Deck 9: Oligopoly and Strategic Behavior

Question 1

In oligopoly markets, firms have no perceptible influence on the market price.

Answer 1

True

Question 2

Oligopoly firms are guaranteed economic profits in the long run.

Answer 2

False

Question 3

A unique feature of oligopoly among market models is the presence of differentiated products.

Answer 3

False

Question 4

Oligopoly is likely to occur whenever the number of firms is so small that any change in output or price by one firm appreciably impacts the sales of competing firms.

Question 5

Barriers to entry into oligopoly industries can be the result of patents, ownership of key resources, large start up costs, or pronounced economies of scale.

Question 6

Foreign firms are incorporated in four firm concentration ratios.

Question 7

The four firm concentration ratio in an industry with ten equally sixed firms is 40%.

Question 8

If entry into an industry was very easy, the four firm concentration ratio would not be a very useful index of the competitiveness in that industry

Question 9

Patents, quotas, tariffs, and government licensing can all create barriers to entry into oligopoly industries.

Question 10

An oligopoly firm cannot know the demand curve it faces unless it knows what its rivals will do in reaction to changes it initiates.

Question 11

There are very few non-price means of undermining cartel agreements to restrict competition among members.

Question 12

When an oligopoly cuts its price to try and attract customers from rivals, it could lead to a price war.

Question 13

The joint profit maximization solution for a cartel is a attempt to achieve the same result as would a monopolist who owned all the firms in the cartel.

Question 14

It more difficult for firms to reach collusive agreements when they are of different sizes, with substantially different production costs and estimates of demand conditions, than when these differences are smaller.

Question 15

If an industry has a price leader, it is most likely to be a dominant firm.

Question 16

When small firms in a concentrated industry merge, it will increase the Herfindahl-Hirshman Index but not change the four firm concentration ratio.

Question 17

An industry with only three large equally-sized firms would have the same four firm concentration ratio but a higher Herfindahl-Hirshman Index compared to an industry with only four equally sized firms.

Question 18

The existence of antitrust law is one reasons economists assume that most strategic behavior in the marketplace is noncooperative.

Question 19

When two ice cream vendors locate next to each other on the beach, they are exhibiting a Nash equilibrium.

Question 20

Which of the following is characteristic of an oligopolistic industry?

A)few firms
B)interdependence
C)large barriers to entry
D)All of the above

Question 21

Firms in an oligopoly market tend to be ____ and have ____ barriers to entry.

A)large (relative to the total market); high.
B)large (relative to the total market); low.
C)small (relative to the total market); high.
D)small (relative to the total market); low.

Question 22

Firms in an oligopoly market tend to have strategies that are ____ and have ____ barriers to entry.

A)Independent of one another; high.
B)Independent of one another; low.
C)Interdependent with one another; high.
D)Interdependent with one another; low

Question 23

Firms in an oligopoly market tend to have strategies that are ____ and ____ economic profits.

A)Independent of one another; earn guaranteed
B)Independent of one another; are not guraranteed .
C)Interdependent with one another; earn guaranteed
D)Interdependent with one another; are not guraranteed

Question 24

Firms in an oligopoly market can potentially earn economic profits.

A)In the short run, but not the long run.
B)In the long run, but not the short run.
C)In both the short run and long run
D)In neither the short run nor the long run

Question 25

Which of the following characterizes an oligopolistic industry?

A)Few firms and standardized products
B)Few firms and differentiated products
C)Few firms and wither standardized or differentiated products
D)A large number of competing firms

Question 26

If an oligopolist reduces the price of its product:

A)It may get some customers to switch from rival firms if they don't respond by reducing their prices.
B)It may not get some customers to switch from rival firms if they respond by reducing their prices.
C)It does not know whether its profits will rise or fall without knowing how rivals will change their prices in response.
D)All of the above are true.

Question 27

Which of the following is not true?

A)Collusion is relatively rare, in part because it is illegal in many countries.
B)Collusion is relatively rare, even though members find it easy to agree on key decisions.
C)Collusion is relatively rare, in part because members frequently have an incentive to cheat on the cartel.
D)Collusion is harder to maintain when differentiated products are involved, which introduce many ways to undercut a collusive agreement.

Question 28

The long run success of a collusion

A)Is limited by ease of entry into the industry.
B)Is enhanced by ease of entry into the industry.
C)Is unaffected by the ease of entry into the industry.
D)Could be either limited by or enhanced by ease of entry into the industry.

