Question 1

A duopoly in which the two firms collude on a price to set is called a

Accepted Answer

In a collusive duopoly, the two firms in the market agree to set a specific price level to maximize their joint profits. This allows them to avoid undercutting each other and engaging in a price war, which would ultimately harm both of their profits. The other two options, the Bertrand model and competitive duopoly, indicate situations where the two firms are competing on price rather than colluding to set it.

Question 2

In the Stackelberg model, the Stackelberg follower moves

Accepted Answer

In the Stackelberg model, the leader moves first and the follower moves second. This is because the leader has the advantage of being able to anticipate the decisions of the follower and strategically select their actions to maximize their own profit. Therefore, the follower must respond to the leader's actions and cannot move first.

Question 3

A duopoly game in which firms alternate in setting quantities is called a

Accepted Answer

In a sequential-move quantity-setting duopoly game, one firm sets its quantity first and then the other firm sets its quantity in response to the first firm's quantity choice. This game is also known as a "turn-based" or "move-and-respond" game, and is different from a simultaneous-move game where both firms choose their quantity simultaneously. The Stackelberg-move quantity-setting duopoly game is another type of sequential-move game where one firm sets its quantity first, knowing that the other firm will respond to its quantity choice.

Question 4

Collusive arrangements are more viable if the competition is like a game that is played

Accepted Answer

Collusive arrangements are more likely to succeed if there is repeated competition as the firms can enforce the agreement over time and monitor each other's compliance with the arrangement. In a one-time competition, there is no guarantee that the firms will stick to the agreement, and in a market with no competition, there is no need for collusion.

Question 5

A model of oligopolistic competition where firms compete by setting prices is called a

Accepted Answer

The Bertrand model assumes firms compete by setting prices in an oligopolistic market. The Cournot model assumes firms compete by setting quantities, while the Stackelberg model assumes a leader-follower structure, where one firm sets its quantity or price first and the other firms adjust their strategies accordingly.

Question 6

Once firms in a collusive duopoly start cheating on the agreed-upon price, the cheating usually continues until the price is

Accepted Answer

Once firms in a collusive duopoly start cheating on the agreed-upon price, the cheating usually continues until the price is driven down to marginal cost. This is because each firm has an incentive to undercut the other firm's price to gain a larger market share and increase profits. As both firms start to lower their prices, the price will eventually reach the competitive level of marginal cost.

Question 7

The set of output combinations for two duopolistic firms that has the property of the sum of the outputs being constant is called an

Accepted Answer

An iso-output line represents all possible output combinations for two duopolistic firms where the sum of their outputs is constant. This curve is also referred to as an isoquant, which shows the different input combinations that can produce the same level of output. Isocost curves represent all possible combinations of inputs that would cost the same and is related to input prices, while an isoprofit curve shows all possible combinations of inputs that would yield the same level of profit.

Question 8

As a government official responsible for commerce, would you prefer to see a market reach the monopolistic, perfectly competitive, or Cournot equilibrium?

Accepted Answer

The answer of As a government official responsible for commerce,...

Question 9

Which of the following does not derive from an assumption that opponents will not respond to any action that a firm takes?

Accepted Answer

The kinked-demand curve model assumes that competitors will not match price increases but will match price decreases, implying a response to the firm's actions.

Question 10

The advantage the leader has in the Stackelberg model, which allows the leader to produce a higher level of output than in the Cournot equilibrium, thus receiving greater profits, is known as the

Accepted Answer

The advantage described in the question is commonly referred to as the first-mover advantage, which is the benefit that a firm gains by being the first to enter a market or take a specific strategic action. In the Stackelberg model, the leader has the advantage of being able to set the quantity first and the follower has to adjust accordingly. As a result, the leader can effectively set the market price and production levels, achieving greater profits. Therefore, the correct answer is A - first-mover advantage.

Question 11

What is the difference between convergent and divergent Cournot equilibria?

Accepted Answer

The answer of What is the difference between convergent and...

Question 12

Under the Edgeworth model, will firms engage in price wars?

Accepted Answer

The answer of Under the Edgeworth model, will firms engage...

Question 13

Describe a Cournot equilibrium.

Accepted Answer

The answer of Describe a Cournot equilibrium....

Question 14

A model that assumes that the firms are capacity-constrained is the

Accepted Answer

The Edgeworth model assumes that firms are capacity-constrained, focusing on how these constraints affect competition and market outcomes.

Question 15

The assumption that firms will match a reduction but not an increase in the prevailing price that is responsible for the stability of duopolistic and oligopolistic markets is known as the

Accepted Answer

The assumption that firms will match a reduction but not an increase in the prevailing price is known as the kinked-demand curve conjecture. This theory explains why duopolistic and oligopolistic markets tend to be stable and less prone to price wars. The idea is that if one firm lowers its price, the other firms will match the reduction to avoid losing market share. However, if one firm raises its price, the other firms will not follow suit because they fear losing customers to their competitors who maintain their lower prices. This creates a "kink" in the demand curve at the prevailing price and explains why prices tend to stabilize in these markets.

Question 16

At a Bertrand equilibrium, the quantity sold in the market is the

Accepted Answer

In a Bertrand equilibrium, firms compete on price, leading to a situation where prices fall to marginal cost if the products are identical and firms have similar costs. This results in the welfare-optimal quantity being sold in the market, as it maximizes consumer and producer surplus by ensuring that all units of the good that provide more value than they cost to produce are indeed produced and sold.

Question 17

At a Bertrand equilibrium, the price of the product is driven down to

Accepted Answer

At a Bertrand equilibrium, firms are competing purely on price and assuming that they have identical products, consumers will choose to buy from the firm with the lowest price. Therefore, in order to maximize its profits, each firm will set its price equal to its marginal cost. This is because if a firm sets a price higher than its marginal cost, it will lose customers to the rival firm, and if it sets a price lower than its marginal cost, it will not be making as much profit as it could. Therefore, the price will be driven down to the marginal cost level.

Question 18

Which welfare outcome falls between the other two?

Accepted Answer

Cournot equilibrium falls between monopoly market and perfectly competitive market in terms of welfare outcomes. In a monopoly market, consumer surplus is lower and producer surplus is higher than in a competitive market, leading to lower overall welfare. In a perfectly competitive market, there is maximum consumer surplus and producer surplus, resulting in the highest welfare. In a Cournot equilibrium, there is some degree of market power and competition between firms, so welfare outcomes are between those of monopoly and perfect competition.

Question 19

Describe the difference between a Cournot model and a Bertrand model.

Accepted Answer

The answer of Describe the difference between a Cournot model...

Quiz 19: The World of Oligopoly: Preliminaries to Successful Entry