Question 1

Which makes it easier for a cartel to operate effectively over time?
A) Demand for the cartel's product decreases.
B) Demand for the cartel's product becomes more elastic.
C) The number of substitutes for the cartel's product increases.
D) Each member firm observes the pricing and output decisions of other firms in the cartel.

Accepted Answer

When each member firm observes the pricing and output decisions of other firms in the cartel, it becomes easier for the cartel to operate effectively over time. This is because the firms can coordinate their actions and ensure that they are all following the same pricing and output strategies. As a result, the cartel can maintain higher prices and profits than if each firm operated independently. Choices A, B, and C all make it more difficult for the cartel to operate effectively over time, as they either decrease demand for the cartel's product or increase competition from substitutes.

Question 2

In imperfectly competitive industries,producers' agreements to restrict output tend to be unstable because each firm has an incentive to:
A) produce more than its output quota.
B) lower both its price and its output.
C) raise prices above the cooperative price.
D) establish competitive price and output levels.

Accepted Answer

In imperfectly competitive industries, firms have an incentive to produce more than their output quota to increase their individual profits, leading to instability in agreements to restrict output.

Question 3

In competing with rivals,oligopolistic firms will tend to use:
A) price cuts because they do not add to costs like advertising.
B) advertising because it is less easily duplicated than price cuts.
C) collusion because it is a legal way to increase market share.
D) price wars because they will increase the profits of firms.

Accepted Answer

Oligopolistic firms are often interdependent and can engage in non-price competition such as advertising which is less easily duplicated and can help to differentiate their products from those of their rivals. Price cuts can lead to a price war which can harm all firms in the industry. Collusion is illegal and can result in penalties from government regulators.

Question 4

Which would make it easier to maintain an effective collusive agreement in a cartel?
A) The emergence of a number of potential entrant firms
B) A decrease in the elasticity of demand for the cartel's product
C) An increase in the number of substitutes for products produced by the cartel
D) A new method of pricing that makes it more difficult for firms in the cartel to determine the prices at which other cartel members are selling their product

Accepted Answer

A decrease in the elasticity of demand for the cartel's product would mean that consumers have fewer alternatives to the cartel's product, making it easier to maintain high prices and reduce the incentive for firms to cheat on the collusive agreement.

Question 5

The Organization of Petroleum Exporting Countries (OPEC)behaves in many ways like an international cartel.If the cartel were to hire a consulting firm to monitor the production rates of member countries,the economic reason for this monitoring is to:
A) make sure that each member country is producing at an output level at which price equals marginal cost.
B) make sure all the member countries produce at least their quotas so that there will be no oil shortage.
C) detect those member countries that are depressing prices by producing more than their assigned quotas.
D) make sure that the marginal revenue for the last barrel of oil sold by each member country is less than its price.

Accepted Answer

The monitoring of production rates is to detect those member countries that are producing more than their assigned quotas, which results in surplus supply and depresses prices. By identifying these countries, OPEC can take action to ensure that all its members adhere to the agreed-upon production levels and prevent price declines. Option A is incorrect because OPEC's goal is to maintain high oil prices, so producing at a level where price equals marginal cost is not desirable. Option B is incorrect because there is no indication that OPEC is concerned with preventing oil shortages. Option D is incorrect because OPEC wants to earn the highest possible revenue, so the marginal revenue for the last barrel of oil sold should be greater than its price.

Question 6

A major reason that firms form a cartel is to:
A) reduce the elasticity of demand for the product.
B) enlarge the market share for each producer.
C) minimize the costs of production.
D) maximize joint profits.

Accepted Answer

The major reason for firms to form a cartel is to maximize joint profits. Cartels involve cooperation among firms to limit competition by coordinating pricing, output, or other strategic decisions. This allows the firms to collectively increase prices and reduce output, creating artificial scarcity and driving up profits for all members of the cartel. This is only possible if all members of the cartel agree to the terms and follow through with their commitments.

Question 7

If oligopolistic firms facing similar cost and demand conditions successfully collude,price and output results in this industry will be most accurately predicted by which of the following models?
A) Kinked-demand curve model of oligopoly
B) Price-leadership model of oligopoly
C) Pure monopoly model
D) Monopolistic competition model

Accepted Answer

When oligopolistic firms successfully collude, they act as a single entity, similar to a pure monopoly, setting prices and output to maximize joint profits.

