing condition of MR = MC for both firms.

Question 11

Use the following to answer questions below : -Refer to the graph of market demand and marginal revenue. Two firms have formed a centralized cartel in order to maximize profit on the market. Their marginal cost curves are given below: MC₁ = 10Q₁ and MC₂ = 30Q₂ In order to maximize profit, the firms should produce A) Q₁ = 4, Q₂ = 2, and charge P = 50. B) Q₁ = 8, Q₂ = 0, and charge P = 40. C) Q₁ = 3, Q₂ = 1, and charge P = 60. D) None of the above is correct.

Accepted Answer

To maximize profit, the cartel should equate marginal revenue (MR) with the combined marginal cost (MC) of production. Given the marginal cost functions, the optimal production levels are Q₁ = 3 and Q₂ = 1, which results in a price of P = 60.

Question 12

Use the following to answer questions below: 
-Refer to the price leadership graph. The equilibrium price is
A) $40.
B) $50.
C) $60.
D) None of the above is correct.

Accepted Answer

The equilibrium price is the price at which the quantity supplied equals the quantity demanded. In the graph, the equilibrium price is $40.

Question 13

Use the following to answer questions below: 
-Refer to the price leadership graph. The total quantity traded on the market at equilibrium is
A) 3 units.
B) 5 units.
C) 6 units.
D) None of the above is correct.

Accepted Answer

In a price leadership model, the dominant firm sets the price, and the total quantity traded is determined by the intersection of the dominant firm's marginal cost and the market demand curve. In this scenario, the equilibrium quantity is 6 units.

Question 14

Use the following to answer questions below: 
-Refer to the price leadership graph. The quantity supplied by the barometric firm is
A) 2 units.
B) 3 units.
C) 4 units.
D) None of the above is correct.

Accepted Answer

The barometric firm is the price leader and sets the price at $4. At this price, the quantity supplied by the barometric firm is 2 units.

Question 15

Use the following to answer questions below: 
-Refer to the price leadership graph. The quantity supplied by the follower firms is
A) 2 units.
B) 3 units.
C) 4 units.
D) None of the above is correct.

Accepted Answer

The answer of Use the following to answer questions below:...

Question 16

If an oligopolist is attempting to maximize revenue, it should produce a quantity of output where marginal revenue is
A) greater than marginal cost.
B) equal to zero.
C) equal to marginal cost.
D) None of the above is correct.

Accepted Answer

To maximize revenue, an oligopolist should produce where marginal revenue equals zero, as this is the point where any additional unit of output would not increase total revenue.

Question 17

If a monopolistically competitive firm is earning profits in the short run, then in the long run the behavior of competing firms
A) will cause the firm's supply curve to shift to the left.
B) will cause the firm's supply curve to shift to the right.
C) will cause the firm's demand curve to shift to the left.
D) will cause the firm's demand curve to shift to the right.

Accepted Answer

In the long run, the entry of new firms into the market, attracted by the profits, will increase competition for the original firm. This increased competition will reduce the demand for the original firm's product as consumers have more alternatives, leading to a leftward shift in the firm's demand curve.

Question 18

Two firms that comprise an industry have decided to engage in collusion. They intend to maximize their total collective profit, that is, to behave as a single monopolist. How should they behave?
A) Both firms should increase their levels of output.
B) The firm with the higher marginal cost should reduce output and the firm with the lower marginal cost should increase output.
C) The firm with the lower marginal cost should reduce output and the firm with the higher marginal cost should increase output.
D) Both firms should reduce their levels of output.

Accepted Answer

To maximize total collective profit as if they were a single monopolist, the firm with the higher marginal cost should reduce its output, allowing the firm with the lower marginal cost to increase its output. This approach leverages the cost efficiency of the lower-cost firm to produce more, while the higher-cost firm produces less, optimizing overall profit for the collusion.

Question 19

Oligopolist A is considering a price reduction. The payoff from this strategy depends on the behavior of Oligopolist B. If Oligopolist B also reduces price, then Oligopolist A will earn a profit of $50,000. If Oligopolist B does not reduce price, then Oligopolist A will earn a profit of $100,000. The situation is symmetrical; that is, if Oligopolist B reduces price and Oligopolist A doesn't, then Oligopolist B will earn a profit of $100,000, and if both oligopolists reduce their prices, then Oligopolist B will earn a profit of $50,000. If neither oligopolist reduces price, then both will continue to earn profits of $75,000. What can Oligopolist A and Oligopolist B be expected to do in the absence of collusion?
A) Both will refrain from reducing price.
B) Both will reduce price.
C) Oligopolist A will reduce price, but Oligopolist B won't.
D) Oligopolist B will reduce price, but Oligopolist A won't.

Accepted Answer

In the absence of collusion, both oligopolists are likely to reduce their prices to avoid being undercut by the other, leading to a situation where both earn $50,000 instead of risking earning less by not reducing prices while the other does.

Question 20

Some economists have suggested that oligopolists tend to maintain stable prices when there are changes in the demand for their products or in their costs of production. Which of the following models provides an explanation for this type of behavior?
A) Price leadership
B) Centralized cartel
C) Prisoners' dilemma
D) Kinked demand curve

Accepted Answer

The kinked demand curve model explains why oligopolists might keep prices stable despite changes in demand or production costs. It suggests that if a firm raises its prices, competitors will not follow, leading to a loss in market share for the firm that increased prices. Conversely, if a firm lowers prices, competitors will also lower their prices to maintain their market share, leading to a situation where no one benefits from changing prices. This creates a situation where prices become rigid or "kinked" at the current level.

Quiz 10: Oligopoly and Firm Architecture

A market is composed of five firms, and their market shares are 30 percent, 25 percent, 20 percent, 15 percent, and 10 percent. What is the Herfindahl index for the industry?

Which of the following is an oligopoly model where firms assume that their rivals will hold their rates of production constant?

Which of the following is an oligopoly model where firms assume that their rivals will hold their rate prices constant?

Which of the following is an oligopoly model where firms assume that their rivals will match price cuts but not price increases?

Which of the following is an oligopoly model where firms respond to the behavior of a dominant firm?

Use the following to answer questions below : -Refer to the kinked demand graph. If an oligopolistic firm with constant unit cost equal to $60 faces this demand curve, then the firm will

Use the following to answer questions below : -Refer to the kinked demand graph. If an oligopolistic firm with constant unit cost equal to $60 faces this demand curve, then the firm will

Use the following to answer questions below : -Refer to the kinked demand graph. If an oligopolistic firm with constant unit cost equal to $40 faces this demand curve, then the firm will

Use the following to answer questions below : -Refer to the kinked demand graph. If an oligopolistic firm with constant unit cost equal to $40 faces this demand curve, then the firm will

Use the following to answer questions below: -Refer to the price leadership graph. The equilibrium price is

Use the following to answer questions below: -Refer to the price leadership graph. The total quantity traded on the market at equilibrium is

Use the following to answer questions below: -Refer to the price leadership graph. The quantity supplied by the barometric firm is

Use the following to answer questions below: -Refer to the price leadership graph. The quantity supplied by the follower firms is

If an oligopolist is attempting to maximize revenue, it should produce a quantity of output where marginal revenue is

If a monopolistically competitive firm is earning profits in the short run, then in the long run the behavior of competing firms

Two firms that comprise an industry have decided to engage in collusion. They intend to maximize their total collective profit, that is, to behave as a single monopolist. How should they behave?

Some economists have suggested that oligopolists tend to maintain stable prices when there are changes in the demand for their products or in their costs of production. Which of the following models provides an explanation for this type of behavior?