Deck 12: Price and Output Determination Under Oligopoly

Question 1

Collusion is designed to limit competition in a market.

Answer 1

True

Question 2

Monopolists engage in game theory pricing behavior.

Answer 2

False

Question 3

The problem with the prisoner's dilemma, from the point of view of the police, is that no one is ever convicted.

Answer 3

False

Question 4

When firms do not collude in a game-playing market environment, firms end up with low prices and high output levels.

Question 5

The kinked demand curve exists because consumers make erratic decisions.

Question 6

When a firm's competitors cut their prices when the firm does, but do not raise their prices when the firm does, the result is that the firm has a kinked demand curve.

Question 7

Conglomerate mergers are designed to increase market share.

Question 8

The percentage of U.S. industrial sales produced in industries with four-firm sales concentration ratios of 50 percent or more has remained pretty much unchanged from1895 through 1982.

Question 9

Unbalanced oligopolies are not stable.

Question 10

A four-firm concentration ratio of 60 percent would indicate the likely presence of oligopoly.

Question 11

Oligopolies exist only in industries that produce large durable goods such as automobiles and refrigerators.

Question 12

The long-term trend in the United States is for markets to become more oligopolistic over time.

Question 13

The concentration ratios for various industries in the United States are comparable to those in other modern industrial economies.

Question 14

Horizontal mergers are pretty rare in the United States due to antitrust laws.

Question 15

A merger between two firms in a supplier-purchaser relationship is called a vertical merger.

Question 16

Conglomerate mergers increase concentration in an industry.

Question 17

Examples of "disguised" cartels are the citrus cooperatives in Florida and California.

Question 18

When there is a kinked demand curve, an oligopolist's competitors will match price increases.

Question 19

A cartel is a group of firms that acts as if it were a monopoly and produces where MR = MC for the industry.

Question 20

Census data clearly shows the United States economy is becoming increasingly more oligopolistic.

Question 21

U.S. industry is much more concentrated than other leading industrial nations of the world.

Question 22

The formation of cartels in the U.S. is illegal.

Question 23

Price and concentration ratios are inversely related.

Question 24

The formation of cartels is illegal in all countries of the world.

Question 25

The concentration ratio of a monopoly industry is 100 percent.

Question 26

Prices in an oligopoly industry tend to be higher than in a competitive industry.

Question 27

Most cartels self-destruct because cartel members cheat.

Question 28

Game theory is most useful as a technique to model monopolistically competitive oligopolies.

Question 29

Which of the following terms is not associated with a market having a firm whose behavior has been judged to be characteristic of the dominant firm model?

A) godfather
B) price leadership
C) kinked demand curve
D) profit maximization
E) oligopoly

Question 30

The "prisoner's dilemma" is a result of

A) differentiated products
B) large number of participants
C) game theory
D) certain outcomes
E) open market entry

Question 31

When the profit-maximizing output level for a firm can be decided by setting output at the level where price is equal to marginal cost, the market structure is

A) perfect competition
B) monopolistic competition
C) duopoly
D) monopoly
E) oligopoly

Question 32

A market structure wherein one firm among several is dominant is referred to as

A) unbalanced oligopoly
B) monopolistic competition
C) perfect competition
D) balanced oligopoly
E) monopoly

Question 33

A kinked demand curve is associated with

A) tit-for-tat behavior
B) a dominant firm
C) a discontinuous marginal revenue curve
D) extreme marginalism
E) price leadership

Question 34

A "sticky price" model has its primary characteristic (i.e., sticky prices) due to

A) barriers to entry
B) a monopoly situation
C) differentiated products
D) too many competitors
E) a gap in marginal revenue curve

Question 35

When one firm assumes others in the market will follow its price setting behavior, this is referred to as

A) the kinked demand model
B) the godfather model
C) oligopoly
D) the cartel model
E) monopolistic competition

Question 36

The only item which would be consistent with a decreased likelihood of cartel formation for production of a product is

A) patent protection
B) price inelastic demand
C) many producers
D) income elastic demand
E) limited market entrance

Question 37

Which of the following items most likely explains why corn is not produced by a cartel?

