Deck 15: Oligopoly and Strategic Behavior

Question 1

The demand curve faced by an oligopolistic producer depends on how rival firms react to its prices and policies.

Answer 1

True

Question 2

Oligopoly is an industry with a small number of firms producing homogeneous or differentiated goods with minimal barriers to entry.

Answer 2

False

Question 3

The U.S.commercial airline industry is a good example of an oligopolistic market.

Answer 3

True

Question 4

Firms in oligopoly often behave like the prisoners in the prisoners' dilemma,carefully
anticipating the moves of their rivals in an uncertain environment.

Question 5

At a Nash equilibrium,each player in a game is said to be doing as well as he can given the actions of his competitor.

Question 6

In game theory,a strategy that is optimal no matter what your opponent does is called a dominant strategy.

Question 7

The key difference between oligopoly and other market structures is the interdependence among producers.

Question 8

There are significant technological barriers to entry that help make the automobile industry oligopolistic.

Question 9

One of the most famous cartels is OPEC.

Question 10

Oligopolists may charge a price lower than the profit maximizing price to discourage new firms from entering a market.

Question 11

Even if entry is easy,oligopolists possess sufficient market power so that profits are assured in the long run.

Question 12

A cartel is a group of firms that attempt to collude by coordinating price and output decisions.

Question 13

The primary difference between cooperative and noncooperative games is the ability to form contracts.

Question 14

When making decisions on pricing and other behaviors,oligopolistic firms must take into account the actions of other firms.

Question 15

Cartels are legal in many countries,including the United States.

Question 16

Collusive behavior guarantees economic profits in the long run for oligopolists.

Question 17

Large oligopoly firms are often able to take advantage of significant economies of scale.As a result,they can often produce at a lower average total cost than can smaller firms.

Question 18

Economists consider the breakfast food industry to be an oligopolistic market.

Question 19

The "Prisoners' Dilemma" is an example of a cooperative game.

Question 20

As in perfect and monopolistic competition,oligopoly firms cannot earn economic profits in the long run.

Question 21

In oligopolistic markets:

A) there are a large number of sellers.
B) firms are large relative to the size of the market.
C) there are insignificant barriers to entry.
D) firms have no perceptible influence over the market price.

Question 22

When the prisoners follow their dominant strategy and confess,they will be worse off than if both had remained silent-hence,the "prisoners' dilemma."

Question 23

A small number of firms competing with each other is characteristic of:

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

Question 24

The key characteristic of oligopoly markets is "interdependence among firms." This means that:

A) the demand curve faced by each firm is perfectly elastic.
B) each firm produces a product identical to its rivals.
C) each firm must consider how its decisions will affect its competitors.
D) firms will be able to earn above-normal profits in the long run.

Question 25

Which of the following industries most closely approximates the conditions of the oligopoly model?

A) legal services
B) retail clothing
C) milk
D) breakfast cereals

Question 26

Mutual interdependence means that:

A) each firm faces a perfectly elastic demand curve.
B) each firm faces a perfectly inelastic demand curve.
C) firms choose price and output simultaneously.
D) firms must anticipate the possible reaction of rivals to their own economic behavior.

Question 27

Which of the following is characteristic of an oligopolistic industry?

A) homogeneous or differentiated products
B) few firms
C) interdependence
D) large barriers to entry
E) all of the above

Question 28

High barriers to entry are generally found in:

A) monopolistically competitive markets.
B) oligopolistic markets.
C) monopolistic markets.
D) both (b) and (c).

Question 29

Oligopoly firms:

A) usually act as if they were a monopoly producer.
B) generally charge a price for goods and services equal to marginal cost.
C) base their pricing and output decisions on the likely responses of rival firms.
D) are isolated from competition by low barriers to entry.

Question 30

An oligopoly is a market:

A) dominated by a few buyers.
B) dominated by one buyer.
C) dominated by a few sellers.
D) with many sellers.

Question 31

Which of the following would not be an example of an oligopolistic industry?

A) light bulbs
B) convenience stores
C) aircraft
D) breweries

Question 32

An example of an oligopoly is:

A) the restaurant industry.
B) the wheat market.
C) the cigarette industry.
D) the beef industry.

Question 33

Interdependence among firms is characteristic of:

A) perfectly competitive markets.
B) monopoly markets.
C) oligopoly markets.
D) monopolistically competitive markets.

Question 34

Which of the following is not a common characteristic of oligopolistic firms?

A) high barriers to entry
B) mutual interdependence
C) a large number of sellers
D) nonprice competition

Question 35

Whether a dominant strategy is an optimal strategy for a firm depends upon the actions of competitors.

Question 36

Which of the following statements characterize an oligopoly market?

A) Oligopoly firms are guaranteed profits due to the lack of competition.
B) Firms are aware that their own economic behavior will influence the decisions of rivals.
C) There are few barriers to entry.
D) Firms choose price and output independently from the decisions made by competitors.

