Econ Practice Questions Ch. 10

Temporary price reductions intended to drive out competition are referred to as: A. Predatory pricing. B. Price fixing. C. Price leadership. D. Retaliation.

A. Predatory pricing.

One reason why prices tend to be less flexible in oligopoly markets than in other market structures is because: A. Coordination tends to stabilize prices. B. According to the kinked-demand model, a firm will tend to become worse off if it increases ordecreases its prices. C. Oligopoly firms cannot afford to let prices decrease since they incur large advertising expenses. D. Price changes are always matched by the oligopolist's competitors.

B. According to the kinked-demand model, a firm will tend to become worse off if it increases or decreases its prices.

Market share can be computed by dividing: A. The amount that a buyer buys by the total amount that is produced in the market. B. Profit by total cost. C. The amount sold by a single firm by the total sold in the market. D. Price by average total cost.

C. The amount sold by a single firm by the total sold in the market.

The market share of a monopolist is: A. 20 percent. B. 40 percent. C. 60 percent. D. 100 percent.

D. 100 percent.

Open and explicit agreements concerning pricing and output shares transform an oligopoly into a: A. Monopoly. B. Cartel. C. Differentiated oligopoly. D. Perfectly competitive firm.

B. Cartel

Suppose there are only three firms in a market. The largest firm has sales of $500 million, the second- largest has sales of $300 million, and the smallest has sales of $200 million. The market share of the largest firm is: A. 50 percent. B. 100 percent. C. 60 percent. D. 40 percent.

A. 50 percent.

Suppose the larger firm of a duopoly has sales of $400 million and the smaller firm has sales of $100 million. The market share of the larger firm is: A. 80 percent. B. 40 percent. C. 20 percent. D. 10 percent.

A. 80 percent.

Suppose the larger firm of a duopoly has sales of $900 million and the smaller firm has sales of $100 million. The market share of the larger firm is: A. 90 percent. B. 80 percent. C. 10 percent. D. 20 percent.

A. 90 percent.

Which of the following is the best indication of high market power? A. A small firm with a market share of 80 percent B. A firm with $10 billion in sales in a market with an HHI of 800 C. A large firm with a concentration ratio of 10 percent D. An elastic demand curve for the firm's product

A. A small firm with a market share of 80 percent

Market power leads to market failure when it results in: A. Decreased market output. B. Lower market prices. C. Normal economic profits. D. The demise of the industry.

A. Decreased market output.

If rival oligopolists completely ignore Mitchell's Tool Company's price changes, then Mitchell's Tool Company's: A. Demand curve will not have a kink. B. Most profitable strategy will be to raise its price. C. Demand curve will be less elastic than if rivals matched price changes. D. Demand and marginal revenue curves will be the same.

A. Demand curve will not have a kink.

When oligopoly firms collude to raise prices: A. Each firm benefits, but society loses. B. Both the colluding firms and society benefit. C. Everyone is eventually a loser. D. Only the price leader benefits while other firms and society lose

A. Each firm benefits, but society loses.

In the long run, an oligopolist is most likely to: A. Experience economic profits because of barriers to entry. B. Experience zero economic profits because barriers to entry do not exist in the long run. C. Produce at the most technically efficient output level due to long-run competition. D. Face a straight line demand curve.

A. Experience economic profits because of barriers to entry.

The study of how decisions are made when strategic interaction between firms exists is known as: A. Game theory. B. Contestable market theory. C. Market power theory. D. Predatory pricing theory.

A. Game theory.

Price leadership is a method by which oligopolies can: A. Increase prices without explicit price fixing. B. Illegally raise prices. C. Maintain the "kink" in their demand curves. D. Encourage competition.

A. Increase prices without explicit price fixing.

Which of the following is true about the kink in the demand curve? A. It is the result of different rival responses to price increases and reductions B. It leads to an explanation of price flexibility C. It occurs because rivals do not respond to price reductions D. It occurs because rivals match price increases

A. It is the result of different rival responses to price increases and reductions

If one firm in an oligopoly market increases its advertising expenditures in an effort to increase market share, the most likely response by its competitors would be to: A. Keep the price of their products the same but increase advertising expenditures even if it means reducing profits. B. Increase the price of their products to raise profits and then increase advertising expenditures. C. Reduce advertising expenditures to maintain profits. D. Make no changes in price or advertising expenditures.