A) barriers to market entrance
B) patent protection
C) many producers
D) income inelastic demand
E) limited raw materials

Question 38

Cartel models are most like

A) duopoly
B) monopoly
C) kinked demand
D) monopolistic competition
E) price leadership

Question 39

-In the godfather model of Exhibit L-1, the price and output combination for the godfather will be

A) $10, 50
B) $8, 30
C) $7, 20
D) $10, 20
E) $8, 20

Question 40

-The price is likely to be quite stable in the godfather model because

A) the market functions like a cartel
B) the other firms in the industry have cost advantages over the godfather
C) the godfather could decrease price below levels that other firms could afford
D) entry into the market is easy
E) all firms are maximizing profit anyway

Question 41

A concentration ratio refers to the

A) ranking of firms by profitability
B) percentage of sales accounted for by the leading firms in an industry
C) percentage of sales accounted for by the largest firm in an industry
D) ability of a firm to control market price
E) percentage of profit accounted for by the largest firm in an industry

Question 42

Market power refers to the

A) firm's ability to control the industry's supply and demand
B) joining of firms into a cartel
C) firm's ability to control market price
D) market's ability to control a firm's price
E) industry's ability to control market price

Question 43

If a four-firm concentration ratio in an industry equals 75 percent, this implies that

A) 75 percent of all profits in the industry accrue to the leading four firms
B) 25 percent of sales in the industry are accounted for by the four leading firms
C) the four firms represent 75 percent of all the firms in the industry
D) the four firms represent 25 percent of all the firms in the industry
E) 75 percent of all sales in the industry are accounted for by the four leading firms

Question 44

A firm's market share can be measured by

A) firm's sales/industry sales
B) industry sales/firm's sales
C) the concentration ratio
D) the HHI
E) firm's sales/firm's profits

Question 45

-In Exhibit L-2, the table shows the market shares of five firms that operate in three different industries. The four-firm concentration ratio in Industry I is equal to

A) 20 percent
B) 100 percent
C) 80 percent
D) 60 percent
E) 40 percent

Question 46

-In Exhibit L-2, the table shows the market shares of five firms that operate in three different industries. The four-firm concentration ratio in Industry II is equal to

A) 30 percent
B) 50 percent
C) 70 percent
D) 85 percent
E) 100 percent

Question 47

-In Exhibit L-2, the table shows the market shares of five firms that operate in three different industries. The four-firm concentration ratio in Industry III is equal to

A) 5 percent
B) 15 percent
C) 60 percent
D) 100 percent
E) 95 percent

Question 48

-In Exhibit L-2, the table shows the market shares of five firms that operate in three different industries. The highest concentration ratio appears in

A) Industry I
B) Industry II
C) Industry III
D) Industries I and III (their concentration ratios are identical)
E) Industries II and III (their concentration ratios are identical)

Question 49

-In Exhibit L-2, the table shows the market shares of five firms that operate in three different industries. According to the text, Industry I would be classified as a

A) balanced oligopoly
B) unbalanced oligopoly
C) price leadership oligopoly
D) cartel
E) price discriminating oligopoly

Question 50

-In Exhibit L-2, the table shows the market shares of five firms that operate in three different industries. According to the text, Industry III would be classified as a

A) balanced oligopoly
B) unbalanced oligopoly
C) price leadership oligopoly
D) cartel
E) price discriminating oligopoly

Question 51

-In Exhibit L-2, the table shows the market shares of five firms that operate in three different industries. The HHI in industry I is

A) 20 percent
B) 20
C) 400
D) 2,000
E) 80 percent

Question 52

-In Exhibit L-2, the table shows the market shares of five firms that operate in three different industries. The HHI in industry III is

A) 20 percent
B) 20
C) 4,050
D) 1,600
E) 80 percent

Question 53

-In Exhibit L-2, the table shows the market shares of five firms that operate in three different industries. Using the HHI, the most concentrated of these three industries is(are)

A) Industry I
B) Industry II
C) Industry III
D) Industries I and III (their HHIs are identical)
E) Industries II and III (their HHIs are identical)

Question 54

In an unbalanced oligopoly

A) only two firms make up the oligopoly
B) the sales of the leading firms are distributed unevenly
C) the sales of the leading firms are distributed evenly
D) the sales of the 4 leading firms is less than 50 percent
E) the market share of the 4 leading firms equals 100 percent

Question 55

A firm with substantial market power must be in a ____________ industry.

