Deck 12: Oligopoly: Firms in Less Competitive Markets

Question 1

If an industry is made up of five identical firms, the four-firm concentration ratio is

A)5%.
B)20%.
C)80%.
D)100%.

Answer 1

C

Question 2

An oligopoly firm is similar to a monopolistically competitive firm in that

A)both firms face the prisoner's dilemma.
B)both operate in a market in which there are entry barriers.
C)both firms have market power.
D)both firms are in industries characterized by an interdependent firm.

Answer 2

C

Question 3

Which of the following is the best example of an oligopolistic industry?

A)the beef market
B)the pharmaceutical industry
C)public education
D)the beauty products industry

Answer 3

B

Question 4

An oligopolist's demand curve is

A)identical to that of a perfect competitive firm.
B)identical to that of a monopolistically competitive firm.
C)vertical on a price quantity diagram.
D)unknown because a response of firms to price changes by rivals is uncertain.

Question 5

Which of the following is not a shortcoming of the concentration ratio as a measure of the extent of competition in an industry?

A)Concentration ratios do not include sales in Canada by foreign firms.
B)Concentration ratios are calculated for the national market, even though the competition in some industries is mainly local.
C)Concentration ratios assign weights to only the four largest firms in an industry.
D)Concentration ratios do not address the fact that competition sometimes exists between firms in different industries.

Question 6

Which of the following is not a reason why government officials are willing to impose entry barriers?

A)to raise revenue
B)to encourage innovation which may improve the standard of living in the long run
C)to increase economic efficiency
D)to promote an equitable distribution of income

Question 7

In an oligopoly market

A)the pricing decisions of all other firms have no effect on an individual firm.
B)individual firms pay no attention to the behavior of other firms.
C)advertising of one firm has no effect on all other firms.
D)one firm's pricing decision affects all the other firms.

Question 8

The value of the four-firm concentration ratio that many economists consider indicative of the existence of an oligopoly in a particular industry is

A)anything greater than 10 percent.
B)anything greater than 20 percent.
C)anything greater than 30 percent.
D)anything greater than 40 percent.

Question 9

The Department Stores industry is highly concentrated.What does this mean?

A)There are many large stores such as Hudson Bay Company, Target, and Giant Tiger/Tigre Géant, in this industry.
B)A few large stores account for a significant portion of industry sales.
C)There is cut-throat competition in this industry because there are no entry barriers.
D)The sales volume in this industry is consistently high.

Question 10

A characteristic found only in oligopolies is

A)break even level of profits.
B)interdependence of firms.
C)independence of firms.
D)products that are slightly different.

Question 11

A four-firm concentration ratio measures

A)the fraction of an industry's sales accounted for by the four largest firms.
B)the production of any four firms in an industry.
C)how the four largest firms became so concentrated.
D)the fraction of employment of the four largest firms in an industry.

Question 12

All of the following are examples of oligopolistic markets except

A)the broadcasting industry.
B)aircraft manufacture.
C)college bookstores.
D)seafood restaurant chains.

Question 13

A key part of Apple's business strategy in the electronics market has been

A)to wait until competitors introduce new technology in their products before incorporating the technology in its products.
B)to concentrate on selling its products and services through large discount retailers like Walmart.
C)the innovation of new products which initially have little to no competition.
D)to dominate the market by offering low-end products and beating its competitors' prices.

Question 14

Oligopolies are difficult to analyze because

A)the firms are so large.
B)demand and cost curves do not exist for these types of industries.
C)how firms respond to a price change by a rival is uncertain.
D)oligopolies are a recent development so economists have not had time to develop models.

Question 15

An oligopolist differs from a perfect competitor in that

A)there is cutthroat competition in perfect competition but little competition in oligopoly because firms have significant market power.
B)firms in an oligopoly do not produce homogeneous products while firms in perfect competition do.
C)the market demand curve for a perfectly competitive industry is perfectly elastic but it is downward-sloping in an oligopolistic industry.
D)there are no entry barriers in perfect competition but there are entry barriers in oligopoly.