Question 37

A market situation where a small number of sellers compose the entire industry is called:

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

Question 38

A basic characteristic of the firms in an oligopoly market structure is that they are:

A) large (relative to the total market) and interdependent.
B) large (relative to the total market) and independent.
C) small (relative to the total market) and interdependent.
D) small (relative to the total market) and independent.

Question 39

An example of an oligopoly is:

A) the commercial airline industry.
B) a stock market.
C) the video rental industry.
D) the market for eyeglasses.

Question 40

An industry characterized by only a few firms in the market is called:

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

Question 41

If the firms in an oligopoly collude,the results will approximate what other type of industry?

A) perfect competition
B) monopolistic competition
C) monopoly
D) none of the above

Question 42

Equilibrium price and quantity for a collusive oligopoly are determined according to the intersection of the ____ curve and the horizontal sum of the short-run ____ curves for the oligopolists.

A) total revenue; total cost
B) marginal revenue; marginal cost
C) average revenue; average cost
D) marginal revenue; average total cost

Question 43

Which of the following is a unique characteristic of the oligopolistic market structure?

A) low barriers to entry
B) a large number of firms
C) product differentiation
D) mutual interdependence among firms

Question 44

An oligopoly firm is generally characterized by:

A) its consideration of rivals' reactions.
B) the sale of standardized products.
C) the possibility of realizing profits in the long run.
D) both (a) and (c).

Question 45

Under conditions of oligopoly markets,firms generally don't like to compete based on price.Why?

A) Because no producer has a cost advantage in doing so.
B) Because consumers rarely spend time making price comparisons between different brands.
C) Because competing on the basis of price can set off a price war among competitors and significantly reduce profits to the firm.
D) Because price competition is illegal in most states.

Question 46

If an oligopolist reduces the price of its product relative to its competitors:

A) some customers will switch to rival firms.
B) the number of customers it has will likely remain unchanged.
C) some customers will switch from rival firms to buy from him.
D) rival firms are unlikely to react.

Question 47

Overt collusion is relatively rare because:

A) they are illegal in some countries, including the United States.
B) members find it difficult to agree on key decisions.
C) members frequently have an incentive to cheat on the cartel.
D) of all the above reasons.

Question 48

Which of the following is true for a typical firm in a typical cartel?

A) "I can never do better for myself than by following agreed-upon cartel policies."
B) "If everyone cheats, I'm better off, and so is everyone else in the cartel."
C) "If I alone cheat, I'm better off; if everyone cheats, I'm worse off."
D) "If I suspect others are planning to cheat, I'll do best for myself by refraining from cheating."

Question 49

One difference between oligopoly firms and firms that are monopolistic competitors is that:

A) the average total cost curves of monopolistic competitors are generally u-shaped, but for oligopoly firms they are not.
B) monopolistic competitors choose a level of output such that marginal revenue equals marginal cost, but oligopoly firms generally do not.
C) monopolistic competitors face lower costs on average than do oligopoly firms.
D) the interdependence among firms is highly significant in oligopoly markets, but not in monopolistically competitive markets.

Question 50

An example of an oligopoly is:

A) the book industry.
B) the music CD industry.
C) the automobile industry.
D) the market for soybeans.

Question 51

The Organization of Petroleum Exporting Countries is an example of:

A) a price leadership system.
B) a trade group whose members have yet to influence the world price of oil, despite repeated attempts to collude.
C) a successful monopoly.
D) a periodically successful cartel.

Question 52

Which of the following is characteristic of firms operating in an oligopoly market?

A) either homogeneous or differentiated products
B) mutual interdependence among firms
C) significant barriers to entry
D) All of the above characterize oligopoly firms.

Question 53

Cartels are thought to be inherently unstable because:

A) the costs of enforcing cartel agreements are very low.
B) each cartel member can privately profit from increasing production beyond agreed-upon levels.
C) customers force cartel members to increase production and reduce prices.
D) cartel agreements are legally binding and can be upheld in court.

Question 54

A cartel is:

A) a group of oligopolists who try to behave like a single monopolist and split the benefits among themselves.
B) a government-approved organization for the exchange of technical information among firms.
C) an industry trade group formed to lobby political leaders.
D) a regulated industry manufacturers association that is officially permitted to set the price of its product above long-run average total cost.

Question 55

Under conditions of oligopoly,economies of large-scale production mean that:

A) firms are able to sell all of the output they desire.
B) it is difficult for a firm to determine its profit-maximizing price and output.
C) large firms would find it more profitable to break up into smaller production units.
D) small firms are at a disadvantage in competing with relatively large firms.

Question 56

Which of the following industries most closely approximates the oligopoly model?

A) dry cleaning
B) fast food
C) automobile manufacturing
D) agricultural produce

Question 57

Which of the following is characteristic of oligopoly firms,but not of monopolistically competitive firms?

A) firms seek to maximize profits
B) firms face downward-sloping demand curves
C) the pricing behavior of one firm has a significant effect on the sales of other firms
D) firms have at least some ability to influence price

Question 58

Under which one of the following market structures are sellers most likely to consider the reaction of rival sellers when they set the price of their product?

