1 of 12 11/6/2013 8:40 PM

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1 1 of 12 11/6/2013 8:40 PM In which of the following market structures are entry barriers the highest? Perfect competition. Monopolistic competition. Oligopoly. Monopoly. Although oligopolies are protected by barriers to entry, the monopoly market typically has the highest barriers to entry. There are many corn farmers, each of whom produces the same product. The corn market can best be classified as Monopolistic competition. Perfect competition. Oligopoly. Monopoly. Many agricultural products are produced in perfectly competitive markets because there are a large number of producers with no market power and no barriers to entry, and they sell a homogeneous product. When firms are interdependent, One firm can ignore other companies in the market when making decisions. The profit of one firm depends on how its rivals respond to its strategic decisions. They can act independently of one another. Then the market is perfectly competitive. One firm in an oligopoly may decide to cut prices, but the success of this decision will depend on whether the other firms match the price reduction.

2 2 of 12 11/6/2013 8:40 PM Which market structure is characterized by a few interdependent firms? Monopoly. Perfect competition. Monopolist competition. Oligopoly. An oligopoly is a market with a few firms that are protected by high barriers to entry and have substantial market power. Which of the following may not characterize an oligopoly? A few firms. No market power. High barriers to entry. Substantial control over price. An oligopoly is a market with a few firms that are protected by high barriers to entry and have substantial market power. Which of the following may not characterize an oligopoly? A few firms. Substantial market power. High barriers to entry. Many firms. An oligopoly is a market with a few firms that are protected by high barriers to entry and have substantial market power.

3 3 of 12 11/6/2013 8:40 PM It is most difficult for new firms to enter A perfectly competitive market. An oligopolistic market. A monopolistically competitive market. A perfectly contestable market. Although oligopolies are protected by barriers to entry, the monopoly market typically has the highest barriers to entry. Which of the following is not a determinant of market power? Number of producers. Availability of substitutes. Barriers to entry. Age of the industry. The determinants of market power include number of producers, size of each firm, barriers to entry, and availability of substitute goods. The concentration ratio measures the Number of plants owned by an oligopoly. Percentage of total profits made by a firm in a specific market. Proportion of total output produced by the four largest producers in a specific market. Relative size of a firm compared to other industries. The standard measure of market power is the concentration ratio. The concentration ratio is a measure of market power that relates the size of firms to the size of the product market. Difficulty: 1 Easy

4 4 of 12 11/6/2013 8:40 PM The goal of a company in an oligopoly industry is to Increase market share and profits. Obtain the highest price possible. Always follow rivals if they raise price. Be the market leader in innovation. Oligopoly industries are characterized by a battle for larger market shares and higher profits by the large firms. Learning Objective: How oligopolies maximize profits. Concentration ratios tend to overstate the power of some corporations to influence economic outcomes because they measure output For single firms rather than markets. For the whole United States, which is too large a geographic market for some firms or industries. Only for domestic production when the true market boundaries are international for some markets. Over many industries rather than a single market. Concentration ratios refer to national markets and therefore may not accurately reflect market power. Which of the following industries is likely to have the highest concentration ratio? Corn production. Clothing manufacturing. Video game systems. College education. The three oligopolists that produce video game consoles (Sony, Nintendo, and Microsoft ) have 100 percent of a $14 billion market. Difficulty: 3 Hard

5 5 of 12 11/6/2013 8:40 PM The concentration ratio for an oligopoly is Under 40 percent. Over 60 percent. 90 percent. 100 percent. The sum of the top four firms' market shares in a typical oligopoly is over 60 percent. Difficulty: 1 Easy Market share can be computed by dividing The amount that a buyer buys by the total amount that is produced in the market. Profit by total cost. The amount sold by a single firm by the total sold in the market. Price by average total cost. Market share is the percentage of total market output produced by a single firm and is equal to the revenues of a single firm divided by the revenues of the entire market. Difficulty: 1 Easy Which one of the following is not a danger of experimenting with pricing for an oligopoly? Retaliation. Firms matching price reductions. The uncertainty of competitor response. Product differentiation. Oligopolists avoid price competition and instead pursue nonprice competition (e.g., advertising and product differentiation) to reduce the risk of retaliation, price wars, and uncertainty.

6 6 of 12 11/6/2013 8:40 PM RC Cola lost market share in the 1980s due to Its decision not to advertise. Consumers not liking the taste of its colas. Wasting precious resources on advertising. Its lack of shelf space at supermarkets. RC lost sales in the 1980s due to its decision not to advertise while Pepsi and Coke spent millions on advertising. If two firms in an oligopoly are advertising heavily, the other firms must match those expenditures or lose market share. The kinked demand curve explains the observation that in oligopoly markets Rivals match price increases. Rivals do not match price reductions. Prices may not change even in the face of cost increases. Practice product differentiation. The demand curve will be kinked if rival oligopolists match price reductions but not price increases. If costs increase for oligopolists, firms are unlikely to increase prices because the quantity demanded and revenues will fall, causing profits to decrease. The demand curve will be kinked if rival oligopolists Match price increases but not price reductions. Match price reductions but not price increases. Match both price increase and price reductions. Do not match price changes at all. The demand curve will be kinked if rival oligopolists match price reductions but not price increases.