Question 16

An oligopolistic industry is characterized by all of the following except

A)existence of entry barriers.
B)the possibility of reaping long run economic profits.
C)firms pursuing aggressive business strategies, independent of rivals' strategies.
D)production of standardized products.

Question 17

Producing a differentiated product occurs in which of the following industries?

A)oligopoly, monopolistic competition and perfect competition
B)monopolistic competition only
C)oligopoly only
D)monopolistic competition and oligopoly

Question 18

Producing a homogeneous product occurs in which of the following industries?

A)oligopoly, monopolistic competition and perfect competition
B)perfect competition only
C)oligopoly and perfect competition
D)monopolistic competition and perfect competition

Question 19

Marginal revenue for an oligopolist is

A)identical to the demand for the firm's product.
B)difficult to determine because the firm's demand curve is typically unknown.
C)downward sloping beneath the firm's demand curve.
D)horizontal on a price-quantity diagram.

Question 20

Which of the following is not part of an oligopolist's business strategy?

A)meeting worker health and safety standards required of all firms
B)deciding the level of total output of a new product
C)determining the amount of advertising a new product needs
D)setting the product's price after considering what rivals will do

Question 21

Patents, tariffs and quotas are all examples of

A)government-imposed barriers.
B)economic regulations that increase efficiency.
C)entry barriers that improve a country's standard of living.
D)entry barriers that protect consumers.

Question 22

Which of the following is not necessarily a consequence of occupational licensing laws?

A)They restrict competition.
B)Consumers pay higher prices for the services of licensed professions.
C)They result in a higher quality of service.
D)They ensure that licensed professionals meet some minimum qualifications.

Question 23

Which of the following is important in determining the extent of competition in an industry?

A)the minimum level of short run average total costs of production
B)the minimum efficient scale of production relative to market demand
C)whether or not the industry product is differentiated or standardized
D)the level of market demand for the industry's product

Question 24

The barrier to entry that allowed Alcoa to make persistent economic profits was ownership of an essential input.

Question 25

An entry barrier exists when firms in an industry charge the lowest price possible for their products.

Question 26

What is meant by the term "government-imposed barrier to entry"? Why would a government be willing to impose barriers to entering an industry?

Question 27

One reason why, in the last four decades, the number of new auto makers in the world has been very small compared to the past is that

A)the automobile cannot be improved upon in any way by new producers.
B)new auto makers cannot obtain necessary inputs to produce new cars.
C)governments restrict who can produce automobiles.
D)new producers cannot match the economies of scale of existing auto makers.

Question 28

The study of how people make decisions in situations where attaining their goals depends on their interactions with others is called

A)Nash equilibrium.
B)the prisoner's dilemma.
C)game theory.
D)dominant strategy equilibrium.

Question 29

Oligopolies exist and do not attract new rivals because

A)of competition.
B)of barriers to entry.
C)the firms keep profits and prices so low that no rivals are attracted.
D)there can be no product differentiation.

Question 30

What is an oligopoly? Give two examples of oligopolistic industries in Canada.

Question 31

Interdependence of firms is most common in

A)monopolistically competitive industries.
B)monopolistic industries.
C)monopolistically competitive and oligopolistic industries.
D)oligopolistic industries.

Question 32

Economies of scale can lead to an oligopolistic market structure because

A)if larger firms have lower costs, new small entrants will not be able to produce at the low costs achieved by the big established firms.
B)if economies of scale are insignificant, only a few firms are able to produce at the low costs achieved by the big established firms.
C)a few firms can force rivals to produce at low levels of output.
D)a few firms can use high profits to keep out new entrants.

Question 33

If economies of scale are significant, the typical firm will not reach the minimum point on its long-run average cost curve until it has produced a large fraction of industry sales.

Question 34

Monopolistic competition differs from oligopoly in that in monopolistic competition firms act independently while in oligopoly firms act interdependently.

Question 35

How does the demand curve for an oligopoly firm differ from the demand curves for firms in competitive market structures?

