Chapter 16 Oligopoly What Is Oligopoly?

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1 Chapter 16 Oligopoly 16.1 What Is Oligopoly? 1) Sammy's Inc. competes with a few other firms because there are natural barriers to entry. Sammy's operates in A) a perfectly competitive market. B) an oligopoly. C) a monopolistically competitive market. D) a monopoly. E) a natural monopolistically competitive market. Topic: Oligopoly 2) Which of the following is found ONLY in oligopoly? A) producers who sell identical products B) one firm's actions affect another firm's profit C) entry into the industry is blocked D) sellers face a downward sloping demand curve for their product E) the firm's demand curve is horizontal Topic: Oligopoly Author: TS

2 660 Bade/Parkin œ Foundations of Economics, Third Edition 3) Herb's Inc. has a large share of its market and is tempted to collude with the few firms that are in its market. Herb's operates in A) an oligopoly. B) a monopolistically competitive market. C) a monopoly market. D) a perfectly competitive market. E) collusively protected market. Answer: A Topic: Oligopoly 4) In an oligopoly, there are A) many firms and barriers to entry. B) many firms and no barriers to entry. C) few firms and barriers to entry. D) few firms and no barriers to entry. E) barriers to entry and only one firm. Answer: C Topic: Oligopoly Author: SB 5) An oligopoly created because of economies of scale is called a A) natural oligopoly. B) legal oligopoly. C) public oligopoly. D) monopolistic oligopoly. E) scale oligopoly. Answer: A Topic: Oligopoly Author: SB

3 Chapter 16 Oligopoly 661 6) Which of the following is correct about firms in an oligopoly? A) Each firm has complete control over its own selling price and the prices of its competitors. B) All firms independently charge monopoly prices. C) No one firm controls price, but each has an influence on the price. D) There is no competition in oligopoly industries. E) Each firm in an oligopoly is a price taker and must accept the price determined in the market. Answer: C Topic: Oligopoly Author: TS 7) A cartel is A) a market structure with a small number of large firms. B) a market structure with a large number of small firms. C) a group of firms acting together to raise price, decrease output, and increase economic profit. D) a market with only two firms. E) another name for an oligopoly. Answer: C Topic: Cartel Author: SB 8) Daryl's Inc. has formed a cartel with the two other firms in its industry. In which of the following market structures does Daryl's operate? A) monopolistic competition. B) oligopoly. C) perfect competition. D) monopoly. E) legally protected monopoly. Topic: Cartel

4 662 Bade/Parkin œ Foundations of Economics, Third Edition 9) A cartel is A) a group of firms selling identical products but at slightly different prices. B) an agreement among firms to limit output, raise prices, and increase economic profit. C) the automobile producing industry. D) the only firm selling a particular product. E) an illegal agreement among firms which most often arises in monopolistically competitive markets. Topic: Cartel Author: TS 10) A two-firm oligopoly is called a A) double monopoly. B) cartel. C) duopoly. D) monopolistic oligopoly. E) dual-market. Answer: C Topic: Duopoly Author: SB 11) When economies of scale limit the number of firms in an industry to 3, there is a A) natural monopoly. B) natural oligopoly. C) legal oligopoly. D) legal cartel. E) natural monopolistic competition. Topic: Natural oligopoly Skill: Level 2: Using definitions

5 Chapter 16 Oligopoly ) There are two bookstores in a college town. If another bookstore opened, each of the stores would incur an economic loss. This bookstore market is A) a natural monopoly. B) a monopoly. C) monopolistic competition. D) a natural oligopoly. E) a legal oligopoly. Answer: D Topic: Natural oligopoly Skill: Level 2: Using definitions 13) When a city licenses only 3 taxi firms to serve the market, the city has created a A) cartel. B) legal monopoly. C) monopolistically competitive market. D) legal oligopoly. E) natural oligopoly. Answer: D Topic: Legal oligopoly Skill: Level 2: Using definitions