7 7 of 12 11/6/2013 8:40 PM The study of how decisions are made when strategic interaction between firms exists is known as Game theory. Contestable market theory. Market power theory. Predatory pricing theory. Game theory attempts to explain behavior in strategic situations, in which a business's success depends on the choices of others. Difficulty: 1 Easy The potential for maximizing total industry profits is greater in oligopolies than in perfect competition because There are fewer firms and each is dependent on the actions of rivals. Firms in an oligopoly are more profitable. There are independent firms in an oligopoly. Perfectly competitive firms can easily cooperate to restrict supply. Oligopoly firms strive to behave like a monopoly to maximize industry profits. They can do this more easily than can firms in perfect competition because there are only a few large firms in the industry and they are interdependent. Learning Objective: How oligopolies maximize profits. In an effort to maximize profits, oligopolists could participate in all of the following but Price leadership. Price-fixing. Cartels. Self-destructive behavior. Price leadership, price-fixing, and entering cartels can help oligopolists maximize profit reduces profit.. Self-destructive behavior

8 8 of 12 11/6/2013 8:40 PM Oligopolists have an incentive to coordinate price because with coordination The demand for each firm's product is kinked. Each firm faces a perfectly inelastic demand for its product. The market demand curve is perfectly inelastic. Each firm faces a relatively inelastic demand for its product. An oligopoly strives to behave like a monopoly to maximize industry profits. A monopoly and an oligopoly produce at an elastic point on the demand curve because on the inelastic portion of the demand curve, higher prices will bring higher revenues and therefore will continue to increase prices and decrease output until the point where demand is elastic. General Electric and Westinghouse were convicted of Price-fixing. Marginal cost pricing. Price leadership. Allocation of market shares. In 1961 General Electric and Westinghouse were convicted of fixing prices on $2 billion worth of electrical generators that they'd been selling to the Tennessee Valley Authority and commercial customers. Price leadership is a method by which oligopolies can Increase prices without explicit price-fixing. Illegally raise prices. Maintain the "kink" in their demand curves. Encourage competition. Price leadership is a subtle (not explicit) pricing pattern that allows one firm to establish the (market) price for all firms in the industry. Difficulty: 1 Easy

9 9 of 12 11/6/2013 8:40 PM 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 Predatory pricing. Retaliation. Price-fixing. Price leadership. Price leadership is a subtle (not explicit) pricing pattern that allows one firm to establish the (market) price for all firms in the industry. Difficulty: 3 Hard Temporary price reductions intended to drive out competition are referred to as Predatory pricing. Price-fixing. Price leadership. Retaliation. Predatory pricing is a temporary price reduction designed to alter market shares or drive out competition. Difficulty: 1 Easy A firm cannot maintain above-normal profits over the long run Without the existence of a cartel. Unless barriers to entry exist. Unless predatory pricing occurs. Without retaliation occurring. Above-normal profits encourage entry into the market by profit-motivated entrepreneurs. In order for the profits to be maintained, barriers to entry must exist.

10 10 of 12 11/6/2013 8:40 PM The most common form of nonprice competition is Collusion. Advertising. Patents. Predatory pricing. The goal of nonprice competition is to influence demand. Advertising is an effective way to enhance market power by changing consumer tastes. How might an oligopolist increase total revenue without changing price? Reduce output. Reduce marketing efforts. Through nonprice competition. Reduce costs. The goal of nonprice competition is to influence demand. Advertising is an effective way to enhance market power by changing consumer tastes without changing prices. High training costs help firms maintain Contestable markets. Cartels. Government regulation. Barriers to entry. If consumers need training (at significant cost) to switch to a new product, new competitors face significant barriers to entry the cost of retraining staff.

11 11 of 12 11/6/2013 8:40 PM Refer to Figure 25.1 for an oligopoly firm. Assume that the existing price and quantity are $10 and 2,000 units. Which of the following statements is most likely correct? Demand curves D and D both assume that rivals will not match any price changes. 1 2 Demand curves D 1 and D 2 both assume that rivals match any price changes. Demand curve D 1 assumes that rivals do not match price changes. Demand curve D 2 assumes that rivals do not match price changes. D is an elastic demand curve, which means if the firm lowers its price, quantity demanded increases significantly. 2 This would not occur if the firm's competitors matched its price decrease. Difficulty: 3 Hard Learning Objective: How oligopolies maximize profits.

12 12 of 12 11/6/2013 8:40 PM Which of the following is not an argument to have less antitrust enforcement? Global competitors put pressure on U.S. oligopoly industries. There is always a chance that new innovators will replace oligopoly firms. Oligopolies can lead to less output and higher prices. Companies become large because they are successful in satisfying consumer demand. Global competition and new innovation can decrease the power of companies in a U.S. oligopoly. This argument does not state that oligopolies are harmful to consumers in the form of higher prices and less available output because global markets can eliminate these problems. According to "Oil Cartel Achieves Cuts in Output, Halting Price Slide," OPEC wants to behave like a monopoly, choosing a rate of industry output that maximizes total industry profit. The challenges for all cartels, OPEC in particular, include all of the following except Preventing some members from decreasing production. Allocating market share. Coordination. Replicating monopoly outcomes. The challenges for cartels are maintaining low production, allocating market share, coordination, and replicating monopoly outcomes.