Question 1

Cartels are inherently self-destructive because each member firm has the incentive to cheat on the cartel agreement.

Accepted Answer

Unless the cartel can establish mechanisms to detect and punish cheaters, the agreement will fail.

Question 2

Television stations have seemingly synchronized their commercial breaks. This is likely an example of

Accepted Answer

The fact that television stations have synchronized their commercial breaks suggests that they are engaged in tacit collusion, where they coordinate their behavior without directly communicating with each other. This behavior can be beneficial for individual stations, as it can prevent them from losing market share to competitors.

Question 3

Which of the following statements is FALSE?

Accepted Answer

Cartels can form among any group of firms, not just oligopolies.

Question 4

Cartels can detect cheating by

Accepted Answer

The answer of Cartels can detect cheating by
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Question 5

A cartel is a group of firms that attempts to

Accepted Answer

A cartel is a group of firms that work together to maximize joint profit by coordinating their actions and setting prices or output levels.

Question 6

Which of the following does NOT influence the type of oligopoly that forms?

Accepted Answer

The type of demand curve the firms face does not influence the type of oligopoly that forms. Factors such as whether firms act sequentially or simultaneously, whether firms set price or quantity, and the time horizon over which firms will be in competition can have an impact on the type of oligopoly that forms.

Question 7

The Cournot Model of Oligopoly assumes that

Accepted Answer

The Cournot Model of Oligopoly assumes that firms decide what quantity to produce, make their decisions simultaneously, and do not cooperate. Therefore, all of the above answers are correct.

Question 8

When the market demand curve is relatively inelastic

Accepted Answer

When the market demand curve is relatively inelastic, raising the price will not significantly decrease the quantity demanded. Therefore, the cartel can set a higher price and still achieve higher profits without losing too many customers.

Question 9

If a cartel is unable to monitor its members and punish those firms that violate their agreement, then

Accepted Answer

The success of a cartel depends on its ability to enforce the agreements made among its members. If a cartel is unable to monitor its members and punish those firms that violate their agreement, then the member firms will have an incentive to cheat on the agreement and produce more output than agreed upon. This would lead to a collapse of the cartel, resulting in increased competition among member firms and lower prices in the market.

Question 10

Which of the following is a current example of a government-granted cartel?

Accepted Answer

U.S. professional baseball is a government-granted cartel due to its antitrust exemption, allowing it to operate without the same competitive pressures as other industries.

Question 11

The use of "most-favored-customer" clauses is an example of

Accepted Answer

"Most-favored-customer" clauses require each member of a cartel to offer their best prices to all customers, and not to give preferential treatment to any particular customer. This rule helps to discourage members from secretly cutting deals with a favored customer, which can undermine the stability of the cartel. If one member of the cartel decides to lower the price for a single customer, they must also lower it for all previous customers as well. This mechanism helps to ensure that all members of the cartel stay in line and maintain the agreed-upon pricing structure.

Question 12

The Organization of Petroleum Exporting Countries (OPEC)is an example of a(n)

Accepted Answer

OPEC is a cartel, as it is an organization made up of oil-producing countries that work together to control the supply and prices of oil in the world market. Cartels are generally formed to increase profits and reduce market competition.

Question 13

Explain why gasoline stations across the street from each other with large signs displaying their prices may "legally" jointly set monopoly prices.

Accepted Answer

The answer of Explain why gasoline stations across the street...

Question 14

A cartel might fail because

Accepted Answer

All of the above reasons can cause a cartel to fail. If a cartel does not control enough of the output in a market, then it may not have enough market power to raise prices. In addition, there is always an incentive for cartel members to cheat and produce more output than agreed upon in order to make higher profits. Finally, if too many firms leave the cartel, then the cartel's market share may decrease, causing the cartel price to fall.

Question 15

Each member of a cartel

Accepted Answer

The main purpose of a cartel is to reduce output and increase the price of the product in order to maximize profits for its members. Therefore, each member agrees to reduce output lower than it would if it were acting independently.

Answer: B 
 This statement is false. While cartels may operate illegally in some countries, they can also be legal if they are sanctioned and regulated by the government or an international organization.

Answer: C 
 This statement is false. Cartels aim to coordinate output levels among its members in order to control prices and maximize profits. Members must agree to set output levels collectively.

Answer: D 
 This statement is partly true. While cartel members may make less money in terms of market share due to reduced output, they can still make higher profits through the increased prices of their products. However, this also depends on the elasticity of demand for the product.

Question 16

When deciding on output levels, members of a cartel

Accepted Answer

Members of a cartel consider the impact of output level changes on their profits. They aim to maximize their joint profits by setting output levels that will result in the highest possible profit for all members. This is achieved by considering market demand, production costs, and the price elasticity of demand. Therefore, option C is the correct answer. Option A is not always true since MR = MC is the profit-maximizing output level only for a single firm operating in a perfectly competitive market. Option B is incorrect because if members of a cartel produced the same output level as they would in a competitive market, they would not be maximizing their joint profits. Option D is incorrect because, while cartels aim to behave as monopolies to maximize their joint profits, they do not necessarily act like monopolies since their ability to control prices and output levels is limited by the threat of cheating and the actions of non-cartel members.

Question 17

The specific oligopolistic model used in a market

Accepted Answer

The specific oligopolistic model used in a market depends on the characteristics of the market, such as time horizon for competition. Pricing structure and illegality of cartels may also play a role, but they are not the only determining factors. The Cournot model is just one possible model used in oligopoly analysis. Therefore, the best choice is B.

Question 18

In a sense, a cartel is self-destructive because

Accepted Answer

Each cartel member has an incentive to cheat on the cartel because by producing more than their allocated output, they can earn more profit. This competitive behavior among cartel members can lead to the breakdown of the cartel, as each member tries to increase their market share and profit. Therefore, a cartel is essentially self-destructive.

Question 19

A typical firm in a cartel will hold which of the following attitudes?

Accepted Answer

A typical firm in a cartel will hold the attitude that if they alone cheat, they will be better off. However, if everyone cheats, they will be worse off. Therefore, option B is the best choice. Option A is not valid because if everyone cheats, the cartel will fall apart, and the member firms will suffer in the long run. Option C is not valid because there will always be an incentive to cheat, especially if the profits are higher. Option D is not valid because if a firm suspects other firms of cheating and decides not to cheat, they will be at a disadvantage compared to other firms who cheat.

Question 20

Which of the following conditions can help prolong the life of a cartel?

Accepted Answer

Having only a few firms in the market that are all part of the cartel makes it easier to monitor and enforce cartel agreements, thus helping to prolong the life of the cartel.

Quiz 11: Oligopoly and Monopolistic Competition