Question 8

Suppose a few powerful firms control all production in an industry and face identical demand and cost schedules.If they successfully collude and maximize joint profits,then price,output,and profit levels in the industry will be the same as those in:
A) pure monopoly.
B) regulated monopoly.
C) monopolistic competition.
D) an oligopoly with a kinked-demand curve.

Accepted Answer

When firms collude to maximize joint profits, they effectively act as a single entity, similar to a pure monopoly, setting prices and output to maximize profits.

Question 9

Price leadership represents a situation where oligopolistic firms:
A) reduce their reliance on nonprice competition.
B) conspire to form a cartel.
C) face a kinked-demand curve.
D) tacitly collude.

Accepted Answer

Price leadership refers to a situation where one dominant firm in an oligopoly sets the price and other firms follow it. This could happen either due to a tacit understanding between the firms or due to the dominant firm's size and market power. In either case, the other firms in the industry accept the dominant firm's price as a benchmark and adjust their prices accordingly. This leads to a degree of coordination in pricing behavior among the firms. Hence, choice D, which refers to tacit collusion, is the best answer. Choices A, B, and C are not necessarily true or relevant to the concept of price leadership.

Question 10

The incentive to cheat is strong in a cartel because:
A) each firm can increase its output and thus its profits by cutting price.
B) the marginal revenue for an individual firm is greater than marginal cost at the profit-maximizing price set by the cartel.
C) there is a significant lack of government regulation of cartels,especially those in worldwide production.
D) the costs of production are the same for each firm,but the product demand differs.

Accepted Answer

Each firm in a cartel can increase its profits by secretly cutting prices and increasing output, as the cartel's agreed price is typically above the competitive level.

Question 11

A cartel is formed among the major firms in an industry that maximizes joint profits of the firms.Each firm:
A) will operate at the level of output associated with the kink in the demand curve.
B) will be protected from the economic effects of a recession.
C) has a perfectly elastic demand for its product.
D) has the incentive to cheat by cutting its price.

Accepted Answer

Each firm in a cartel has the incentive to cheat by cutting its price to increase its own profits, even though this undermines the cartel's joint profit maximization.

Question 12

If a particular bank regularly announces changes in its interest rate schedules before its competitors,which then set rates very close to those announced by that bank,this could be described as:
A) markup pricing.
B) predatory pricing.
C) price leadership.
D) explicit price collusion.

Accepted Answer

This could be described as price leadership, where one bank sets the standard for interest rates and other competitors follow suit. Markup pricing refers to the practice of adding a percentage to a product's cost to determine its selling price. Predatory pricing involves intentionally setting low prices to drive competitors out of business. Explicit price collusion is when competitors come together to agree on prices, which is illegal. None of these options accurately describe the situation presented in the question.

Question 13

Which constitutes an obstacle to collusion among oligopolists?
A) A standardized product
B) A large number of firms
C) Prosperous economic conditions
D) Trademarks and copyrights

Accepted Answer

The presence of a large number of firms makes it difficult for oligopolists to collude and fix prices because it becomes harder to monitor the actions of all firms and enforce any agreements made between them.

Question 14

The kinked-demand curve model of oligopoly:
A) suggests a firm's rivals will ignore a price cut but match a price increase.
B) suggests small changes in unit costs will have no effect on equilibrium price and output.
C) assumes a firm's rivals will match any price change it may initiate.
D) assumes a firm's rivals will ignore any price change it may initiate.

Accepted Answer

The kinked-demand curve model suggests that firms in an oligopoly will match price decreases but not price increases, leading to price rigidity. This implies that small changes in costs do not affect the equilibrium price and output, as firms are reluctant to change prices due to the expected reactions of competitors.

Question 15

An oligopolistic price leader increases the price of its product.If all other firms follow the leader's example,the price leader will:
A) decrease its price.
B) increase its price.
C) maintain its new price.
D) increase its quantity of output.

Accepted Answer

In an oligopoly, firms often follow the pricing strategy of the market leader. If the market leader increases the price of its product and all other firms follow the leader, the leader will maintain its new price since it is the trendsetter and the other firms follow its lead. Therefore, the most likely outcome is that the price leader will maintain its new price.

Question 16

Other things being equal,a firm in a cartel will most likely cheat on a price-fixing agreement by:
A) increasing price and restricting its output.
B) organizing promotions of the product.
C) secretly increasing sales to a large number of small customers.
D) secretly lowering price and increasing sales to a few customers.

