Deck 11: Oligopoly and Monopolistic Competition

Question 1

Cartels are inherently self-destructive because each member firm has the incentive to cheat on the cartel agreement.

Answer 1

True

Question 2

Television stations have seemingly synchronized their commercial breaks. This is likely an example of

A)tacit collusion.
B)explicit collusion.
C)mixed strategies.
D)pure strategies.

Answer 2

tacit collusion.

Question 3

Which of the following statements is FALSE?

A)Cartels only form among members of an oligopoly.
B)A cartel might form if members believe they can increase profits by coordinating activity.
C)Members of a cartel produce less output than that produced in a competitive market.
D)Cartel members often have an incentive to cheat.

Answer 3

Cartels only form among members of an oligopoly.

Question 4

Cartels can detect cheating by

A)reporting each other to government authorities.
B)keeping two sets of accounting books, one for internal use and one for sharing with the cartel.
C)dividing the market by region so that each cartel member is the only seller in a particular region.
D)All of the above.

Question 5

A cartel is a group of firms that attempts to

A)maximize joint revenue.
B)maximize joint profit.
C)behave independently.
D)increase consumer surplus.

Question 6

Which of the following does NOT influence the type of oligopoly that forms?

A)Whether firms act sequentially or simultaneously.
B)Whether firms set price or quantity.
C)The type of demand curve the firms face.
D)The time horizon over which firms will be in competition.

Question 7

The Cournot Model of Oligopoly assumes that

A)firms decide what quantity to produce.
B)firms make their decisions simultaneously.
C)firms do not cooperate.
D)All of the above.

Question 8

When the market demand curve is relatively inelastic

A)it is unrealistic for a cartel to form because profits will be lower.
B)penalties for forming an illegal cartel will be relatively low.
C)the lower the price the cartel sets, the greater the benefits to the cartel.
D)the higher the price the cartel sets, the greater the benefits to the cartel.

Question 9

If a cartel is unable to monitor its members and punish those firms that violate their agreement, then

A)the member firms will each act as price setters.
B)the cartel will prosper in the long run.
C)the market will become a monopoly.
D)the cartel will fail.

Question 10

Which of the following is a current example of a government-granted cartel?

A)the "Big Three" accounting firms
B)the U.S. automobile industry
C)U.S. professional baseball
D)the U.S. airline industry

Question 11

The use of "most-favored-customer" clauses is an example of

A)incenting members to maintain the cartel, because if they lower the price for one customer, they have to lower it for previous customers as well.
B)incenting members to maintain the cartel, because if they raise the price for one customer, they have to raise it for previous customers as well.
C)giving customers special perks for purchasing goods from members of the cartel.
D)selling higher quality goods and services to favorite customers.

Question 12

The Organization of Petroleum Exporting Countries (OPEC)is an example of a(n)

A)oil monopoly.
B)cartel.
C)competitive arrangement.
D)prisoner's dilemma.

Question 13

Explain why gasoline stations across the street from each other with large signs displaying their prices may "legally" jointly set monopoly prices.

Question 14

A cartel might fail because

A)it does not control enough of the output in a market to raise prices enough.
B)there is an incentive for members to cheat.
C)too many firms leave the cartel, causing the cartel price to fall.
D)All of the above.

Question 15

Each member of a cartel

A)agrees to reduce output lower than it would if it were acting independently.
B)is operating illegally in every country in which it is doing business.
C)sets output independently of the impact on other members.
D)makes less money than it otherwise would.

Question 16

When deciding on output levels, members of a cartel

A)set their output where MR = MC.
B)produce the same level of output as if they were in a competitive market.
C)take into account the impact of changes on members' profits.
D)act as if they were monopolies.

Question 17

The specific oligopolistic model used in a market

A)depends on the pricing structure of the good or service sold.
B)depends on the characteristics of the market, such as time horizon for competition.
C)is usually a Cournot model, unless cartels are illegal.
D)All of the above.

Question 18

In a sense, a cartel is self-destructive because

A)it reduces consumer surplus.
B)it sets price above marginal cost.
C)each cartel member has the incentive to cheat on the cartel.
D)each cartel member earns economic profit.

Question 19

A typical firm in a cartel will hold which of the following attitudes?

A)If everyone cheats, I'm better off, and so is everyone in the cartel.
B)If I alone cheat, I'm better off; if everyone cheats, I'm worse off.
C)I can never do better for myself than following agreed-upon cartel rules.
D)If I suspect others are planning to cheat, I'll do best for myself by deciding not to cheat.

