Question 1

Which of the following is NOT a factor that enables collusion to work?

Accepted Answer

Collusion on prices rather than output levels does not inherently enable collusion to work. The effectiveness of collusion typically depends on factors like the ability to detect cheating, credible threats of punishment, and patience of firms, rather than the specific focus of the collusion (prices vs. output).

Question 2

The firms in the petroleum industry of Perylia have decided to cooperate with each other by setting their respective market shares.This is an example of ________ in the petroleum industry.

Accepted Answer

Collusion refers to a secret or illegal cooperation or conspiracy, especially in order to cheat or deceive others. In this case, the firms in the petroleum industry are setting their market shares, which is a collusive practice aimed at controlling prices and maintaining their market power. Cost-cutting, undercutting, and free riding are not applicable in this scenario.

Question 3

Scenario: Two firms, Firm 1 and Firm 2, make differentiated products and compete in a duopoly market. The firms do not have a fixed cost. Firm 1's cost is $30 per unit, while Firm 2's cost is $25 per unit. (So they are the marginal cost and the average total cost). There are 1,000 consumers in this market. The demand is divided between the two firm in the following way:
• If Firm 1's price is less than twice Firm 2's price, then everyone buys from Firm 1.
• If Firm 1's price is more than twice Firm 2's price, then everyone buys from Firm 2.
• If Firm 1's price is equal to twice Firm 2's price, then half of the consumers buy from Firm 1 and the other half buy from Firm 2.
-Refer to the scenario above.Suppose Firm 2 sets the price at $25.If Firm 1 sets its price above $50,then its profit is ________.If Firm 1 sets its price above $30 and below $50,then its profit is ________.If Firm 1 sets its price below $30,then its profit is ________.

Accepted Answer

If Firm 1 sets its price above $50, it will not sell any units because its price is more than twice Firm 2's price of $25, resulting in $0 profit. If Firm 1 sets its price above $30 (its cost per unit) and below $50, it can still sell its product at a profit because it covers its marginal cost and part of the market will buy from Firm 1. If Firm 1 sets its price below $30, it sells below its cost, making it impossible to earn a profit, thus $0 profit since it does not cover its costs.

Question 4

The competition faced by firms in an oligopoly with differentiated products is higher than that faced by firms in ________.

Accepted Answer

In an oligopoly with differentiated products, firms face significant competition, but it is not as intense as in perfect competition or monopolistic competition, where there are many firms competing. A duopoly with homogeneous products also involves direct competition, but between only two firms. A monopoly faces the least competition since it is the sole provider of a product or service in the market.

Question 5

As the number of firms in an oligopolistic market increases,________.

Accepted Answer

In an oligopolistic market, as the number of firms increases, competition among them also increases. This competition tends to push prices down toward the marginal cost of production, as firms strive to undercut each other's prices to gain market share.

Question 6

Which of the following will happen if a new firm enters an oligopoly with differentiated products?

Accepted Answer

When a new firm enters an oligopoly with differentiated products, it increases the competition in the market. This often leads to a decrease in the market price as each firm tries to maintain or gain market share by lowering their prices. Therefore, the best choice is A, the market price will fall.

Question 7

A collusion breaks down if ________.

Accepted Answer

A collusion breaks down when one or more firms deviate from the agreed-upon behavior of charging the same price. If a firm charges a lower price than the price set by the other colluding firms, it can gain a larger market share and increase profits, leading to the breakdown of the collusion. If a firm charges a higher price than the other colluding firms, it would be unlikely to gain customers and may lose market share, but this would not necessarily lead to the breakdown of collusion. The price set by the colluding firms may be above or below the marginal cost of production, but that alone does not determine whether the collusion will break down.

Question 8

Suppose there are only two firms in an industry,and their products are perfect substitutes for each other.Each firm had a fixed marginal cost of $5,and zero fixed cost of operation.The highest the consumers of this product are willing to pay for it is $10,and there are 200 consumers in this market.The two firms agree to collude and come up with a pricing scheme that maximizes their joint profit.The agreed-on price of this collusion will be ________,and this collusion is ________.

Accepted Answer

The agreed-on price of this collusion will be $9.99, and this collusion is stable.

Question 9

Which of the following is true of a duopoly with differentiated products?