6 664 Bade/Parkin œ Foundations of Economics, Third Edition 14) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the efficient scale for one firm is units per hour. A) 2,000 B) 4,000 C) 8,000 D) 6,000 E) 10,000 Topic: Natural oligopoly

7 Chapter 16 Oligopoly ) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the lowest price at which a firm could stay in business in the long run is per unit and the quantity demanded in the market at that price is units per hour. A) $15; 6,000 B) $10; 8,000 C) $10; 6,000 D) $25; 2,000 E) $10; 4,000 Topic: Natural oligopoly 16) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, the figure shows a can profitably operate. A) natural monopoly in which 1 firm B) natural monopoly in which 2 firms C) natural oligopoly in which 3 firms D) natural oligopoly in which 2 firms E) natural oligopoly in which 8 firms Answer: D Topic: Natural oligopoly 17) The figure above shows the market demand curve and the ATC curve for a firm. If all firms in the market have the same ATC curve, economies of scale limit the market to firm(s). A) 1 B) 2 C) 3 D) 4 E) 8 Topic: Natural oligopoly

8 666 Bade/Parkin œ Foundations of Economics, Third Edition 18) Oligopoly is a market structure in which A) many firms each produce a slightly differentiated product. B) one firm produces a unique product. C) a small number of firms compete. D) many firms produce an identical product. E) the number of firms is so small that they do not compete with each other. Answer: C Topic: Oligopoly 19) The fact that firms in oligopoly are interdependent means that A) there are barriers to entry. B) one firm's profits are affected by other firms' actions. C) they can produce either identical or differentiated goods. D) there are too many of them for any one firm to influence price. E) they definitely compete with each other so that the price is driven down to the monopoly level. Topic: Interdependent 20) Collusion results when a group of firms i. act separately to limit output, lower prices, and decrease economic profits. ii. act together to limit output, raise prices, and increase economic profits. iii. in the United States legally fix prices. A) i only. B) ii only. C) iii only. D) i and iii. E) ii and iii. Topic: Collusion

9 Chapter 16 Oligopoly ) A cartel is a group of firms A) acting separately to limit output, lower price, and decrease economic profit. B) acting together to limit output, raise price, and increase economic profit. C) legally fixing prices. D) acting together to erect barriers to entry. E) that compete primarily with each other rather than the other firms in the market. Topic: Cartel 22) A market with only two firms is called a A) duopoly. B) two-firm monopolistic competition. C) two-firm monopoly. D) cartel. E) two-firm quasi monopoly. Answer: A Topic: Duopoly 23) The efficient scale of one firm is 20 units and the average total cost at the efficient scale is $30. The quantity demanded in the market as a whole at $30 is 40 units. This market is A) a natural duopoly. B) a legal duopoly. C) a natural monopoly. D) a legal monopoly. E) monopolistically competitive. Answer: A Topic: Natural duopoly

10 668 Bade/Parkin œ Foundations of Economics, Third Edition 24) Even though four firms can profitably sell hotdogs downtown, the government licenses only two firms. This market is a A) natural duopoly. B) legal duopoly. C) natural monopoly. D) legal monopoly. E) market-limited oligopoly. Topic: Legal duopoly 25) To determine if a market is an oligopoly, we need to determine if A) the market's HHI is less than 900. B) there are many firms in the market. C) the firms are so few that they recognize their mutual interdependencies. D) the firms make identical or differentiated products. E) cartels are legal in their market. Answer: C Topic: Determination of oligopoly 16.2 Alternative Oligopoly Outcomes 1) If firms in an oligopolistic industry successfully collude and form a cartel, what price and output will result? A) the monopoly price and output B) the competitive price and output C) the monopolistically competitive price and output D) a price higher than the monopoly price and, because there is more than one firm in the industry, more output than the monopoly amount E) a price lower than the competitive price and, because there are only a few firms in the industry, less output than the competitive amount Answer: A Topic: Monopoly outcome Author: TS

