Question 1

What are the main characteristics of oligopoly?

Accepted Answer

The number of firms is small. There are likely to be some significant barriers to entry. The product may be a differentiated product, but may also be relatively undifferentiated (e.g. when economies of scale create an entry barrier). The demand curve facing the incumbent firms will be downward- sloping and relatively inelastic. Firms in an oligopolistic environment are likely to favour non- price competition over price competition (which may trigger profit- reducing price wars).

Question 2

In monopolistic competition, how are short- run supernormal profits competed away?

Accepted Answer

In monopolistic competition, there is freedom of entry into an industry. If firms are making supernormal profits, then there is an incentive for new firms to enter the industry. When they enter, they will take some of the customers of the established firms. Hence the established firms will see a fall in the demand for their product. As a result, their demand curve will shift to the left (a fall in demand), and it will continue shifting as more firms enter the industry until it is just tangential to the long- run average cost curve. At this point only normal profits are being made, and so no new firms have an incentive to enter the industry. All supernormal profits have been competed away and the market has reached its long- run equilibrium.

Question 3

Firms operating under monopolistic competition can make economic profits (supernormal profits) in the short and long run.

Accepted Answer

A) True 
 B)False  FALSE

Question 4

Which factors make collusion less likely?

Accepted Answer

The more firms there are in the industry

Question 5

A dominant strategy, as seen by a firm, is one that is

Accepted Answer

A)  legally imposed by the government or a regulator. 
B)  always chosen. 
C)  decided by a dominant firm. 
D)  decided by the firm itself, because it is dominant in the industry. 
A)  legally imposed by the government or a regulator. 
B)  always chosen. 
C)  decided by a dominant firm. 
D)  decided by the firm itself, because it is dominant in the industry.

Question 6

Which of the following defines a first- mover advantage?

Accepted Answer

A)  When a firm gains from being the first one to take action 
B)  When a firm is the first one to make supernormal profits 
C)  When a firm is the first to make a promise of a change in strategy 
D)  When a firm is the first to make a threat of a change in price 
A)  When a firm gains from being the first one to take action 
B)  When a firm is the first one to make supernormal profits 
C)  When a firm is the first to make a promise of a change in strategy 
D)  When a firm is the first to make a threat of a change in price

Question 7

Explain why the demand curve for an oligopolist may be kinked.

Accepted Answer

A demand curve under oligopoly may be ki

Question 8

Imperfect competition occurs when

Accepted Answer

A)  firms agree on prices or market shares. 
B)  there are only a few firms in the market, and they compete by advertising. 
C)  firms are neither monopolies nor perfect competitors. 
D)  firms produce identical products. 
A)  firms agree on prices or market shares. 
B)  there are only a few firms in the market, and they compete by advertising. 
C)  firms are neither monopolies nor perfect competitors. 
D)  firms produce identical products.

Question 9

Firms X and Y face the following payoffs in terms of profits, according to which of two prices - a high price or a low price - that each one charges. Each firm must choose whether to charge the high price or the low price, but does not know what the other will do.
    In the absence of collusion, which combination of strategies is most likely to occur?

Accepted Answer

A)  X sets the low price and Y sets the high price. 
B)  Both firms set the high price. 
C)  Both firms set the low price. 
D)  X sets the high price and Y sets the low price. 
E)  Any of the four combinations of strategies is likely, depending on what each firm predicts that its rival is most likely to do. 
A)  X sets the low price and Y sets the high price. 
B)  Both firms set the high price. 
C)  Both firms set the low price. 
D)  X sets the high price and Y sets the low price. 
E)  Any of the four combinations of strategies is likely, depending on what each firm predicts that its rival is most likely to do.

Question 10

Paul's bakery, a monopolistically competitive firm, is incurring a loss. This firm will continue to produce as long as

Accepted Answer

A)  marginal revenue is equal to average total cost. 
B)  price is greater than or equal to average fixed cost. 
C)  price is greater than or equal to average variable cost. 
D)  marginal revenue is greater than or equal to marginal cost. 
E)  marginal revenue is greater than or equal to average variable cost. 
A)  marginal revenue is equal to average total cost. 
B)  price is greater than or equal to average fixed cost. 
C)  price is greater than or equal to average variable cost. 
D)  marginal revenue is greater than or equal to marginal cost. 
E)  marginal revenue is greater than or equal to average variable cost.