A. Keep the price of their products the same but increase advertising expenditures even if it means reducing profits.

While there are many newspapers in the U.S., each city tends to have only one or two. If newspapers are generally local markets, then newspapers are characterized by a: A. Low national concentration and a high HHI at the local level. B. Low national concentration and a low HHI at the local level. C. High national concentration and a high HHI at the local level. D. High national concentration and a low HHI at the local level.

A. Low national concentration and a high HHI at the local level.

If an oligopoly market is contestable and new firms enter, the: A. Market power of the former oligopolists will be reduced. B. Number of firms in the industry will decrease. C. Former oligopolists will raise their price. D. Profitability of the industry will increase.

A. Market power of the former oligopolists will be reduced.

The goal of an oligopoly is to maximize: A. Market share to achieve long-run economic profit. B. Short-run profit to achieve long-run maximum revenue. C. Short-run profit to achieve long-run market share. D. Profit in the short run and to minimize cost in the long-run.

A. Market share to achieve long-run economic profit.

Which of the following market structures is characterized by firms that have limited control over price? A. Monopolistic competition B. Oligopoly C. Monopoly D. Duopoly

A. Monopolistic competition

If a market changes from oligopoly to perfect competition, then as a result: A. Output should increase in the long run. B. Fewer resources will be allocated to the market. C. Profitability should rise in the long run. D. Prices should rise in the long run.

A. Output should increase in the long run.

It is easiest for new firms to enter into a: A. Perfectly competitive market. B. Duopoly market. C. Oligopoly market. D. Monopoly market.

A. Perfectly competitive market.

Borden, Inc., who sold milk to Texas Tech University, public schools and hospitals, paid $8 million in fines for: A. Price-fixing. B. Marginal cost pricing. C. Price leadership. D. Allocation of market shares.

A. Price-fixing.

General Electric and Westinghouse were convicted of: A. Price-fixing. B. Marginal cost pricing. C. Price leadership. D. Allocation of market shares.

A. Price-fixing.

Which of the following industries has the highest concentration ratio? A. Satellite radio B. Camera, film C. Detergents D. Beer

A. Satellite radio

Which of the following may characterize a monopoly? A. Substantial market power B. Low barriers to entry C. Many firms D. Differentiated product

A. Substantial market power

102. Oligopolistic behavior includes: A. Tacit collusion. B. High concentration ratios. C. High barriers to entry. D. Independent pricing.

A. Tacit collusion.

The measure of market power found by adding together the market shares of the largest four firms is: A. The concentration ratio. B. Their Herfindahl-Hirshman Index. C. The sales of the market. D. The barriers to entry.

A. The concentration ratio.

The kinked demand curve explains: A. The consequences of the interdependent behavior of oligopolists. B. Why oligopolists are more sensitive to cost changes than are competitive markets. C. Price fixing along the elastic part of the demand curve and predatory pricing on the inelastic portion. D. How an oligopoly can achieve monopoly profits.

A. The consequences of the interdependent behavior of oligopolists.

If an oligopolist is going to change its price or output, its initial concern is: A. The response of its competitors. B. A change in its cost structure. C. The concentration ratio. D. The response of the Federal Trade Commission.

A. The response of its competitors.

The most common form of nonprice competition is: A. Collusion. B. Advertising. C. Patents. D. Predatory pricing.

B. Advertising.

A contestable market is: A. A perfectly competitive market. B. An imperfectly competitive situation that is subject to entry. C. An imperfectly competitive situation with high barriers to entry. D. A market with only one producer.

B. An imperfectly competitive situation that is subject to entry.

It is most difficult for new firms to enter into: A. A perfectly competitive market. B. An oligopolistic market. C. A monopolistically competitive market. D. A perfectly contestable market.

B. An oligopolistic market.

In an oligopoly, if a firm expands its market share at prevailing prices, its competitors are likely to: A. Raise prices on their own products. B. Increase their own marketing efforts. C. Ignore the expansion. D. Increase their own profits.

