Deck 14: Oligopoly and Strategic Behavior

Question 1

Which of the following is a unique feature of oligopoly?

A)mutual interdependence
B)advertising expenditures
C)product differentiation
D)nonprice competition

Answer 1

mutual interdependence

Question 2

Which of the following industries is an illustration of homogeneous oligopoly?

A)household laundry products
B)personal computers
C)aluminum
D)the auto industry

Answer 2

aluminum

Question 3

Oligopoly is more difficult to analyze than other market models because

A)the number of firms is so large that market behavior cannot be accurately predicted.
B)the marginal cost and marginal revenue curves of an oligopolist play no part in the determination of equilibrium price and quantity.
C)of mutual interdependence and the fact that oligopoly outcomes are less certain than in other market models.
D)unlike the firms of other market models, it cannot be assumed that oligopolists are profit maximizers.

Answer 3

of mutual interdependence and the fact that oligopoly outcomes are less certain than in other market models.

Question 4

Use your basic knowledge and your understanding of market structures to answer this question.Which of the following companies most closely approximates a homogeneous oligopolist in a highly concentrated industry?

A)Kellogg's
B)Pittsburgh Plate Glass
C)Ford Motor Company
D)Starbucks Coffee

Question 5

In an oligopolistic market,

A)one firm is always dominant.
B)products may be standardized or differentiated.
C)the four largest firms account for 20 percent or less of total sales.
D)the industry is monopolistically competitive.

Question 6

Which of the following is an illustration of differentiated oligopoly?

A)the aluminum industry
B)the steel industry
C)the soft drink industry
D)retail stores in large cities

Question 7

Homogeneous oligopoly exists where a small number of firms are

A)producing virtually identical products.
B)setting price and output independently.
C)setting price and output collusively.
D)producing differentiated products.

Question 8

Oligopolistic industries are characterized by

A)a few dominant firms and substantial entry barriers.
B)a few dominant firms and no barriers to entry.
C)a large number of firms and low entry barriers.
D)a few dominant firms and low entry barriers.

Question 9

In which of the following market models do demand and marginal revenue not diverge?

A)pure competition
B)monopolistic competition
C)pure monopoly
D)oligopoly

Question 10

Prices are likely to be least flexible

A)in oligopoly.
B)in monopolistic competition.
C)where product demand is inelastic.
D)in pure competition.

Question 11

Mutual interdependence means that each oligopolistic firm

A)faces a perfectly elastic demand for its product.
B)must consider the reactions of its rivals when it determines its price policy.
C)produces a product identical to those of its rivals.
D)produces a product similar but not identical to the products of its rivals.

Question 12

The automobile, household appliance, and automobile tire industries are all illustrations of

A)homogeneous oligopoly.
B)monopolistic competition.
C)pure monopoly.
D)differentiated oligopoly.

Question 13

Differentiated oligopoly exists where a small number of firms are

A)producing goods that differ in terms of quality and design.
B)setting price and output collusively.
C)setting price and output independently.
D)producing virtually identical products.

Question 14

The term oligopoly indicates

A)a one-firm industry.
B)many producers of a differentiated product.
C)a few firms producing either a differentiated or a homogeneous product.
D)an industry whose four-firm concentration ratio is low.

Question 15

If there are significant economies of scale in an industry, then

A)a firm that is large may be able to produce at a lower unit cost than can a small firm.
B)a firm that is large will have to charge a higher price than will a small firm.
C)entry to that industry will be easy.
D)firms must differentiate their products to earn economic profits.

Question 16

The copper, aluminum, cement, and industrial alcohol industries are examples of

A)interproduct competition.
B)homogeneous oligopoly.
C)monopolistic competition.
D)differentiated oligopoly.

Question 17

The mutual interdependence that characterizes oligopoly arises because

A)the products of various firms are homogeneous.
B)the products of various firms are differentiated.
C)each firm in an oligopoly depends on its own pricing strategy and that of its rivals.
D)the demand curves of firms are kinked at the prevailing price.