11 Chapter 16 Oligopoly 669 2) If firms in an oligopolistic industry consistently cut their price to sell more output, what price and output will result? A) the monopoly price and output B) the competitive price and output C) the monopolistically competitive price and output D) a price lower than the competitive price and less output than the competitive amount E) a price lower than the competitive price and more output than the competitive amount Topic: Competitive outcome Author: TS 3) In an oligopoly, output is A) less than the output in monopoly. B) greater than the output in perfect competition. C) in all circumstances the same as the output in perfect competition. D) somewhere between the output in monopoly and that in perfect competition outcomes. E) in all circumstances the same as the output in monopoly. Answer: D Topic: Range of outcomes Author: SB

12 670 Bade/Parkin œ Foundations of Economics, Third Edition 4) The above figure shows the market demand curve for long-distance telephone calls. Suppose the marginal cost of a long-distance telephone call is 2É a minute for a call no matter how many minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate as perfect competitors, there are minutes of calls made per hour. A) between 0 and 3 million B) more than 3 million and less than or equal to 5 million C) more than 5 million and less than or equal to 7 million D) more than 7 million and less than or equal to 9 million E) more than 9 million Answer: D Topic: Competitive outcome

13 Chapter 16 Oligopoly 671 5) The above figure shows the market demand curve for long-distance telephone calls. Suppose the marginal cost of a long-distance telephone call is 2É a minute for a call no matter how many minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate as a monopoly, there are minutes of calls made per hour. A) between 0 and 3 million B) more than 3 million and less than or equal to 5 million C) more than 5 million and less than or equal to 7 million D) more than 7 million and less than or equal to 9 million E) more than 9 million Topic: Monopoly outcome 6) The above figure shows the market demand curve for long-distance telephone calls. Suppose the marginal cost of a long-distance telephone call is 2É a minute for a call no matter how many minutes of calls are made and there are 3 firms in the industry. If the firms in the industry operate as perfect competitors, the price of a call is per minute and if the firms in the industry operate as a monopoly, the price of a call is per minute. A) 2 cents; more than 3 cents and less than 4 cents B) more than 3 cents and less than 4 cents; more than 3 cents and less than 4 cents C) 1 cents; 2 cents D) 2 cents; either equal to 4 cents or more than 4 cents E) either equal to 4 cents or more than 4 cents; 2 cents Answer: A Topic: Range of outcomes

14 672 Bade/Parkin œ Foundations of Economics, Third Edition 7) Imagine a duopoly in which two firms, A and B, produce the monopoly profit-maximizing output and equally share the economic profit. If firm A increases output, A) both firms' profits increase. B) firm A's profits increase and firm B's profits decrease. C) firm B's profits increase and firm A's profits decrease. D) both firms' profits decrease. E) firm A's profits increase and firm B's profits do not change. Topic: Duopolists' dilemma Author: SB 8) If one firm in a duopoly increases its production by one unit beyond the monopoly output, that firm's profit, the other firm's profit, and the total profit of the duopoly. A) increases; increases; increases B) does not change; does not change; does not change C) increases; decreases; does not change D) increases; does not change; increases E) increases; decreases; decreases Answer: E Topic: Duopolists' dilemma Author: MR 9) Imagine a duopoly in which two firms, A and B, produce the monopoly profit-maximizing output and equally share the economic profit. If firm A increases its output, the market price and total economic profit of the two firms combined. A) falls; decreases B) falls; increases C) rises; decreases D) rises; increases E) falls; does not change Answer: A Topic: Duopolists' dilemma Author: SB