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

Question 59

If mutual interdependence among firms is present,then each profit-maximizing firm in the market:

A) produces a product that is similar but not identical to the products of its rivals.
B) must consider the reactions of its rivals when it determines its pricing policy.
C) faces a perfectly elastic demand curve for its product.
D) faces a perfectly inelastic demand curve for its product.

Question 60

Which of the following characterizes an oligopolistic industry?

A) mutual interdependence
B) low barriers to entry
C) small output of individual firms relative to the total market
D) a large number of competing firms

Question 61

Cartels usually succumb to divisive forces caused by:

A) stringent enforcement of a cartel agreement.
B) the similarity of production costs across member firms.
C) members cheating by giving secret discounts.
D) insufficient profits compared to independent operations.

Question 62

Cartel members have a collective interest in ____ industry output and a private interest in ____ their own output.

A) increasing; increasing
B) increasing; decreasing
C) decreasing; increasing
D) decreasing; decreasing

Question 63

Individual members of a cartel have an incentive to ____ the cartel agreement because pursuit of ____ will maximize individual profit.

A) adhere to; self-interest
B) cheat on; collective interest
C) cheat on; self-interest
D) adhere to; collective interest

Question 64

For a time,either R.J.Reynolds or Phillip Morris raised prices of cigarettes twice a year by about 50 cents per carton.The other firms in the industry raised their prices by the same amount.Economists call this:

A) predatory pricing.
B) a price war.
C) price leadership.
D) producer sovereignty.

Question 65

Cartel agreements are more likely to succeed if:

A) there are a large number of firms in the industry producing identical products.
B) there are few firms in the industry producing identical products.
C) there are a large number of firms in the industry producing differentiated products.
D) there are a few firms in the industry producing differentiated products.

Question 66

A successful cartel ____ supply so that member firms earn ____ profits.

A) restricts; monopoly
B) expands; monopoly
C) restricts; no economic
D) expands; no economic

Question 67

In a typical cartel agreement,the cartel maximizes profit when it:

A) behaves as a duopolist.
B) is flexible in enforcing production targets.
C) behaves as a monopolist.
D) behaves as a perfectly competitive firm.

Question 68

If firms meet together to decide on prices and outputs,it is called:

A) collusion.
B) oligopolistic competition.
C) price leadership.
D) a pricing conglomerate.

Question 69

When oligopolists join together in a cartel,they:

A) choose to ignore their mutual interdependence.
B) indicate awareness that their behavior is interdependent.
C) violate the law of supply and demand.
D) attempt to behave like perfect competitors.

Question 70

Cartels are:

A) difficult to organize.
B) difficult to preserve.
C) especially unlikely to succeed if the members sell many varied products.
D) all of the above.

Question 71

Cartels are difficult to maintain because:

A) there are generally few barriers to entry in oligopoly markets.
B) firms have a strong private incentive to cheat on agreements.
C) it is difficult to enforce a cartel agreement.
D) both (b) and (c).

Question 72

A large oligopolistic firm that unilaterally makes changes in price which competitors tend to follow is known as a:

A) price leader.
B) price maker.
C) dominant strategy firm.
D) cartel leader.

Question 73

A cartel is a group of firms that:

A) agree to increase industry output in order to boost profits.
B) agree to restrict industry output in order to boost profits.
C) agree to differentiate their products from one another.
D) together control a significant portion of an industry's output, but fail to consider the behavior of rivals when making decisions.

Question 74

Three airlines account for most of the air traffic in and out of a local city.If the three airlines joined together in setting fares and air travel schedules,economists would say that they were acting as:

A) monopolistic competitors, as each firm would have to differentiate its airline services from its rivals.
B) perfect competitors, as each firm would sell travel services at the same fares as the other airlines.
C) a cartel, as the three airlines together would attempt to coordinate policies in the local market to jointly maximize profits.
D) none of the above

Question 75

Cartels are likely to be better able to prevent their members from cheating on an agreement:

A) the fewer the number of members in the cartel.
B) the greater the number of members in the cartel.
C) the greater are the differences in production costs across member firms.
D) the greater are the differences in demand projections across member firms.

Question 76

____ facilitates joint profit maximization for the oligopoly.

A) Entry barrier
B) Switching costs
C) Collusion
D) Externalities

Question 77

Firms may be tempted to cheat on cartel agreements by:

A) raising both price and output.
B) lowering both price and output.
C) raising price and reducing output.
D) lowering price and increasing output.

Question 78

As the number of firms in an oligopoly ____,the oligopoly becomes more ____.

A) increase; competitive
B) increase; uncompetitive
C) decrease; competitive
D) decrease; like monopolistic competition

Question 79

In a collusive oligopoly,joint profits are maximized when a price leader establishes price based on:

A) its own demand and cost schedules.
B) the market demand for the product and the marginal costs of the various firms.
C) the market demand for the product and its own marginal cost schedule.
D) the demand curve faced by a typical competitor and its own marginal cost curve.

Question 80

The maximum possible profit that could be earned by a cartel is:

A) greater than the monopoly profit.
B) equal to the monopoly profit.
C) less than the monopoly profit.
D) unrelated to the level of monopoly profit.