Chapter 15: Oligopoly

E

) Prisoners' dilemma describes a case where A) collusion of the participants leads to the best solution from their point of view. B) rivalry among a large number of rivals leads to lower overall profit. C) one prisoner has no chance to be acquitted since there is no other prisoner to support his testimony. D) a prisoner has no incentive to confess to his crime, and stands a greater chance of not going to prison. E) rivalry of the participants leads to the worst solution from their point of view.

C

0) If the efficient scale of production only allows three firms to supply a market, the market is a A) three-firm monopoly. B) cost-based oligopoly. C) natural oligopolgy. D) monopolistic competition. E) competitive monopoly.

B

1) A cartel is a group of firms which agree to A) behave competitively. B) raise the price of their products. C) lower the price of their products. D) increase the amount they produce. E) cheat on each other.

E

1) All games share four common features. They are A) costs, prices, profit, and strategies. B) revenues, elasticity, profit, and payoffs. C) rules, strategies, profit, and outcome. D) patents, copyrights, barriers to entry, and rules. E) rules, strategies, payoffs, and outcome.

D

1) In the dominant firm model of oligopoly, the smaller firms behave as A) oligopolists. B) monopolists. C) firms in monopolistic competition. D) firms in perfect competition. E) a cartel.

D

1) The market structure in which natural or legal barriers prevent the entry of new firms and a small number of firms compete is A) monopoly. B) monopolistic competition. C) perfect competition. D) oligopoly. E) duopoly.

E

10) In the dominant firm model of oligopoly, the dominant firm produces the quantity at which marginal revenue equals A) price. B) total revenue. C) average total cost. D) zero. E) marginal cost.

D

3) The Nash equilibrium for a sequential game in a contestable market with locked-in first stage prices results in A) potential entrants entering and making monopoly profit. B) potential entrants entering and incurring economic loss. C) potential entrants entering and making zero economic profit. D) potential entrants not entering the market. E) potential entrants taking all the business away from existing firms.

C

3) Which one the following industries is the best example of an oligopoly? A) the market for wheat B) the fast-food industry C) the automobile industry D) the clothing industry E) the restaurant industry

B

31) Refer to Table 15.3.7. The payoff matrix of economic profits above displays the possible outcomes for Bob and Jane who are involved in game of whether or not to advertise. After each player chooses his or her best strategy and sees the result, A) only Bob would like to change his decision. B) neither player would be willing to change his or her decision unless the other player also changes his or her decision. C) if Jane does not change her decision, Bob would like to change his. D) if Bob does not change his decision, Jane would like to change hers. E) None of the above.

A

36) Refer to Table 15.3.10. Libertyville has two optometrists, Dr. Smith and Dr. Jones. Each optometrist can choose to advertise his service or not. The incomes of each optometrist, in thousands of dollars, are given in the payoff matrix above. Which of the following statements correctly describes Dr. Smith's strategy given what Dr. Jones may do? A) Dr. Smith advertises no matter what Dr. Jones does. B) Dr. Smith does not advertise no matter what Dr. Jones does. C) Dr. Smith advertises only if Dr. Jones doesn't advertise. D) Dr. Smith advertises only if Dr. Jones advertises. E) Dr. Smith does not advertise if Dr. Jones advertises.

A

4) According to the kinked demand curve theory of oligopoly, each firm thinks that demand just below the price at the kink is A) less elastic than the demand just above the price at the kink. B) unit elastic. C) perfectly elastic. D) perfectly inelastic. E) more elastic than the demand just above the price at the kink.

A

4) Which one of the following industries is the best example of an oligopoly? A) the battery industry B) the sporting goods industry C) the footwear industry D) the cosmetics industry E) the power industry

C

9) Which is not a characteristic of oligopoly? A) Each firm faces a downward-sloping demand curve. B) Firms are profit-maximizers. C) The sales of one firm will not have a significant effect on other firms. D) There is more than one firm in the industry.

B

11) Once a cartel determines the profit-maximizing price, A) all members of the cartel have a strong incentive to abide by the agreed-upon price. B) each member will face the temptation to cheat on the cartel price to increase its sales and profit. C) changes in the output of any member firms will have no impact on the market price. D) entry into the industry of rival firms will have no impact on the profit of the cartel. E) entry into the industry of rival firms will raise cartel profit as long as the new firms join the cartel.

C

11) Which one of the following quotations best describes a dominant firm oligopoly? A) "Gas prices in this town always go up and down together." B) "Every time Sparrow's Donuts has a donut sale, so does Tim Horton's." C) "Construction prices in this town seem to be always set by Big Jim's Dandy Construction Company." D) All of the above. E) None of the above.