Question 20

Which of the following conditions can help prolong the life of a cartel?

A)There are only a few firms in the market and they all belong to the cartel.
B)There are many firms in the market that are not members of the cartel.
C)It is difficult to know what price any cartel member is actually charging.
D)The cartel has no ability to punish members who cheat on the cartel.

Question 21

In the Cournot model, if the products are differentiated

A)this reduces the pressure of one firm's decisions on the other.
B)this increases the pressure of one firm's decisions on the other.
C)there is no difference between this model and one with homogeneous goods.
D)marginal costs are necessarily different.

Question 22

In the simplest version of the Cournot model, we assume the firms

A)set quantities independently and simultaneously.
B)set quantities independently and sequentially.
C)set price independently and simultaneously.
D)are not in a Nash equilibrium.

Question 23

If a firm is selling a quantity that is NOT on its best-response curve it

A)will go out of business.
B)is in a Nash equilibrium.
C)will want to change its behavior.
D)is operating in a duopoly.

Question 24

In the Cournot model, a firm maximizes profit by selecting

A)its output, assuming that other firms keep their output constant.
B)its price, assuming that other firms keep their price constant.
C)its output, assuming that other firms will retaliate.
D)its price, assuming that other firms will retaliate.

Question 25

The market demand that is NOT met by other sellers in a market is known as a firm's

A)excess demand curve.
B)market demand curve.
C)residual demand curve.
D)leftover demand curve.

Question 26

In the Cournot model

A)market price is unaffected by the actions of any individual firm.
B)firms do not have to worry about the strategies of the other firms.
C)firms' profits are independent.
D)firms' profits are interdependent.

Question 27

The above figure shows the reaction functions for two pizza shops in a small isolated town. The perfect competitive outcome is that

A)each firm produces 40 pizzas.
B)each firm produces 50 pizzas.
C)the firms split the production of 200 pizzas.
D)each firm produces 200 pizzas.

Question 28

Compared to a cartel, firms in a Cournot Oligopoly

A)make more joint profit.
B)sell less output.
C)make less joint profit.
D)act independently.

Question 29

A Nash equilibrium occurs when

A)players choose their best strategy given the strategies chosen by others.
B)the efficient allocation of resources is achieved by setting marginal revenue equal to marginal cost.
C)a monopolist is forced to produce the efficient level of output.
D)oligopolists cooperate with each other.

Question 30

Suppose two Cournot duopolist firms operate at zero marginal cost. The market demand is p = a - bQ. Firm 1's best-response function is

A)q1 = (a - bq2)/2b.
B)q1 = (a - 2bq2)/2b.
C)q1 = a/b.
D)q1= a/2b.

Question 31

If, holding the strategies of all other firms constant, no firm can obtain a higher profit by choosing a different strategy, then

A)the firms are using the Cournot model.
B)the firms' strategies are a Nash equilibrium.
C)the firms must have formed a cartel.
D)the firms are using the Bertrand model.

Question 32

In the Cournot model, if one firm increases its output

A)the market will not clear because now there is a surplus.
B)the market price drops, reducing the revenues received by the other firms.
C)the others will kick it out of the oligopoly.
D)the other firms are unaffected.

Question 33

In the simplest version of the Cournot model, we assume

A)the firms set price independently and simultaneously.
B)the firms set price independently and sequentially.
C)that the firms have identical costs.
D)the firms are in a Nash equilibrium.

Question 34

The above figure shows the reaction functions for two pizza shops in a small isolated town. Collusion would result in

A)each firm producing 25 pizzas.
B)each firm producing 40 pizzas.
C)the firms splitting the production of 100 making 50 pizzas each.
D)firm A monopolizing the market by selling 50 pizzas.

Question 35

In the simplest version of the Cournot model, we assume

A)the firms set quantities independently and simultaneously.
B)the firms have identical costs and sell identical products.
C)there are a small number of firms, and no other firm can enter the market.
D)All of the above.

Question 36

The above figure shows the reaction functions for two pizza shops in a small isolated town. Firm B producing 100 pizzas and firm A producing 50 pizzas is NOT a Cournot equilibrium because

A)Cournot duopolists agree to share the market equally.
B)firm B is not on its best-response function.
C)firm A is not on its best-response function.
D)neither firm is on its best-response function.