Question 29

Barriers to entry can be the result of

A)Positive network externalities
B)High switching costs
C)Economies of scale
D)All of the above

Question 30

Which of the following could not create barriers to entry?

A)Negative network externalities
B)Ownership of essential inputs
C)Economies of scale
D)All of the above could create barriers to entry

Question 31

Which of the following is true?

A)Price leadership is a form of explicit collusion.
B)Price leadership is more likely when there are a substantial number of roughly equally sized firms in oligopoly.
C)A price leader is most likely to be a dominant firm in an industry.
D)None of the above is true.

Question 32

Which of the following types of mergers are of greater concern as being anticompetitive among antitrust regulators?

A)Horizontal mergers
B)Vertical mergers
C)Conglomerate mergers
D)Horizontal, vertical and conglomerate mergers are of equal concern as being anticompetitive

Question 33

If an oligopolist is naïve, and therefore expect rivals not to respond if it chooses to cut its price,

A)It could start a price war
B)It would be more likely to cut prices than an oligopolist that expected rivals to react if it cut its prices.
C)It would be less likely to cut prices than an oligopolist that expected rivals to react if it cut its prices.
D)Both a. and b. are true

Question 34

If the four firms in an industry represented 40%, 30%, 20%, and 10% of the market, respectively, what would be the Herfindahl-Hirschman Index for this industry? What if the largest firm then divested into two equal sized companies?

A)3,000; 2,300.
B)2,300; 3,000
C)3,000; 5,400
D)2,300; 5,400

Question 35

Whenever any firms in a concentrated industry merge, the four firm concentration ratio:

A)will rise.
B)may rise or stay the same.
C)may rise or fall.
D)will fall.

Question 36

Whenever any firms in a concentrated industry merge, the Herfindahl-Hirschman Index:

A)will rise.
B)may rise or stay the same.
C)may rise or fall.
D)will fall.

Question 37

Whenever any firms in a concentrated industry merge, the four firm concentration ratio ___ and the Herfindahl-Hirschman Index ____:

A)Will rise; will rise.
B)Will rise; may rise or stay the same.
C)May rise or stay the same; will rise.
D)May rise or stay the same; May rise or stay the same.

Question 38

Whenever the largest firm in a concentrated industry breaks into two equal sized parts, the four firm concentration ratio ___ and the Herfindahl-Hirschman Index ____:

A)Will fall; will fall.
B)Will fall; may fall or stay the same.
C)May fall or stay the same; will fall.
D)May fall or stay the same; May fall or stay the same.

Question 39

For a firm to be engaged in predatory pricing, and for it to be successful:

A)It would have to charge a price less than the average variable cost of production.
B)It would have to drive rivals out of the market.
C)It would have to raise its prices after rivals were driven out of the market.
D)All of the above would have to be true.

Question 40

A firm could be engaged in successful predatory pricing if:

A)It charged prices greater than the average variable cost of production.
B)It did not drive rivals out of the market.
C)It did not raise its prices after its predatory price cutting.
D)None of the above is true.

Question 41

A firm could not be engaged in successful predatory pricing if:

A)It charged prices greater than the average variable cost of production.
B)It drove rivals out of the market.
C)It raised its prices after its price cutting campaign.
D)None of the above is true.

Question 42

Oligopoly:

A)Does not meet the condition for allocative efficiency.
B)Does not meet the condition for productive efficiency.
C)May lead to greater technological progress.
D)a. and b. are true, but not c.

Question 43

Oligopoly:

A)Meets the condition for allocative efficiency.
B)Meets the condition for productive efficiency.
C)Leads to slower technological progress.
D)None of the above is true.

Question 44

Which of the following is true?

A)A Nash equilibrium maximizes a player's welfare, regardless of the behavior of a competitor while a dominant strategy maximizes a player's welfare, given the actions of its competitor.
B)A Nash equilibrium maximizes a player's welfare, given the actions of its competitor, while a dominant strategy maximizes a player's welfare, regardless of the behavior of its competitor.
C)A Nash equilibrium is just another name for a dominant strategy.
D)A Nash equilibrium may or may not be a self-enforcing equilibrium.

Question 45

Which of the following is false?

A)A Nash equilibrium can be a dominant strategy.
B)A Nash equilibrium maximizes a player's welfare, given the actions of its competitor, while a dominant strategy maximizes a player's welfare, regardless of the behavior of its competitor.
C)A Nash equilibrium is just another name for a dominant strategy.
D)A Nash equilibrium is a self-enforcing equilibrium.