B. Increase their own marketing efforts.

If a firm is producing at the kink in its demand curve and it decides to increase its price, according to the kinked-demand model: A. It will gain market share. B. It will lose market share to the firms that do not follow the price increase. C. Its market share will not be affected. D. It will not gain market share but it will definitely increase profits.

B. It will lose market share to the firms that do not follow the price increase.

Which of the following may characterize monopolistic competition? A. Two firms B. Low barriers to entry C. Substantial market power D. Unique product

B. Low barriers to entry

Market share is the percentage of total: A. Market output produced by the largest firm in an industry. B. Market output produced by a single firm. C. Market output produced by the four largest firms in an industry. D. Industry profit earned by a single firm.

B. Market output produced by a single firm.

The demand curve will be kinked if rival oligopolists: A. Match price increases but not price reductions. B. Match price reductions but not price increases C. Match both price increase and price reductions. D. Do not match price changes at all.

B. Match price reductions but not price increases

If oligopolists start cutting prices to capture a larger market share, the result will be a: A. Movement up the market demand curve. B. Movement down the market demand curve. C. Leftward shift of the market demand curve. D. Rightward shift of the market demand curve.

B. Movement down the market demand curve.

Which of the following may not characterize an oligopoly? A. A few firms B. No market power C. High barriers to entry D. Substantial control over price

B. No market power

There are many corn farmers, each of whom produces the same product. The corn market can best be classified as: A. Monopolistic competition. B. Perfect competition. C. Oligopoly. D. Monopoly.

B. Perfect competition.

The pricing strategy in which one firm is allowed by its rivals to establish the market price for all firms in the market is called: A. Overt collusion. B. Price leadership. C. Pattern pricing. D. Price fixing.

B. Price leadership.

The pricing strategy in which one firm is allowed to establish the market price for all firms in the market is called: A. Price discrimination. B. Price leadership. C. The profit-maximizing rule. D. Marginal cost pricing.

B. Price leadership.

The pricing strategy in which there is an explicit agreement among producers regarding price is called: A. Price discrimination. B. Price-fixing. C. Price leadership. D. Marginal cost pricing.

B. Price-fixing.

Oligopolists have a mutual interest in coordinating production decisions in order to maximize joint: A. Costs. B. Profits. C. Revenues. D. Market share.

B. Profits.

Sky-High Skywriters raises its price and the other four firms in the industry raise their prices in response. Coordination in this industry is accomplished by: A. Predatory pricing. B. Retaliation. C. Price fixing. D. Price leadership.

B. Retaliation.

Game theory is: A. The study of price fixing and collusion. B. The study of how decisions are made when interdependence exists between firms. C. An explanation of how oligopolists become monopolists. D. Practiced by perfectly competitive firms.

B. The study of how decisions are made when interdependence exists between firms.

A nationwide concentration ratio is likely to understate market power when: A. Firms sell nationally. B. The true markets are local and small. C. There is extensive foreign competition. D. A market is perfectly contestable.

B. The true markets are local and small.

A firm cannot maintain above-normal profits over the long run: A. Without the existence of a cartel. B. Unless barriers to entry exist C. Unless predatory pricing occurs. D. Without retaliation occurring.

B. Unless barriers to entry exist

Which of the following is the best indication of high market power? A. A firm with large sales B. A Herfindahl-Hirshman Index of 100 or greater C. A concentration ratio of 90 percent D. Infrequent, sticky price changes

C. A concentration ratio of 90 percent

If all of your friends use the same instant messaging service provider, you are likely to use it too. This behavior may create: A. Cartels. B. Nonprice competition. C. A network economy. D. Distribution control.

C. A network economy.

For an oligopoly, above-normal profits cannot be maintained in the long run unless: A. A cartel is formed. B. A firm has a high concentration ratio. C. Barriers to entry exist. D. The market is contestable.

C. Barriers to entry exist.

What is the most likely response by rivals when an oligopolist cuts its price to increase its sales? A. Raise their prices B. Ignore the change C. Cut their prices D. Reduce their costs

C. Cut their prices

Price leadership: A. Results in inflexible prices. B. Accounts for kinked oligopoly behavior. C. Helps achieve monopoly profit for the market. D. Results in predatory pricing.

