Question 1

Which of the following is a key characteristic of an oligopoly?

Accepted Answer

One of the key characteristics of an oligopoly is that the firms are interdependent. This means that the actions of one firm can have a significant impact on the other firms in the market, leading to strategic behavior and a focus on mutual reactions. This can lead to a variety of outcomes, including collusion, price competition, and non-price competition. The other options (B-E) are not characteristics of an oligopoly.

Question 2

An oligopoly firm's effective demand curve will be kinked at the current market price if:

Accepted Answer

The kinked demand curve model suggests that if a firm raises its price, other firms will not follow, making demand elastic for price increases.

Question 3

When the four-firm concentration ratio is less than 40 percent, we can conclude that:

Accepted Answer

When the four-firm concentration ratio is less than 40 percent, it indicates that the industry is relatively fragmented and no single firm has a dominant market share. This suggests that there is increased competition in the industry and hence, the industry can be considered more competitive.

Question 4

The laundry machine industry has a four-firm concentration ratio of 98%. Based on this information, we can conclude that:

Accepted Answer

A four-firm concentration ratio of 98% suggests that the industry is dominated by four large firms that control almost the entire market. This indicates a tight oligopoly, as only a few firms have significant market power and can potentially act as price setters.

Question 5

Some years ago, the three leading aluminum producers in the U.S. changed prices nine times by exactly the same amount each time and usually within one to three days of the initial price increase. This is an example of _____.

Accepted Answer

The answer of Some years ago, the three leading aluminum...

Question 6

In the Cournot model of quantity competition, as the number of firms increases:

Accepted Answer

In the Cournot model, as the number of firms increases, competition among them also increases, leading to a decrease in the price of the product. This process continues until the price approaches the average cost, making the market more competitive and efficient.

Question 7

The following matrix shows the pricing strategies and resultant profits (in thousands of dollars) for two profit-maximizing firms.
Table 9-1
 $\begin{array} {c}
\quad\quad \text { Firm B}  \
\begin{array}{ | c | c | c | } 
\hline \text { Firm } \mathrm { A } & \text { High } & \text { Low } \
\hline \text { High price } & 35,35 & 21,41 \
\hline \text { Low price } & 37,21 & 30,30 \
\hline
\end{array} 
\end{array}$
-Refer to Table 9-1. If Firm A sets a high price, Firm B will:

Accepted Answer

If Firm A sets a high price, Firm B can choose between a high price, earning $35,000, or a low price, earning $41,000. To maximize profit, Firm B will choose the low-price strategy, earning more than with a high price.

Question 8

The quantity that is set by the dominant firm in an oligopolistic industry:

Accepted Answer

In an oligopolistic industry, the dominant firm sets its output quantity where its marginal revenue and marginal cost are equal, in order to maximize its profit. This is known as the profit-maximizing quantity. So, option B is the correct choice. The other options are incorrect because they do not reflect the behavior of a dominant firm in an oligopolistic industry.

Question 9

Which of the following correctly explains the dominant firm model of an oligopoly?

Accepted Answer

In the dominant firm model of an oligopoly, a single firm sets the price in the market, which is taken as given by the other smaller firms. This dominant firm can either set a high price and enjoy a high profit margin or set a low price and gain market share at the expense of other firms. The key characteristic of this model is the assumption of a dominant firm that has significant market power and sets the price for the entire market.

Question 10

The model of the kinked demand curve in price competition implies that:

Accepted Answer

The kinked demand curve model suggests that if a firm lowers its price, its competitors will follow suit to capture the same market share. However, if a firm raises its price, its competitors will not follow suit and instead maintain their current price, leading to a significant loss in market share. As a result, firms have little incentive to engage in price competition unless they feel they can maintain a significant advantage over their competitors. The kinked demand curve model is often used to explain why prices in some oligopolistic markets remain relatively stable over time.

Question 11

The following matrix shows the pricing strategies and resultant profits (in thousands of dollars) for two profit-maximizing firms.
Table 9-1
 $\begin{array} {c}
\quad\quad \text { Firm B}  \
\begin{array}{ | c | c | c | } 
\hline \text { Firm } \mathrm { A } & \text { High } & \text { Low } \
\hline \text { High price } & 35,35 & 21,41 \
\hline \text { Low price } & 37,21 & 30,30 \
\hline
\end{array} 
\end{array}$
-Refer to Table 9-1. If Firm B sets a high price, Firm A will:

Accepted Answer

The answer of The following matrix shows the pricing strategies...