15 Chapter 16 Oligopoly ) For a duopoly, the highest price is charged when the duopoly achieves A) the competitive outcome. B) the monopoly outcome. C) an outcome between the competitive outcome and the monopoly outcome. D) its noncooperative Nash equilibrium. E) Both answers A and D are correct because both refer to the same price. Topic: Monopoly outcome 11) For a duopoly, the smallest quantity is produced when the duopoly achieves A) the competitive outcome. B) the monopoly outcome. C) an outcome between the competitive outcome and the monopoly outcome. D) its noncooperative Nash equilibrium. E) Both answers A and D are correct because both refer to the same amount of output. Topic: Monopoly outcome 12) For a duopoly, the maximum total profit is reached when the duopoly produces A) the same amount of output as the competitive outcome. B) the same amount of output as the monopoly outcome. C) an amount of output that lies between the competitive outcome and the monopoly outcome. D) more output than the competitive outcome. E) less output than the monopoly outcome. Topic: Monopoly outcome

16 674 Bade/Parkin œ Foundations of Economics, Third Edition 13) If a duopoly has reached the monopoly outcome, a firm can increase its profit by if it and it alone its price and its production. A) raises; increases B) raises; decreases C) lowers; increases D) lowers; decreases E) raises; does not change Answer: C Topic: Duopolists' dilemma 14) If a duopoly has reached the monopoly outcome and only one firm increases its production, that firm's profit and the other firm's profit. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Topic: Duopolists' dilemma 15) Suppose a duopoly had reached the monopoly outcome and then the first firm increased its production. If the second firm next increases its production, the second firm's profit and the first firm's profit. A) increases; increases B) increases; decreases C) decreases; increases D) decreases; decreases E) increases; does not change Topic: Duopolists' dilemma

17 Chapter 16 Oligopoly ) If both firms in a duopoly increase their production by one unit beyond the monopoly output, each firm's profit and the total profit of the duopoly. A) increases; increases B) does not change; does not change C) decreases; decreases D) does not change; increases E) decreases; does not change Answer: C Topic: Duopolists' dilemma 17) The very best joint outcome possible for firms in a duopoly is to produce the A) monopoly level of output. B) perfectly competitive level of output. C) output level that maximizes total revenue. D) output level that minimizes total cost. E) Nash equilibrium level of output if the game is not repeated. Answer: A Topic: Duopolists' dilemma Skill: Level 2: Using definitions 16.3 Game Theory 1) The players in a game theory situation often do not act in their joint interest because of which of the following? A) They do not realize the benefit of cooperation. B) Players strive to minimize their opponents' profits. C) Players do not understand the game and its payoffs. D) It is not in each player's self-interest to cooperate. E) Players understand the game but they do not know which action(s) will benefit their joint interest. Answer: D Topic: Game theory Skill: Level 4: Applying models Author: TS

18 676 Bade/Parkin œ Foundations of Economics, Third Edition 2) A table showing the various results in a game theory situation is known as which of the following? A) short-run cost table B) payoff matrix C) demand and supply schedule D) game theory table E) results table Topic: Payoff matrix Author: TS 3) The prisoners' dilemma is an example of A) product differentiation. B) collusion. C) game theory. D) monopolistic competition. E) decision making in a monopoly. Answer: C Topic: Prisoners' dilemma Author: SB 4) In the prisoners' dilemma, each player is regardless of the other player's actions. A) forced to confess B) forced to deny C) better off confessing D) better off denying E) going to go free Answer: C Topic: Prisoners' dilemma Author: SB

19 Chapter 16 Oligopoly 677 5) The equilibrium in the prisoners' dilemma i. minimizes the prisoners' combined jail time. ii. has one prisoner confessing and the other denying. iii. is a Nash equilibrium. A) i only. B) ii only. C) iii only. D) i and iii. E) i, ii, and iii. Answer: C Topic: Prisoners' dilemma Author: SB 6) Which of the following is used to analyze all possible choices and outcomes in the prisoners' dilemma? A) the four-firm concentration ratio B) the payoff matrix C) product differentiation D) strategies E) the game-theory profit index. Topic: Prisoners' dilemma Skill: Level 2: Using definitions Author: SB