Question 36

An example of a barrier to entry is

A)product differentiation.
B)high profits.
C)superior technological knowledge.
D)increasing marginal costs.

Question 37

An oligopolistic industry is characterized by a few large firms acting independently.

Question 38

A reason why there is more competition among restaurants than among large discount department stores is that restaurants

A)have to cater to a variety of consumer tastes while department stores do not.
B)unlike department stores, have to abide by government sanitation rules.
C)unlike department stores, do not have significant economies of scale.
D) have more elastic demand for their product compared to department stores.

Question 39

Occupational licensing is an example of an entry barrier that improves a country's standard of living.

Question 40

The Potash Corporation of Saskatchewan (PotashCorp)was able to block competition through

A)economies of scale.
B)ownership of an essential input.
C)government-imposed barriers.
D)differentiating its product.

Question 41

A dominant strategy

A)is one that is the best for a firm, no matter what strategies other firms use.
B)is one that a firm is forced into following by government policy.
C)involves colluding with rivals to maximize joint profits.
D)involves deciding what to do after all rivals have chosen their own strategies.

Question 42

A Nash equilibrium is

A)reached when an oligopoly's market demand and supply intersect.
B)reached when each player chooses the best strategy for himself and for the group.
C)reached when each player chooses the best strategy for himself, given the other strategies chosen by the other players in the group.
D)an equilibrium comprising non-dominant strategies only.

Question 43

Table 12.1

Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 12.1 shows the payoff matrix for this advertising game.
Refer to Table 12.1.What is the Nash equilibrium in this game?

A)There is no Nash equilibrium.
B)Godrickporter increases its advertising budget, but Star Connections does not.
C)Star Connections increases its advertising budget, but Godrickporter does not.
D)Both Godrickporter and Star Connections increase their advertising budgets.

Question 44

Table 12.1

Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 12.1 shows the payoff matrix for this advertising game.
Refer to Table 12.1.Is there a dominant strategy for Godrickporter and if so, what is it?

A)No, its outcome depends on what Star Connections does.
B)Yes, Godrickporter should increase its advertising spending.
C)Yes, Godrickporter should reduce its advertising spending.
D)Yes, Godrickporter's dominant strategy is to collude with Star Connections.

Question 45

Consider two oligopolistic industries selling the same product in different locations.In the first industry, firms always match price changes by any other firm in the industry.In the second industry, firms always ignore price changes by any other firm.which of the following statements is true about these two industries, holding everything else constant?

A)Market prices are likely to be higher in the first industry in which firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes.
B)Market prices are likely to be lower in the first industry where firms always match price changes by rival firms than in the second where firms ignore their rivals' price changes.
C)Market prices are likely to be the same in both markets because they are both oligopolistic markets.
D)No conclusions can be drawn about the pricing behavior under these very different firm behaviors.

Question 46

A set of actions that a firm takes to achieve a goal, such as maximizing profits, is called

A)a business strategy.
B)a payoff matrix.
C)the Porter's Competitive Forces plan.
D)game theory.

Question 47

What is a prisoner's dilemma?

A)a game that involves no dominant strategies
B)a game in which prisoners are stumped because they cannot communicate with each other
C)a game in which players act in rational, self-interested ways that leave everyone worse off
D)a game in which players collude to outfox authorities

Question 48

A market comprised of only two firms is called a

A)competitive market.
B)duopoly.
C)monopoly.
D)monopolistically competitive market.

Question 49

Table 12.1

Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 12.1 shows the payoff matrix for this advertising game.
Refer to Table 12.1.Let's suppose the game starts with each firm adhering to its original budget so that Godrickporter earns a profit of $6,000 and Star Connections earns a profit of $12,000.Is there an incentive for any one firm to increase its advertising budget?

A)No, neither firm has an incentive to raise its advertising spending.
B)Yes, both firms have an incentive to raise their advertising budgets.
C)Yes, Star Connections has an incentive to increase its advertising budget, but Godrickporter does not.
D)Yes, Godrickporter has an incentive to increase its advertising budget, but Star Connections does not.