Question 37

The above figure shows the reaction functions for two pizza shops in a small isolated town. The Cournot equilibrium is at point

A)a.
B)b.
C)c.
D)d.

Question 38

In the Cournot model, the output that a firm chooses to produce increases as

A)the total output of other firms increases.
B)the number of firms in the market increases.
C)the number of firms in the market decreases.
D)its marginal cost increases.

Question 39

If a firm's marginal costs ________ then its ________.

A)fall; best-response curve shifts
B)rise; forced out of the oligopoly
C)rise; output increases
D)fall; price falls

Question 40

In the simplest version of the Cournot model, we assume the firms

A)set price independently and simultaneously.
B)set quantities independently and sequentially.
C)sell identical products.
D)the firms are in a Nash equilibrium.

Question 41

Two identical firms that share a market and produce a homogeneous good will find the Bertrand Oligopoly LEAST attractive because

A)Cartels generate the highest joint profit.
B)a Cournot Oligopoly will generate more profit than a Bertrand Oligopoly.
C)they want to avoid a price war that leads to profit erosion and P = MC.
D)All of the above.

Question 42

In the Cournot model, if the products are differentiated

A)the firm can shift its demand curve to the right and make it less elastic.
B)the firms' demand curve shifts to the left and becomes less elastic.
C)the firms' demand curve shifts to the right and becomes more elastic.
D)None of the above.

Question 43

In a Bertrand model with identical firms and a non-differentiated product, price will increase in response to

A)an increase in the number of firms.
B)a decrease in the number of firms.
C)an increase in marginal cost.
D)a decrease in marginal cost.

Question 44

Suppose the demand for pizza in a small isolated town is p = 10 - Q. There are only two firms, A and B, and each has a cost function TC = 2 + q. Determine the Cournot equilibrium.

Question 45

In a Bertrand model with identical products

A)price is the same as in a competitive market equilibrium.
B)price and quantity are the same as in a monopoly.
C)price and quantity are the same as in a duopoly.
D)None of the above.

Question 46

The Bertrand model of price setting assumes that a firm chooses its price

A)independently of what price other firms charge.
B)subject to what price rival firms are charging.
C)so that joint profits are maximized.
D)without considering the shape of the demand curve.

Question 47

A product can be differentiated through

A)physical changes to the product.
B)marketing.
C)creating barriers to entry.
D)Both A and B.

Question 48

Two identical firms that share a market and produce a homogeneous good will find which of the following market outcomes LEAST desirable?

A)Bertrand Oligopoly
B)Cournot Oligopoly
C)Cartel
D)All are equally preferable.

Question 49

A merger between a firm and one of its suppliers would be called

A)a horizontal merger.
B)a vertical merger.
C)an anti-trust violation.
D)a Cournot merger.

Question 50

Assuming a homogeneous product, the Bertrand duopoly equilibrium price is

A)the same as the Cournot equilibrium price.
B)less than the Cournot equilibrium price.
C)greater than the Cournot equilibrium price.
D)equal to the monopoly price.

Question 51

In a Bertrand model with identical products

A)price is set above marginal cost.
B)marginal revenue is above marginal cost.
C)price is equal to marginal cost.
D)None of the above.

Question 52

If differentiation makes the market demand curve less elastic, then

A)consumer surplus increases.
B)the market structure changes into a monopoly.
C)price markup over marginal cost is lower than when products are identical.
D)price markup over marginal cost is higher than when products are identical.

Question 53

Mergers often increase profit by

A)producing economies of scale.
B)producing economies of scope.
C)increasing efficiency of the firm.
D)All of the above.

Question 54

A merger between two firms that produce identical goods would be called

A)a horizontal merger.
B)a vertical merger.
C)a Lerner merger.
D)a duopoly.

Question 55

The Cournot model assumes that firm A maximizes its profit, holding firm B's output constant.

Question 56

Price and quantity in Bertrand and Cournot models

A)are the same.
B)are different.
C)might be the same depending on whether the products are identical or differentiated.
D)are the same as in a duopoly.

Question 57

Assuming a homogeneous product, the Bertrand equilibrium price is

A)independent of the number of firms.
B)independent of the firm's marginal costs.
C)equal to the Cournot equilibrium price.
D)equal to the monopoly price.

Question 58

One criticism of the Bertrand pricing model is that

A)the model is implausible when there is product differentiation.
B)when there is an oligopoly with no product differentiation, the model's prediction is inconsistent with reality.
C)the model's predicted price is solely a function of demand conditions.
D)the model's predicted price is dependent on the number of firms.