Accepted Answer

In a duopoly with differentiated products, firms have some pricing power as customers are not perfectly substitutable between the two products. Therefore, when one firm lowers its price, it will not lose all its customers to its rival, as some customers may still prefer its product despite the lower price of the rival. However, the firm may lose some customers to its rival, hence option B is correct. Options A, C, and D are incorrect because they do not reflect the characteristics of a duopoly with differentiated products.

Question 10

Scenario: Two firms, Firm 1 and Firm 2, make differentiated products and compete in a duopoly market. The firms do not have a fixed cost. Firm 1's cost is $30 per unit, while Firm 2's cost is $25 per unit. (So they are the marginal cost and the average total cost). There are 1,000 consumers in this market. The demand is divided between the two firm in the following way:
• If Firm 1's price is less than twice Firm 2's price, then everyone buys from Firm 1.
• If Firm 1's price is more than twice Firm 2's price, then everyone buys from Firm 2.
• If Firm 1's price is equal to twice Firm 2's price, then half of the consumers buy from Firm 1 and the other half buy from Firm 2.
-Refer to the scenario above.Suppose Firm 1 sets the price at $50.If Firm 2 sets its price above $25,then its profit is ________.If Firm 2 sets its price below $25,then its profit is ________.If Firm 2 sets its price at $25,then its profit is ________.

Accepted Answer

Given Firm 1's price is $50, if Firm 2 sets its price above $25, no one will buy from Firm 2 because Firm 1's price is not more than twice Firm 2's price, leading to $0 profit for Firm 2. If Firm 2 sets its price below $25, it will sell to all 1000 consumers but at a price lower than its cost of $25 per unit, resulting in a negative profit. If Firm 2 sets its price at $25, it matches its cost, leading to $0 profit because it neither gains nor loses per unit sold, and the demand is split due to Firm 1's price being exactly twice.

Question 11

Scenario: Two firms, Firm 1 and Firm 2, make differentiated products and compete in a duopoly market. The firms do not have a fixed cost. Firm 1's cost is $30 per unit, while Firm 2's cost is $25 per unit. (So they are the marginal cost and the average total cost). There are 1,000 consumers in this market. The demand is divided between the two firm in the following way:
• If Firm 1's price is less than twice Firm 2's price, then everyone buys from Firm 1.
• If Firm 1's price is more than twice Firm 2's price, then everyone buys from Firm 2.
• If Firm 1's price is equal to twice Firm 2's price, then half of the consumers buy from Firm 1 and the other half buy from Firm 2.
-Refer to the scenario above.Suppose Firm 2 sets the price at $25.What price should Firm 1 set in response?

Accepted Answer

If Firm 2 sets the price at $25, then according to the demand conditions, everyone will buy from Firm 2 if Firm 1 sets the price higher than $50. 
If Firm 1 sets the price between $25 and $50, then half of the consumers will buy from Firm 1 and half from Firm 2. 
However, if Firm 1 sets the price below $25, then everyone will buy from Firm 1 which is the most profitable outcome for Firm 1. 
Therefore, Firm 1 should set the price at $25 to capture half of the market or set it lower than $25 to capture the entire market. 
The best choice for Firm 1 is to set the price at $25 to maximize its profits.

Question 12

Crisps and Smith's are the only two bakeries that sell cookies in a small community.Crisps sells butter cookies,while Smith's sells chocolate cookies.Which of the following will happen if Smith's lowers its price for cookies slightly below Crisps's price?

Accepted Answer

Since Crisps and Smith's sell different types of cookies (butter and chocolate, respectively), a slight price reduction by Smith's might attract some customers who are price-sensitive or who enjoy both types of cookies, leading to a decrease in demand for Crisps's cookies. However, it won't necessarily result in Crisps losing all its customers, as some may prefer butter cookies specifically.

Question 13

OnWheels and Speedstar are the only two manufacturers of sports cars.The cars manufactured by these companies are considered to be close substitutes,but not identical.How should each firm determine its price in this case?

Accepted Answer

The answer of OnWheels and Speedstar are the only two...