Question 50

Collusion between two firms occurs when

A)the firms independently pursue strategies that could hurt each other.
B)firms explicitly or implicitly agree to adopt a uniform business strategy.
C)announce that each will match its rival's market price.
D)firms act altruistically to bring about the economically efficient outcome.

Question 51

Which of the following is an example of a way in which a firm in oligopoly can escape the prisoner's dilemma?

A)producing more of its product
B)advertising that it will match its rival's price
C)reneging on a previous tacit agreement with rival firms to charge identical high prices
D)ignoring the pricing decisions of the other firms

Question 52

Suppose we want to use game theory to analyze how an oligopolist selects its optimal price.The cells of the payoff matrix show

A)the profit that each producer can expect to earn by pursuing a single strategy.
B)the profit that each producer can expect to earn from every combination of strategies by the firms in the market.
C)the strategy that a firm must pursue to earn various levels of profit.
D)the expected profits of rival firms.

Question 53

Table 12.2

Table 12.2 shows the payoff matrix for London Drugs and FutureShop from every combination of pricing strategies for the popular PlayStation 3. At the start of the game, each firm charges a low price and each earns a profit of $7,000.
Refer to Table 12.2.Is the current strategy in which each firm charges the low price and earns a profit of $7,000 a Nash equilibrium? If not, why and what is the Nash equilibrium?

A)No, it is not a Nash equilibrium because each firm can do better by charging the high price. The Nash equilibrium occurs when each firm charges the high price and earns a profit of $10,000.
B)No, the current situation is not a Nash equilibrium; it is a dominant strategy equilibrium. There is no Nash equilibrium in this game.
C)No, the current situation is not a Nash equilibrium. The Nash equilibrium for each firm is to have the other charge a high price and for the firm in question charge a low price.
D)Yes, the current situation is a Nash equilibrium.

Question 54

All of the following are characteristics of game theory except

A)rules that determine what actions are allowable.
B)payoffs that are the results of the interaction among players' strategies.
C)strategies that players employ to attain their objectives.
D)independence among players.

Question 55

What is the dominant strategy in the prisoner's dilemma?

A)Each prisoner confesses because this is the rational action to pursue.
B)Do nothing in the hope that the other prisoner will also do nothing.
C)Do not confess because the other prisoner will most likely confess.
D)There is no dominant strategy.

Question 56

Table 12.1

Godrickporter and Star Connections are the only two airport shuttle and limousine rental service companies in the mid-sized town of Godrick Hollow. Each firm must decide on whether to increase its advertising spending to compete for customers. Table 12.1 shows the payoff matrix for this advertising game.
Refer to Table 12.1.Is there a dominant strategy for Star Connections and if so, what is it?

A)No, its outcome depends on what Godrickporter does.
B)Yes, Star Connections should increase its advertising spending.
C)Yes, Star Connections should reduce its advertising spending.
D)Yes, Star Connections' dominant strategy is to collude with Godrickporter.

Question 57

Which of the following statements about the prisoner's dilemma is false?

A)The prisoner's dilemma in a one-shot game leads to a noncooperative, equilibrium outcome.
B)The prisoner's dilemma in repeated games could lead to cooperation especially if there is some enforcement mechanism that punishes a player who does not cooperate.
C)Players caught in a prisoner's dilemma act in selfish ways that lead to an equilibrium that is sub-optimal.
D)The prisoner's dilemma game can never reach a Nash equilibrium as long as players do not cooperate.

Question 58

A game in which each player adopts its dominant strategy

A)will not lead to an equilibrium.
B)must be a cooperative game.
C)could result in a Nash equilibrium.
D)can never result in a Nash equilibrium.

Question 59

The prisoner's dilemma illustrates

A)how oligopolists engage in implicit collusion under strategic situations.
B)why firms will not cooperate if they behave strategically.
C)why firms have an incentive to cheat on agreements.
D)how cooperation in strategic situations lead to the economically efficient market outcome.

Question 60

Which of the following economists did not help to develop game theory analysis?

