Deck 11: Oligopoly: Firms in Less Competitive Markets

Question 1

An oligopolistic industry is characterised 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 standardised products.

Answer 1

C

Question 2

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.

Answer 2

B

Question 3

All of the following are examples of oligopolistic markets except

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

Answer 3

D

Question 4

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 standardised
D)the level of market demand for the industry's product

Question 5

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 characterised by an interdependent firm.

Question 6

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 7

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 8

An example of a barrier to entry is

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

Question 9

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 behaviour 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 10

Oligopolies are difficult to analyse 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 11

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

Question 12

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 13

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 14

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 15

An oligopolist's demand curve is

A)identical to that of a perfectly 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 16

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 17

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 18

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 19

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 20

Interdependence of firms is most common in

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

Question 21

An example of a government-imposed barrier to entry gives a firm the exclusive right to a new product for a period of 20 years from the date the product is invented.This entry barrier is known as

A)a copyright.
B)a patent.
C)an exclusive marketing agreement.
D)a tariff.

Question 22

Which of the following is not a characteristic of oligopoly?

A)the ability to influence price
B)a small number of firms
C)low barriers to entry
D)interdependent firms

Question 23

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

Question 24

A patent is a government-imposed entry barrier because

A)it allows a firm to achieve economies of scale.
B)it is a key input owned by the firm that is granted the patent.
C)it limits the quantity of a good that can be imported into a country.
D)it gives a firm the exclusive right to a new product for a period of 20 years from the date the product is invented.

Question 25

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

Question 26

Oligopoly differs from perfect competition and monopolistic competition in that

A)barriers to entry are lower in oligopoly industries than they are in perfectly competitive and monopolistically competitive industries.
B)demand and marginal revenue curves are more useful for analysing oligopoly than they are for analysing perfect competition and monopolistic competition.
C)because oligopoly firms often react when other firms in their industry change their prices,it is difficult to know what the oligopolist's demand curve looks like.
D)the concentration ratios of oligopoly industries are lower than they are for perfectly competitive and monopolistically competitive firms.

Question 27

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

A)deciding on how to manage relations with suppliers
B)choosing what new technologies to adopt
C)selecting which new markets to enter
D)independently setting a product's price without consideration of its rivals' pricing policies

Question 28

The justification for occupational licensing laws is that they protect the public from incompetent practitioners (for example,lawyers and medical doctors),but the laws also result in

A)higher prices and restrictions on the number of people who can enter the professions affected by the laws.
B)economies of scale.
C)ownership of a key input.
D)an increase in the amount of output required to achieve minimum efficient scale.

Question 29

When large firms in oligopoly markets cut their prices,

A)rival firms will also cut their prices to avoid losing sales.
B)rival firms will not change their prices because most of their customers have signed contracts that commit them to doing business with the same firms for the life of their contracts.
C)we don't know for sure how rival firms will respond.
D)rival firms will not cut their prices because they fear that the federal government will accuse them of collusion.

Question 30

If economies of scale are relatively unimportant in an industry,the typical firm's long-run average total cost curve will reach a minimum at a level of output that is a ________ fraction of total industry sales.The industry will be ________.

A)large;competitive
B)large;an oligopoly
C)small;competitive
D)small;an oligopoly

Question 31

We can draw demand curves for firms in perfectly competitive and monopolistically competitive industries,but not for oligopoly firms.The reason for this is

A)there are no barriers to entry in perfectly competitive and monopolistically competitive industries.There are high barriers to entry in oligopoly industries.
B)we can assume that the prices charged by perfectly competitive and monopolistically competitive firms have no impact on rival firms.For oligopoly this assumption is unrealistic.
C)that perfectly competitive and monopolistically competitive firms are price takers.Oligopoly firms are price makers.
D)perfectly competitive and monopolistically competitive firms sell standardised products.Oligopoly firms sell differentiated products.

Question 32

A patent is an example of

A)how ownership of a key input creates a barrier to entry.
B)a government-imposed barrier to entry.
C)occupational licensing.
D)how market failure can lead to oligopoly.