E

12) Because an oligopoly has a small number of firms A) each firm can act like a monopoly. B) the firms may legally form a cartel. C) the HHI for the industry is small. D) the four-firm concentration ratio for the industry is small. E) the firms are interdependent.

B

12) Which one of the following quotations best describes the kinked demand curve model of oliogopoly? A) "Gas prices in this town always go up and down together." B) "Every time Sparrow's Donuts has a donut sale, so does Tim Horton's." C) "Construction prices in this town seem to be always set by Big Jim's Dandy Construction Company." D) All of the above. E) None of the above.

D

13) A dominant firm oligopoly might be one for which the Herfindahl-Hirschman Index is A) 0. B) 1. C) 2. D) 2,750. E) 10,000.

C

13) A tit-for-tat strategy can be used A) in a single-play game or a repeated game. B) in a single-play game but not a repeated game. C) in a repeated game but not a single-play game. D) in neither a repeated game nor a single-play game. E) only when there is no Nash equilibrium.

B

13) Complete the following sentence. A duopoly is A) a market where three dominant firms collude to decide the profit-maximizing price. B) a market where two firms compete for profit and market share. C) the same as a monopoly. D) not an oligopoly. E) a market with two distinct products.

A

14) A duopoly occurs when ________. A) there are only two producers of a particular good competing in the same market B) there are two producers of two goods competing in an oligopoly market C) there are numerous producers of two goods competing in a competitive market D) the one producer of two goods sells the goods in a monopoly market E) a competitive market produces two goods

D

14) The kinked demand curve model A) suggests that price will remain constant even with fluctuations in demand. B) assumes marginal cost is constant. C) assumes that marginal revenue equals marginal cost only at the quantity at the "kink." D) assumes that competitors will match price cuts and ignore price increases. E) none of the above.

C

16) A monopolistically competitive firm is like an oligopolistic firm insofar as A) both face perfectly elastic demand. B) both can earn an economic profit in the long run. C) both have MR curves that lie beneath their demand curves. D) neither is protected by high barriers to entry. E) both are price takers.

A

16) The firms Trick and Gear form a cartel to collude to maximize profit. If this game is nonrepeated, the Nash equilibrium is A) both firms cheat on the agreement. B) both firms comply with the agreement. C) Trick cheats, while Gear complies with the agreement. D) Gear cheats, while Trick complies with the agreement. E) unknown.

B

18) A market with a single firm but no barriers to entry is known as A) a natural monopoly. B) a contestable market. C) a perfectly competitive market. D) monopolistic competition. E) an oligopoly

B

2) In the dominant firm model of oligopoly, the larger firm acts like A) a firm in an oligopoly market. B) a monopoly. C) a firm in monopolistic competition. D) a firm in perfect competition. E) a cartel.

D

2) Suppose that industry A consists of four firms who collectively control 96 percent of total sales in the market. We can conclude that industry A is A) perfectly competitive. B) a duopoly. C) monopolistically competitive. D) an oligopoly. E) a monopoly.

E

21) It is difficult to maintain a cartel for a long period of time. Which one of the following is the most important reason? A) Each firm has an incentive to collude. B) Other firms will enter the industry. C) Firms in the cartel will want to raise the price. D) Consumers will eventually decide not to buy the cartel's output. E) Each firm has an incentive to cheat.

E

26) Refer to Table 15.3.4. The marketers of Budweiser Light beer and Miller Lite beer must decide whether or not to offer new advertising campaigns promoting their products. The payoffs in the table are the economic profit made by Bud and Miller. Which one of the following observations is correct? A) This game has no dominant strategies. B) This game has no Nash equilibrium. C) Miller has a dominant strategy but Bud does not. D) Bud has a dominant strategy but Miller does not. E) Bud and Miller each have a dominant strategy.

D

3) Canada's anti-combine law is enforced by A) a Competition Tribunal. B) the courts. C) Parliament. D) A and B. E) A and C.