C. Helps achieve monopoly profit for the market.

Product differentiation: A. Involves charging different prices to different customers. B. Is commonly practiced in perfect competition and monopoly markets. C. Involves advertising unique product features. D. Is a rarely successful advertising campaign.

C. Involves advertising unique product features.

If a firm is producing at the kink in its demand curve and it decides to decrease its price, according to the kinked-demand model: A. It will gain market share. B. It will lose market share to the firms that do not follow the price decrease. C. Its market share will not be affected. D. It will lose market share but its profits will decrease.

C. Its market share will not be affected.

An imperfection in the market mechanism that prevents optimal outcomes is called: A. Antitrust behavior. B. Collusion. C. Market failure. D. Price leadership.

C. Market failure.

The correct ranking of degree of market power (from highest to lowest) is: A. Monopoly, monopolistic competition, perfect competition, oligopoly. B. Monopoly, monopolistic competition, oligopoly, perfect competition. C. Monopoly, oligopoly, monopolistic competition, perfect competition. D. Oligopoly, monopoly, monopolistic competition, perfect competition.

C. Monopoly, oligopoly, monopolistic competition, perfect competition.

The only market structure in which there is significant interdependence among firms with regard to their pricing and output decisions is: A. Monopolistic competition. B. Monopoly. C. Oligopoly. D. Perfect competition.

C. Oligopoly.

The soft drink market is dominated by Coke, Pepsi, and very few other firms. The firms often start price wars. The market can best be classified as: A. Perfect competition. B. Monopolistic competition. C. Oligopoly. D. Monopoly.

C. Oligopoly.

Concentration ratios tend to overstate the power of some corporations to influence economic outcomes because they measure output: A. For single firms rather than markets. B. For the whole United States, this is too large a geographic market for some firms or industries. C. Only for domestic production, when the true market boundaries are international for some markets. D. Over many industries, rather than a single market.

C. Only for domestic production, when the true market boundaries are international for some markets.

Sky-High Skywriters temporarily reduces its price when a new firm called The Sky's the Limit Skywriting enters the industry. Sky-High Skywriters is practicing: A. Retaliation. B. Price leadership. C. Predatory pricing. D. Cartel pricing.

C. Predatory pricing.

The kinked demand curve explains the observation that in oligopoly markets: A. Rivals match price increases. B. Rivals do not match price reductions. C. Prices may not change even in the face of cost increases. D. Practice product differentiation.

C. Prices may not change even in the face of cost increases.

When a business advertises that its product has unique features that make it superior to other similar products, it is engaging in: A. Game theory. B. Predatory pricing. C. Product differentiation. D. Contestable market advertising.

C. Product differentiation.

The concentration ratio measures the: A. Number of plants owned by an oligopoly. B. Percentage of total profits made by a firm in a specific market. C. Proportion of total output produced by the four largest producers in a specific market. D. Relative size of a firm compared to other industries.

C. Proportion of total output produced by the four largest producers in a specific market.

When U.S. government regulations that prevent goods from being imported are relaxed this: A. Causes oligopoly profits to increase. B. Causes U.S. cartels to become even stronger. C. Reduces the barriers to entry into U.S. markets. D. Creates an environment conducive to predatory pricing.

C. Reduces the barriers to entry into U.S. markets.

The number of firms in an oligopoly must be: A. Four. B. Large enough so that firms cannot coordinate. C. Small enough so that one firm's decisions have a significant impact on the decisions of the other firms in the industry. D. Small enough so that revenues are large enough to support advertising expenditures.

C. Small enough so that one firm's decisions have a significant impact on the decisions of the other firms in the industry.

Which of the following is the critical determinant of market power? A. The number of producers B. The size of each firm C. The extent of barriers to entry D. The availability of substitute goods

C. The extent of barriers to entry

How might an oligopolist increase total revenue without changing price? A. Reduce output B. Reduce marketing efforts C. Through nonprice competition D. Reduce costs

C. Through nonprice competition

Which of the following industries is likely to have the highest concentration ratio? A. Corn production B. Clothing manufacturing C. Video game systems D. College education

C. Video game systems

Which of the following is not a determinant of market power? A. Number of producers B. Availability of substitutes C. Barriers to entry D. Age of the industry

D. Age of the industry

High training costs help firms maintain: A. Contestable markets. B. Cartels. C. Government regulation. D. Barriers to entry.