A) monopoly or oligopoly
B) perfectly competitive
C) monopolistically competitive
D) perfectly competitive or monopolistically competitive
E) perfectly competitive or a monopoly

Question 56

According to the text, U.S. manufacturing data show that

A) the economy is rapidly becoming more concentrated into the hands of the few
B) the economy today is less concentrated than it was in 1865, just after the Civil War
C) concentration in the economy has remained fairly stable over the past 40 years
D) the U.S. economy is much more concentrated than most other industrialized nations of the world
E) concentration has fallen rapidly over the past 40 years

Question 57

In an unbalanced oligopoly,

A) one firm has significantly greater market power than any other in the industry
B) only one firm exists in the industry
C) the industry is rapidly converging into a monopolistically competitive industry
D) all firms have near-equal market share
E) the four-firm concentration ratio exceeds 100 percent

Question 58

In a balanced oligopoly,

A) one firm has significantly greater market power than any other in the industry
B) only one firm exists in the industry
C) the industry is rapidly converging into a monopolistically competitive industry
D) all firms have near-equal market shares
E) the four-firm concentration ratio exceeds 100 percent

Question 59

A merger between two firms occurs when

A) two firms agree to work temporarily on a single project, which is why we constantly read about mergers occurring and splitting up
B) one firm splits into two or more firms, such as General Motors splitting into divisions of Buick, Pontiac, and so on
C) each of the two firms agrees not to sell in each other's markets
D) the two firms become one firm, as in the newspaper industry when the Chicago Sun and the Chicago Times became the Chicago Sun-Times
E) one firm quits the industry and another takes over its market share

Question 60

A horizontal merger between two firms occurs when

A) the goods produced by the merging firms are not related
B) one firm produces goods while the other produces services
C) one firm is a domestic firm and the other is a foreign firm
D) the firms were in a buyer-seller relationship before the merger
E) the merging firms produce identical or close substitute goods

Question 61

If two steel firms merge, the merger is described as

A) a horizontal merger
B) a vertical merger
C) a conglomerate merger
D) either a vertical or conglomerate merger depending on whether the oligopoly is balanced or unbalanced
E) either a vertical or conglomerate merger depending on the number of steel firms in the steel industry

Question 62

According to the text, all of the following are reasons for firms to merge except

A) to exercise greater market control
B) to increase control over suppliers of their inputs
C) to increase control over buyers of their products
D) to diversify assets
E) to form a cartel

Question 63

According to the text, which of the following is a principal reason why firms merge?

A) to form a cartel
B) to exercise greater market control
C) to increase their product differentiation
D) to decrease their product differentiation
E) to become a monopoly

Question 64

A vertical merger occurs when

A) the goods produced by the merging firms are not related
B) one firm produces goods while the other produces services
C) one firm is a domestic firm while the other is a foreign firm
D) the firms are in a buyer-seller relationship
E) the merging firms produce identical or close substitute goods

Question 65

A good example of _________ is the merger between a steel firm and a cookware firm.

A) a horizontal merger
B) a vertical merger
C) a conglomerate merger
D) either a horizontal or conglomerate merger, depending on whether the oligopoly is balanced or unbalanced
E) either a horizontal or conglomerate merger, depending on the market shares of the two firms

Question 66

A conglomerate merger occurs when

A) the goods produced by the merging firms are not related
B) one firm produces goods while the other produces services
C) one firm is a domestic firm while the other is a foreign firm
D) the firms are in a buyer-seller relationship
E) the merging firms produce identical or close substitute goods

Question 67

A good example of _______ is the merger between a steel firm and an ice cream firm.

