Deck 14: Oligopoly and Monopolistic Competition

Question 1

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.

Answer 1

A

Question 2

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.

Answer 2

B

Question 3

The benefits from cartelizing are greater if

A) the market demand elasticity is higher.
B) the market demand elasticity is lower.
C) the market price is higher.
D) each firm cuts its output more.

Answer 3

B

Question 4

A competitive market structure differs from the monopoly,oligopoly,and monopolistic competition structures in the

A) producers' ability to set price.
B) profit maximization condition.
C) amount of long run profit.
D) entry conditions.

Question 5

Perfect competition and monopolistic competition are similar in that both market structures include

A) price-taking behavior by firms.
B) a homogeneous product.
C) no barriers to entry.
D) very few firms.

Question 6

Firms in all types of market structures pay attention to current rival firms' behavior.

Question 7

Mergers may result in

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

Question 8

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 9

Regardless of market structure,all firms

A) consider the actions of rivals.
B) maximize profit by setting marginal revenue equal to marginal cost.
C) produce a differentiated product.
D) have the ability to set price.

Question 10

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 11

Perfect competition and monopolistic competition are similar in that firms in both types of market structure will

A) act as price takers.
B) produce a level of output where price equals marginal cost.
C) earn zero profit in the long run.
D) act as price setters.

Question 12

Explain why a monopoly or a perfectly competitive firm does not consider a rival firm's behavior,but an oligopoly and a monopolistically competitive firm do.

Question 13

If a cartel is unable to monitor its members and punish those firms that violate the 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 14

Explain how long-run economic profits are linked to entry in monopolistic competition and perfect competition.

Question 15

In comparing monopolistic competition to perfect competition,one can conclude that the lack of free entry is the key to having the ability to set price.

Question 16

Market failure or inefficient consumption will take place in the market structures EXCEPT for

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

Question 17

Monopolistic competition and monopoly have all of the following in common EXCEPT

A) P > MC.
B) Firms are price setters.
C) Barriers to entry.
D) MR = MC.

Question 18

Oligopoly differs from monopolistic competition in that an oligopoly includes

A) product differentiation.
B) barriers to entry.
C) no barriers to entry.
D) downward-sloping demand curves facing the firm.

Question 19

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 20

Monopolistic Competition and perfect competition differ because

A) only monopolistically competitive firms will set MR = MC.
B) only perfectly competitive firms will set MR = MC.
C) only monopolistic competition allows for entry of other firms in the long run.
D) only competitive firms take the price as given.

Question 21

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 22

Collusion is more successful in a game that will continue forever or in a game with an uncertain ending time,than in a game with a known ending time.

Question 23

A group of firms are selling undifferentiated products if

A) consumers perceive the products identical between the firms
B) production costs are the same for all firms
C) if the firms are selling goods that are identical, though consumers view them as different
D) if the firms are part of a single cartel

Question 24

Two firms sell 100% orange juice in 10 ounce bottles.The juice is only good for one week.The two firms have contracts for all the oranges produced in a large geographic area.Each firm decides how many bottles of juice to produce at the same time.This market is best described with a

A) Bertrand model.
B) Stackelberg model.
C) monopolistic competition model.
D) Cournot model.

Question 25

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

Question 26

Suppose two Cournot duopolist firms operate at zero marginal cost.The market demand is p = a - bQ.Each firm will produce

A) a/b.
B) a/2b.
C) a/3b.
D) a/4b.

Question 27

In the Cournot model,if a firm's marginal cost increases,its best-response function will

A) shift inward.
B) not change.
C) shift outward.
D) The shift is ambiguous.

Question 28

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 29

If a Cournot duopolist announced that it will double its output,

A) it becomes the leader.
B) the other firm does not view the announcement as credible.
C) the other firm will shut down.
D) the other firm will double output also.

Question 30

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 31

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 32

Which of the following is NOT an assumption of the initial Cournot Oligopoly Model?

A) Market lasts for only one period.
B) Firms act simultaneously.
C) Firms have same cost functions .
D) Firms produce differentiated products.

Question 33

To determine guilt of cartelizing,the antitrust laws use

A) evidence of conspiracy.
B) economic effect.
C) evidence of tacit collusion without meeting.
D) None of the above.

Question 34

Suppose that market demand can be represented as p = 100 - 2Q.There are 10 identical firms producing an undifferentiated product,each with the total cost function TC = 50 + q².Compare the competitive outcome with the cartel outcome.What is the individual firm's incentive to cheat on the cartel?

Question 35

If a Cournot duopolist announced that it will double its output,the other firm does not view the announcement as credible because

A) the announcing firm's profits will fall if it carries out the threat.
B) the other firm's profits will fall if the announcing firm carries out the threat.
C) the other firm's profits will rise if the announcing firm carries out the threat.
D) the other firm will double output also.

Question 36

Suppose a market with a Cournot structure has five firms and a market price elasticity of demand equal to -2.What is a Cournot firm's Lerner Index?