Accepted Answer

A firm in a cartel will most likely cheat on a price-fixing agreement by secretly lowering price and increasing sales to a few customers. This allows the firm to gain a competitive advantage while still appearing to comply with the agreement. By increase sales to just a few customers, the firm can avoid drawing too much attention to itself and potentially being caught by the other cartel members.

Question 17

Collusive control over price may permit oligopolists to:
A) use new technology,achieve economies of scale,and get government subsidies.
B) achieve economies of scale,reduce costs,and prevent price cheating.
C) increase product demand,increase product supply,and lower cost.
D) reduce uncertainty,increase profits,and possibly limit entry of new firms.

Accepted Answer

Collusive control over price allows oligopolists to reduce uncertainty by dictating prices among themselves, which leads to increased profits for each of the firms involved. Additionally, this collusion may make it difficult for new firms to enter the market since the established firms are working together to maintain their position.

Question 18

The strategy of establishing a price that prevents the entry of new firms is called:
A) a price war.
B) limit pricing.
C) price leadership.
D) setting a profit-maximizing price.

Accepted Answer

Limit pricing is a specific pricing strategy designed to prevent the entry of competitors into a market by setting a low enough price to make it unprofitable for new firms to enter. This strategy can be used by dominant firms to maintain their market position and prevent competition, but it can also lead to accusations of anti-competitive behavior. Price war (A) refers to a situation where multiple firms continually lower prices in response to each other, typically resulting in lower profits for all involved. Price leadership (C) occurs when a dominant firm in a market sets the price and other firms follow suit. Setting a profit-maximizing price (D) is a common goal for many firms, but it may not necessarily prevent new entrants into the market.

Question 19

An oligopolistic firm finds that marginal revenue can range from $10 to $25 at an output level of 2500 units.This information would suggest that the oligopolistic model for this industry is most likely one of:
A) collusive pricing.
B) price leadership.
C) cost-plus pricing.
D) kinked demand.

Accepted Answer

The fact that the marginal revenue can range from $10 to $25 suggests that the demand curve facing the oligopolistic firm is not a smooth, linear curve but rather a kinked demand curve. This means that the firm's competitors are likely to match any price cuts but may not follow any price increases, resulting in the kink in the demand curve. Thus, the best choice is D - kinked demand.

Question 20

OPEC provides an example of:
A) an unwritten,informal understanding.
B) noncollusive oligopoly.
C) an international cartel.
D) a monopolistically competitive industry.

Accepted Answer

OPEC stands for Organization of the Petroleum Exporting Countries and is an international cartel. It is made up of 13 countries that control a significant portion of the world's oil supply and work together to regulate oil production and prices.

Quiz 9: Monopolistic Competition and Oligopoly

Which makes it easier for a cartel to operate effectively over time?

In imperfectly competitive industries,producers' agreements to restrict output tend to be unstable because each firm has an incentive to:

In competing with rivals,oligopolistic firms will tend to use:

Which would make it easier to maintain an effective collusive agreement in a cartel?

The Organization of Petroleum Exporting Countries (OPEC) behaves in many ways like an international cartel.If the cartel were to hire a consulting firm to monitor the production rates of member countries,the economic reason for this monitoring is to:

A major reason that firms form a cartel is to:

If oligopolistic firms facing similar cost and demand conditions successfully collude,price and output results in this industry will be most accurately predicted by which of the following models?

Suppose a few powerful firms control all production in an industry and face identical demand and cost schedules.If they successfully collude and maximize joint profits,then price,output,and profit levels in the industry will be the same as those in:

Price leadership represents a situation where oligopolistic firms:

The incentive to cheat is strong in a cartel because:

A cartel is formed among the major firms in an industry that maximizes joint profits of the firms.Each firm:

If a particular bank regularly announces changes in its interest rate schedules before its competitors,which then set rates very close to those announced by that bank,this could be described as:

Which constitutes an obstacle to collusion among oligopolists?

The kinked-demand curve model of oligopoly:

An oligopolistic price leader increases the price of its product.If all other firms follow the leader's example,the price leader will:

Other things being equal,a firm in a cartel will most likely cheat on a price-fixing agreement by:

Collusive control over price may permit oligopolists to:

The strategy of establishing a price that prevents the entry of new firms is called:

An oligopolistic firm finds that marginal revenue can range from $10 to $25 at an output level of 2500 units.This information would suggest that the oligopolistic model for this industry is most likely one of:

OPEC provides an example of: