Chapter 11: OligopolyMULTIPLE CHOICE 1. a. b. c. d. e. ANS: C MSC: Factual 2. a. b. c. d. e. ANS: C MSC: Factual A market where there are only a few sellers is known as: perfectly competitive. monopolistically competitive. oligopolistic. monopolistic. cartelized. DIF: Easy REF: 410 TOP: Oligopoly In the model of oligopoly, there: are many firms producing differentiated products. is one firm producing undifferentiated products. are a few firms producing differentiated or undifferentiated products. are many firms producing undifferentiated products. is one firm producing a highly differentiated product. DIF: Easy REF: 410 TOP: Oligopoly 3. When an economist says an oligopoly has a “small” number of firms, the economist means: a. exactly 1. b. exactly 2, 3, or 4. c. few enough to allow for interdependence. d. few enough to allow for perfectly inelastic demand curves. e. few enough to allow for four stages of industry development. ANS: C MSC: Factual 4. a. b. c. d. e. ANS: D MSC: Factual DIF: Easy REF: 410 TOP: Oligopoly Oligopoly is a market structure that necessarily has: cartels. a large number of firms with homogeneous products. a large number of firms with slightly different products. a small number of firms but more than one. only one firm. DIF: Easy REF: 410 TOP: Oligopoly a. a. b. d. b. ANS: E MSC: Factual 6. d. a. Interstate Commerce Commission. the monopoly price. a. c. a group of firms using price leadership. DIF: Easy REF: 411 TOP: Cooperative Profit-maximizing cartels allocate sales according to: precartel sales. e. e. quantities where all firms’ marginal costs are equal. b. c. b. minimum average total cost pricing. b. a collusive organization. an oligopolist that competes with other oligopolists. ANS: E Behavior MSC: Factual 9. e. ANS: A Behavior MSC: Factual 7. advertising. potential to cheat on the cartel. Constitution.5. e. DIF: Easy DIF: Easy REF: 411 TOP: Cooperative A cartel is: the name for firms in any oligopoly market. the monopolistically competitive price. e. d. Oligopoly is the only market structure in which one finds: barriers to entry. c. Declaration of Independence. average total cost of the last unit. d. firm interdependence. . TOP: Oligopoly In the United States most cartels were declared illegal by the: Sherman Antitrust Act. a. marginal revenue. a group of firms using preemptive strategies. ANS: B Behavior MSC: Factual 8. competing brand names. quantities where all firms’ marginal revenues are equal. c. c. geographic location. d. Supreme Court. REF: 410 DIF: Easy REF: 411 TOP: Cooperative Profit-maximizing cartels choose price equal to: marginal cost. DIF: Easy TOP: Cooperative Cartels can only exist: a. b. Q = 260 and P = $60. ANS: A Behavior MSC: Applied 11.ANS: E Behavior MSC: Factual DIF: Easy REF: 411 TOP: Cooperative 10. DIF: Easy REF: 411 TOP: Cooperative 13. each firm to cheat on the cartel agreement. c. ANS: A Behavior MSC: Conceptual Q = 200 and P = $80. c. d. If Gulfstream and Bombardier. when demand curves are perfectly inelastic. ANS: A Behavior MSC: Conceptual 12. $500. b. $1. $4. b. higher prices and higher quantities offered for sale. Q = 500 and P = $75. $3. d. lower prices and lower quantities offered for sale. d. in oligopoly markets. e.000. none of the above. when products are not homogeneous. higher prices and lower quantities offered for sale. e. in countries where they are legal. $2. Q = 250 and P = $80. c. consumers could expect: a. one firm to emerge as the price leader in the oligopoly. If the market described in the accompanying diagram is dominated by a cartel. the loss in total surplus relative to perfectly competitive market conditions will be: a.000. c. diagram is: REF: 411 DIF: Easy REF: 411 TOP: Cooperative The optimal output and price for the cartel shown in the accompanying a. both producers of upscale jet airplanes. d. were to collude rather than compete. e. when products are homogeneous. e.000. .000. b. . P = 75. d. Q = 80. P = 40.ANS: A Behavior MSC: Conceptual DIF: Easy REF: 411 TOP: Cooperative 14. P = 25. P = 80. they should produce so that: a. Duopolists A and B face the following demand curves: QA = 120 – 2PA + PB and QB = 120 – 2PB + PA. what is the profit-maximizing price and quantity? a. Q = 150. If the cartel described by the accompanying diagram is broken up and forced into a perfectly competitive market situation. Q = 100. ANS: C Behavior MSC: Applied DIF: Moderate REF: 411 TOP: Cooperative 16. b. Q = 160. P = 75. Q = 80. MCA = MCB = MRA + MRB. Q = 180. If both firms have zero marginal cost and they form a cartel. e. c. e. the optimal output and price will be: a. not necessarily MCA = MRA. d. ANS: D Behavior MSC: Conceptual Q = 200 and P = $80. Duopolists A and B face the following demand curves: QA = 150 – 5PA + 4PB and QB = 150 – 5PB + 4PA. Q = 120. If both firms have zero marginal cost and they form a cartel. Q = 260 and P = $60. P = 30. Q = 250. Q = 120. P = 60. MCA = MCB = MR. MCA + MCB = MRA + MRB. P = 80. b. DIF: Easy REF: 411 TOP: Cooperative 15. If both firms produce as a cartel. e. c. Q = 90. d. b. MCA = MRA and MCB = MCB. and market marginal revenue MR. c. c. Q = 500 and P = $60. what is the profit-maximizing price and quantity? a. Q = 250 and P = $80. marginal revenues MRA and MRB. e. d. P = 40. P = 60. ANS: E Behavior MSC: Applied DIF: Moderate REF: 411 TOP: Cooperative 17. Q = 250 and P = $75. b. Two firms (A and B) have marginal costs MCA and MCB. MCA + MCB = MR. d. P < MR. MCi > MR. c. the United States refused to buy oil from OPEC. c. b. ANS: A Behavior MSC: Conceptual 19. b. not necessarily MCA = MRA. It always pays in the short run and may pay in the long run. d. The OPEC oil cartel lost its market power and world oil prices fell in the 1980s because: a. e. DIF: Moderate REF: 411 TOP: Cooperative While a cartel is holding together. world consumers boycotted OPEC oil. e. e. MCA + MCB = MRA + MRB. c. b. b. b. What is the advantage to a particular firm of cheating on an otherwise effective cartel? a. kinked. MCA = MCB = MRA + MRB. If a cartel is working properly. e. its individual members’ demand curves are significantly elastic. MCA = MCB = MR. c. . P = MR. ANS: A Behavior MSC: Conceptual DIF: Moderate REF: 411 TOP: Cooperative 18. OPEC expanded its membership to include all international producers of oil. likely to be: a. d. d. and P is price): a. MCi = MR. MCA = MRA and MCB = MCB. MCi < MR. MCA + MCB = MR. e. its firms will likely be producing where (MCi is each firm i’s marginal cost. It always pays in the long run and may pay in the short run. a limit pricing strategy was pursued by some members of the cartel. It enhances credibility. MR is market marginal revenue. upward-sloping. d. ANS: D DIF: Moderate REF: 413 TOP: The Breakdown of Collusive Agreements MSC: Conceptual 21. ANS: A DIF: Moderate REF: 413 TOP: The Breakdown of Collusive Agreements MSC: Conceptual 20. The industry can then act like a monopoly.a. c. It decreases risk. close to unitary in elasticity. members began to cheat on cartel agreements. significantly inelastic. a. $184. e. Glyde has competition from a fringe of four small firms that produce where their individual marginal costs equal the market price. ANS: D MSC: Factual DIF: Easy REF: 414 TOP: Price Leadership 24. If Glyde’s total costs are given by TCG = 100 + 6QG. colluding. c. and the many small firms must follow its behavior. . firms are not profit maximizers. The industry can then act like a monopoly. $32. and the large firm must follow their behavior. The fringe firms each have total costs given by TCi = 10Qi + 2Q2i. d. a price leader. $332. $160. It always pays in the long run and may pay in the short run. e. what is Glyde’s maximum profit? a. $148. chooses a price for its sink stoppers. e. losing money in the long run. Whopper Stoppers Inc. $362. what are the total profits of the fringe firms? a. Glyde has competition from a fringe of four small firms that produce where their individual marginal costs equal the market price. The fringe firms each have total costs given by TCi = 10Qi + 2Q2i . the large firm sets the market price. c. d. b. is: a. threatening competitors. It enhances credibility. $128. If Glyde’s total costs are given by TCG = 100 + 6QG. d. $64. d. It decreases risk. c. d.a. Whopper Stoppers Inc. e. which has a total market demand given by Q = 80 – 2P. b. ANS: A MSC: Applied DIF: Moderate REF: 414 TOP: Price Leadership 25. $96. e. preempting the competitors. b. c. which has a total market demand given by Q = 80 – 2P. c. Glyde Air Fresheners is the dominant firm in the solid room aromatizer industry. ANS: D DIF: Moderate REF: 413 TOP: The Breakdown of Collusive Agreements 22. Glyde Air Fresheners is the dominant firm in the solid room aromatizer industry. firms determine price and output independent of one another. ANS: B MSC: Factual MSC: Conceptual With the price leadership strategy: the many small firms set the market price. b. $240. b. It always pays in the short run and may pay in the long run. and other firms always charge the same price. firms collude to determine optimal price and output for the industry. DIF: Easy REF: 414 TOP: Price Leadership 23. e. a. b. ANS: D MSC: Applied DIF: Moderate REF: 414 TOP: Price Leadership 26. $16. ANS: A DIF: Easy REF: 417 TOP: Possible Behavior in Markets with Few Rivals a. TOP: Price Leadership Duopolists who compete on the basis of price will: end up with price equal to marginal cost. b. $240. REF: 414 MSC: Factual If duopolists engage in price competition. c. $18. charge a price less than marginal cost. The fringe firms each have total costs given by TCi = 10Qi + 2Q2i. $332. $362. $10. oligopolistic. ANS: D MSC: Conceptual a. c. b. always zero profits unless the two goods are perfect substitutes. TOP: Price Leadership The price leadership strategy is most appropriate when a market is: perfectly competitive. c. monopolistic competitive. $184. Glyde Air Fresheners is the dominant firm in the solid room aromatizer industry. $12. price discriminate. If Glyde’s total costs are given by TCG = 100 + 6QG. DIF: Moderate REF: 414 29.a. d. always zero profits unless the firms produce differentiated products. c. b. ANS: B DIF: Moderate REF: 417 TOP: Possible Behavior in Markets with Few Rivals MSC: Factual . e. DIF: Moderate 28. $14. what price should Glyde establish for air fresheners? a. e. c. charge a price equal to marginal revenue. b. monopolistic. never zero profits. e. charge a price greater than marginal cost. e. d. d. $148. always zero profits unless the two firms collude. all of the above. d. Glyde has competition from a fringe of four small firms that produce where their individual marginal costs equal the market price. which has a total market demand given by Q = 80 – 2P. the result is: always zero profits. d. ANS: E MSC: Applied 27. b. MSC: Applied Two local ready-mix cement manufacturers. e. 10 units.55. $1. Here and There.30. Here and There. $2. their maximum joint profits will be: a. Here and There. d. d.33. c.000. 50 units.22.5Q2Here and TCThere = 5QThere + 0.5Q2Here and TCThere = 5QThere + 0. $222. Their total costs are given by TCHere = 5QHere + 0. Their total costs are given by TCHere = 5QHere + 0. $111. If they successfully collude. Their total costs are given by TCHere = 5QHere + 0.44. each firm’s profits will be: a.11. 50.5Q2There. d. ANS: C DIF: Moderate REF: 417 TOP: Possible Behavior in Markets with Few Rivals MSC: Applied 31.5Q2There. $333. $555. Two local ready-mix cement manufacturers. e. $500. Two local ready-mix cement manufacturers.67 units. . 66. 20 units. c. $1. If they successfully collude. Their total costs are given by TCHere = 5QHere + 0.500.5Q2Here and TCThere = 5QThere + 0. $2. Two local ready-mix cement manufacturers. have combined demand given by Q = 105 – P. Here and There. their total output will be: a. have combined demand given by Q = 105 – P. 85. If they cannot successfully collude and instead produce where the market price equals marginal cost. d. 40 units. ANS: C DIF: Moderate REF: 417 TOP: Possible Behavior in Markets with Few Rivals MSC: Applied 32.000. If they cannot successfully collude and instead produce where the market price equals marginal cost. $444.5Q2There. 66. e. e. have combined demand given by Q = 105 – P. 75.5Q2There.67. b. c.5Q2Here and TCThere = 5QThere + 0. b. ANS: D DIF: Moderate REF: 417 TOP: Possible Behavior in Markets with Few Rivals 33. b. have combined demand given by Q = 105 – P. c. their total output will be: a. 60.600. ANS: A DIF: Easy REF: 435 TOP: Duopolists and Price Competition with Differentiated Products . PB = 200. 