A) )1
B) )2
C) )5
D) 1

Question 37

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 38

The concept of Nash equilibrium states that

A) no firm can improve their outcome holding the other firm's actions constant.
B) all firms are earning the highest possible profit.
C) firms make alternating output decisions.
D) None of the above

Question 39

Which of the following will facilitate the enforcement of a cartel?

A) most-favored-customer clauses
B) reports of bids on government contracts
C) meet the competition or price match
D) All of the above

Question 40

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

Question 41

In the Stackelberg model,the leader has a first-mover advantage because it

A) has lower costs than the follower.
B) commits to producing a larger quantity.
C) reacts to the follower's decision.
D) differentiates its output.

Question 42

Assuming Cournot behavior,what happens to the market output,the price of the output,and each firm's output as the number of firms in a market increases?

Question 43

If two firms playing Cournot are identical with decreasing average costs,how should the firms divide production to maximize joint profits?

Question 44

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

Question 45

Draw a graph that shows the effect on the equilibrium quantities if the government subsidizes one firm in a Cournot duopoly with a per-unit subsidy.Assume that the best-response functions are linear.Explain the new equilibrium quantities.

Question 46

Suppose Ralph sells bento lunches which have the following demand:
pR = 100 - qR - 0.5qD
where pR is the price of Ralph's bentos and qR is the number of bentos Ralph sells.qD is the number of bentos Ralph's rival Dave sells.Dave's demand is given by:
pR = 100 - qD - 0.5qR
where pD is the price Dave can sell his bentos for.Suppose each seller has a cost per unit (average and marginal)of $1.
a.How does this game differ from the Cournot model with identical products? Why do the demand curves indicate that the goods are differentiated - not perfect substitutes for one another?
b.Compute the best response functions for each seller and the Nash Equilibrium outputs and prices.

Question 47

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 48

The market power for a firm in the Cournot model will be greater

A) if the market demand is more elastic.
B) if there are fewer firms in the industry.
C) if market demand is higher.
D) the more output this firm produces.

Question 49

Suppose in the ice-cream market with 10 firms,the elasticity of market demand is -1,and each firm has a constant marginal cost at $2.The Nash-Cournot equilibrium price is

A) $2.
B) $2.2.
C) $2.4.
D) $2.5.

Question 50

Consider a market with inverse demand p = 100 - 2Q.Firms have no fixed cost and constant marginal cost c.
a.Derive the firms' outputs and profits when this market is served by Cournot duopolists.
b.How do outputs and profits vary with c? Specifically,use calculus to find the derivative of the output of each firm and profit of each firm with respect to c.
c.Suppose the firm's also have a fixed cost of F in addition to the marginal cost c.How does F alter the best response functions and NE? Explain in words.(For technical reasons,assume that both firms still produce a positive level of output in equilibrium)

Question 51

Consider a market with just one firm.The demand in the market is p = 18 - Q and the firm has a linear cost function C(Q)= 2Q.
a.How much output will this firm produce.What will be the profit and consumers surplus?
b.Suppose a second firm with the same cost function enters the market and the two firms compete in a Cournot style (simultaneous output choice).What will be the equilibrium price and quantity in the market? What is the total market profit and CS?

Question 52

The Stackelberg model is more appropriate than the Cournot model in situations where

A) there are more than two firms.
B) all firms enter the market simultaneously.
C) one firm makes its output decision before the other.
D) firms will be likely to collude.

Question 53

The outcome of the Stackelberg model is

A) a Nash equilibrium.
B) the same as the Cournot outcome.
C) that the follower earns zero profit.
D) that the follower cannot be on its best-response curve.

Question 54

The three models of oligopolies,Cournot,Stackelberg and Bertrand,all assume firms independently choose the quantity of output to produce.

Question 55

If an incumbent cannot commit and faces an identical potential entrant with relatively high fixed costs that are below the level where entry is blockaded,the incumbent will

A) produce the Cournot duopolist level of output.
B) produce the Stackelberg leader level of output.
C) set price equal to marginal cost.
D) produce a level of output that is greater than the Stackelberg leader level of output.

Question 56

In a Nash-Cournot equilibrium where firms produce identical products with unequal costs,

A) the firm with lower costs charges a higher price.
B) the firm with higher costs charges a higher price.
C) the firm with lower costs produces more.
D) the firm with higher costs produces more.

Question 57

Two firms sell identical products and compete as Cournot (price-setting)competitors in a market with a demand of p = 150 - Q.Initially,each firm has a constant marginal and average cost of $3 per unit of output.
a.Compute each firm's best response function.Plot each of these functions on a graph with q₁ on the horizontal axis and q₂ on the vertical.
b.Compute the Cournot equilibrium quantities.
c.Suppose that firm 1's cost rises to $4 per unit and firm 2's decreases to $2.On a graph,show how this will change the best response functions.How will the equilibrium change according to the changes you made on the graph?