Question 18

Which of the following is the best example of oligopoly?

A)women's dress manufacturing
B)automobile manufacturing
C)restaurants
D)cotton farming

Question 19

Use your basic knowledge and your understanding of market structures to answer this question.Which of the following companies most closely approximates a differentiated oligopolist in a highly concentrated industry?

A)Subway Sandwiches
B)Pittsburgh Plate Glass
C)Ford Motor Company
D)Kaiser Aluminum

Question 20

In which of these continuums of degrees of competition (lowest to highest) is oligopoly properly placed?

A)pure monopoly, monopolistic competition, oligopoly, pure competition
B)oligopoly, pure competition, monopolistic competition, pure monopoly
C)monopolistic competition, pure competition, pure monopoly, oligopoly
D)pure monopoly, oligopoly, monopolistic competition, pure competition

Question 21

Concentration ratios may be inaccurate indicators of the degree of monopoly power in an industry because

A)they include interindustry competition.
B)foreign competition is not considered.
C)they are only calculated for local and regional markets.
D)they do not distinguish between normal and economic profit.

Question 22

Firm Market Share (%) A 20 B 20
C 20
D 20
E 10
F 10
The industry characterized by these data is

A)an oligopoly.
B)a monopolistically competitive industry.
C)a purely competitive industry.
D)a pure monopoly.

Question 23

Concentration ratios

A)may overstate the degree of competition because they ignore imported products.
B)may overstate the degree of competition because interindustry competition is ignored.
C)may understate the degree of competition because they ignore imported products.
D)provide detailed insights as to the price and output behavior of firms that compose the various industries.

Question 24

If a product such as cement or bricks is costly to ship and, therefore, markets are very localized, the national concentration ratio for that industry

A)will be greater than 50 percent.
B)may understate the degree of monopoly.
C)may overstate the degree of monopoly.
D)will yield an accurate impression of the degree of monopoly.

Question 25

Suppose that Firm B in this table was found guilty of antitrust violations and split into two firms with equal market share.This would cause the Herfindahl index to

A)rise to 2,500.
B)fall to 2,500.
C)fall to 2,450.
D)rise to 2,450.

Question 26

The Herfindahl index for the industry described in this table is

A)80.
B)1,800.
C)greater than it would be if there were only four firms in the industry.
D)1,600.

Question 27

If the four-firm concentration ratio in an oligopolistic five-firm industry is 80 percent, and each firm has an equal percentage of sales, the Herfindahl index is

A)8,000.
B)2,000.
C)2,500.
D)1,600.

Question 28

The four-firm concentration ratio for an industry measures the

A)profitability of the four largest firms in the industry.
B)extent to which the four largest firms dominate the sales of a good.
C)percentage of the industry's workforce employed by the four largest firms.
D)degree of product variation in the industry.

Question 29

Interindustry competition means that

A)in oligopolistic industries, a few large firms compete with one another in bidding down product price.
B)in some markets, the producers of a particular product might face competition from products produced by other industries.
C)firms that sell a product at one stage of production are faced with firms that buy the product at the next stage of production.
D)in most industries, there are usually a number of firms producing identical products.Difficulty: 02 Medium

Question 30

As a general rule, oligopoly exists when the four-firm concentration ratio

A)equals the Herfindahl index.
B)yields a Herfindahl index below 500.
C)is 40 percent or more.
D)is 50 percent or more.

Question 31

Assume six firms composing an industry have market shares of 30, 30, 10, 10, 10, and 10 percent.The Herfindahl index for this industry is

A)2,000.
B)1,600.
C)2,200.
D)80.

Question 32

Aluminum competes with copper in the market for power transmission lines.This illustrates

A)mutual interdependence.
B)differentiated oligopoly.
C)interindustry competition.
D)homogeneous oligopoly.