Question 33

The profit-maximising level of output and the profit-maximising price for an oligopolist cannot be calculated when we don't know

A)what the concentration ratio for the oligopolist's industry is.
B)what the minimum efficient scale in the oligopolist's industry is.
C)the demand curve and the marginal revenue curve of the oligopolist.
D)the type of barrier to entry that exists in the oligopolist's industry.

Question 34

If economies of scale are relatively important in an industry,the typical firm's

A)marginal cost curve will decline continuously until it reaches minimum efficient scale.
B)long-run average cost curve will begin rising before it reaches minimum efficient scale.
C)long-run average cost curve will reach a minimum at a level of output that leaves room for a large number of firms to enter the industry.
D)long-run average cost curve will reach a minimum at a level of output that is a relatively large fraction of total industry sales.

Question 35

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 36

Consider a U-shaped long-run average cost curve that has a minimum efficient scale at 6000 units of output.In this case,this industry would be

A)perfectly competitive if the market quantity demanded is 20 000 units.
B)monopolistically competitive if the market quantity demanded is 12 000 units.
C)an oligopoly if the market quantity demanded is 18 000 units.
D)an oligopoly if the four-firm concentration ratio is more than 10 per cent.

Question 37

Which of the following is not a barrier to entry?

A)an inelastic demand curve
B)economies of scale
C)ownership of a key input
D)a patent

Question 38

Which of the following is not an example of a government-imposed entry barrier?

A)patents
B)occupational licensing
C)barriers to international trade
D)antitrust legislation

Question 39

Economies of scale will create a barrier to entry in an oligopoly industry when

A)a firm's minimum efficient scale occurs where long-run average total costs are constant.
B)the typical firm's long-run average total cost curve reaches a minimum at a level of output that is a large fraction of total industry sales.
C)the typical firm's long-run average total cost curve reaches a minimum at a level of output that is a small fraction of total industry sales.
D)the industry's four-firm concentration ratio is less than 40 per cent.

Question 40

What do Sony,Microsoft,and Nintendo have in common?

A)Each achieved a dominant position in its industry because it owned a key input in the production of its product.
B)The industry in which each firm competes is an oligopoly because of government-imposed barriers to entry.
C)Each company was founded in the same state.
D)The profitability of each firm depends on its interactions with other firms.

Question 41

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

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

Question 42

In an oligopoly,minimum efficient scale is likely to occur at a level of output that is a large fraction of industry sales.

Question 43

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 44

Firms in an oligopoly are said to be interdependent.What does this mean?

Question 45

Suppose we want to use game theory to analyse 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 46

The most important barrier to entry is economies of scale.

Question 47

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

Question 48

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 49

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

Question 50

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

Question 51

A market comprised of only two firms is called a

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

Question 52

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

Question 53

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

Question 54

If firms are protected by substantial barriers to entry,short-run profits can turn into long-run profits.

Question 55

Most economists are concerned about entry barriers.Why is this so important to them?

Question 56

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 57

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 58

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 59

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 maximise joint profits.
D)involves deciding what to do after all rivals have chosen their own strategies.

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

Collusion between two firms occurs when

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

Question 62

Table 11-1 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 11-1 shows the payoff matrix for this advertising game.
Refer to Table 11-1.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 63

What is the prisoners' 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 64

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 65

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)maximise marginal revenue.
D)discourage rivals from matching price cuts.

Question 66

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 67

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 68

Table 11-1 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 11-1 shows the payoff matrix for this advertising game.
Refer to Table 11-1.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 69

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 70

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 71

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 72

Table 11-1 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 11-1 shows the payoff matrix for this advertising game.
Refer to Table 11-1.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 73

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 74

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 75

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 behaviour under these very different firm behaviours.

Question 76

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 77

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 leads to the economically efficient market outcome.

Question 78

Table 11-1 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 11-1 shows the payoff matrix for this advertising game.
Refer to Table 11-1.Let's suppose the game starts with each firm adhering to its original budget so that Godrickporter earns a profit of $60 00 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 79

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 80

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