A) a horizontal merger
B) a vertical merger
C) a conglomerate merger
D) either a horizontal or vertical merger, depending on whether the oligopoly is balanced or unbalanced
E) either a horizontal or vertical merger, depending on the market shares of the two companies

Question 68

The most common form of merger(s) in the U.S. economy is (are)

A) the horizontal merger
B) the vertical merger
C) the conglomerate merger
D) horizontal and vertical mergers (equally common)
E) horizontal and conglomerate mergers (equally common)

Question 69

The principal reason why two firms would form a conglomerate merger is to

A) increase the concentration in the industry
B) reduce the concentration in the industry
C) reduce dependency on buyers and thereby have greater control over price
D) diversify assets
E) achieve monopoly control

Question 70

The type(s) of merger(s) that directly increase(s) concentration in an industry is (are)

A) horizontal
B) vertical
C) conglomerate
D) both vertical and horizontal
E) both vertical and conglomerate

Question 71

A cartel

A) consists of two firms that collude to eliminate product differentiation so that they can sell their goods as identical goods
B) is a group of firms that collude to limit competition within their market
C) refers to the breakup of a firm into two or more firms where each produces a good that does not compete against the others
D) is a government-supported merger of two or more firms to improve the nation's advantage in international trade
E) is an illegal merger of two firms that produce unrelated goods

Question 72

Why do firms collude to become a cartel? Because it allows them to

A) develop innovations without the threat of competition within the industry
B) compete in order to increase market share
C) act like a monopoly
D) diversify their markets without fear of losing market share
E) increase their own individual concentration ratio

Question 73

Collusion among firms to form a cartel refers to

A) joint ventures in producing new goods, such as France and England colluding to produce the European Airbus as a viable competitor to the U.S. Boeing's 747
B) joint ventures between business and government, such as the exploration of space
C) joint ventures between a domestic firm and a foreign firm, such as in the mega- movies of the entertainment world
D) the practice among firms of preventing other firms from entering the industry
E) the practice among firms of agreeing to abide by the group decision on price and output

Question 74

The formation of cartels is primarily a concern in the __________ market structure(s).

A) perfectly competitive
B) monopolistically competitive
C) oligopoly
D) monopoly
E) perfectly competitive and monopolistically competitive

Question 75

The text refers to OPEC as a classic example of a cartel. OPEC is a group of countries that collude to control prices and output in the _______ industry(ies).

A) agriculture
B) engineering and computer
C) airline
D) oil
E) machinery

Question 76

All evidence points to the fact that firms' market power within an industry and industry concentration ratios are

A) directly related, that is, firms' market power is high when concentration ratios are high
B) inversely related, that is, firms' market power is low when concentration ratios are high
C) totally unrelated, that is, they are directly related in some industries and indirectly related in others
D) only moderately related, depending on the degree of competition in the industry
E) low for monopoly and high for perfect competition

Question 77

The text describes various pricing strategies that oligopolists use. Which of the following is not one of these strategies?

A) game theory
B) price leadership
C) kinked demand
D) cartel
E) trial and error

Question 78

In a price leadership oligopoly model,

A) a cartel of leading firms determines price and industry output
B) the leading firm colludes on price with each of the other firms and in this way has primary decision-making powers over price
C) one firm is the price leader and all other firms in the industry follow
D) the firm that leads abandons the profit-maximizing goal
E) the leader firm produces where MR = MC, and all others produce where P = ATC

Question 79

According to the text, why would firms in an industry follow the price leadership of another firm?

A) fear of retribution from the price leader if they don't follow
B) smaller firms do not have the resources to determine optimal price
C) the price chosen by the leading firm is the optimal one for all
D) profit will be distributed in accordance with firms' market share
E) every firm in the industry has confidence the leading firm will act for the benefit of all firms

Question 80

What assumption(s) is (are) necessary to generate a kinked demand curve?

A) all firms in the industry ignore the price changes made by any one firm
B) any price decrease will be ignored but price increases will be followed
C) all firms will follow a price decrease but will ignore any price increase
D) all price changes made by any firm will be followed by all of the other firms
E) price can increase, but not decrease