Question 33

Firm Market Share (%) A 20 B 20
C 20
D 20
E 10
F 10
Refer to the data.Suppose that firms A and F merged into a single firm.The four-firm concentration ratio and the Herfindahl index would be

A)90 percent and 2,100, respectively.
B)80 percent and 2,100, respectively.
C)100 percent and 2,200, respectively.
D)90 percent and 2,200, respectively.

Question 34

Suppose that total sales in an industry in a particular year are $600 million and sales by the top four sellers are $200 million, $150 million, $100 million, and $50 million, respectively.We can conclude that

A)price leadership exists in this industry.
B)the concentration ratio is more than 80 percent.
C)this industry is a differentiated oligopoly.
D)the firms in this industry face a kinked demand curve.

Question 35

Clear-cut mutual interdependence with respect to the price-output policies exists in

A)pure monopoly.
B)oligopoly.
C)monopolistic competition.
D)pure competition.

Question 36

If an industry evolves from monopolistic competition to oligopoly, we would expect

A)the four-firm concentration ratio to decrease.
B)the four-firm concentration ratio to increase.
C)the four-firm concentration ratio to remain the same.
D)barriers to entry to weaken.

Question 37

Industries X and Y both have four-firm concentration ratios of 70 percent, but the Herfindahl index for X is 2,500, while that for Y is 2,000.These data suggest

A)greater market power in Y than in X.
B)greater market power in X than in Y.
C)that X is more technologically progressive than Y.
D)that price competition is stronger in X than in Y.

Question 38

Concentration ratios measure the

A)geographic distribution of the largest corporations in each industry.
B)degree to which a particular firm accounts for sales in a given metropolitan area.
C)percentage of total industry sales accounted for by the largest firms in the industry.
D)dependence of an industry on its resource suppliers.

Question 39

An industry having a four-firm concentration ratio of 85 percent

A)approximates pure competition.
B)is monopolistically competitive.
C)is a pure monopoly.
D)is an oligopoly.

Question 40

If firms E and Fin this table merged into a single firm, the Herfindahl index would

A)not change.
B)rise, as would the four-firm concentration ratio.
C)rise, but the four-firm concentration ratio would remain unchanged.
D)fall.

Question 41

The likelihood of a cartel being successful is greater when

A)firms are producing a differentiated, rather than a homogeneous, product.
B)cost and demand curves of various participants are very similar.
C)the number of firms involved is relatively large.
D)the economy is in the recession phase of the business cycle.

Question 42

The kinked-demand curve model of oligopoly

A)assumes a firm's rivals will ignore a price cut but match a price increase.
B)embodies the possibility that changes in unit costs will have no effect on equilibrium price and output.
C)assumes a firm's rivals will match any price change it may initiate.
D)assumes a firm's rivals will ignore any price change it may initiate.

Question 43

Three major means of collusion by oligopolists are

A)cartels, informal understandings, and price leadership.
B)market sharing, mutual interdependence, and product differentiation.
C)cartels, kinked-demand pricing, and product differentiation.
D)informal understandings, P = MC pricing, and mutual interdependence.

Question 44

If competing oligopolists completely ignore oligopolist X's price changes, then X's

A)demand curve will be less elastic than if the other oligopolists matched X's price changes.
B)demand curve will be more elastic than if the other oligopolists matched X's price changes.
C)marginal revenue curve will have a vertical gap.
D)demand and marginal revenue curves will coincide.

Question 45

OPEC provides an example of

A)an unwritten, informal understanding.
B)noncollusive oligopoly.
C)an international cartel.
D)a monopolistically competitive industry.

Question 46

If the firms in an oligopolistic industry can establish an effective cartel, the resulting output and price will approximate those of

A)a purely competitive producer.
B)a pure monopoly.
C)a monopolistically competitive producer.
D)an industry with a low four-firm concentration ratio.

Question 47

Suppose an oligopolistic producer assumes its rivals will ignore a price increase but match a price cut.In this case the firm perceives its

A)demand curve as being of unit elasticity throughout.
B)supply curve as kinked, being steeper below the going price than above.
C)demand curve as kinked, being steeper below the going price than above.
D)demand curve as kinked, being steeper above the going price than below.