D. Barriers to entry.

Oligopolists have an incentive to coordinate price because with coordination: A. The demand for each firm's product is kinked. B. Each firm faces a perfectly inelastic demand for its product. C. The market demand curve is perfectly inelastic. D. Each firm faces a relatively inelastic demand for its product.

D. Each firm faces a relatively inelastic demand for its product.

If oligopolists start cutting prices to capture a larger market share, the result will be a: A. Lower prices, decreased output, and larger profits. B. Higher prices, increased output, and larger profits. C. Lower prices, increased output, and larger profits. D. Lower prices, increased output, and smaller profits.

D. Lower prices, increased output, and smaller profits.

Oligopolists will maximize total profits for all of the firms in the market at the rate of output where: A. TR = TC for the total market. B. MR = MC for the marginal firm. C. AR = AC for each firm. D. MR = MC for the market.

D. MR = MC for the market.

10. Which of the following may not characterize an oligopoly? A. A few firms B. Substantial market power C. High barriers to entry D. Many firms

D. Many firms

In which of the following market structures are entry barriers the highest? A. Perfect competition B. Monopolistic competition C. Oligopoly D. Monopoly

D. Monopoly

In which of the following market structures does a firm produce a unique product for which there are no close substitutes? A. Perfect competition B. Monopolistic competition C. Oligopoly D. Monopoly

D. Monopoly

Tacit collusion is most easily and effectively accomplished in: A. Contestable markets. B. Conglomerates. C. Competitive markets. D. Oligopolies.

D. Oligopolies.

Which market structure is characterized by a few interdependent firms? A. Monopoly B. Perfect competition C. Monopolist competition D. Oligopoly

D. Oligopoly

Which of the following market structures is characterized by the absence of market power? A. Monopolistic competition B. Oligopoly C. Monopoly D. Perfect competition

D. Perfect competition

Price leadership: A. Typically results in greater instability in oligopolistic markets. B. Is illegal under the Federal Trade Commission Act. C. Is common in perfectly competitive markets. D. Permits oligopolistic firms in a given market to coordinate market-wide price changes.

D. Permits oligopolistic firms in a given market to coordinate market-wide price changes.

Distribution control can be accomplished through all but which one of the following methods? A. Long-term supply contracts B. Warranty provisions C. Selective discounts D. Predatory pricing

D. Predatory pricing

Which of the following does not function as a barrier to entry into an oligopoly market? A. Patents B. The expense involved in nonprice competition C. Control of distribution outlets D. Predatory pricing

D. Predatory pricing

A kinked demand curve indicates that rival oligopolists match all: A. Increased advertising. B. Advertising reductions. C. Price increases. D. Price reductions.

D. Price reductions.

Which one of the following is not a danger of experimenting with pricing for an oligopoly? A. Retaliation B. Price wars C. The uncertainty of competitor response D. Product differentiation

D. Product differentiation

Collusion is undesirable and illegal because: A. Government intervention leads to inefficient outcomes. B. It leads to greater production than would occur in a competitive market. C. It is unprofitable and the government must bail out firms which are bankrupted by collusion. D. Resources are misallocated and the level of output is restricted.

D. Resources are misallocated and the level of output is restricted.

To keep a market from being contested firms might: A. Increase their concentration ratio. B. Practice price discrimination. C. Match price reductions by rivals. D. Seek to obtain a monopoly franchise from the government.

D. Seek to obtain a monopoly franchise from the government.

In an effort to maximize profits, oligopolists could participate in all but: A. Price leadership. B. Price-fixing. C. Cartels. D. Self-destructive behavior.

D. Self-destructive behavior.

Which of the following industries has the highest concentration ratio? A. Wheat production B. Sugar production C. Used car sales D. Soft drinks

D. Soft drinks

17. The degree of market power exercised by a firm is related to all but: A. The number and proximity of competing firms. B. The price elasticity of demand for the firm's product. C. Its ability to influence the market price of its output. D. The age of the industry.

D. The age of the industry.