Question 12

The Herfindahl-Hirschman Index _____.

Accepted Answer

The Herfindahl-Hirschman Index takes into account the market share of all the firms in the market, and is calculated by summing the squares of the market shares of all the firms in the market. It ranges from 0 for a market in which there are many small firms with equal market shares, to 10,000 for a market with a single firm that has a 100% market share. A higher value of the index indicates a more concentrated market.

Question 13

During the 1990s, one of the dominant firms in the U.S. cigarette industry would raise prices once or twice a year by about 50 cents per carton. Other firms in the industry typically raised their prices by the same amount. This is an example of:

Accepted Answer

This is an example of price leadership, where one dominant firm in the industry sets the price and other firms follow suit by also raising their prices by the same amount. This indicates that the dominant firm has significant market power and can influence pricing in the industry.

Question 14

The demand function in a duopoly is: P = 100 - 2(Q1 + Q2). If the first firm decides to sell 10 units while the second firm sells 20 units, which of the following will be true?

Accepted Answer

EThe market price is determined by the total quantity sold by both firms, which is $P = 100 - 2(Q1 + Q2) = 100 - 2(10 + 20) = 60$. Both firms sell at this price, so the revenue of the second firm, selling 20 units, will indeed be twice as much as the first firm, which sells 10 units, making choice A correct. Choice E is incorrect because the market price is determined by the combined output of both firms, not just the output of the firm with the larger quantity.

Question 15

Which of the following statements is true?

Accepted Answer

An increase in market concentration, measured by the concentration ratio, leads to less intense competition and more market power for the dominant firms. This can result in higher prices and profits for those firms.

Question 16

In an oligopoly, the kinked demand curve model explains:

Accepted Answer

The kinked demand curve model explains price rigidity among firms in an oligopoly, where firms are reluctant to change prices in response to changes in cost or demand because they fear that other firms will not follow suit, leading to a loss in market share and revenue.

Question 17

The concentration ratio for an industry with four firms shows the:

Accepted Answer

The concentration ratio measures the percentage of total industry sales that is generated by the largest firms in the industry. Therefore, choice A is the correct answer.

Question 18

Which of the following is true of the Cournot model of a duopoly?

Accepted Answer

The Cournot model of a duopoly assumes that the firms produce differentiated products, which are imperfect substitutes. The demand curve facing each firm is downward sloping but not perfectly elastic, so the market price is not determined solely by output but also affected by demand elasticity. The equilibrium output and price in a Cournot duopoly lies between the output and price levels of a pure monopoly and purely competitive market, hence the name "monopolistic competition."

Question 19

During the 1990s, the U. S. cigarette industry was dominated by four major firms that charged similar prices for the cigarettes they sold under a variety of brand names. When one firm raised its prices, the other firms generally followed. The cigarette industry is best characterized as:

Accepted Answer

The fact that four major firms dominate the industry and charge similar prices suggests that it is an oligopoly. An oligopoly is a market structure in which a few large firms dominate the market and can influence prices.

Question 20

The following matrix shows the pricing strategies and resultant profits (in thousands of dollars) for two profit-maximizing firms.
Table 9-1
 $\begin{array} {c}
\quad\quad \text { Firm B}  \
\begin{array}{ | c | c | c | } 
\hline \text { Firm } \mathrm { A } & \text { High } & \text { Low } \
\hline \text { High price } & 35,35 & 21,41 \
\hline \text { Low price } & 37,21 & 30,30 \
\hline
\end{array} 
\end{array}$
-Refer to Table 9-1. If both the firms act noncooperatively, which of the following is most likely?

Accepted Answer

In a noncooperative setting, each firm aims to maximize its own profit without collaborating with the other. Given the matrix, if either firm believes the other will set a high price, it has an incentive to set a low price to increase its profit (37 for A if B sets high, 41 for B if A sets high). Conversely, if one expects the other to set a low price, setting a low price still yields a better or equal outcome (30 for both if both set low) than the alternative (21 for A if it sets high, B sets low; 21 for B if it sets high, A sets low). Thus, rational choice leads both to set low prices, resulting in a profit of $30,000 each, aligning with the Nash Equilibrium concept.

Quiz 9: Oligopoly