Question 48

The kinked-demand curve model of oligopoly is useful in explaining

A)the way that collusion works.
B)why oligopolistic prices and outputs are extremely sensitive to changes in marginal cost.
C)why oligopolistic prices might change infrequently.
D)the process by which oligopolists merge with one another.

Question 49

Cartels are difficult to maintain in the long run because

A)they are illegal in all industrialized countries.
B)individual members may find it profitable to cheat on agreements.
C)it is more profitable for the industry to charge a lower price and produce more output.
D)entry barriers are insignificant in oligopolistic industries.

Question 50

Game theory

A)is the analysis of how people (or firms) behave in strategic situations.
B)is best suited for analyzing purely competitive markets.
C)reveals that mergers between rival firms are self-defeating.
D)reveals that price-fixing among firms reduces profits.

Question 51

This industry shown in this table illustrates

A)pure competition.
B)monopolistic competition.
C)oligopoly.
D)pure monopoly.

Question 52

The kinked-demand curve of an oligopolist is based on the assumption that

A)competitors will follow a price cut but ignore a price increase.
B)competitors will match both price cuts and price increases.
C)competitors will ignore a price cut but follow a price increase.
D)there is no product differentiation.

Question 53

Game theory is best suited to analyze the pricing behavior of

A)pure monopolists.
B)pure competitors.
C)monopolistic competitors.
D)oligopolists.

Question 54

If an oligopoly is faced with a kinked-demand curve that is relatively elastic above, and relatively inelastic below, the going price, then it will

A)increase total revenue by increasing price but lower total revenue by decreasing price.
B)decrease total revenue by either increasing or decreasing price.
C)increase total revenue by either increasing or decreasing price.
D)increase total revenue by decreasing price but lower total revenue by increasing price.

Question 55

The kinked-demand curve model helps to explain price rigidity because

A)there is a gap in the marginal revenue curve within which changes in marginal cost will not affect output or price.
B)demand is inelastic above and elastic below the going price.
C)the model assumes firms are engaging in some form of collusion.
D)the associated marginal revenue curve is perfectly elastic at the going price.

Question 56

If an oligopolist is faced with a marginal revenue curve that has a gap in it, we may assume that

A)it is colluding with its rivals to maximize joint profits.
B)its demand curve is kinked.
C)it is selling a standardized product.
D)it is selling a differentiated product.

Question 57

Game theory can be used to demonstrate that oligopolists

A)rarely consider the potential reactions of rivals.
B)experience economies of scale.
C)can increase their profits through collusion.
D)may be either homogeneous or differentiated.

Question 58

Oligopolistic firms engage in collusion to

A)minimize unit costs of production.
B)realize allocative efficiency, that is, the P = MC level of output.
C)earn greater profits.
D)increase production.

Question 59

If enforcement of antitrust laws caused the two largest firms in this table to be divided in half, with each half having equal market share, the industry's four-firm concentration ratio would and its Herfindahl index would .

A)fall; fall
B)fall; rise
C)remain the same; rise
D)remain the same; fall

Question 60

The study of how people (or firms) behave in strategic situations is called

A)cost-benefit analysis.
B)recursive analysis.
C)normative economics.
D)game theory.

Question 61

A breakdown in price leadership leading to successive rounds of price cuts is known as

A)limit pricing.
B)a price war.
C)informal pricing.
D)price discrimination.

Question 62

The conclusion that oligopoly is inefficient relative to the competitive ideal must be qualified because

A)industry price leaders often select a price equal to marginal cost.
B)over time oligopolistic industries may promote more rapid product development and greater improvement of production techniques than if they were purely competitive.
C)increased output due to persuasive advertising may perfectly offset the restriction of output caused by monopoly power.
D)many oligopolists sell their products in monopolistically competitive or even purely competitive industries.

Question 63

Advertising can impede economic efficiency when it

A)increases entry barriers.
B)reduces brand loyalty.
C)enables firms to achieve substantial economies of scale.
D)increases consumer awareness of substitute products.