20 678 Bade/Parkin œ Foundations of Economics, Third Edition 7) In an oligopoly in which the firms have entered into a cartel agreement, the Nash equilibrium exhibits which of the following? A) firms jointly maximizing profits B) the firms cheating on the cartel agreement, which benefits society C) production at a price and output level close to monopolistic competition in the long run D) the firms cheating on the cartel agreement, which harms society E) one firm cheating on the cartel agreement and the other firms complying with the cartel agreement. Topic: Nash equilibrium Skill: Level 2: Using definitions Author: TS 8) A Nash equilibrium is defined as A) earning normal profits in the long run. B) forming a cartel with strong penalties for cheaters. C) relying on other game players to realize the benefit of cooperation. D) each player taking the best possible action given the action of the other player. E) each player taking the action that is best for all the players. Answer: D Topic: Nash equilibrium Skill: Level 2: Using definitions Author: TS

21 Chapter 16 Oligopoly 679 9) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not allowed to communicate. Given the information in the payoff matrix, the Nash equilibrium is that Bonnie and Clyde. A) confesses; denies B) confesses; confesses C) denies; denies D) denies; confesses E) denies; either confess or denies, either outcome is consistent with the Nash equilibrium. Topic: Nash equilibrium Skill: Level 4: Applying models

22 680 Bade/Parkin œ Foundations of Economics, Third Edition 10) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not allowed to communicate. Given the information in the payoff matrix, the Nash equilibrium is A) Bonnie confesses only if she thinks Clyde denies committing the crime. B) Clyde confesses only if he thinks Bonnie denies committing the crime. C) both Bonnie and Clyde confess to the crime. D) both Bonnie and Clyde deny committing the crime. E) Clyde confesses and Bonnie might either confess or not confess, either outcome is consistent with the Nash equilibrium. Answer: C Topic: Nash equilibrium Skill: Level 4: Applying models 11) The table above shows the payoff matrix offered to two suspected criminals, Bonnie and Clyde. The payoffs are the years they will spend in prison. The suspected criminals are not allowed to communicate. Which of the following statements correctly describes the equilibrium choices made by Bonnie and Clyde? A) The Nash equilibrium is the best outcome for Bonnie and Clyde. B) There is no equilibrium in this game. C) In the Nash equilibrium, both Bonnie and Clyde deny committing the crime. D) Bonnie and Clyde could improve upon the Nash equilibrium if they could communicate. E) Bonnie and Clyde get the best outcome for themselves because they are not allowed to communicate. Answer: D Topic: Nash equilibrium Skill: Level 4: Applying models

23 Chapter 16 Oligopoly ) Intel and AMD are a duopoly that produce CPU chips. Intel and AMD can conduct R&D or they can not conduct R&D. The table above shows the payoff matrix for the two firms. The numbers are millions of dollars of profit. The Nash equilibrium is for Intel to and for AMD to. A) conduct R&D; conduct R&D B) conduct R&D; not conduct R&D C) not conduct R&D; conduct R&D D) not conduct R&D; not conduct R&D E) conduct R&D; either conduct R&D or not conduct R&D, the equilibrium could be either choice for AMD Answer: A Topic: Nash equilibrium Skill: Level 4: Applying models Author: MR

24 682 Bade/Parkin œ Foundations of Economics, Third Edition 13) Intel and AMD are a duopoly that produce CPU chips. Intel and AMD can conduct R&D or they can not conduct R&D. The table above shows the payoff matrix for the two firms. If AMD is playing a tit-for-tat strategy, then if Intel conducted R&D last period, AMD A) definitely conducts R&D this period. B) definitely does not conduct R&D this period. C) might conduct R&D or might not conduct R&D, depending on Intel's profit. D) might conduct R&D or might not conduct R&D, depending on its profit. E) might conduct R&D or might not conduct R&D, but more information is needed to determine its action. Answer: A Topic: Repeated games Skill: Level 4: Applying models Author: MR 14) Intel and AMD are a duopoly that produce CPU chips. Intel and AMD can conduct R&D or they can not conduct R&D. The table above shows the payoff matrix for the two firms. AMD is playing a tit-for-tat strategy and Intel did not conduct R&D last period. Then, of the following answers, Intel's total profit for the next two periods is the highest if Intel R&D this period and R&D next period. A) conducts; conducts B) does not conduct; conducts C) conducts; does not conduct D) does not conduct; does not conduct E) conducts; either conducts or does not conduct because the profit is the same in either case Topic: Repeated games Skill: Level 4: Applying models Author: MR