Question 59

Mergers may result in

A)anticompetitive behavior.
B)more efficient production.
C)fewer firms in a market.
D)All of the above.

Question 60

Mergers are closely scrutinized by the government because

A)they might allow the firms involved to dominate the market and act as a legalized cartel (monopoly).
B)they always result in a more efficient market.
C)they always result in lower joint profits of the firms involved.
D)all mergers are undesirable.

Question 61

An example of a market where a Bertrand model would be NOT be plausible is the market for

A)pizza.
B)sweaters.
C)motorcycles.
D)toothpicks.

Question 62

Monopolistically competitive firms face downward sloping residual demand curves because these firms

A)have relatively few rivals (compared to competition).
B)sell differentiated products.
C) A and/or B.
D)None of the above.

Question 63

The Bertrand model is a more plausible model of firm behavior than the Cournot model

A)when firms set the quantity to be sold.
B)when firms sell a differentiated product.
C)because firms that sell a non-differentiated product typically act as price takers.
D)because the Bertrand model predicts that firms will price at marginal cost.

Question 64

In the long run, firms in markets that are ________ earn zero economic profits.

A)perfectly competitive
B)monopolistically competitive
C)monopolies
D)Both A and B

Question 65

An example of a market where a Bertrand model would be plausible is the market for

A)oil.
B)wheat.
C)beer.
D)sugar.

Question 66

In a Bertrand duopoly with product differentiation, explain how a change in one firm's marginal cost can have an effect on the price charged by the other firm.

Question 67

The market for electricians in a small town might have a different structure than in a large city because

A)cartels are legal in large cities but not in small towns.
B)the small town market can only support a few electricians.
C)unions are stronger in large cities than in small towns.
D)None of the above.

Question 68

In a Bertrand model with differentiated products

A)firms can set price above marginal cost.
B)firms set price at marginal cost.
C)price is independent of marginal cost.
D)firms set price independently of one another.

Question 69

Product differentiation

A)may allow firms to price above a competitive level.
B)generates value as consumers value more choices.
C)depends on perceived differences between products.
D)All of the above.

Question 70

In a Bertrand model, market power is a function of

A)marginal cost.
B)the number of firms.
C)price elasticity of supply.
D)product differentiation.

Question 71

Firms in a monopolistically competitive market face ________ demand curves and earn ________ economic profits in the long run.

A)downward sloping; zero
B)downward sloping; positive
C)horizontal; zero
D)horizontal; negative

Question 72

In the long run, a monopolistically competitive firm

A)earns zero economic profit.
B)produces at minimum average cost.
C)operates at full capacity.
D)All of the above.

Question 73

In monopolistically competitive markets

A)price is greater than it would be in perfect competition.
B)price is less than it would be in perfect monopoly.
C)quantity is greater than it would be in perfect monopoly.
D)All of the above.

Question 74

The number of firms in a monopolistically competitive market will be smaller if

A)the market demand curve shifts rightward.
B)minimum efficient scale is lower.
C)fixed costs are smaller.
D)fixed costs are larger.

Question 75

In the long run a monopolistic competitor

A)set MR = MC.
B)produces where P = AC.
C)sets P > MC.
D)All of the above.

Question 76

If AC < p where MR = MC

A)firms earn positive profits and new firms will enter.
B)firms earn negative profits and existing firms will leave.
C)firms earn zero profits and new firms will not enter and no existing firms will leave.
D)None of the above.

Question 77

A monopolistically competitive firm has the free entry characteristics of ________ and the price setting characteristics of ________.

A)an oligopolistic market; perfect competition
B)perfect competition; a monopoly
C)a monopolistic market; a cartel
D)perfect competition; perfect competition

Question 78

If AC > p where MR = MC

A)firms earn positive profits and new firms will enter.
B)firms earn negative profits and existing firms will leave.
C)firms earn zero profits and new firms will not enter and no existing firms will leave.
D)None of the above.

Question 79

Firms seek to differentiate their product

A)to avoid state and federal regulation.
B)to create an illusion of value.
C)to strengthen their demand and to make it more inelastic.
D)to strengthen their demand and to make it more elastic.

Question 80

Monopolistically competitive firms

A)have market power because they face downward sloping demand curves.
B)have no market power because they earn zero economic profit.
C)have no market power because of free entry.
D)have no market power because price equals marginal cost.