C

41) Refer to Table 15.3.12. Firm A and Firm B are the only producers of soap powder. They collude and agree to share the market equally. The equilibrium ________ a dominant strategy equilibrium because the strategy in this game is for a firm ________. A) is; to comply regardless of the other firm's choice B) is not; to comply when the other firm cheats and to cheat when the other firm complies C) is; to cheat regardless of the other firm's choice D) is not; to comply when the other firm complies and to cheat when the other firm cheats E) is; to comply when the other firm cheats and to cheat when the other firm complies

B

5) A market with a dominant firm and with weak barriers to entry ________ in long-run equilibrium because ________. A) is; all other firms act as if they are perfectly competitive B) is not; other firms can enter, which increases supply, decreases the price, and drives economic profit down to zero C) is; the dominant firm is making an economic profit D) is; the smaller firms cannot become the dominant firm E) is not; frequently one of the smaller firms becomes the dominant firm, and the original dominant firm becomes less important

E

5) According to the kinked demand curve theory of oligopoly, each firm believes that if it raises its price, A) the government will impose price controls. B) other firms will lower theirs. C) other firms will raise their prices by an identical amount. D) its profit will rise by the same percentage. E) other firms will not raise theirs.

C

5) Which one of the following characteristics applies to oligopolistic markets? A) There is a large number of firms. B) The absence of barriers to entry of firms. C) Firms are large relative to the size of the market. D) All firms are price takers. E) Firms produce only differentiated products.

B

5) Which one of the following is not a feature common to all games? A) rules B) collusion C) strategies D) payoffs E) an outcome

D

6) According to the kinked demand curve theory of oligopoly, at the quantity corresponding to the kink, the firm's A) average total cost curve is discontinuous. B) marginal cost curve is discontinuous. C) average variable cost curve is discontinuous. D) marginal revenue curve is discontinuous. E) marginal revenue curve is upward sloping.

B

6) In the prisoners' dilemma with players Art and Bob, each prisoner would be best off if A) both prisoners confess. B) both prisoners deny. C) Art denies and Bob confesses. D) Bob denies and Art confesses. E) none of the above is done.

B

6) Wal-Mart follows the kinked demand curve model of oligopoly. Wal-Mart's marginal cost of a flat panel TV has fallen, and as a result Wal-Mart will ________. A) raise the price if marginal revenue increases B) lower the price if the new marginal cost curve lies below the break in the marginal revenue curve C) definitely lower the price D) not change the price E) raise the price if other firms raise their prices

D

6) Which one of the following characteristics applies to oligopolistic markets? A) There is free entry of rival firms. B) Firms are so large relative to the market that they do not have to consider the behaviour of rival firms. C) Firms are mutually independent because there are many firms in the industry. D) Firms have to consider the behaviour of their rivals since their rivals are also large relative to the size of the market as a whole. E) Economic profit of each firm equals zero.

B

7) The kinked demand curve theory of oligopoly predicts that A) equilibrium price and quantity will be sensitive to small cost changes. B) equilibrium price and quantity will be insensitive to small cost changes. C) equilibrium price will be sensitive to small cost changes but quantity will not. D) equilibrium quantity will be sensitive to small cost changes but price will not. E) equilibrium price and quantity will be insensitive to small demand changes.

A

7) Why might only a few firms dominate an oligopolistic industry? A) A natural or legal barrier to entry exists. B) Perfectly elastic demand makes small-scale operation economically inefficient. C) Decreasing returns to scale may make small-scale firms more advantageous. D) Inelastic market demand leads to the domination of the industry by a few firms. E) It is due to the outcome of the prisoners' dilemma.

B

8) A merger is unlikely to be approved if ________. A) there are fewer than 6 firms in a market B) it prevents or substantially lessens competition C) the good produced in the market has been deemed a necessity D) the industry is government regulated E) All of the above.

B

8) A weakness of the kinked demand curve theory of oligopoly is that it does not A) specify the technology of production. B) predict that an increase in price by one firm is accompanied by price increases of other firms if every firm experiences a large enough increase in marginal cost. C) specify how marginal cost is determined. D) specify how average cost is determined. E) specify what happens if costs change.

E

8) Firm X is competing in an oligopolistic industry. When firm X increases its price A) then rival firm Y will always increase its price. B) then rival firm Y will increase its market share if firm Y also increases its price. C) then the behaviour of rival firm Y will have no impact on the market share of firm X. D) the market as a whole will become less profitable. E) the rival firm Y will increase its market share if firm Y keeps a constant price.

A

8) Which of the following quotes shows a contestable market in the widget industry? A) "I am producing extra widgets, even though it costs me short-run profits, to stop Wally's Widgets from expanding into my market." B) "I am producing more widgets than Wally and I agreed to in our talk last week." C) "If only Wally and I could agree on a higher price, we could make more profits." D) "I have been spending extra on research and development of my new two-way widget." E) none of the above

D

9) In the dominant firm model of oligopoly, the dominant firm faces a A) kinked demand curve. B) perfectly inelastic demand. C) perfectly elastic demand. D) unit elastic demand. E) downward-sloping demand curve with no kink.