25 Chapter 16 Oligopoly ) The prisoners' dilemma can be used to analyze decision making in A) perfect competition. B) monopoly. C) duopoly. D) monopolistic competition. E) monopolistic oligopoly. Answer: C Topic: Duopoly game Skill: Level 2: Using definitions Author: SB 16) If an oligopolistic game is repeatedly played, which of the following can occur? A) players can learn ways to cooperate and earn an economic profit B) the competitive price and output consistently is the final result C) firms can learn how to cheat more effectively on the other player D) one firm will be driven out of business E) an implicit agreement is reached in which one firm constantly cheats on the cartel and the other firm complies with it. Answer: A Topic: Repeated games Author: TS 17) One of the main tools economists use to analyze strategic behavior is A) the Herfindahl-Hirschman Index. B) game theory. C) product differentiation. D) the collusion index. E) dual theory, which is used to study duopolies. Topic: Game theory

26 684 Bade/Parkin œ Foundations of Economics, Third Edition 18) Game theory reveals that A) the equilibrium might not be the best solution for the parties involved. B) firms in oligopoly are not interdependent. C) each player looks after what is best for the industry. D) if all firms in an oligopoly take the action that maximizes their profit, then the equilibrium will have the largest possible combined profit of all the firms. E) firms in an oligopoly choose their actions without regard for what the other firms might do. Answer: A Topic: Game theory 19) A Nash equilibrium occurs A) when each player acts without considering the actions of the other player. B) when each player takes the best possible action given the action of the other player. C) only when players use the tit-for-tat strategy. D) only when the game is played in Nashville, TN. E) when each player takes the action that makes the combined payoff for all players as large as possible. Topic: Nash equilibrium 20) The prisoners' dilemma game A) shows that prisoners are better off if they cooperate. B) shows it is easy to cooperate. C) has an equilibrium in which both prisoners are made as well off as possible. D) would have the same outcome even if the prisoners can communicate and cooperate. E) has an equilibrium in which one prisoner is made as well off as possible and the other prisoner is made as worse off as possible. Answer: A Topic: Prisoners' dilemma Skill: Level 2: Using definitions

27 Chapter 16 Oligopoly ) A collusive agreement to form a cartel is difficult to maintain because A) each member firm can increase its own profits by cutting its price and selling more. B) forming a cartel is legal but frowned upon throughout the world. C) supply will decrease because of the high cartel price. D) demanders will rebel once they realize a cartel has been formed. E) each firm can increase its profit if it decreases its production even more than the decrease set by the cartel. Answer: A Topic: Duopolists' dilemma Skill: Level 2: Using definitions 22) Firms in oligopoly can achieve an economic profit A) always in the long run. B) if they cooperate. C) only if the demand for their products is inelastic. D) only if the demand for their products is elastic. E) if they reach the non-cooperative equilibrium. Topic: Duopoly game 23) When duopoly games are repeated and a "tit for tat" strategy is used, A) the competitive outcome is more likely to be reached than when the game is played once. B) the monopoly outcome is more likely to be reached than when the game is played once. C) both firms begin to incur economic losses. D) one firm goes out of business. E) because the game is repeated it is impossible to predict whether the competitive or the monopoly outcome is more likely. Topic: Repeated games Skill: Level 2: Using definitions

28 686 Bade/Parkin œ Foundations of Economics, Third Edition 24) From a social perspective, oligopoly is A) always efficient. B) efficient only if the firms cooperate. C) efficient only if the firms play non-repeated games. D) generally not efficient. E) efficient only if the firms innovate. Answer: D Topic: Efficiency of oligopoly Skill: Level 2: Using definitions

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