Question 11

What is tacit collusion, and when is it likely to occur?

Accepted Answer

Oligopolists can make more profit if the

Question 12

Game theory is applied to

Accepted Answer

A)  any situation which is like a game. 
B)  a monopoly. 
C)  games. 
D)  non co- operative situations. 
E)  an oligopoly. 
A)  any situation which is like a game. 
B)  a monopoly. 
C)  games. 
D)  non co- operative situations. 
E)  an oligopoly.

Question 13

As more firms enter the market, we would expect a monopolistic competitor's demand curve to

Accepted Answer

A)  stay the same. 
B)  become more elastic. 
C)  become less elastic. 
D)  we cannot tell 
A)  stay the same. 
B)  become more elastic. 
C)  become less elastic. 
D)  we cannot tell

Question 14

Assume that a collusive oligopoly has agreed to fix prices, and that quotas have been allocated accordingly. Why do members of this cartel have an incentive to either produce more than their quota or to undercut the cartel's price?

Accepted Answer

Once a collusive agreement is in place,

Question 15

In game theory, a dominant strategy implies that different assumptions about rivals' behaviour lead to the adoption of the same strategy.

Accepted Answer

A) True 
 B)False

Question 16

What are the main forms of price leadership?

Accepted Answer

Price leadership occurs when firms chang

Question 17

Explain the concept of a Nash equilibrium.

Accepted Answer

This is an equilibrium where everyone ma

Question 18

Oligopolists will try to compete in a way that does not involve price competition.

Accepted Answer

A) True 
 B)False

Question 19

In long- run equilibrium under monopolistic competition, a firm will charge more than the market price under perfect competition, assuming the same average cost curves.

Accepted Answer

A) True 
 B)False

Question 20

If firms in a monopolistically competitive industry are earning economic profits, then in the long run

Accepted Answer

A)  the government will probably regulate firms in this industry to reduce these economic profits. 
B)  new firms producing exactly the same product will enter the industry and this entry will continue until economic profits are eliminated. 
C)  these firms can continue earning economic profits since entry into the industry is blocked. 
D)  new firms producing close substitutes will enter the industry and this entry will continue until economic profits are eliminated. 
A)  the government will probably regulate firms in this industry to reduce these economic profits. 
B)  new firms producing exactly the same product will enter the industry and this entry will continue until economic profits are eliminated. 
C)  these firms can continue earning economic profits since entry into the industry is blocked. 
D)  new firms producing close substitutes will enter the industry and this entry will continue until economic profits are eliminated.

Exam 12: Profit Maximisation Under Imperfect Competition

What are the main characteristics of oligopoly?

In monopolistic competition, how are short- run supernormal profits competed away?

Firms operating under monopolistic competition can make economic profits (supernormal profits) in the short and long run.

Which factors make collusion less likely?

A dominant strategy, as seen by a firm, is one that is

Which of the following defines a first- mover advantage?

Explain why the demand curve for an oligopolist may be kinked.

Imperfect competition occurs when

Paul's bakery, a monopolistically competitive firm, is incurring a loss. This firm will continue to produce as long as

What is tacit collusion, and when is it likely to occur?

Game theory is applied to

As more firms enter the market, we would expect a monopolistic competitor's demand curve to

Assume that a collusive oligopoly has agreed to fix prices, and that quotas have been allocated accordingly. Why do members of this cartel have an incentive to either produce more than their quota or to undercut the cartel's price?

In game theory, a dominant strategy implies that different assumptions about rivals' behaviour lead to the adoption of the same strategy.

What are the main forms of price leadership?

Explain the concept of a Nash equilibrium.

Oligopolists will try to compete in a way that does not involve price competition.

In long- run equilibrium under monopolistic competition, a firm will charge more than the market price under perfect competition, assuming the same average cost curves.

If firms in a monopolistically competitive industry are earning economic profits, then in the long run

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