Question 64

Advertising can impede economic efficiency when it

A)reduces entry barriers.
B)reduces brand loyalty.
C)leads to greater monopoly power.
D)provides consumers with useful information about product quality.

Question 65

If the several oligopolistic firms that compose an industry behave collusively, the resulting price and output will most likely resemble those of

A)bilateral monopoly.
B)pure monopoly.
C)monopolistic competition.
D)pure competition.

Question 66

In 2014, advertising expenditures in the United States were

A)10 to 12 percent of GDP.
B)about $103 billion.
C)about $141 billion.
D)about $539 billion.

Question 67

Suppose that a particular industry has a four-firm concentration ratio of 85 and a Herfindahl index of 3,000.Most likely, this industry would achieve

A)both productive efficiency and allocative efficiency.
B)allocative efficiency but not productive efficiency.
C)neither productive efficiency nor allocative efficiency.
D)productive efficiency but not allocative efficiency.

Question 68

Other things equal, cartels and similar collusive arrangements are easier to establish and maintain

A)when there are ample opportunities for the firms to make secret price concessions to selected buyers.
B)during periods of business-cycle stability and full employment.
C)when the demand and cost conditions of the participating firms differ substantially.
D)when the number of firms is relatively large.

Question 69

Secret conspiracies to fix prices are examples of

A)cartels.
B)price leadership.
C)overt collusion.
D)covert collusion.

Question 70

We would expect a cartel to achieve

A)both allocative efficiency and productive efficiency.
B)allocative efficiency but not productive efficiency.
C)productive efficiency but not allocative efficiency.
D)neither allocative efficiency nor productive efficiency.

Question 71

Which of the following nations is not a member of the OPEC oil cartel?

A)Iraq
B)Iran
C)Venezuela
D)Norway

Question 72

Suppose that an industry is characterized by a few firms and price leadership.We would expect that

A)price would equal marginal cost.
B)price would equal average total cost.
C)price would exceed both marginal cost and average total cost.
D)marginal revenue would exceed marginal cost.

Question 73

Advertising can enhance economic efficiency when it

A)increases brand loyalty.
B)raises entry barriers.
C)increases consumer awareness of substitute products.
D)boosts average total cost.

Question 74

In the United States cartels are

A)quite common in industries that produce nondurable goods.
B)in violation of the antitrust laws.
C)concentrated in monopolistically competitive industries.
D)encouraged by government policy so firms can achieve economies of scale.

Question 75

Suppose firms in a collusive oligopoly decide to establish their prices at a level that discourages new rivals from entering the industry.This is called

A)mutual interdependence.
B)pricing the demand curve.
C)limit pricing.
D)price leadership.

Question 76

Advertising can enhance economic efficiency when it

A)increases brand loyalty.
B)expands sales such that firms achieve substantial economies of scale.
C)keeps new firms from entering profitable industries.
D)is undertaken by pure competitors.

Question 77

One would expect that collusion among oligopolistic producers would be easiest to achieve in which of the following cases?

A)a rather large number of firms producing a differentiated product
B)a very small number of firms producing a differentiated product
C)a rather large number of firms producing a homogeneous product
D)a very small number of firms producing a homogeneous product

Question 78

A simultaneous game is said to exist when

A)firms are playing pricing games in different markets at the same time.
B)firms choose their strategies at the same time as their rivals.
C)firms can set multiple prices for the same good at the same time.
D)strategies are set without regard to possible interactions in future time periods.

Question 79

Which of the following companies was not fined in 2011 for attempting to run an international cartel and fix prices?

A)Intel
B)Danfoss
C)Panasonic
D)Whirlpool

Question 80

Suppose the only three existing manufacturers of video game players signed a written contract by which each agreed to charge the same price for products and to distribute their products only in the geographical area assigned them in the contract.This best describes

A)cost-plus pricing.
B)multiproduct pricing.
C)a cartel.
D)price leadership.