Question 14

Scenario: Two firms, Firm 1 and Firm 2, make differentiated products and compete in a duopoly market. The firms do not have a fixed cost. Firm 1's cost is $30 per unit, while Firm 2's cost is $25 per unit. (So they are the marginal cost and the average total cost). There are 1,000 consumers in this market. The demand is divided between the two firm in the following way:
• If Firm 1's price is less than twice Firm 2's price, then everyone buys from Firm 1.
• If Firm 1's price is more than twice Firm 2's price, then everyone buys from Firm 2.
• If Firm 1's price is equal to twice Firm 2's price, then half of the consumers buy from Firm 1 and the other half buy from Firm 2.
-Refer to the scenario above.Suppose Firm 1 sets the price at $50.What price should Firm 2 set in response?

Accepted Answer

If Firm 1 sets the price at $50, then according to the demand conditions, all consumers will buy from Firm 1 if Firm 2 sets a price above $25. Therefore, Firm 2 needs to set a price below $25 in order to attract any consumers. Choosing a price below $50 (option C) would mean that some consumers will still buy from Firm 1, reducing Firm 2's market share. Choosing a price at $30 (option D) would not provide any advantage to Firm 2 as all consumers will still buy from Firm 1. Thus, option B is the only choice that makes sense for Firm 2 to compete with Firm 1.

Question 15

Which of the following is a difference between an oligopoly with homogeneous products and an oligopoly with differentiated products?

Accepted Answer

In an oligopoly with homogeneous products, firms compete solely on price, leading to zero economic profits in equilibrium due to intense price competition. In contrast, in an oligopoly with differentiated products, firms have some market power and can earn positive economic profits by offering unique and differentiated products that consumers are willing to pay a premium for. Therefore, D is the correct choice as it correctly distinguishes the two types of oligopolies based on their equilibrium profit outcomes.

Question 16

Collusion occurs when firms ________.

Accepted Answer

Collusion refers to an agreement between firms to limit competition by coordinating their production or pricing decisions. This is commonly seen in situations where firms in an industry have limited competition and can collectively raise prices or restrict output levels to maximize profits. Therefore, the correct answer is B - collusion occurs when firms conspire to set the quantity they produce or the prices they charge.

Question 17

Firms in an oligopoly often do not collude with one another because ________.

Accepted Answer

Collusion is illegal in many jurisdictions as it restricts competition and can lead to higher prices for consumers. This legal prohibition makes firms in an oligopoly hesitant to collude.

Question 18

Scenario: Two firms, Firm 1 and Firm 2, make differentiated products and compete in a duopoly market. The firms do not have a fixed cost. Firm 1's cost is $30 per unit, while Firm 2's cost is $25 per unit. (So they are the marginal cost and the average total cost). There are 1,000 consumers in this market. The demand is divided between the two firm in the following way:
• If Firm 1's price is less than twice Firm 2's price, then everyone buys from Firm 1.
• If Firm 1's price is more than twice Firm 2's price, then everyone buys from Firm 2.
• If Firm 1's price is equal to twice Firm 2's price, then half of the consumers buy from Firm 1 and the other half buy from Firm 2.
-Refer to the scenario above.Suppose Firm 1 sets its price at $50 and Firm 2 sets its price at $25.Is this a Nash equilibrium? Why?

Accepted Answer

In a Nash equilibrium, each firm's strategy is the best response to the other firm's strategy. Here, if Firm 1 sets its price at $50, Firm 2's best response is to set its price at $25 to capture all the consumers, given the demand conditions. Conversely, if Firm 2 sets its price at $25, Firm 1's best response is to set its price at $50, capturing half the market without being able to profitably undercut Firm 2 due to its higher cost structure. This makes both firms' strategies best responses to each other, indicating a Nash equilibrium.

Question 19

There are a few firms in the automobile industry in Zadmia.To prevent a price war,these firms have secretly agreed to charge a price 20 percent above the marginal cost of production.This is an example of ________.

Accepted Answer

The agreement between the firms to charge a price 20 percent above the marginal cost of production is an example of collusion - when firms secretly agree to work together to achieve a shared goal. In this case, the shared goal is to prevent a price war and ensure that each firm earns a profit at a slightly higher price point.

Question 20

If firms in an oligopoly industry producing differentiated products collude,________.

Accepted Answer

When firms in an oligopoly industry producing differentiated products collude, they collectively produce the monopoly output level (which is less than the competitive level but greater than the non-collusive oligopoly level) and divide the monopoly profits. This is achieved by setting a high price and restricting output to ensure that they earn higher profits than they would in a non-collusive oligopoly setting.

Quiz 14: Oligopoly and Monopolistic Competition