Question 58

In a Duopoly Nash-Cournot equilibrium,

A) neither firm has an incentive to change its output level given the other firm's output decision.
B) firms will choose the pair of quantities above the intersection of the two best response functions.
C) firms will choose the pair of quantities below the intersection of the two best response functions.
D) firms will choose its quantity regardless of the other firm's output decision.

Question 59

Explain why the intersection of the best-response functions is the Cournot equilibrium.

Question 60

One firm previously operated as a monopoly.Now,one potential entrant exists.Consumers would prefer

A) entry, and the firms to split the output equally.
B) no entry, and for the incumbent to produce the Stackelberg leader level of output.
C) entry, and for the incumbent to produce the Stackelberg leader level of output.
D) no entry, and the monopoly to continue.

Question 61

Which of the following market models results in the highest level of consumer surplus,assuming a fixed number of firms with identical costs and a given demand curve?

A) Cournot
B) Stackelberg
C) Monopoly
D) Cartel

Question 62

The above figure shows the reaction functions for two pizza shops in a small isolated town.The Stackelberg leader will produce

A) 25 pizzas.
B) 50 pizzas.
C) 66.7 pizzas.
D) 100 pizzas.

Question 63

As the number of firms increases in a market,the differences between the Cournot,Stackelberg,and price-taking market structures

A) decrease.
B) increase.
C) remain the same.
D) cannot be determined.

Question 64

If two firms behave as Cournot duopolists,the level of social welfare is lower than if the same firms act as a cartel.

Question 65

Suppose two duopolists operate at zero marginal cost.The market demand is p = a - bQ.If firm 1 is the Stackelberg leader,what level of output will it choose?

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

Question 66

Which of the following market models results in the highest price assuming a fixed number of firms with identical costs and a given demand curve?

A) Cournot
B) Stackelberg
C) Monopoly
D) Price is the same in all three markets.

Question 67

Which of the following is a necessary condition for government subsidies to influence a firm to choose an output level as if it were a Stackelberg leader?

A) The subsidy must be announced before the firms choose output levels.
B) The subsidy must be equal to the firm's marginal cost.
C) The subsidy must be equal to the firm's rival's marginal cost.
D) The firm does not have any fixed costs.

Question 68

Incumbents are unaffected by fixed costs of entry while potential entrants are affected by them because

A) for potential entrants the cost is avoidable, while for the incumbent, it is not.
B) fixed costs will be greater for the potential entrant than for the incumbent.
C) fixed costs are zero for the incumbent.
D) incumbents will act to prevent entry at all costs.

Question 69

If there are 2 identical firms in a market that choose the quantity they produce,total welfare is the highest when there is a cartel.

Question 70

Suppose the demand for pizza in a small isolated town is p = 10 - Q.The only two firms,A and B,behave as Cournot duopolists.Each has a cost function TC = 2 + Q.If the government wants to subsidize firm A to raise its output to that of a Stackelberg leader,how large should the subsidy be?

Question 71

What strategic advantage compared to a Cournot Oligopoly results in the Stackelberg outcome?

A) the ability to move first
B) the ability to set price
C) the ability to set quantity
D) the ability to make independent decisions by the Stackelberg leader

Question 72

What happens in a duopoly if both firms try to act as the Stackelberg leader?

Question 73

Suppose the demand for pizza in a small isolated town is p = 10 - Q.There are only two firms,A and B.Each has a cost function TC = 2 + Q.Determine the equilibrium quantities of each if firm A is the Stackelberg leader.

Question 74

Which of the following models results in the greatest total profit,assuming a fixed number of firms with identical costs and a given demand curve?

A) Cournot
B) Stackelberg
C) Monopoly
D) Perfect competition

Question 75

Which of the following models results in the highest level of output assuming a fixed number of firms with identical costs and a given demand curve?

A) Cournot
B) Stackelberg
C) Monopoly
D) Cartel

Question 76

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.Compare the firms' profits if they behave as Cournot duopolists with their profits if they form a cartel and share the market.

Question 77

If only two identical firms operate in a market,consumers prefer

A) a Cournot equilibrium.
B) a Stackelberg equilibrium.
C) a collusive equilibrium.
D) any equilibrium, since they all result in the same consumer surplus.

Question 78

In which of the following market structures with two identical firms do both firms produce more than the Cournot outcome?

A) Stackelberg Oligopoly
B) Cartel
C) Perfect Competition
D) None of the above

Question 79

Firms A and B are identical,produce identical products,and are the only firms in a market.Firm A's output is higher than Firm B's.This means that Firm B is the

A) Cartel leader.
B) Stackelberg leader.
C) Stackelberg follower.
D) Cournot leader.

Question 80

Which of the following models results in the greatest deadweight loss,assuming a fixed number of firms with identical costs and a given demand curve?

A) Cournot
B) Stackelberg
C) Monopoly
D) Perfect competition