Question 46

Exhibit
The following payoff matrix shows the possible sentences that two suspects, who are arrested on suspicion of car theft, could receive. The suspects are interrogated separately and are unable to communicate with one another.


-Refer to Exhibit. Under the circumstances:

A)if Suspect 1 confesses, Suspect 2 is better off not confessing.
B)if Suspect 2 confesses, Suspect 1 is better off not confessing.
C)if Suspect 1 confesses, Suspect 2 is better off confessing.
D)if Suspect 1 does not confess, Suspect 2 is better off not confessing.

Question 47

Exhibit
The following payoff matrix shows the possible sentences that two suspects, who are arrested on suspicion of car theft, could receive. The suspects are interrogated separately and are unable to communicate with one another.


-Refer to Exhibit. When the prisoner's follow their dominant strategy, the sentences for Suspect 1 and Suspect 2 are:?

A)2 years and 2 years, respectively.
B)6 years and 6 years, respectively.
C)10 years and 1 year, respectively.
D)1 year and 10 years, respectively.

Question 48

Exhibit
The following payoff matrix shows the possible sentences that two suspects, who are arrested on suspicion of car theft, could receive. The suspects are interrogated separately and are unable to communicate with one another.


-Refer to Exhibit. The dominant strategy of Suspect 2 is to:

A)confess, regardless of what Suspect 1 is expected to do.
B)not confess, regardless of what Suspect 1 is expected to do.
C)confess if Suspect 1 is expected to confess, not confess if Suspect 1 is expected to not confess.
D)confess if Suspect 1 is expected to not confess, not confess if Suspect 1 is expected to confess.

Question 49

Exhibit
The following payoff matrix shows the possible sentences that two suspects, who are arrested on suspicion of car theft, could receive. The suspects are interrogated separately and are unable to communicate with one another.


-Refer to Exhibit. The game is called the "Prisoners' Dilemma"because:

A)the Nash equilibrium of the game results in the lowest combined prison term.
B)the prisoners, by acting in their own private interests, end up worse off than otherwise could be the case.
C)when cooperation is not allowed, the prisoners each choose not to confess.
D)the prisoners always act in solidarity, when each could individually be better off.

Question 50

Exhibit
The manufacturers of Pepsi and Coca-Cola must each decide whether to launch new ad campaigns to advertise their respective soft drinks. The payoff matrix shows the profits earned from sales of Pepsi and Coca-Cola under alternative advertising scenarios.

-Refer to Exhibit. Based on this information, one can say that:

A)if Pepsi introduces new ads and Coca-Cola does not, then profits from the sale of Pepsi equal $80 million.
B)Coca-Cola will earn the greatest profit if it advertises and Pepsi does not.
C)Pepsi will earn the greatest profit if it introduces new ads.
D)combined profits for the two firms will be greatest if neither firm were to introduce new ads.

Question 51

Bert and Ernie are noncolluding oligopolists. If both choose a high price strategy, each makes $40 in profits; if both choose a low price strategy, each makes $30 in profits. If Bert chooses a high price strategy and Ernie chooses a low price strategy, Bert makes $20 in profits and Ernie makes $60 in profits, while if Bert chooses a low price strategy and Ernie chooses a high price strategy, Bert makes $60 in profits and Ernie makes $20 in profits. Which combination of pricing strategies would you expect Bert and Ernie to adopt if they act independently?

A)Both choose a high price strategy.
B)Both choose a low price strategy.
C)Bert chooses a high price strategy and Ernie chooses a low price strategy.
D)Bert chooses a low price strategy and Ernie chooses a high price strategy.

Question 52

A tit for tat strategy

A)Generates the same result as the prisoner's dilemma.
B)Provides a way to punish rivals who defect from the jointly optimum behavior
C)Means that a firm would cooperate as long as other firms cooperated.
D)Both b. and c. are true

Question 53

In a repeated game,

A)Cooperation is more likely than in a one-shot game
B)Cooperation is less likely than in a one-shot game
C)Cooperation can be either more or less likely than in a one-shot game
D)The results are likely to be the same as in a one-shot game

Question 54

Traffic congestion represents

A)A positive network externality
B)A negative network externality
C)A Bandwagon effect
D)Neither a positive nor a negative externality snob effect; congestion

Question 55

What is a Nash equilibrium? How is it different from a dominant strategy.