A)Adam Smith
B)John Nash
C)John von Neumann
D)Oskar Morgenstern

Question 61

Table 12.2

Table 12.2 shows the payoff matrix for London Drugs and FutureShop from every combination of pricing strategies for the popular PlayStation 3. At the start of the game, each firm charges a low price and each earns a profit of $7,000.
Refer to Table 12.2.Suppose Target and Walmart both advertise that they will match the lowest price offered by any competitor.What is the purpose of such a strategy?

A)to signal to each other not to charge below the current low price
B)to signal to each other that they will not hesitate to initiate a price war
C)to signal to each other that they intend to charge the high price
D)to signal to each other to share the market equally

Question 62

In which of the following cartels is total cartel profit likely to be the highest?

A)a cartel made up of equal sized firms each producing different quantities of a differentiated product
B)a cartel made up of firms of various sizes each producing different quantities of a homogeneous product
C)a cartel made up of firms of various sizes each producing the same quantity of a differentiated product
D)a cartel made up of identical firms each producing the same quantity of a homogeneous product

Question 63

In most business situations where firms compete, often they can escape the prisoner's dilemma and reach the most profitable outcome.Which of the following is a reason for this?

A)Firms engage in aggressive advertising to overcome the barriers to loyalty.
B)Most games are one-shot games so firms learn from their mistakes.
C)Most games are repeated games and firms can employ retaliation strategies against those who do not cooperate.
D)Firms are constantly improving their products and anticipating changing consumer tastes.

Question 64

Table 12.3

Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 12.3 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota.
Refer to Table 12.3.Is there a dominant strategy for Nigeria and, if so, what is it?

A)Yes, it has a dominant strategy depending on what Saudi Arabia does.
B)No, there is no dominant strategy.
C)Yes, the dominant strategy is to produce a low output.
D)Yes, the dominant strategy is to produce a high output.

Question 65

Each member of OPEC can increase its income by selling more oil than its output quota because

A)by selling more at OPEC's cartel price, a member will automatically earn more income.
B)each member's demand is more elastic than the total demand for oil.
C)the demand for oil is inelastic so total revenue increases.
D)the demand for oil is perfectly elastic.

Question 66

What is a second-price auction?

A)An auction in which the bidder who submitted the highest bid is awarded the object being sold and pays a price equal to the second highest amount bid.
B)An auction in which the bidder who submitted the second highest bid is awarded the object being sold.
C)An auction in which the bidder who submitted the highest bid is awarded the object being sold and pays a price equal to the average of the highest and second highest amount bid.
D)An auction in which the bidder who submitted the second highest bid is awarded the object being sold and pays a price equal to the average of the highest and second highest amount bid.

Question 67

Airlines often engage in last-minute price cutting to fill remaining empty seats on a flight because this practice will generally

A)prevent rival airlines from competing in that market.
B)increase marginal revenue more than marginal cost.
C)maximize marginal revenue.
D)discourage rivals from matching price cuts.

Question 68

Table 12.2

Table 12.2 shows the payoff matrix for London Drugs and FutureShop from every combination of pricing strategies for the popular PlayStation 3. At the start of the game, each firm charges a low price and each earns a profit of $7,000.
Refer to Table 12.2.Suppose pricing PlayStations is a repeated game in which London Drugs and FutureShop will be selling the game system in competition over a long period of time.In this case, what is the most likely outcome?

A)a noncooperative equilibrium in which each firm charges the high price
B)a cooperative equilibrium in which each firm charges the high price
C)a noncooperative equilibrium in which each firm charges the low price
D)a cooperative equilibrium in which each firm charges the low price

Question 69

A cartel is

A)a temporary storage facility for automobiles.
B)a group of firms that enter into an informal agreement to fix prices to maximize joint profits.
C)a group of firms that enter into a formal agreement to fix prices to maximize joint profits.
D)an example of a group of firms that collectively regulate a competitive industry.