2. 1. 833 gallons of water per day per firm. QA = 600. QA = 1. Duopolists A and B face the following demand curves: QA = 100 – 2PA + 5PB and QB = 120 – 3PB + 4PA. where P is the price per gallon and Q is thousands of gallons of water per day. e. 625 gallons of water per day. PA = 200. 48 gallons of water per day.500 gallons of water per day per firm. 833 gallons of water per day. 2. where P is the price per gallon and Q is thousands of gallons of water per day. PA = 200. b.250 gallons of water per day per firm. 625 gallons of water per day per firm. d. 0 gallons of water per day per firm. 2. d.02Q. QB = 320. b. ANS: A DIF: Moderate REF: 423 TOP: Possible Behavior in Markets with Few Rivals MSC: Applied 36. If one firm acts as a first mover. The marginal cost of producing water is near zero for both firms.500 gallons of water per day. 0 gallons of water per day. Suppose duopolists in the market for spring water share a market demand curve given by P = 50 – 0. 1. QB = 400. c. Suppose duopolists in the market for spring water share a market demand curve given by P = 50 – 0. c. QB = 660. b. e.250 gallons of water per day.02Q. 833 gallons of water per day. e. where P is the price per gallon and Q is thousands of gallons of water per day. Suppose duopolists in the market for spring water share a market demand curve given by P = 50 – 0.250. QB = 270. PB = 200. Optimal output for Cournot duopolists moving simultaneously is: a. d. QA = 700. PA = 300.ANS: E DIF: Moderate REF: 417 TOP: Possible Behavior in Markets with Few Rivals MSC: Applied 34.500 gallons of water per day. ANS: C DIF: Moderate REF: 423 TOP: Possible Behavior in Markets with Few Rivals MSC: Applied 37. 1. 0 gallons of water per day per firm. QA = 750. d. PB = 220. c. If firm A produces zero.250 gallons of water per day.02Q. c. PA = 300. PB = 350. PB = 250. e. the second firm will produce: a. The marginal cost of producing water is near zero for both firms. QA = 400. firm B’s best response is producing: a. ANS: D DIF: Easy REF: 423 TOP: Possible Behavior in Markets with Few Rivals MSC: Applied 35. PA = 300. what are the profitmaximizing prices and quantities? a. QB = 570. The marginal cost of producing water is near zero for both firms. If both firms have zero marginal cost. b. Between 3 and 5. QA = 80. what are the profitmaximizing prices and quantities? a. PA = 25. REF: 439 MSC: Conceptual REF: 439 MSC: Factual The kinked demand model assumes firms will: ignore the price increases of rivals. c. PB = 50. b. but firms will have no incentive to change their prices in oligopolistic industries. a. ANS: B DIF: Easy TOP: The Sticky Pricing of Managers 40. QA = 100. PB = 40. PA = 100. e. QB = 140. firms will set price equal to marginal cost in oligopolistic industries.MSC: Applied 38. PB = 40. Duopolists A and B face the following demand curves: QA = 100 – 2PA + 2PB and QB = 100 – 2PB + 2PA. Demand for an increase in price is Q = 280 – 40P and demand for a decrease in price is Q = 100 – 10P. QB = 120. follow the price decreases of rivals. PA = 50. b. Between 2 and 4. PB = 80. a. d. PA = 50. ANS: D DIF: Easy REF: 435 TOP: Duopolists and Price Competition with Differentiated Products MSC: Applied 39. marginal costs can vary to some extent. ANS: C DIF: Moderate TOP: The Sticky Pricing of Managers 41. If both firms have zero marginal cost. QA = 100. d. e. Over what range of marginal cost would the optimal price remain unchanged? a. follow all price changes of rivals. QA = 60. marginal costs are constant in oligopolistic industries. d. PB = 25. PA = 60. c. c. Sticky prices are an outcome of the kinked demand model because: firms in an oligopoly will collude to hold prices fixed. QB = 100. QB = 100. a and b ANS: E DIF: Moderate TOP: The Sticky Pricing of Managers REF: 439 MSC: Factual . QA = 60. d. b. e. Between 3 and 4. c. e. demand is perfectly elastic in oligopolistic industries. ignore all price changes of rivals. QB = 140. Between 2 and 5. Between 1 and 4. b. An oligopolist that faces a kinked demand curve is charging price P = 6.
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