Question 70

Collusion

A)is rampant in perfect competition as all firms charge the same price.
B)reduces market concentration in an industry.
C)among firms is difficult to maintain because it eliminates long run economic profit.
D)is more difficult when there are many firms producing differentiated products in an industry.

Question 71

Suppose two firms in a duopoly implicitly collude and charge a high price.How might each firm benefit from advertising that it will match the lowest price offered by its competitor?

A)The offer to match prices is a way of deterring entry by other large firms, thereby keeping the market share of the existing firms intact.
B)The advertisement ensures that the other firm does not cheat. If a firm cheats on the agreement and charges the lower price, the rival firm will retaliate by doing the same.
C)The offer to match prices is a way of signaling to antitrust authorities that the firms are not engaged in illegal collusion.
D)The advertisement is meant to suggest to consumers that the offered price is actually the lowest price available.

Question 72

If the painting firms in a city sign a contract outlining a pricing plan, they are involved in

A)price competition.
B)a legal form of business contract in the United States.
C)collusion.
D)price regulation.

Question 73

In an oligopoly, firms can increase their market power by

A)selling to buyers who have market power.
B)pursuing dominant strategies.
C)colluding to set prices.
D)undertaking heavy advertising expenditure.

Question 74

A cartel is

A)a temporary storage facility for automobiles.
B)a group of firms that enter into an informal agreement to fix prices to maximize joint profits.
C)a group of firms that enter into a formal agreement to fix prices to maximize joint profits.
D)an example of a group of firms that collectively regulate a competitive industry.

Question 75

What is the dominant strategy in a second-price auction?

A)bidding below one's true value
B)bidding above one's true value
C)bidding one's true value
D)There is no dominant strategy.

Question 76

A member of a cartel like OPEC has an incentive to

A)argue for larger production quotas for each member of the cartel.
B)agree to a low cartel production level and then produce more than its quota.
C)abide by its individual production quota.
D)support equal production quotas for each member.

Question 77

What is the incentive for a firm to join a cartel?

A)to be able to earn profits in the long run but not in the short run
B)to be able to earn larger profits than if it was not part of the cartel
C)to completely insulate itself from competition
D)to produce a larger amount of output than if it was not part of the cartel

Question 78

Table 12.2

Table 12.2 shows the payoff matrix for London Drugs and FutureShop from every combination of pricing strategies for the popular PlayStation 3. At the start of the game, each firm charges a low price and each earns a profit of $7,000.
Refer to Table 12.2.For each firm, is there a better outcome than the current situation in which each firm charges the low price and earns a profit of $7,000?

A)Yes, the firms can implicitly collude and agree to charge a higher price.
B)No, there is no incentive for each firm to consider any other strategy.
C)No, any other strategy hurts consumers.
D)Yes, each firm can implicitly agree to increase output and not to deviate from a low price.

Question 79

There is much evidence to suggest that airlines are more likely to match price cuts than price increases.Which of the following best explains this evidence?

A)The law of demand which states that an increase in price leads to a decrease in quantity demanded.
B)No one airline wants to be the first to renege on a tacit collusive agreement in which all airlines implicitly agree to match price cuts but not price increases.
C)An airline fears that if it does not match a price cut, its sales may fall considerably but if it does not match a price increase, it will be able to attract customers away from its rivals.
D)Airlines have different costs of production and therefore it is more difficult to agree on a price increase than on a price decrease.

Question 80

Table 12.3

Suppose OPEC has only two producers, Saudi Arabia and Nigeria. Saudi Arabia has far more oil reserves and is the lower cost producer compared to Nigeria. The payoff matrix in Table 12.3 shows the profits earned per day by each country. "Low output" corresponds to producing the OPEC assigned quota and "high output" corresponds to producing the maximum capacity beyond the assigned quota.
Refer to Table 12.3.Is there a dominant strategy for Saudi Arabia and, if so, what is it?

A)Yes, the dominant strategy is to produce a high output.
B)Yes, the dominant strategy is to produce a low output.
C)No, there is no dominant strategy.
D)Yes, it has a dominant strategy depending on what Nigeria does.